Diago Cp. 43 Regulatory News (36VY)

Diageo Capital plc

LEI: 213800L23DJLALFC4O95

Half-year results for the six months ended 31 December 2021

The Directors present their interim financial report for the six months ended 31 December 2021.

Activities

Diageo Capital plc (the "company") is engaged in the provision of treasury, risk and cash management for Diageo plc and its subsidiary undertakings (the "group"). Diageo Capital plc's principal activity is to raise external funds, principally using the London and New York financial markets. The company finances other companies of the group via intragroup loans and deposits. Foreign exchange translation hedging, interest rate risk management and cash management are also performed by the company.

The company does not anticipate any changes in its activities in the remaining six months of the financial year.

Business review

Development and performance of the business of the company during the period and position of the company as at 31 December 2021

The results of the company and the development of its business are influenced to a considerable extent by group financing requirements. Further information on the risk management policies of the group is included in the Annual Report 2021 of Diageo plc (see note 15 of the consolidated financial statements of Diageo plc).

Net finance charge was £1 million in the six months ended 31 December 2021, which is a £4 million decrease from net finance charge of £5 million in the six months ended 31 December 2020.

External borrowings increased by £112 million in the six months ended 31 December 2021 to £5,550 million from £5,438 million in the year ended 30 June 2021, mainly due to the strengthening of US dollar versus sterling.

Financial and other key performance indicators

As the company forms part of the group's treasury operations, the company's performance is measured at the group level.

There was no profit or loss transferred to reserves in the six month ended 31 December 2021, (six months ended 31 December 2020 - £nil) and the other comprehensive loss is £10 million (six months ended 31 December 2020 - loss of £105 million).

The Directors do not propose the payment of an interim dividend to be distributed to shareholders in regard to the six months ended 31 December 2021 (six months ended 31 December 2020 - £nil).

Going concern

The company's business activities, together with the factors likely to affect its future development and position, are set out below. The company is expected to continue to generate profit for its own account and to remain in a positive net asset position for the foreseeable future. The company is in net current liability position, however the company participates in the group's centralised treasury arrangements and the parent will provide financial support for the foreseeable future. The Directors have no reason to believe that a material uncertainty exists that may cast significant doubt about the ability of the company to continue as a going concern.

Going concern (continued)

On the basis of their assessment, the company's Directors have a reasonable expectation that the company will be able to continue in operational existence for a period of at least 12 months from the date the financial statements are approved and signed as the ultimate parent undertaking has agreed its policy is and in a position to provide financial support for this period. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

In arriving at this conclusion, the Directors have also considered the potential impact that the Covid-19 outbreak may have on the company and believe that any impact would be minimal.

Principal and financial risks and uncertainties facing the company as at 31 December 2021

The principal risks identified by the group are disclosed on page 45-48 of the Diageo Annual Report 2021. The most relevant of the group risks to this entity are the ones we have selected and articulated below, together with specific considerations relating to the company's operations and environment. If any of these risks occur, the company's business, financial condition and operational results could suffer. As the company forms part of the group's financial operations, the financial risk management measures used by management to analyse the development, performance and position of the company's business are mainly similar to those facing the group as a whole and are managed by the group's treasury department.

In addition, given that the company performs treasury functions for the group, it is exposed to foreign currency risk associated with certain foreign currency denominated bonds and interest rate risk arising principally on changes in US dollar and sterling interest rates. The company uses derivative financial instruments to hedge its exposures to fluctuations in interest and exchange rates. Cash flow hedges are carried out to hedge the currency risk of highly probable future foreign currency cash flows, as well as the cash flow risk from changes in interest rates. Fair value hedges are carried out to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed.

Brexit

The European Union and the United Kingdom have agreed the EU-UK Trade and Cooperation Agreement which fully came into force on 1 May 2021. We remain of the view that the direct financial impact to the group or the company will not be material. A cross-functional working group is in place to identify and assess the consequences of Brexit, with all major functions within our business represented, including the treasury function responsible for raising external funding. The group will monitor the implications of the Agreement very closely, as well as the risks brought by the broader environment, 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.

Pandemics

Global outbreak of a public health threat or fear of such an event could result in continuing, periodic and unplanned government restrictions and regulations. This could include the shutdown of the on-trade, restrictions to travel, and quarantining of employees resulting in a negative impact to consumer demand, or a slowdown or halting of the group business operations due to supply or logistic constraints which could adversely impact the group financial performance. To mitigate these challenges the group regularly gathers data and obtains insights which enable management to assess conditions in the markets where the group operates and to amend forecasts and investment decisions appropriately.

Principal risks and uncertainties facing the company as at 31 December 2021 (continued)

Pandemics (continued)

The Directors have assessed that the key impacts from the pandemic on the company would be in respect of any change in credit risk impacting the valuation of derivatives and the effect of Covid-19 on remote working and ability to access IT systems, along with a potentially heightened cyber risk.

The Directors believe that the risk mitigation actions taken in relation to the Covid-19 pandemic have been agile and effective and that the group will maintain adequate liquidity and be strongly positioned for a recovery in consumer demand. During the year, the group took actions to protect the business and support Diageo partners and communities. As part of the group viability statement assessment, the group has prepared cash flow forecasts which have also been sensitised to reflect severe, but plausible downside scenarios taking into consideration the group's principal risks. The potential financial impact of a slower Covid-19 pandemic recovery has been modelled in the plausible downside scenarios. Even with these negative sensitivities, the group's cash position is still considered to remain strong, therefore it is not anticipated that the solvency or the liquidity of the company will deteriorate.

Climate Risk

Considering that the company forms part of the group's treasury operations, the probability of climate change related risks having a significant and direct impact on the activities and operation of the company is remote. The Directors believe that the risk mitigation actions taken in relation to climate risk by the group are appropriate measures in managing direct or indirect risks posed by climate change. Including the risk to the company of being able to access financing at competitive rates where borrowings could become sustainability linked. Based on the climate risk assessment performed by the group, the risk attached to the recoverability of intercompany balances is considered to be remote. Further information on the group's actions to combat climate change are disclosed on pages 50-55 of Diageo plc's 2021 Annual Report.

Statement on Section 172 of the Companies Act 2006

Section 172 of the Companies Act 2006 requires the Directors to promote the success of the company for the benefit of the members as a whole, having regard to the interests of stakeholders in their decision-making. In making decisions, the Directors consider what is most likely to promote the success of the company for its shareholders in the long term, as well as the interests of the group's stakeholders. The Directors understand the importance of taking into account the views of stakeholders and the impact of the company's activities on local communities, the environment, including climate change, and the group's reputation.

The company is a member of the group of companies (the "group") whose ultimate holding company is Diageo plc ("Diageo"). In accordance with the requirements of UK company law, Diageo has included in its 2021 Annual Report and Accounts on page 7 a statement as to how the Directors of Diageo have had regard to the matters set out in Section 172 of the Companies Act 2006. The company's principal activity is to raise external funds through debt capital markets in order to finance other companies in the group, and therefore in making their decisions, the Directors consider the interests of the holders of the company's listed debt securities as well as the needs of the group.

In order to ensure consistency in how the group operates with regard to its wider stakeholders, the group has adopted an internal Code of Business Conduct alongside a comprehensive framework of global policies and standards that are designed to ensure, amongst other things, that all companies throughout the group, including the company, have regard to its wider stakeholders in a consistent manner.

Principal risks and uncertainties facing the company as at 31 December 2021 (continued)

Statement on Section 172 of the Companies Act 2006 (continued)

The company has therefore had regard to the matters set out in Section 172 of the Act in a manner that is consistent with the approach adopted by Diageo, while at the same time ensuring the Directors of the company are fulfilling their duties.

Independent review

This interim report has not been audited or reviewed by auditors.

Statement of Directors' responsibilities

The Directors confirm that this condensed set of interim financial information has been prepared in accordance with Financial Reporting Standard 104: Interim Financial Reporting, issued by the Financial Reporting Council, and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R namely:

• an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and

• material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last annual report.

The Directors of the company are listed in the company's annual report and financial statements for the year ended 30 June 2021.

J Edmunds

Director

22 March 2022

INCOME STATEMENT (UNAUDITED)

STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

BALANCE SHEET (UNAUDITED)

STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

The company is incorporated and domiciled as a public limited company in the United Kingdom.

The interim financial statements of the company for the six months ended 31 December 2021 were authorised for issue in accordance with a resolution of the Directors on 22 March 2022.

Basis of preparation

The annual report and financial statements of the company for the year ended 30 June 2021 were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101) and Companies Act 2006.

The interim condensed financial statements for the six months ended 31 December 2021 have been prepared in accordance with Financial Reporting Standard 104 Interim Financial Reporting (FRS 104), issued by the Financial Reporting Council. The interim condensed financial statements do not include all of the information and disclosures required in the annual financial statements, and should be read in conjunction with the company's annual financial statements at 30 June 2021.

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the company's annual report and financial statements for the year ended 30 June 2021.

These condensed interim financial statements have not been subject to a full audit or audit review and do not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The annual report and financial statements for the year ended 30 June 2021 were approved by the Directors of the company on 27 October 2021 and have been filed with the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The company is a wholly owned subsidiary of Diageo plc and is included in the consolidated financial statements of Diageo plc which are publicly available.

These financial statements are separate financial statements.

Functional and presentational currency

These financial statements are presented in sterling (£), which is the company's functional currency.

All financial information presented in sterling has been rounded to the nearest million.

Going concern

The financial statements have been prepared on a going concern basis as a fellow group undertaking has agreed to provide financial support for the foreseeable future.

1. FINANCE INCOME AND CHARGES

2. TAXATION

The total tax charge for the six months ended 31 December 2021 was £3 million (31 December 2020 - £25 million income), in accordance with increase in deferred tax liability in relation to the effective portion of changes in fair value of cash flow hedges. The change in deferred tax liability is presented as part of the other comprehensive income.

3. BORROWINGS AND BANK OVERDRAFTS

The interest rates of external borrowings shown in the table above are those contracted on the underlying borrowings before taking into account any interest rate hedges. Bonds are stated net of unamortised finance costs of £36 millions (30 June 2021 - £37 millions).

Bonds are reported at amortised cost with a fair value adjustment shown separately. All bonds, medium term notes and commercial papers issued by the company are fully and unconditionally guaranteed by Diageo plc

4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair value measurements of financial instruments are presented through the use of a three-level fair value hierarchy that prioritises the valuation techniques used in fair value calculations.

The group maintains policies and procedures to value instruments using the most relevant data available. If multiple inputs that fall into different levels of the hierarchy are used in the valuation of an instrument, the instrument is categorised on the basis of the most subjective input.

Foreign currency forwards and swaps, cross currency swaps and interest rate swaps are valued using discounted cash flow techniques. These techniques incorporate inputs at levels 1 and 2, such as foreign exchange rates and interest rates. These market inputs are used in the discounted cash flow calculation incorporating the instrument's term, notional amount and discount rate, and taking credit risk into account. As significant inputs to the valuation are observable in active markets, these instruments are categorised as level 2 in the hierarchy. There were no significant changes in the measurement and valuation techniques, or significant transfers between the levels of the financial assets and liabilities in the period ended 31 December 2021.

The company's financial assets and liabilities measured at fair value are categorised as follows: