Diageo : Annual Report Strategic Report 2020

August 10, 2020 at 03:44 am

Annual Report 2020

Contents
Strategic report
Our brands .......................................................................	2
Our global reach...........................................................	3
Chairman's statement .............................................	4
Our purpose and ambition .................................	6
Chief Executive's statement ...............................	8
Our business model .................................................	10
Stakeholder engagement ....................................	12
Our market dynamics ..............................................	14
Our strategic priorities .............................................	17
Key performance indicators ...............................	30
Sustainability performance .................................	32
Our principal risks and
risk management .......................................................	38
Climate-related risks .................................................	42
Group financial review ...........................................	44
Business review ............................................................	50
Category review ..........................................................	60
Definitions and reconciliation
of non-GAAP measures to
GAAP measures ...........................................................	62
Governance report
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

Diageo is a global leader in beverage alcohol with an outstanding collection of brands across spirits and beer.

Our Performance Ambition is to be one of the best performing, most trusted and respected consumer products companies in the world.

Our products are sold in more

than 180 countries and our brands include Johnnie Walker, Crown Royal, JεB, Buchanan's and Windsor whiskies, Smirnoff, Cîroc

and Ketel One vodkas, Captain Morgan, Baileys, Don Julio, Tanqueray and Guinness.

We are proud of the brands we make and the enjoyment they give to millions. We are passionate about the role alcohol plays in bringing people together, to celebrate life every day, everywhere.

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.

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 messages from our brands

Lost-time accident frequency(v)

(i) See definitions and reconciliation of non-GAAP measures to GAAP measures on pages 62-67.

Net sales are sales less excise duties.
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.

Per 1,000 full-time employees.
Data for the year ended 30 June 2019 has been restated where relevant in accordance with Diageo's environmental reporting methodologies.
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%

Excluding corporate net sales of £38 million (2019: £53 million).
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

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

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)

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.
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.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Chairman's statement

Recommended final dividend per share

42.47p 0%

2019: 42.47p

Total dividend per share(i)

69.88p  2%

2019: 68.57p

Total shareholder return

(19)%

2019: 27%

Includes recommended final dividend of 42.47p.

This year, the onset of the Covid-19 pandemic has been extremely challenging for many people, communities and businesses around the world. At a testing time, Diageo has been able to rely on the culture of agility and efficiency that has been nurtured under Ivan's leadership. I am particularly grateful to all our employees for their tenacity and commitment through this difficult period, and for their hard work to help tackle the public health emergency, their support for our communities and their work with our suppliers and customers.

Culture

Our ability to adapt to market challenges, combined with our unwavering focus on consumers and trade partners, are the foundation for the delivery of our Performance Ambition.

During the year, we continued to invest

behind the opportunities we believe will deliver the best returns. From brands to innovation and technology, we continued to enhance capabilities and drive efficiencies across the business. Although the trajectory of the global recovery from Covid-19 is uncertain, I am confident that our culture will continue to underpin our resilience and our longer-term success.

Our stakeholders

Our purpose is to celebrate life, every day, everywhere. This requires us to be the best we can be at work, at home and in the community. It means engaging with our stakeholders, listening to their ideas and concerns and working constructively with them to find solutions to our shared challenges. You can read more about our stakeholder engagement on pages 12-13 and 76-77.

Our first priority this year has been the health, safety and wellbeing of our employees. While Covid-19 restrictions prevented our annual Your Voice Survey from taking place this year, we developed a new survey tool which helped us

'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 swift action ranging from strengthening our financial liquidity to re-prioritising our investment plans.'

Javier Ferrán

Chairman

understand employee engagement, listen to our people's feedback and learn from their working experience during the pandemic. The Board was pleased with the survey results, with 91% of employees saying they were 'proud to work at Diageo'.

As the designated Non-Executive Director for workforce engagement, I have also very much appreciated the candid discussions I have had with employees. During the year, I held open and constructive sessions with employees across all five regions, both in person and, in the second half of the year, virtually. Our employees' perspectives and ideas provide very valuable input for the Board's consideration and our workforce engagement statement is available on page 77.

The global environment

As a business that sells its products in over 180 countries, we are never immune from volatility in the global trade environment. The global impact of Covid-19 is unprecedented. We are closely tracking and adapting to consumer behaviour and have taken swift action ranging from bolstering our financial liquidity to re-prioritising our investment plans.

With the United Kingdom approaching the end of the transition period for exiting the European Union, we remain confident that the direct financial impact to Diageo will not be material. Under World Trade Organization rules the majority of our products already move tariff-free within the European Union and we see some potential longer-term opportunities if the United Kingdom can strike beneficial new trade deals.

Diageo in society

We are determined to build our business for the very long term and seek to make a positive impact on the issues that matter most to our stakeholders and to wider society.

The work we do in the societies and communities in which we live and work is fully integrated with our strategic priorities. We have a longstanding commitment to promote positive drinking through encouraging

4 DIAGEO Annual Report 2020

moderation and tackling misuse. We were encouraged to see the results of an international survey covering nine countries which shows 84% of drinkers are not drinking more than they did before the pandemic lockdowns.(i) We are not, however, complacent and continue our important work in this area, which you can read more about on pages 24-25.

Water is our most important ingredient and a precious shared resource which is coming under increasing pressure in many parts of the world. Managing our impact on water, and being good stewards of this resource, is our highest environmental priority. A big part of our action on water is our replenishment programme in water-stressed areas where we operate. We have made significant progress this year and have achieved our 2020 target, meaning that we have replenished the total water used in our final product in these areas. This year Diageo was one of only 72 companies, out of 8,400 globally, to achieve an 'A' for Water Stewardship from CDP, the leading global disclosure system for environmental reporting. This puts Diageo in the top 1% of companies globally. You can read more about our water stewardship performance on page 34.

Creating value

In fiscal 2020, our performance was significantly impacted by the Covid-19 pandemic. We took swift and decisive action across the business and this, combined with the changes that have been made over the last six years, provides solid foundations for future progress across the four areas of performance we measure: efficient growth, consistent value creation, credibility and trust, and engaged people.

Return on invested capital was down 267 basis points at 12.4%. Total shareholder return (TSR) was minus 19% this year, although the compound average growth rate of both the five- and ten-year TSR was up double-digits, placing Diageo sixth in both periods amongst our consumer products peer group.

We continue to target dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) of between 1.8 and 2.2 times. The recommended final dividend is 42.47 pence

per share. This brings the recommended full-year dividend to 69.88 pence per share and dividend cover to 1.6 times. Subject to shareholder approval, the final dividend will be paid to UK shareholders on 8 October 2020.

Payment will be made to US ADR holders on 14 October 2020. This year, we purchased 39 million shares, returning £1.25 billion to shareholders in the first phase of the current return of capital programme. On 9 April, we announced that we would not initiate the next phase of this programme in fiscal 2020. Given our elevated leverage ratio we are now pausing the share buyback programme until leverage is back within our target range of 2.5-3.0 times adjusted net debt to EBITDA.

Board changes

From the end of October 2019, Susan Kilsby, Non-Executive Director and Chair of the Board's Remuneration Committee, took over as the Senior Independent Director. She replaced Lord Davies of Abersoch, who had served as the Senior Independent Director since October 2011 and who retired from the Board at the end of June. Lord Davies had been a non-executive Director for over nine years, and I am very grateful to him for his wise guidance and significant contribution

to the Board's deliberations.

In January, we announced the appointment of Valérie Chapoulaud- Floquet as a Non-Executive Director, effective 1 January 2021. Valérie will also join the Audit, Nomination and Remuneration Committees.

At the end of March, Debra Crew stepped down from the Board as she

June 2020 survey of more than 11,000 people across nine countries in Africa, North America, Latin America, Asia and Europe conducted by YouGov for the International Alliance for Responsible Drinking (IARD).

REPORT STRATEGIC

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.

Read more on pages 30-31

DIAGEO Annual Report 2020

Chief Executive's statement

Volume movement

11.8% 

2019: 2.3% 

Organic volume movement

11.2% 

2019: 2.3% 

Net sales movement

8.7% 

2019: 5.8% 

Organic net sales movement

8.4% 

2019: 6.1% 

Reported operating profit movement

47.1% 

2019: 9.5% 

Organic operating profit movement

14.4% 

2019: 9.0% 

The Covid-19 pandemic represents the most challenging environment for international businesses for a generation. I want to thank all my colleagues for their remarkable dedication in such difficult circumstances and, especially, for the support they have shown to each other, our partners and the communities in which we live and work.

As well as causing devastating loss of life around the world, the pandemic has seriously affected many countries and significantly impacted our performance in the second half. Nonetheless, our business has shown considerable resilience throughout the pandemic. This is testament to the hard work of our colleagues and efforts over recent years to make our business more agile, putting the consumer at the heart of everything we do.

Our priority remains the health and wellbeing of our colleagues, while taking the necessary actions to protect our business. At the start of the pandemic, we put in place stringent safety protocols and heightened sanitation measures at all our sites and enabled employees to work from home wherever possible. Across the business, we have implemented new policies and resources to support all our people, both on site and at home.

From the beginning of this pandemic, we addressed the medical and humanitarian emergency with charitable donations, drinking water, food parcels, masks and hygiene products around the world. At a time of acute personal protective equipment (PPE) shortages, we donated alcohol to make more than ten million bottles of hand sanitiser for frontline healthcare workers in 20 countries and manufactured hand sanitiser to meet community surges in demand.

Many countries implemented lockdowns that included bar closures. As a result, we have provided support packages for bartenders and bar

'Covid-19 has vividly demonstrated that governments, businesses and communities must work together to build more resilient societies, better able to withstand major social and economic shocks. I am very proud of the way our people responded when they were truly tested this year. Together, we will enable Diageo and the communities in which we live and work to emerge stronger from this pandemic.'

Ivan Menezes

Chief Executive

owners and have worked closely with our suppliers and customers to reduce the disruption to their businesses and ours. In June, we announced a $100 million recovery fund and global programme, 'Raising the Bar', to support pubs and bars as they start to welcome their customers back.

We will continue to help communities and our industry, and we are determined to do what we can to support the global recovery.

I am very proud of the way our people responded when they were truly tested this year. Together, we will enable Diageo and the communities in which we live and work to emerge stronger from this pandemic.

Performance

After several years of consistent delivery, the global outbreak of Covid-19 has presented significant challenges for our business, impacting fiscal 2020 performance.

In the first half, we delivered a good, consistent set of results, with broad based organic net sales growth across regions and categories; we continued to increase investment behind marketing and growth initiatives, while expanding organic operating margins; we returned £1.1 billion to shareholders via share buybacks and delivered solid free cash flow at almost £1 billion.

For the full year, reported net sales were down 8.7%, driven by a decline in organic net sales. Organic net sales were down 8.4%, with growth in North America offset by declines in all other regions. Reported operating profit was down 47.1%, mainly driven by exceptional operating items, including impairments, and by a 14.4% decline in organic operating profit. The decline in organic operating profit was driven by an 11.2% decline in volumes, cost inflation and unabsorbed fixed costs, which were partially offset by short term cost reductions and ongoing productivity benefits.

Reported and organic net sales were down across most brands and categories, with the exception of tequila, up 25%, Canadian whisky, up 8%, US whiskey, up 3% and ready to drink, up 8%. Organic net sales of our global giant brands were down 13%, driven by declines in Johnnie Walker and Guinness. Guinness was impacted

8 DIAGEO Annual Report 2020

by global on-trade closures and keg return schemes in the second half. Our local stars declined 7%, with continued growth of Crown Royal offset, primarily, by declines in Chinese white spirits in China. Our Reserve brands declined 4%, with double-digit growth in Don Julio and Casamigos offset by declines in Chinese white spirits, Johnnie Walker Reserve variants, Cîroc and Ketel One vodka. Earnings per share before exceptionals declined 16.4%, driven primarily by lower operating profit.

During the second half, we reduced discretionary expenditure

and reallocated resources across the group. As part of these mitigation measures, we stopped any A&P spend that would not be effective, but have been clear that we must remain invested in the medium to long term health of our brands and business. We also tightly managed working capital and deferred discretionary capital expenditure projects.

We have a strong balance sheet and recognise the importance of liquidity through uncertain times. During the second half we issued an additional £2 billion of bonds and temporarily increased our committed facilities from £2.8 billion to £5.3 billion. We delivered solid cash flow performance, with free cash flow at £1.6 billion. As a result, we have the liquidity and the confidence to continue investing in our priorities.

As demand recovers, we will continue investing behind the most effective initiatives to ensure we emerge stronger.

2020 net sales by category (%)

Scotch	23%
Vodka	11%
US Whiskey	3%
Canadian Whisky	8%
Rum	7%
IMFL Whisky	5%
Liqueurs	5%
Gin	5%
Tequila	5%
Beer	15%
Ready to drink	7%
Other	6%

Communities

Covid-19 has vividly demonstrated that governments, businesses and communities must work together to build more resilient societies, better able to withstand major social and economic shocks. I am proud that, despite the pandemic, Diageo has maintained its community investment to ensure the business has a positive impact on society: promoting moderation and tackling alcohol misuse; reducing our carbon emissions and water usage; and supporting local communities through our global skills and empowerment programmes. You can read more on pages 24-29.

This year, our ambitious and stretching external targets for the environment and communities come to a close. While we are proud of our progress, we know there is much more to do. We have been developing our new targets to 2030, which will take our commitment to positive drinking, inclusion and diversity and grain-to-glass sustainability even further. You can read more on pages 32-37.

REPORT STRATEGIC

I am very proud of the inclusive and diverse culture we are creating at Diageo. Championing inclusion and diversity is fundamental to driving engagement and achieving the best possible outcomes for our business. This year, we were ranked the second Most Diverse and Inclusive Workplace globally by the Refinitiv Diversity and Inclusion Index.

Raising the Bar

We are committed to taking every step necessary to champion equality everywhere. While we have made progress, there is so much more to do. I am proud that our $100 million global 'Raising the Bar' programme included a $20 million community fund to support social justice in

the United States, helping Black communities and businesses recover from Covid-19.

As we look ahead, we are determined to continue building resilience in our business and to support our communities. The United Nations' International Labour Organization has forecast that 436 million enterprises worldwide face serious disruption and one in six young people will be unemployed due to Covid-19. Through our 'Raising the Bar' programme, we will provide support to help pay for the physical equipment needed for outlets to re-open in major hospitality centres around the world. These businesses play an essential role in bringing people together to socialise and celebrate - something that we have missed so much during this pandemic. They also sustain hundreds of millions of jobs, which provide a first foot on the employment ladder for many young people.

Outlook

Our immediate focus is on emerging from Covid-19 in a stronger position, having built deeper relationships with our customers, consumers and the communities in which we operate. Although the trajectory of the recovery is uncertain, with volatility expected to continue into fiscal 2021, we are well-positioned to invest effectively, as consumer demand returns. Recovery will depend on the success of public health measures, the impact of economic policies, the pace at which lockdown measures are eased and how quickly consumers choose to return to bars and restaurants and resume international travel.

Over the longer term, total beverage alcohol remains highly attractive, with robust fundamentals, and the actions we have taken over the last six years provide solid foundations to grow in a consistent, sustainable way.

We have passionate, committed people, an enviable portfolio of brands and a strong balance sheet. I am confident in Diageo's strategy and our ability to move quickly in the current environment. We will continue to execute with discipline and invest appropriately to ensure we are strongly positioned for a recovery in consumer demand.

Ivan Menezes

Chief Executive

DIAGEO Annual Report 2020

Our business model

Creating a truly sustainable business for the very long term

We deliver our strategic priorities through a business model that leverages

global and local expertise, has the consumer at its heart and puts our responsibilities to our stakeholders front and centre.

Our enablers

Our people

We are proud of our people, whose passion, commitment and specialist skills make the difference.

27,775

Our brands

We have a leading portfolio of iconic brands across spirits and beer.

200+

Our relationships

From grain to glass, strong, trusted relationships with all our stakeholders are essential to our business.

180+ countries

Our insight and know-how

Our in-country sales and marketing teams give us greater agility and enhanced insight, so we can anticipate the diverse needs of our consumers and customers.

Our infrastructure

We have a global network of sites devoted to research and development, distillation, maturation, brewing, warehousing and packaging of spirits and beer.

150+ sites

Our financial strength

Attractive industry margins, a strong balance sheet and solid free cash flows give us the financial strength to execute our strategy and deliver strong stakeholder returns over the long term.

What sets us apart

Our brand portfolio

and geographic footprint

Our leading brand portfolio offers consumers a broad range of products across categories and price points. We have extensive operations in the United States and Europe, as well as leading positions in many of the markets that are expected to contribute most to medium-term industry growth.

Our track record in innovation and brand building

We innovate across centuries-old brands such as Johnnie Walker, Tanqueray and Guinness, and we develop and grow new brands like Bulleit and Roe & Co. We use our archives, two of the largest and most comprehensive in the drinks industry, to provide a rich source of inspiration for our brands.

Our relationships with the trade

Diageo Reserve World Class™ discovers the next generation of bartending talent, who set the latest mixology trends and bring these to the best bars worldwide. Since its launch in 2009, we have created a network of relationships with bartenders, customers and distributors that provides us with a unique route to our consumers.

Johnnie & Ginger Highball cocktail

10 DIAGEO Annual Report 2020

Our communities

Our business activities

Consumer	Sourcing	Marketing
insights	From smallholder	We invest in
We have well-	farmers in Africa	world-class marketing
established	to multinational	to responsibly build
proprietary data	companies, we work	vibrant brands that
tools to understand	with our suppliers to	resonate with our
consumers' attitudes	procure high-quality	consumers. We have
and motivations.	raw materials and	a rigorous Marketing
We convert this	services. Where it	Code and belong to
information into	makes sense, we	the Global Alliance
insights which	source locally.	for Responsible
enable us to respond			Media, working
with agility to our			with peers to push
consumers' interests			for further consumer
and preferences.			and brand safeguards.

REPORT STRATEGIC

The value we create(i)

Our people

We want our people to be the best they can be. We offer a diverse and inclusive workplace with opportunities for development and progression.

91%	of employees are proud to work
for Diageo

Our consumers

We are passionate about the role our brands play in celebrations globally. We are committed to promoting moderation and reducing alcohol misuse.

229.2m	people reached with moderation
messages from our brands(ii)

Our customers

We work closely with customers to build sustainable partnerships that help grow their businesses through great insight and execution.

149,000 bar professionals trained through the Diageo Bar Academy

Innovation

Using our deep understanding of trends and consumer socialising occasions, we focus on driving sustainable innovation that provides

new products

and experiences for consumers, whether they choose to drink alcohol or not.

Distilling and	Selling
brewing	We grow by
We distil, brew,	working in
bottle and distribute	partnership with
our premium spirits	our customers.
and beer brands	Our global
through a globally	and local
co-ordinated supply	sales teams use
operation, working	proprietary data
to the highest	tools and insights
quality and	to extend our sales
manufacturing	reach and improve
standards. Where	our execution. When
it makes sense, we	our customers grow,
produce locally.	we grow too.

We help build thriving communities by making lasting contributions where we live, work, source and sell.

> 293,000 people benefitted from our community programmes

Our suppliers

We partner with suppliers to ensure long-term, mutually beneficial relationships. Respect for human rights is embedded throughout our global supply chain.

14th in the Gartner Supply Chain Top 25

Our investors

We aim to maximise shareholder returns through consistent, efficient growth and a disciplined approach to capital allocation.

13% compound annual growth rate in total shareholder return over 10 years

Our expertise in distillation and brewing

Our supply chain teams are the guardians of our brands' quality and craftsmanship. Their skills and experience range from the craft of barrel-making and coppersmithing, to blending scotch, brewing premium beer, designing packaging and ensuring our complex modern supply operations are working to the highest standards.

Governments and regulators

We contribute to economic and development priorities and advocate laws that protect communities where these are not already in place.

£1.3m	average amount generated for every
£1m we contribute to national GDP(iii)

Data points refer to fiscal 2020 other than where indicated.
Cumulative for fiscal 2019 and fiscal 2020.
Oxford Economics, 2020 for calendar year 2019.

DIAGEO Annual Report 2020

Stakeholder engagement

Ensuring a continuous dialogue

We aim to maintain open and positive dialogue with all our stakeholders, considering their key interests and communicating with them on a regular basis. This helps us build trust and respect and make choices as a business that help shape the role we play in society.

Our purpose and values help guide our engagement around the world.

Why we engage

People

Consumers

Customers

Our people are at the core of our business. We aim to build a trusting, respectful and inclusive culture so every individual feels highly engaged and can be their best. We want our people to feel their human rights are respected and they are treated with dignity. We are committed to creating opportunities for growth and to a continuous learning culture.

Understanding our consumers is key to growing our business sustainably for the long term. Consumer motivations, attitudes and behaviour form the basis of our brand marketing and innovations. We make our brands with pride and want them to be enjoyed responsibly. On occasions when consumers choose alcohol, we want them to 'drink better, not more'.

Our customer partners are experts in the products they buy and sell, as well as in the experiences they create and deliver. We work with a wide range of customers: big and small, on-trade and off, digital and e-commerce. Our passion is to ensure we nurture mutually beneficial relationships that deliver joint value and the

best outcome for all our consumers.

Our stakeholders'	-- Prioritisation of health, safety	-- Choice of brands for different	-- A portfolio of leading brands that
interests	and wellbeing	occasions, including no- and	meets evolving consumer preferences
	-- Investment in learning	lower-alcohol	-- Identification of opportunities that
	opportunities for employee	-- Innovation in heritage brands	offer profitable growth
	growth and development	and creation of new brands	-- Insights into consumer behaviour
	-- Ways of working, culture and	-- Responsible marketing	and shopper trends
	benefits programme	-- Great experiences	-- Trusted product quality
	-- Contribute to the growth of our	-- Product quality	-- Innovation, promotional support
	brands and our performance	-- Sustainability credentials	and merchandising
	-- The promotion of inclusion	-- Price	-- Availability and reliable supply
	and diversity		and stocking
			-- Technical expertise

How we respond	--Company-wide employee	-- Broad portfolio of choices across	-- Use of best practice sales analytics

	engagement surveys	categories and price points	and technology to support our
	-- Consistent talent and performance	-- Insightful innovation that satisfies	retailers and distributors
	management approach	consumer preferences	-- Ongoing dialogue and account
	-- Extensive online learning and	-- Responsible advertising and	management support
	development material	marketing that adheres to our strict	-- Physical and virtual sales calls
	-- Informative and up-to-date	Diageo Marketing Code	-- Development of joint business plans
	employee communication channels	-- Active engagement and education	-- Regular business updates
	-- Meetings with non-executive	to promote moderation and reduce	-- Training and webinars through
	workforce engagement director	the harmful use of alcohol	unique offerings, like the Diageo
Read more about how our Board	-- Employee interest groups	--High-quality manufacturing	Bar Academy
	and environmental standards
engages with our stakeholders
on pages 76-77

12 DIAGEO Annual Report 2020

REPORT STRATEGIC

Suppliers

Our suppliers and agencies are experts in the wide range of goods and services we require to create and market our brands. By working with them, we not only deliver high-quality products marketed responsibly, but improve our collective impact, ensuring sustainable supply chains, reducing our environmental impact and making positive contributions to society.

-- Developing strong, mutually beneficial partnerships

-- Collaborating to realise innovation

-- Fair contract and payment terms

-- Consistent performance measurement

-- Joint risk assessment and mitigation

Communities

Investing in sustainable growth means supporting and empowering the communities where we live, work, source and sell. By ensuring we make a positive contribution, we can help build thriving communities and strengthen our business.

-- Impact of our operations on the local economy

-- Access to skills development

-- Opportunities for employment and supplier opportunities

-- Improved access to water, sanitation and hygiene

-- Responsible use of natural resources

-- Gender equality, inclusion and diversity

-- Transparency and engagement

Investors

We want to enable equity and debt investors to have an in-depth understanding of our strategy and our operational and financial performance, so they can more accurately assess the value of our shares and the opportunities to finance our business.

-- Strategic priorities

-- Financial performance

-- Corporate governance

-- Leadership credentials, experience and succession

-- Executive remuneration policy

-- Shareholder returns

-- Environmental and social commitments and progress

Governments and regulators

The regulatory environment is critical to the success of our business. We believe it is important that those who can influence policy, laws and regulation understand our views. We also want to share information and perspectives on areas that can impact our business and

public health.

-- Contribution to national economic and development priorities

-- Tax, excise and illicit trade

-- Positive drinking programmes and impacts

-- Wider sustainability agenda, including human rights, environmental impacts, sustainable agriculture and support for communities

-- Corporate behaviour

-- Partnering with Suppliers standard,	-- Ongoing dialogue, annual reviews	-- Stock exchange announcements	-- Ongoing dialogue
	our code for working with suppliers	-- Partnerships, including local raw	-- Results announcements	-- Collaboration on responsible
-- Direct resolution process	material supply partnerships in Africa	-- Investor roadshows	drinking initiatives and promotion of
-- Confidential, independent	-- Learning for Life, our global training	-- Meetings and calls	moderation, tackling illicit trade and
	whistleblowing helpline	programme for hospitality and retail	-- Capital Markets Days	strengthening industry standards
	and website	sector workers	-- Participation in governments'
	-- Annual General Meeting
-- Regional supplier awards	-- Our community water, sanitation and	business and industry advisory groups
-- Annual Report, Form 20-F and
-- Supplier financing	hygiene (WASH) programmes in Africa	-- Sharing of research, economic
-- Supplier performance	and India	Sustainability and Responsibility	modelling and international best
Performance Addendum
-- Community programme design that	practice, including as a member
	measurement and performance	-- Shareholder information on
	reviews with two-way feedback	includes gender equality and inclusion	of industry trade organisations
-- Standards assessments through	and diversity considerations	www.diageo.com	-- Diageo Code of Business Conduct
-- Participation in investor conferences
-- Tree planting programmes
	independent bodies

		-- Participation in sustainability indices

				DIAGEO Annual Report 2020	13

Our market dynamics

Total beverage alcohol is an attractive industry with a natural runway for sustainable growth

Drinking occasions and practices vary depending on local culture and traditions. We believe that drinking in a responsible way can be part of a balanced lifestyle in many societies around the world.

Our markets are shaped by long-term consumer, economic, cultural and social trends, and the regulatory environment. Notwithstanding Covid-19, the long-term trends for our industry remain extremely attractive.

Consumers are increasingly choosing spirits such as gin on occasions where, traditionally, they might have chosen beer or wine.

	£854 billion	6 billion	600 million
	retail sales value	equivalent units	new legal purchase age
	of global alcohol	of alcohol sold	consumers are expected
	market(i)	each year (ii)	to enter the market
			by 2030(iii)

(i), (ii) IWSR, 2019.		(iii) World Bank, 2020.

Consumers want to 'drink better'

Consumers are seeking new experiences and higher quality products. When it comes to beverage alcohol, consumers are 'drinking better, not more' - increasingly choosing brands and categories that stand out for superior quality, authenticity and taste. This premiumisation trend is supported by product innovation and fuelled by higher levels of prosperity and disposable income, coupled with a greater desire to explore new experiences, ingredients and serves for social occasions.

Impact

Over the last 15 years, brands in higher price tiers have consistently grown volume faster than those in lower price tiers. Consumers are buying a broader range of premium products, including no- and lower-alcohol drinks, that reflect their diet and lifestyle choices and their interest in natural ingredients and craft production.

Our response

We have built an industry-leading portfolio of Reserve brands. We have done this through focused investment, brand-building, the creation of a dedicated management team and, in many countries, a dedicated route to market. Through the development of our Reserve portfolio, we are also able to influence the evolution of mass luxury spirits across different categories and occasions, including super premium scotch and tequila. We are also growing brands of the future. We do this through acquisition, through growing our own brands and through investing in entrepreneurs through our partnership with Distill Ventures.

Higher price spirits tiers grew	Sustain quality growth,
10 times faster	Embed everyday
efficiency, Invest smartly,
than the total spirits category	Promote positive
	drinking, Pioneer
	grain-to-glass
IWSR, 2019 volumes for the period 2015-2019.	sustainability

Consumers are increasingly choosing spirits

Consumers who drink alcohol are increasingly choosing spirits over beer and wine. This is a long-term trend. In markets where spirits is a less mature category, mainstream spirits brands can offer quality and affordability. In more mature markets, premium core and Reserve brands offer choice and new experiences.

Impact

Gin is an example of a category benefitting from switching, starting in Europe and now accelerating in markets like Australia, South Africa and Brazil. This has been fuelled, in part, by an increase in the number of occasions on which consumers are choosing gin, where traditionally they might have chosen beer or wine. In many emerging markets, spirits penetration is still low compared to developed markets, providing the potential for future growth.

Our response

Our innovation brings new brands and serves to our customers.

Our broad, global portfolio across categories and price points provides consumers with product choice to suit different occasions and their disposable income.

+4%	Sustain quality growth,

the increase in spirits share of total	Embed everyday
efficiency, Invest smartly,
beverage alcohol	Promote positive
IWSR, 2019 for the period 2005-2019.	drinking

14 DIAGEO Annual Report 2020

An emerging middle class who can afford international-style spirits

Global population growth and economic development are continuing to drive the emergence of consumers with a higher disposable income. These consumers are seeking new, aspirational experiences and driving demand for quality drinks at a range of price points. They are also moving away from informal alcohol, which is estimated to account for around 25% of global alcohol sales despite the associated health risks and loss of tax revenue for governments.

Impact

Demand for international-style spirits is rising. Around 600 million new legal purchase age consumers are expected to enter the market globally by 2030. Over the same period we expect hundreds of millions of consumers to be able to afford international-style spirits.

Our response

We have built a portfolio of lower price point options. These give emerging market consumers access to our brands at affordable prices and enable us to help shape responsible drinking trends.

Our mainstream spirits such as Baileys Delight and Smirnoff X1 in Africa, McDowell's No. 1 in India and Black & White in Latin America provide quality products at affordable price points and offer opportunities for consumers to trade up as their disposable income increases.

750 million	Sustain quality

consumers expected to be	growth, Embed everyday
efficiency, Invest smartly,
able to afford international-	Promote positive drinking
style spirits by 2030
Euromonitor, 2020.

Consumers are changing how they socialise

Consumers in developed markets are moving away from high-energy,late-night occasions towards more informal and food-related occasions. They are increasingly interested in drinks that fit occasions before, during and after meals. This year, consumers have also been adapting to different ways of socialising at home as a result of the Covid-19 pandemic.

Impact

Spirits, which are versatile and adaptable, are benefitting from the trend away from high-tempo socialising, as consumers discover new serves which are suitable for a broader range of occasions in which to enjoy our brands.

Our response

Our consumer insight enables us to innovate existing brands, anticipate new consumer occasions and create new brands that meet emerging consumer demand. This insight is supported by our ability to develop and launch products and campaigns rapidly and effectively, reaching the right consumers fast. In Latin America this year, when bars and restaurants closed due to the Covid-19 pandemic, our teams rapidly developed online platforms to help consumers make cocktails at home; worked with well-known chefs to pair recipes with signature serves; and brought the bar experience into consumers' homes through live-streaming.

+8%	Sustain quality

the increase in spirits share of	growth, Embed everyday
efficiency, Invest smartly
beverages in mainstream eating
outlets in Great Britain

Kantar, Alcovision 2020 for the period 2009-2019.

REPORT STRATEGIC

Consumers are changing how they buy

Alongside shifts in the way people socialise and consume, digital and technology are changing the way consumers find and buy our brands. Online shopping for alcohol is still low compared to other retail categories, but it is a fast-growing channel. Consumers are increasingly using

the internet to discover and learn about brands and products, where previously they might have done so in venues and while out socialising.

Impact

As regulations continue to evolve and e-commerce expands further, digital channels will play an ever-increasing role in bringing our products to consumers. This trend has been accelerated by the impact of Covid-19. For example, Drizly, the American alcohol e-commerce marketplace, saw an increase in sales of over 400% in May versus growth projections prior to Covid-19(i).

Our response

We have developed our route to consumer approach through multiple channels, with e-commerce being a key focus area this year. We work with a range of online retailers to ensure that our products are competitively and responsibly marketed - for example, through partnerships with online grocery retailers, e-marketplaces and on-demand delivery companies.

We are also developing our own digital channels that help consumers grow their understanding and knowledge of our brands, including through personalised experiences that help them find the right drink for the right occasion, such as Malts.com in Great Britain, TheBar.com in Brazil and our 'What's Your Whisky' app which launched in November.

(i) Drizly, 2020.

+17%	Sustain quality growth,

the annual rate at which the	Invest smartly, Promote
positive drinking
e-commerce sales channel for
alcohol is expected to grow over
the next five years
IWSR Global Ecommerce Strategic Study, 2020.

A complex regulatory environment

The beverage alcohol industry is highly regulated. Regulation varies widely between countries and jurisdictions, often evolving in response to changes in society. As a minimum we comply with all laws and regulations wherever we operate, but we have long understood that a responsible alcohol company must go beyond compliance.

We are proud of our brands and we want them to be enjoyed responsibly. Through our work, we support the United Nations' and the World Health Organization's goal of reducing harmful drinking by 10% by 2025. We also advocate laws and industry standards, including minimum legal purchase age laws and maximum blood-alcohol concentration driving limits, in countries where these are not already in place.

Impact

While most people who choose to enjoy alcohol do so moderately and responsibly, the misuse of alcohol can harm individuals and those around them, damage our industry's reputation and make it harder for us to create value.

Our response

We want to offer consumers the opportunity to 'drink better, not more'

- an approach that is rooted in our social values and aligns with our

DIAGEO Annual Report 2020

Our market dynamics continued

business model as a producer of premium drinks. We are committed to promoting moderation while campaigning to reduce harmful drinking and improving laws and industry standards. Our Positive Drinking strategy, described on page 24, includes ambitious targets for areas where we can have the greatest impact in reducing harm: drink driving, underage drinking and heavy drinking.

Over 1 million	Sustain quality

young people, parents and	growth, Embed everyday
efficiency, Promote
teachers educated on the dangers	positive drinking
of underage drinking over the last
three years
Diageo, 2020.

Consumers expect businesses to act responsibly

Consumers, like all stakeholders, are increasingly challenging businesses to show how they make a positive impact on society and to demonstrate their commitment to protecting the environment. Stakeholders rightly expect to see that businesses are generating wealth, fostering inclusion and diversity, respecting human rights, supporting their communities and acting on important environmental issues, including climate change and water stress.

Impact

Earning trust and respect is fundamental to achieving our ambition. Any business that relies on agricultural raw materials and water has both a responsibility to the environment around it and an exposure to environmental risks. Our future success depends on us continuing to reduce our environmental impact and promoting inclusive economic growth, while making sure we do business with integrity and respect for human rights.

Our response

Our environmental programmes reduce carbon emissions and improve water efficiency throughout our value chain, and address waste and sustainable packaging, including the use of plastic. With the oversight of our Climate Risk Steering Group, we are integrating the management of climate-related issues into our business. Our Water Blueprint defines our approach to water stewardship and prioritises our actions in areas we have defined as water-stressed.

We have a strategic commitment to inclusion and diversity within and beyond our business, while our community programmes are designed to empower women, help people develop their skills and increase access to clean water, sanitation and hygiene (WASH). Respect for human rights throughout our value chain, including the right to a safe workplace, underpins everything we do.

Baileys is well established across a range of treating occasions.

The right insights to deliver consumer-led growth

Everything we do is designed to delight consumers and customers. That means identifying the factors that drive consumer choice, so we can put the right product in front of the right consumer at the right time.

Drawing on behavioural science and the power of data, we have transformed the way we understand consumer motivations and behaviours. Our Diageo Foresight system analyses trends so we can make strategic choices and anticipate major shifts. Our Consumer Choice Framework is giving us detailed information on a huge range of social contexts - what we call 'occasions' - so we better understand who is drinking, what, where and when.

Together, these market-leading research tools are inspiring us to embrace bold, disruptive innovations, such as Ketel One Botanical and Smirnoff Infusions. At the same time, our insights

73%

of consumers believe it is not enough for brands to be environmentally responsible - they should be socially responsible too

Kantar Global Monitor, 2019.

Sustain quality growth, Invest smartly, Promote positive drinking, Champion inclusion and diversity, Pioneer grain-to-glass sustainability

enable us to unlock new opportunities for established brands. For example, we used improved global insights to re-launch Baileys as an 'adult treat' brand in 2016. The move has revitalised the brand, which is now well established across a range of treating occasions. This year, our insight told us consumers were looking to treats and baking as a creative outlet during lockdown and Baileys quickly repurposed its baking content across markets.

16 DIAGEO Annual Report 2020

Our strategic priorities

Delivering our Performance Ambition

Our strategic priorities support the achievement of our ambition to be one of the best performing, most trusted and respected consumer products companies in the world. Through them, we deliver the strategic outcomes against which we measure our performance.

REPORT STRATEGIC

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Strategic outcome:

Efficient growth

Consistently grow organic

net sales, grow operating profit, deliver strong free cash flow

CVC

Strategic outcome:

Consistent value creation

Top-tier total shareholder returns, increase return on invested capital

Strategic outcome:

Credibility and trust

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Strategic outcome:

Engaged people

High-performing and engaged teams, continuous learning, inclusive culture

Read more about the link between our strategic outcomes and our principal risks

on pages 39-40

The delivery of our strategic priorities is enabled by our culture and values

Our culture underpins the work we do to deliver our strategic priorities and is key to our success. It is shaped by our values and encourages our people to: lead bold execution that ensures consumers delight in our brands; act like entrepreneurs and encourage learning; take ownership for shaping and achieving our ambition; and create an inclusive environment where everyone can be their best.

We strive to share	Passionate about	Freedom to	Proud of what	Valuing each other	Be the best
our values with	consumers and	succeed	we do	We are creating	We are restless:
our stakeholders,	customers	We foster an	We are proud of	a truly inclusive	always learning,
building mutually	Our curiosity and	entrepreneurial	how we operate	culture. We seek	always improving.
fulfilling relationships	insights deliver	spirit by giving each	and what we stand	diversity in people	We strive to be the
and partnerships.	experiences and	other the freedom	for. We act sensitively	and perspectives	best at work and in
	products that delight	to succeed. It's how	with the highest	and believe in the	our communities.
	and drive growth.	we move with pace	standards for	benefits it delivers
		and keep our big	integrity and social	across our business.
		company small.	responsibility.

DIAGEO Annual Report 2020

Our strategic priorities continued

1 Sustain quality growth

Creating sustainable and consistent quality growth is at the heart of our ambition to be 'one of the best performing'. It enables us to invest in our business, grow our margins and deliver top-tier total shareholder returns.

Market dynamics

Consumers want to 'drink better'
Consumers are increasingly choosing spirits
An emerging middle class who can afford international-style spirits
Consumers are changing how they socialise
A complex regulatory environment

Strategic outcomes

Efficient growth, Consistent value creation,

Credibility and trust

Progress in 2020

Continued investment in brand building, targeting the most effective opportunities
Further developed NRM processes and capabilities
Significantly enhanced Diageo Bar Academy content and support for bartenders and bar owners
Launched innovations to recruit new consumers and unlock new occasions, focusing on our global giants, no- and lower- alcohol and retail formats

Looking ahead to 2021

Focus on emerging from the pandemic in a stronger position, having built deeper relationships with our customers and consumers
Continue to build our NRM capabilities and route to consumer at pace
Innovate creatively, focusing on the right opportunities for the current environment

Delivering sustained quality growth

The demographic and economic market drivers for the beverage alcohol sector point to clear potential for growth. Over the long term, however, growth on its own is not enough to achieve our Performance Ambition. We need to make sure that our growth is sustainable, consistent and of high quality.

Creating sustained, quality growth is not new to us. Brands such as Guinness and Johnnie Walker, which celebrates its 200th anniversary in 2020, show how the right approach to quality, brand equity, innovation and investing for the long term can build lasting value. We focus on six key elements that help us sustain quality growth:

Key elements of our approach

-- Grow volume, price and mix	-- Innovate sustainably
-- Execute the most effective	-- Grow next generation
route to consumer	brands
-- Build brand equity	-- Enable a positive
	policy environment

Grow volume, price and mix

Supported by improved capabilities in net revenue management (NRM), a balance of volume, price and mix is essential for driving consistent net sales growth. NRM is all about driving quality growth by making sure we are offering our consumers and customers the right assortment of brands and formats in the right place, at the right price, and for the right occasion.

This year, we continued to embed NRM across the business.

We established multi-disciplinary teams across markets and made our approach more holistic. This has allowed us to create actionable insights within shorter timeframes, increase the speed of our decision-making and enhance our ability to create, execute and adjust more bespoke plans that generate value for our customers and our business.

For example, in Northern Ireland this year we were better able to meet specific consumer and customer preferences by changing the mix of brands and formats available, which also improved our promotional plans and further integrated customers' needs into our decision-making. Our progress on NRM has enabled us to respond in an even more

agile and targeted way to our consumers' and customers' rapidly evolving requirements during the Covid-19 pandemic. We adapted pack sizes and formats and reprioritised our investments in line with changing shopper behaviours and channel shifts.

Execute the most effective route to consumer

Our business is built on getting the right product to the right consumer for the right occasion - and at the right price. The shopper landscape is evolving, as are technologies and our consumers' preferences. Through best practice sales analytics and technology, we are transforming the way we partner with our retailers and distributors. We want to ensure we create distinction and competitive advantage at every point in the route to consumer, not just when people enjoy our products.

This year, in order to support our bar and restaurant customers affected by Covid-19-related closures, we developed 'Cocktails To Go' programmes. These enabled our customers to simplify their offering, continue delivering quality cocktail experiences and connect with consumers online. Our 'How to' guides contain a range of support, from information on how to partner with third-party delivery services to branded content for menus and digital promotion, cocktail recipes,

'to go' packaging instructions and tips for enhancing the consumer experience.

18 DIAGEO Annual Report 2020

Build brand equity

Our brands are key to our success and we work hard to ensure their long-term health by safeguarding and building their brand equity. This year, the second of our successful Six Nations Title Sponsorship, Guinness continued to build on its long-term affiliation with rugby. The brand has a history of powerful storytelling, releasing 'Liberty Fields', the latest advert in the 'Made of More' series during the Japan Rugby World Cup.

In the second half of the year, with Covid-19-related closures in the on-trade taking place just before St Patrick's Day, Guinness quickly amended its plans to stay relevant to consumers and unveiled measures to support pub and bar staff. In the United States, Guinness released advertising with an optimistic and hopeful message to its consumers: 'We'll March Again'. In Great Britain and Ireland when lockdowns were first put in place, Guinness announced over £2 million in funds to support on-trade staff, and in Nigeria, a new initiative saw Guinness support bar owners and staff impacted by closures by providing care packages.

Innovate sustainably

Driving sustainable growth is at the heart of our innovation. Led by our strength in developing consumer insights, each innovation either recruits new consumers, re-recruits them by giving them another reason to choose our products, or disrupts a category by changing consumer perceptions. Our focus is on recruiting new consumers to occasions and brands and this year 60% of our projects were in this category, compared to around 30% five years ago.

This year, Diageo brands won nearly 80 awards at the 2020 San Francisco World Spirits Competition, including 14 awards for innovation. Baileys Red Velvet Irish Liqueur, launched in the United States and Great Britain this year, was awarded a Double Gold, while Crown Royal Peach Flavoured Whisky was also recognised. George Dickel Bottled in Bond, a limited release 13-year-old whisky, was awarded Whisky of the Year by Whisky Advocate.

Grow next generation brands

While it is vital to grow the big brands of today, we also want to seed the successful brands of the future. We grow next generation brands by acquiring brands, like Casamigos, and developing our own, like Roe & Co Irish Whiskey.

This year, Zhong Shi JiTM, the new-to-world whisky we launched in China with our joint venture partner Yanghe Distillery Co. Ltd in 2019, was awarded a Silver Medal at the IWSC (International Wine and Spirit Competition). It is crafted by master blenders and distillers from Scotland and China through a unique process, including maturation in Chinese ceramic pots, which has created a full-flavoured, exceptionally smooth liquid.

We also grow next generation brands by investing in entrepreneurs with new ideas through our partnership with Distill Ventures. We have the option to acquire Distill Ventures' portfolio companies and this year we acquired Seedlip.

Enable a positive policy environment

We sell our products in over 180 countries and to grow sustainably we rely on a transparent, predictable and fair public policy environment. We seek to secure this by constructively engaging governments and stakeholders around the world on evidence-based policies and recommendations

to ensure our brands compete on a more equal playing field in terms of alcohol taxation and regulatory policy, while also supporting government policies and objectives. This year, for example, we worked with the local Spirits Association to help the Government of Uruguay develop robust laws aimed at reducing illicit trade on its border with Brazil.

Hear more about Sustain Quality Growth from Ann Joy Muhoro, Head of Marketing, EABL, Kenya

visit diageo.com

Crown Royal Regal Apple is in its sixth year of growth.

Crown Royal: sustained growth driven by insight and innovation

Connecting with consumers and their passions is at the heart of sustained quality growth. This year, Crown Royal grew 8% and was once again North America's most valuable whisky brand(i), as consumers continue to connect with its purpose of 'inspiring exceptional generosity'.

The insight that it is better to give than to receive really resonates, as Crown Royal's Purple Bag community gifting campaign continues to show. This strong brand equity is supported by sustainable innovation and consistent investment. The result is that Crown Royal is recruiting new consumers, accessing new occasions and reinforcing its premium status.

Crown Royal Regal Apple, for example, is now in its sixth year of growth. Other innovations, such as this year's Crown Royal Peach, are also contributing to the brand's growth and vibrancy. Our marketing places Crown Royal at the centre of cultural occasions that connect with consumers. And in 2020, Crown Royal's 'The Guy Who's Got It All' campaign won a prestigious Effie advertising award.

During the Covid-19 pandemic, the brand continued to connect with consumers' desire to give back, hosting an online #GenerosityHour that has supported bartenders affected

by closures.

(i) Nielsen/NABCA for the 12 months to 31 May 2020.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Our strategic priorities continued

2 Embed everyday efficiency

Everyday efficiency creates the fuel that allows us to invest smartly and sustain quality growth.

At its heart, everyday efficiency is a mindset and a culture, which everyone in Diageo is encouraged to bring to life in their daily work.

Market dynamics	Strategic outcomes	Progress in 2020	Looking ahead to 2021
-- Consumers want to	Efficient growth,	-- Rollout of EDGE in Africa	-- Leverage and strengthen
'drink better'	Consistent value creation,	-- Introduction of EDGE365	our efficiency culture
-- Consumers are increasingly	Engaged people	and rollout in nine countries	-- Progress investments
choosing spirits		-- Development of almost	in data analytics and
-- Consumers are changing		100 new intelligent	automation
how they socialise		automation processes	-- Strong focus on cost and cash
-- Consumers are changing		-- Agile adaptation of creative
how they buy		campaigns and initiatives
-- Consumers expect businesses		to delight consumers and
to act responsibly		support customers during
		Covid-19 pandemic

Delivering everyday efficiency

We are ensuring our resources are deployed where they are most effective. This means using technology and data analytics to make better, faster decisions and work in a more agile way. It also means simplifying our business so that we can liberate our teams to better meet the needs of our consumers and customers. At the same time as freeing resources to focus on great performance, everyday efficiency enables us to generate savings that we can invest smartly.

We focus on three key elements to help embed everyday efficiency:

Key elements of our approach

Simplifying the business, injecting speed into what we do
Focusing resources on delighting customers and consumers
Unleashing technology, including data and analytics, on our processes to drive efficiency and insights

Simplifying the business, injecting speed into what we do

Across the business, we are developing systems that enable our people to spend less time collecting data and more time on execution. Automated processes and reports are also liberating our people to create value by reducing task time and improving self-sufficiency.

This year we automated a key part of our product development

process. Each year, our technical teams manage many hundreds of new product development projects, ranging from global brand redesigns to cutting-edge innovations. Collating in a single file the thousands

of individual data points needed to manage each project was a highly repetitive, manual activity. By leveraging intelligent automation, we have reduced the time it takes to create the data in the format we need - in some instances, what used to take weeks now takes hours. We have also been able to automate data entry at the start of each project. So rather than spending time on collating data, our people have more time for review and analysis, which has improved efficiency and accuracy.

Focusing resources on delighting customers and consumers

We are changing the way we work so we act with more agility and focus resources on our top business priorities. This year, with thousands of hospitality workers across the United States facing unprecedented challenges, we introduced the #TipsFromHome social media programme to help get bartenders back to work at home, and fundraise for hospitality relief funds. The programme features bartenders who use their creative talents to make drinks crafted from pantry staples to inspire consumers to make their own at home. Bartenders' cocktail-making has been featured weekly on a 'Cocktails de la Casa' segment on ABC's Jimmy Kimmel Live.

#TipsFromHome features a range of our brands including Bulleit, Don Julio, Johnnie Walker and Ketel One Botanical. We are donating $1

to the United States Bartenders' Guild (USBG) every time someone shares a cocktail image on social media using #TipsFromHome and #DiageoDonation, up to a total of $1 million. This pledge is on top of more than $2 million we have donated this year to North American organisations serving the hospitality industry, including the USBG Foundation Covid-19 Relief Campaign of the Bartender Emergency Assistance Program.

20 DIAGEO Annual Report 2020

Unleashing technology, including data and analytics, on our processes to drive efficiency and insights

Data and analytics offer a clear opportunity to create scale benefits across our business. In fact, they are critical enablers which provide us with tools to understand not just what has happened, but why. They help us make better, faster decisions and give us deeper insights into customers and consumers.

This year, the benefits of our investments have proved even more valuable, providing us with up-to-date insights in rapidly shifting market conditions. For example, earlier this year we introduced a new debtor reporting system. Using enhanced automation, this centralised approach to reporting enabled us to act with pace and agility and to more effectively manage our working capital when Covid-19 measures led to widespread closures of bars and restaurants around the world.

Over the last two years we have been embedding a suite of technology tools, known as EDGE (Every Day Great Execution). These capture in-store data and, through predictive analytics, revolutionise our ability to offer the right brands, in the right outlets, in the right way. This means we can work with customers so that each outlet has specific standards and recommendations that help boost incremental sales.

We introduced EDGE in the United States in early 2019 and this year extended it to eight further markets in Asia Pacific, Europe and Africa.

Hear more about Embed Everyday Efficiency from Kirsten Wilson, Business Development Manager, Global Supply and Procurement, Scotland

visit diageo.com

In addition to accelerating the rollout of EDGE, we have also further developed the tools to reflect the rapid trend towards digitalisation.

In North America, where the use of EDGE is most advanced, we have been able to further simplify our data reporting and insight generation, eliminating over 200 reports and introducing a standardised and highly visual dashboard that enables teams to use data for decision-making even more efficiently.

EDGE365, which we introduced this year, is an industry-

leading application for our sales force that integrates everything they need to manage their customer relationships into a single mobile application. In markets such as Australia and Spain, where EDGE365 has been launched either with our sales teams or with our distributors, we have seen significant improvements in efficiency and effectiveness, enabling more in-depth engagement across a larger number of customers.

In other parts of the business, we are piloting the use of advanced analytics to optimise distillation and fermentation processes at manufacturing sites, with early results showing yield improvements. We are also using data analytics to improve the accuracy of our demand forecasting in our supply operation. Through improved insights, planners can also identify any required adjustments more quickly. All of this is achieved while reducing the time spent on reporting.

REPORT STRATEGIC

Our 'Stop the Stops' initiative is empowering our production teams to use their experience and expertise to create value.

'Stop the Stops': an efficiency culture led by employees

We are seeing the benefits of having a culture of everyday efficiency embedded across the business. This includes our supply operations, where our 'Stop the Stops' initiative is empowering our production teams to use their experience and expertise to create value.

Part of our manufacturing excellence programme, 'Stop the Stops' is based on a simple insight: that no one understands production better than those working on it every day. Our operators know that unplanned stops to our lines mean the potential loss of value in the production of our brands, which can impact the quality and availability of our products. With their knowledge and expertise,

our operators are the best people to identify and resolve unplanned stops. They are developing and delivering the equipment fixes we need to reach our goal of reducing unplanned stops to zero. At the same time, they are building their knowledge, enhancing product quality and improving their work environment.

As we further develop 'Stop the Stops', we are rolling it out worldwide. In Europe, where it is most mature, we are already seeing higher engagement levels with our people, fewer defects and a typical reduction of 30% in unplanned stops.

DIAGEO Annual Report 2020

Our strategic priorities continued

3 Invest smartly

We are investing in the future success of our business - but that investment needs to be 'smart' to support the delivery of consistent performance and enable sustainable, quality growth.

Market dynamics

Consumers want to 'drink better'
Consumers are increasingly choosing spirits
An emerging middle class who can afford international-style spirits
Consumers are changing how they socialise
Consumers expect businesses to act responsibly

Strategic outcomes

Efficient growth, Consistent value creation, Engaged people

Progress in 2020

Continued to develop our Catalyst tools
Further developed our use of intelligent automation
Accelerated our e-commerce capabilities and strategy
Opened the Guinness Gatehouse in Shanghai
Received planning permission for our Johnnie Walker experience in Edinburgh

Looking ahead to 2021

Invest prudently, focusing on the most effective opportunities in the current environment
Enhance capabilities and continue to develop marketing data and analytical tools
Build e-commerce and intelligent automation further

Delivering smart investment

Investing smartly means focusing on areas in which we believe investment will bring the greatest benefits: our people; advertising and promotional (A&P) spend; technology, data and e-commerce; capital expenditure; and mergers and acquisitions (M&A).

Key elements of our approach

Invest to grow and develop our people
Acquire attractive new brands
Spend more on A&P, more effectively and efficiently
Build capabilities in technology, data and e-commerce
Support growth with the right capital investment

Invest to grow and develop our people

Investing in our people is critical to our future success. Smart investment means ensuring our people have the right opportunities to develop their skills and capabilities; the right tools and resources to make faster, smarter decisions; and better data, analytics and information. Our work on building an engaged, inclusive and diverse team is described on pages 26-27.

Acquire attractive new brands

Many of our iconic brands have been built over decades, or even centuries. While never losing sight of the importance of acting as stewards of these great brands, we need to identify and nurture the

new brands that consumers will enjoy in the future. Our strategy is to invest in new-to-world brands which help us access fast-growing categories, such as no- and lower-alcohol drinks.

This year, we acquired Seedlip, the world's first non-alcoholic distilled spirit. Seedlip was launched in 2015 to solve the dilemma of 'what to drink when you're not drinking®'.

Its founder, Ben Branson, set out to change the way the world drinks while continuing his family's 320-year-old farming legacy. In the last four and a half years, Seedlip has grown from Ben's kitchen to a presence in more than 25 countries, over 250 top-rated restaurants, many of the world's best cocktail bars, luxury hotels and high-quality retailers.

Spend more on A&P, more effectively and efficiently

We have always invested in marketing our brands to support their long-term brand equity and growth. We combine our creative flair with smart investment in A&P, which ensures we get maximum impact from our marketing by increasing the efficiency and effectiveness of our spend. Our Marketing Catalyst data analytics tools, for example, help us to accurately predict the short- and long-term impacts of our investments. This means we confidently know when, where and how much to invest to grow our brands.

Marketing Catalyst, which is now used in 60 countries by over a

thousand marketers and our media agencies, is supporting greater data transparency and enabling us to track performance more closely than ever before. Its use covers global giants such as Guinness and Johnnie Walker and local stars like Tusker in Kenya and Bundaberg in Australia. Because Marketing Catalyst delivers more detailed insight as we gather more data, it gives us the confidence to invest in A&P for long-term growth. It also means we can optimise the short-term performance of our investments and make informed decisions where a change in market conditions or consumer behaviour might mean our investment is best focused elsewhere.

For example, this year in North America we were able to achieve a 19% increase in our return on investment in a key channel over the busy holiday period. In Brazil, a shift in spend delivered a significant improvement in the return on Tanqueray investment and in Africa, where we have increased our use of Catalyst, the Senator brand in Kenya also achieved a 20% improvement in return on investment by increasing our A&P spend in better performing channels. We further developed Marketing Catalyst this year by embedding broader and deeper measurement. We also launched an enhanced version of Catalyst in Europe and North America which provides us with additional insight into how our decisions about A&P investment impact other key financial metrics such as net sales and operating profit.

22 DIAGEO Annual Report 2020

Build capabilities in technology, data and e-commerce

We are also investing in best-in-class technological capabilities that support productivity. We want to keep strengthening our analytical capabilities to build our competitive edge and take further strides in developing intelligent automation to make our core processes simpler and ensure our people are focused on higher value-added work.

This year, we have almost doubled the number of applications in which we use intelligent automation. We have used intelligent automation to inject speed and remove complexity for our marketers and creative agencies. Our Diageo Content Hub simplifies how our marketers and agencies are able to find relevant content and buy media. After less than two years in full operation, the millionth download was made in May this year. It took our previous tool over six years to achieve this - showing how the new hub has made it easier and faster for our people and agencies to access what they need.

While online shopping for alcohol is still at low levels compared to other retail categories, it is a fast-growing channel. With so many bar and restaurant closures resulting from Covid-19 lockdown measures, there has been a significant increase in consumers purchasing online this year and this has accelerated the development of e-commerce across our business. In our Caribbean and Central America market,

Hear more about Invest Smartly from Jennifer English,

Global Brand Director, Baileys

visit diageo.com

for example, we moved swiftly, focusing our resources on developing our capabilities in this very underdeveloped channel - and with good results. In partnership with customer e-commerce platforms, delivery apps and distributors, we grew the e-commerce channel by over 400% between February and May.(i)

Support growth with the right capital investment

Sound capital investments underpin our drive to achieve sustained, quality growth. That means investing in our supply footprint, so that we have the capacity to grow in the future. It also means strategically investing in maturing stocks to support our long-term success. We also invest in consumer experiences through distillery visitor centres and attractions where people can engage directly with our brands.

In October we opened a new state-of-the-art Innovation and Research Centre in Scotland as part of our investment in the sustainable growth of the distilling industry. The £6.4 million laboratory provides a new home for our largest global science and innovation hub, where our teams work on science, technology and innovation projects across a number of our global brands, including Johnnie Walker, Smirnoff, Tanqueray, Gordon's and Captain Morgan.

(i) Glovo & Appetito24, February to May 2020.

REPORT STRATEGIC

The original advertisement for the new Smirnoff Red White & Berry Seltzer innovation was quickly adapted in light of Covid-19.

Efficient and effective investment: acting with agility and	creativity
Covid-19 led to the closure of bars and restaurants around the	Bulleit grew net sales by 4% this year. The brand responded to
world - so we re-doubled our focus on investing behind opportunities	consumers being at home with a new Drinking Buddies campaign
that would be effective and relevant for consumers in a rapidly	across digital and social media - and its first national TV campaign.
changing environment.	#NewDrinkingBuddies delivered a tongue-in-cheek message that
When the pandemic began, our brand team had a new	while we all miss our drinking buddies, at home, there are new ones
advertisement depicting a busy summer party ready to drive	everywhere. The campaign content was produced on an iPhone at home
sales of our new Smirnoff Red White & Berry Seltzer innovation	- delivering engaging content quickly and in a highly cost-effective way.
in North America. The team worked quickly to adapt the original	Results were outstanding, with Bulleit adding 10bps of spirits share and
advertisement to the changed environment, making it fun and	gaining 34bps of US whiskey category share.(i)
relevant to our consumers' experience in lockdown. Leading
with the message 'Hang Out From Home For America', it ran	(i) Nielsen, year-on-year growth, three months to 16 June 2020 and NABCA, year-on-year
predominantly on TV, achieving positive feedback from consumers.	growth, three months to 31 May 2020.

DIAGEO Annual Report 2020

Our strategic priorities continued

4 Promote positive drinking

We want to change the way the world drinks for the better, by promoting moderation and addressing the harmful use of alcohol. Our goal is for people to 'drink better, not more' - because we are proud of our brands and we know that the best way for them to be enjoyed is responsibly.

Market dynamics

Consumers want to 'drink better'
A complex regulatory environment
Consumers expect businesses to act responsibly
Consumers are changing how they buy
Consumers are increasingly choosing spirits
An emerging middle class who can afford international-style spirits

Strategic outcomes

Credibility and trust,

Engaged people

Alignment to UN SDGs

For more details see page 33

Progress in 2020

Met our 2025 target on reaching 200m people with moderation messages from our brands
Responded to Covid-19 through online resources combating underage drinking, tackling drink driving and promoting moderation in lockdown

Looking ahead to 2021

Continue to promote positive drinking by promoting moderation and reducing underage drinking, drink driving and heavy drinking
Go beyond our 2025 targets as we develop our strategy for 2030

Our brands have been part of people's celebrations for generations. We take huge pride in them and we want people to continue enjoying them responsibly in the future.

We want everyone at Diageo to be an advocate for positive drinking and we have long campaigned to reduce alcohol-related harm. We know that for most people who drink alcohol, drinking responsibly is common sense - but we also know that harmful drinking causes significant issues for individuals and for society.

Promoting moderation is the right thing to do

and it is an essential part of our Performance Ambition. Our commercial success depends on us creating a positive impact on society, wherever we live, work, source and sell.

We aim to lead our industry in reducing underage drinking, drink driving and heavy drinking. We are working to empower our people and brands to make moderation the norm and we advocate improved laws and industry standards around the world.

Promoting moderation

We aim to reinforce the message of moderation in everything we do.

We want our people to be ambassadors and we are using the reach and influence of our brands to carry moderation messages to consumers. For example, we continued to build on the success of our 'Guinness Clear' moderation campaign in the United Kingdom and Ireland through television and video on demand. Further campaigns bringing home the message of moderation to sports fans were run by Bundaberg, Captain Morgan and Crown Royal.

Our goals for positive drinking

Change the way the world drinks for the better
Lead the industry in reducing underage drinking, drink driving and heavy drinking
Empower our people and brands to advocate moderation

We have set ourselves stretching targets to reach by 2025.

For more details see pages 30 and 33

These campaigns enabled us to meet our target of reaching 200 million people with moderation messages from our brands five years early. We are proud of this achievement and we look forward to building on this commitment.

Addressing underage drinking

We have a longstanding commitment to tackling underage drinking. It is never acceptable for people underage to drink alcohol and we welcome the fact that fewer young people are drinking under age in many countries. Our programmes aim to ensure this downward trend continues and they have reached more than 375,000 people this year, across 20 countries. They include our flagship 'Smashed' education programme, which combines a live theatre production

presented by professional actors with interactive workshops, evaluation and teaching resources for schools. In May 2020, we launched an online version of Smashed in the United Kingdom, making it available to more than a million school children.

Preventing drink driving

We have a longstanding commitment to addressing drink driving through a range of interventions.

We invest in partnerships with police, local authorities and other agencies that support enforcement;

we provide education for drivers and law enforcers; and we support safe rides and public transportation.

One of our key partnerships is with UNITAR, the United Nations Institute for Training and Research. The partnership supports road safety events aimed at reducing traffic deaths and injuries and improving road safety globally. It has a particular focus on high-visibility enforcement in Latin America, Asia and Africa. In April 2020, in response to Covid-19,

we collaborated with UNITAR as it launched a series of online training resources in English and Spanish for government officials responsible for road safety and law enforcement.

24 DIAGEO Annual Report 2020

Tackling heavy episodic drinking

DRINKiQ is one of our most important tools in promoting moderation and addressing heavy drinking. Now available in 16 languages and

35 countries, DRINKiQ is a dedicated responsible drinking website that gives information on alcohol and its impact on the body, along with a range of resources to encourage moderate consumption. To empower more consumers to drink responsibly, we developed the DRINKiQ quiz (see case study, right).

Alongside DRINKiQ, our brand campaigns and our initiatives for the night-time economy with a coalition of partner agencies help reduce alcohol-related problems in entertainment districts.

Advocating improved laws and industry standards

As a minimum, we comply with all laws and regulations wherever we operate. We advocate sensible new regulation based on evidence, including blood-alcohol volume driving limits and legal purchase age laws, in countries where these do not exist. We continue to call on governments to increase the legal purchase age to 18 years old where a lower rate is set, for example for purchasing beer in certain European countries such as Germany, Belgium and Denmark.

We have also joined in collective action with our industry, including through the International Alliance for Responsible Drinking (IARD).

We support IARD's commitments on digital marketing and commercial practices and a package of measures to combat underage drinking. For example, we have committed to including an age-restriction symbol or equivalent words on all of our alcohol brand products in all markets by 2024.

Responsible marketing

Our Diageo Marketing Code (DMC) and Digital Code set mandatory minimum standards for responsible marketing and we review them every two years.

At the heart of the DMC is our commitment to ensuring all our activities depict and encourage only responsible and moderate drinking, and never target those who are younger than the legal purchase age.

Across some of our markets, advertising monitoring and industry bodies publicly report breaches of self-regulatory alcohol marketing codes. This year we are pleased to report that no breaches were upheld by key industry bodies about Diageo's advertising.

Complaints about advertising upheld by key industry bodies that report publicly(i)

		Industry	Complaints
		complaints	about Diageo
Country	Body	upheld	brands upheld

Australia	ABAC Scheme	53	0
	Advertising Standards
Ireland	Authority - for Ireland (ASAI)	2	0
United Kingdom	The Portman Group	11	0
	Advertising Standards
	Authority	11	0
	Distilled Spirits Council of
United States	the United States (DISCUS)	2	0

(i) From 1 July 2019 to 30 June 2020

Hear more about Promote Positive Drinking from Srna Herzog, Head of Positive Drinking Programmes and Policies

visit diageo.com

Committed to promoting moderation and reducing harm

We were the first alcohol company to put nutritional information and alcohol content onto our labels. Our Diageo Consumer Information Standards (DCIS) provide benchmarks for the mandatory minimum information to be included on labels and packaging on all our brands, wherever they are legally permitted.
We have long supported the World Health Organization's goal of reducing harmful drinking by 10% across the world by 2025. We work with partners from within and beyond our industry on initiatives that advance that goal.
DRINKiQ.com, our dedicated responsible drinking website, is now available in 16 languages and 35 countries.

Our DRINKiQ quiz is accessible across a range of devices.

Promoting positive drinking during Covid-19

We were determined to make sure our longstanding work on positive drinking continued through the challenges of Covid-19

including by making the most of digital resources to promote moderation and tackle harmful drinking.
Our flagship DRINKiQ programme, which had launched an online quiz to educate consumers in responsible drinking over the festive period from November 2019 to January 2020, drew on the quiz again for a topical new campaign on responsible drinking at home during lockdown. Over both campaigns, more than 80,000 consumers completed the quiz, which was available in 28 countries and 18 languages.
Our Virtual Good Host Guide, launched in May 2020, helped hosts to plan great online celebrations, including reminding people to measure their pour when making drinks. Finally, local campaigns such as our 'double down' initiative in Mexico saw brands including Buchanan's, Johnnie Walker, Black & White, Don Julio, Smirnoff and Captain Morgan promote positive drinking through their digital reach.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Our strategic priorities continued

5 Champion inclusion and diversity

Hear more about the work we have been doing to Champion Inclusion and Diversity

visit diageo.com

Our Performance Ambition is fuelled by our purpose and values. It drives us to create an inclusive culture where every individual can thrive and to champion inclusion and diversity in our business and in society more broadly.

Market dynamics	Strategic outcomes	Looking ahead to 2021	Alignment to UN SDGs
-- All stakeholders, including	Consistent value creation, Credibility	-- Establish progressive goals and
consumers and employees have	and trust, Engaged people	targets to make a step change
an increasing expectation that	Progress in 2020	on ethnic diversity and sustain
businesses will have an inclusive	focus on gender diversity
-- 39% of leadership roles in our
and diverse culture	-- Roll out inclusive leadership
business are held by women
-- Our global footprint requires us	training more widely
-- Named by Equileap as the
to access and grow diverse talent	-- Extend focus on ethnic diversity
top company globally for
-- Global multinationals have the	through our brands, suppliers
gender equality
ability to create policies that have	and agencies
-- Began inviting employees
a positive impact on society
globally to confidentially

	disclose their ethnicity

Our inclusive and diverse culture is central to our purpose of 'Celebrating life, every day, everywhere'. At the same time as being a moral imperative, having the best and most diverse talent drives innovation and commercial performance. We know that to be one of the best performing consumer products companies we need to leverage the broadest range of backgrounds, skills and capabilities, and create a fully inclusive, high-performing culture.

We want to shape broader societal change by promoting equality and an inclusive culture through our brands, in our industry, across our value chain, and in the communities where we live, work, source and sell.

Key elements of our approach

Foster the creation of an inclusive culture
Promote equality of experience for all employees
Champion inclusion and diversity beyond our business

Celebrating our inclusive and diverse culture

We believe that an inclusive and diverse business is a better place to work - and a better performing business. Everyone should have the freedom to succeed, irrespective of their gender, race, religion, disability, age or sexual orientation.

Each of our markets has an inclusion and diversity plan and we have a global focus on developing a strong pipeline of female talent for all roles. This year, 39% of leadership roles in our business were held by women, taking us beyond the target we set for 2020, and towards our next milestone of 40% by 2025. 50% of our Board members and 38% of

our Executive Committee members are women.

We also focus on ethnic diversity. This year, we began inviting employees in over 50 countries to confidentially disclose their ethnicity to help us understand the makeup of our workforce and develop plans and targets to ensure Diageo reflects local market demographics.

We are also learning through employee listening sessions in every market and through our external partnerships with organisations such as INVOLVE, Business in the Community (BITC), and as early signatories of BITC's Race at Work Charter.

Fostering inclusion through progressive policies and employee resource groups

We continue to build employee-led advocacy through active employee resource groups (ERGs), such as AHEAD (African Heritage Employees at Diageo) and Conectados (Diageo employees championing Latin culture) in the United States, REACH (Race, Ethnicity and Cultural Heritage) in the

United Kingdom and the many chapters internationally of our Spirited Women and Rainbow Networks. These groups support their members and offer leaders the opportunity to understand the barriers and concerns of diverse communities both within and outside the organisation, so that we can develop progressive approaches to breaking down barriers. Many of these groups focus on building allies who can help champion change and inclusion. For the last two years we have supported a global INC. week, a week-long series of employee-led events, panels and workshops designed to help accelerate an inclusive culture through open and authentic conversations on issues and opportunities.

We also support inclusion through a range of progressive policies.

Globally, for example, all new mothers are entitled to six months' fully-paid maternity leave, with all new fathers being entitled to a minimum of four weeks' paid paternity leave. In many markets - including the whole of North America and Europe, as well as Thailand, the Philippines, Singapore, Colombia, Venezuela, and Australia - parents have equal parental leave of up to 52 weeks.

We are proud that our progress is recognised by others. This year, we were named by Equileap as the top company globally for gender equality, ranked second in the Refinitiv Diversity and Inclusion Index and were listed in the Bloomberg Gender Equality Index.

Driving change beyond our business

To be true champions of inclusion and diversity, we need to use the scale and expertise of our business to make a difference in the communities around us and in society at large.

Inclusion and diversity are core elements of our community programmes, as described on page 28. Iconic brands including Guinness and Smirnoff have actively promoted inclusivity and equality in their advertising this year.

We continue to work with others to drive change. We are part of the United Nations Unstereotype Alliance, working with peers across industries to combat harmful stereotypes in advertising, and we are members of Open for Business, which advocates LGBTQ+ rights around the world. We sponsor the Creative Equals Returners programme, which supports women returning to the creative industries after a career break, and we are members of the World Federation of Advertisers' Diversity & Inclusion Taskforce.

We also directly support under-represented groups and communities, especially those in the hospitality industry who have been so badly affected by Covid-19. In June 2020, we created the $20 million Diageo Community Fund to help address the urgent needs of Black communities and businesses in the United States who have been disproportionately harmed by Covid-19.

26 DIAGEO Annual Report 2020

Our people

We want all our employees to feel valued to make a meaningful contribution to our purpose and ambition. We shape market-leading policies and practices so that our people are engaged, empowered and proud of what they do.

REPORT STRATEGIC

Engaged, empowered and proud of what we do

We want our people to be the best they can be, have the freedom to succeed and feel valued for who they are. This year, given the unique challenges faced by all employees during the Covid-19 pandemic, we have found innovative ways to support and engage our people. As well as increasing opportunities for flexible working and enhancing

our employee assistance programme, we have developed specific courses on topics related to health, safety and wellbeing.

Key elements of our approach

Engage and empower our people
Invest in our people's growth through learning and development
Invest in leadership development to include a focus on fostering an entrepreneurial culture

A commitment to human rights, including employees' rights, underpins everything we do - see our policy framework on page 37

Staying engaged and responsive

Employee engagement is one of the overarching measures that define our progress.

Covid-19 restrictions challenged our ability to deliver our annual Your Voice engagement survey this year, so in its place we launched a pulse survey tool to help us measure engagement, listen to employees' feedback and learn from their experience of working during the pandemic. The response rate was 74%, with 91% of respondents reporting that they were 'proud to work at Diageo', and 86% confirming they would 'recommend Diageo as a great place to work'. We recognise that these results are not directly comparable year on year with our employee engagement index, which explores broader questions, but they are highly encouraging, both within the unique circumstances of this year and as part of our long-term drive to have fully engaged employees.

My Learning Hub was launched this year.

My Learning Hub: building critical skills for the future

We want our people to be equipped with the best capability and tools to seize growth opportunities and tackle new challenges. My Learning Hub, our training and skills platform which launched this year, gives employees everything they need for their own development, making it easy to find, use, share and comment on a huge range of learning options. These include world-class capabilities from across our global teams and from external resources.

Since we launched My Learning Hub, the number of employees engaged in self-learning has trebled, with 90% now enrolled in programmes. We are seeing thousands of our people use our Dignity at Work and Integrity at Diageo training, reinforcing our strong ethics culture. My Learning Hub has also been invaluable in the face of Covid-19 restrictions - we have launched dedicated channels including remote working and wellbeing resources.

Investing in our people's future through training

Our new online learning management platform, My Learning Hub, is designed to help our employees, partners and distributors to be at their best, acquire new skills and develop a continuous learning culture that supports growth and progression (see case study, right).

Building leadership

We have always used a range of communications and leadership interventions to bring our strategy and purpose to life for employees. This year, our Chief Executive, senior leaders and employees from across the business have been closely involved in communicating our strategic priorities as part of our Performance Ambition, including through video stories and written guides on our Performance Ambition Hub.

We also moved our planned face-to-face leadership event to a virtual format and we are delivering engaging, global learning sessions on topics such as unleashing the power of teams and leading with pace and boldness. Like other measures we have taken since the pandemic began, we believe we have strengthened our business and culture by enhancing our ability to work flexibly and becoming more agile and responsive.

Our Sustainability & Responsibility Performance Addendum includes further information, including data on our employees by region, role and gender and new hires and leavers by gender

Average number of employees by region by gender(i)

Region	Men	%	Women	%	Total
North America	1,583	60	1,055	40	2,638
Europe and Turkey	6,062	60	4,025	40	10,087
Africa	2,983	72	1,161	28	4,144
Latin America and
Caribbean	1,700	63	1,002	37	2,702
Asia Pacific	6,101	74	2,103	26	8,204
Diageo (total)	18,429	66	9,346	34	27,775
Average number of employees by role by gender

Role	Men	%	Women	%	Total
Executive Committee	8	62	5	38	13
Senior manager(ii)	320	61	203	39	523
Line manager(iii)	2,381	69	1,071	31	3,452
Supervised employee(iv)	15,720	66	8,067	34	23,787
Diageo (total)	18,429	66	9,346	34	27,775

Employees have been allocated to the region in which they reside.
Top leadership positions in Diageo, excluding Executive Committee.
All Diageo employees (non-senior managers) with one or more direct reports.
All Diageo employees (non-senior managers) who have no direct reports.

DIAGEO Annual Report 2020

Our strategic priorities continued

6 Pioneer grain-to-glass sustainability

For our business to be sustainable, it needs to create enduring value - for us and for those around us. We must positively impact the communities in which we live, work, source and sell and protect the natural resources on which we all depend.

Our continued long-term success depends on the people and planet around us. We recognise that poverty, inequality, climate change, water stress, biodiversity loss and other challenges threaten the environment and the prosperity of communities: a reality brought into sharp focus by Covid-19.

We aim to be pioneers, driving innovation and solutions that will benefit our business, our communities and the environment. That means working with our whole value chain - the people and resources that contribute to our success, from grain to glass.

Combating climate change and tackling the global water crisis are central to our strategy - read about our approach on pages 42-43

2030 ambitions: deeper connections and a stronger business

By showing leadership and by working with others, we aim to contribute to the delivery of the UN Sustainable Development Goals (SDGs) in the critical decade of action leading up to 2030, while giving our business

a platform for sustained quality growth.

While the Covid-19 pandemic has delayed the launch of our full strategy for 2030 until later this financial year, it has also emphasised how important it is that we address issues that matter to our stakeholders and strengthen our business, deepening our connections with communities. Building inclusive, thriving communities that work for everyone is

key to this. It requires us to be global champions for water stewardship and vocal advocates for a low-carbon world. It also means going further in exploring circular economy approaches, so we can make more drinks with fewer materials.

At the same time, we aim to be more efficient, to reduce our costs, to build a more secure and resilient supply chain, and to attract and retain the best talent. Ultimately, this will help drive the trust, respect and commercial success that define our Performance Ambition.

We describe our work on embedding human rights throughout our value chain on page 36

We describe our engagement with stakeholders and our materiality process on page 32

Key elements of our approach

Support thriving communities where we live, work, source and sell
Build sustainable, resilient supply chains
Champion water stewardship and a low-carbon world
Minimise waste and develop circular economy solutions

Measuring our progress to 2020

Our pioneering ambition for grain-to-glass sustainability is supported by a comprehensive set of targets and objectives that help us drive, measure, and report transparently on our progress.

In 2015, we set a range of environmental and social targets for 2020 and we have since set other targets for renewable electricity and plastic packaging.

We report on our performance against our targets in full on pages 33-35

Supporting thriving communities where we live, work, source and sell

We aim to promote sustainable growth through inclusive programmes that provide equal access for all to resources, skills and employment opportunities.

Our largest programme is Learning for Life (L4L). L4L focuses on training in hospitality, retail and entrepreneurship. We have kept growing and broadening L4L, and this year developed content focused on the wellbeing of people working in the hospitality industry, on environmental sustainability and on the impacts of Covid-19 on the sector. When the pandemic began restricting face-to-face interactions, we offered our training online - enabling us to continue to build skills and support

our communities despite lockdown measures. Through our range of skills programmes we have reached 6,600 people this year.

We also support communities by providing access to clean water, sanitation and hygiene (WASH) in water-stressed areas that supply our raw materials and support our business. These programmes contribute to SDG 6 (clean water and sanitation), while also helping to replenish the water we use in our products.

The Covid-19 pandemic has reinforced the importance of WASH for individual and community wellbeing (see case study on page 29).

Empowering programmes designed around inclusivity

Our community programmes aim to promote gender equality or empower people from under-represented groups.

Our impact has been enhanced by our strategic partnership with CARE International UK, which works to address the root causes of gender inequality in our value chain through research, programming and advocacy. We have also supported CARE International UK's emergency Covid-19 response to address the disproportionate effects of the crisis on women across the world.

We also run programmes specifically designed to empower women, and supported over 35,000 women this year. Initiatives include our programme for women in Maharashtra and Rajasthan in India who manufacture and sell sanitary pads for their communities, and women in self-help groups in Maharashtra who run 'water ATMs' providing clean, safe water.

Market dynamics	Alignment to UN SDGs	Progress in 2020
-- Consumers want to 'drink better'		-- A detailed description of our social and
-- Consumers expect businesses to act		environmental performance is on page 32
responsibly		Looking ahead to 2021
Strategic outcomes		-- Launch our social and environmental
Consistent value creation,		strategy and targets for the critical decade
Credibility and trust,		to 2030 (see page 32)
Engaged people		-- Address where we have not met our 2020
		targets, such as water quality and reducing
		packaging weight

28 DIAGEO Annual Report 2020

This year Diageo invested £18.9 million or 1.0% (2019 - 0.3%) of operating profit in community initiatives.

See our Sustainability & Responsibility Performance Addendum for further reporting on our community investments

Creating impact and opportunity in our supply chains

We rely on resilient, thriving supply chains for the raw materials we use to make our brands. At the same time, our supply chain connects us to communities all over the world where we have a clear opportunity to have a positive social and environmental impact, by creating economic opportunity, promoting human rights and improving agricultural and environmental practices through responsible sourcing.

Driving progress through standards

Our Partnering with Suppliers standard sets out the minimum social, ethical and environmental standards we require all suppliers to follow as part of their contract with us.

Our Sustainable Agriculture Guidelines (SAG) set out the standards we expect of suppliers of agricultural raw materials, and how they should work towards sustainable farming. We use the Sustainable Agriculture Initiative Platform's Farm Sustainability Assessment (FSA) tool to check compliance, with FSA's bronze rating being our minimum requirement. We also work through AIM-PROGRESS, a forum of leading consumer goods companies, and the not-for-profit SEDEX, which both allow suppliers to share assessments and audits of ethical and responsible practices.

Local sourcing and working directly with farmers

We work directly with farmers on a range of sustainable agriculture projects, and we aim to increase our positive impact by sourcing locally where possible. We assist smallholder farmers in a variety of ways, such as: training, access to seeds and fertilisers, micro-loans, and financial resilience support.

This year, we supported 78,600 farmers in Africa. We sourced 79% of agricultural raw materials locally within Africa for use by our African markets, compared with 82% last year. This percentage fell slightly as Covid-19 restrictions pushed us just below our target of 80%.

Reducing our environmental impact and protecting natural resources

We recognise that the threats to our environment are urgent and growing, which is why we are committed to a pioneering approach that combines action and advocacy on the issues that matter most to our stakeholders and to us.

Championing water stewardship and a low-carbon world

Combating climate change and its associated impacts on water stress and the environment are at the heart of our strategy. We are committed to de-carbonising our own operations and our value chain, and acting as advocates for a low-carbon world. Water stewardship is a longstanding strategic priority for us and we are focused on preserving this critical resource, particularly in water-stressed areas. Our approach to carbon emission reduction and water stewardship is described in Responding to climate-related risks, pages 42-43.

Taking action on waste

In the last three months of this year, we achieved zero waste to landfill at all our supply and office sites. We want to build on our use of circular economy approaches, push forward with our longstanding programmes to tackle packaging waste and make sure that more of what we do use is made from recycled material and can itself be recycled (see page 35).

See our Sustainability & Responsibility Performance Addendum for further reporting on our non-financial performance

Hear more about the work we have been doing to

Pioneer Grain-to-Glass Sustainability

visit diageo.com

Meeting our water replenishment target and supporting communities through Covid-19

Access to clean drinking water, sanitation and hygiene (WASH) can transform communities - especially when hand washing is such an important part of protecting people and communities from Covid-19.

WASH projects play an important role in our water replenishment programme, alongside key water-related projects such as tree planting and rehabilitating dams and ponds. This year we reached over 250,000 people in Africa and India through our WASH projects.

Our water replenishment programme targets areas where water scarcity is a critical issue. We are therefore particularly pleased that this year we achieved our 2020 target of replenishing the amount of water used in our final product in water-stressed areas. Water stewardship will remain a core part of our approach in the decade ahead.

$100 million fund to help our industry recover from Covid-19

In June, we launched a new global programme, 'Raising the Bar', to help pubs and bars recover from the effects of the Covid-19 pandemic. We are providing $100 million to support the recovery of major hospitality centres including New York, London, Edinburgh, Dublin, Belfast, Mexico City, São Paulo, Shanghai, Delhi, Mumbai, Bangalore, Nairobi, Dar es Salaam, Kampala and Sydney. The money will pay for the equipment neighbourhood pubs and bars need to enable them to re-open safely. Of this fund, $20 million will go to Black communities in the United States particularly affected by the pandemic.

We are also offering any bar, anywhere in the world, free access to digital training through the Diageo Bar Academy, which includes advice on how to implement social distancing, enhance hygiene measures and optimise their recovery.

We also supported customers, communities and healthcare systems where we live and work by: pledging over 10 million bottles of hand sanitiser to support frontline healthcare workers across more than 20 countries; donating to local charities and relief efforts; supporting bartenders' wages; and providing food vouchers and emergency assistance.

'Raising the Bar' will provide a $100 million global recovery package.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Key performance indicators

Monitoring performance and progress

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

Financial indicators

Organic net sales growth (%)

Organic operating profit growth (%)

Earnings per share before

exceptional items (pence)(i)

8.4%					14.4%

2020	(8.4)					2020	(14.4)

2019		6.1	2019		9.0

2018		5.0		2018		7.6

2017		4.3			2017		5.6

2016		2.8				2016		3.5

109.4p

2020	109.4

2019	130.8

2018	118.6

2017	108.5

2016	89.4

Definition

Sales growth after deducting excise duties, excluding the impact of exchange rate movements, acquisitions and disposals.

Why we measure

This measure reflects our performance as the result of the choices made in terms of category and market participation, and Diageo's ability to build brand equity, increase prices and grow market share.

Performance

Organic net sales declined 8.4%, driven mainly by an 11.2% reduction in volume partially offset by 2.8% positive price/mix. All regions reported declines in organic net sales except for North America.

More detail on page 45

Definition

Organic operating profit is calculated on a constant currency basis excluding the impact of exceptional items, certain fair value remeasurement, and acquisitions and disposals.

Why we measure

The movement in operating profit measures the efficiency and effectiveness of the business. Consistent operating profit growth is a business imperative, driven by investment choices, our focus on driving out costs across the business and improving mix.

Performance

Organic operating profit declined ahead of net sales at 14.4% with first half growth of 4.6% more than offset by impact of Covid-19 in the second half.

More detail on page 45

Definition

Profit before exceptional items attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue.

Why we measure

Earnings per share reflects the profitability of the business and how effectively we finance our balance sheet. It is a key measure for our shareholders.

Performance

Eps before exceptional items decreased 21.4 pence driven by decline in organic operating profit, lower income from associates and joint ventures, increased finance charges and the impact of acquisitions and disposals. These were partially offset by tax, lower non-controlling interests and the impact of the share buyback programme.

More detail on page 45

Non-financial indicators

Positive drinking		CT	EP
Educate 5 million young	1 million
people, parents and	2019: 632,000
teachers about the dangers
of underage drinking

Collect 50 million pledges	25.3 million
never to drink and drive	2019: 16.88 million
through #JoinThePact(ii)

Reach 200 million people	229.2 million
with moderation messages	2019: 66.02 million
from our brands

See pages 24-25 for more information about our approach to pioneering positive drinking

Definition

We report against three indicators for positive drinking.

Why we measure

We want to change the way the world drinks for the better by promoting moderation and addressing the harmful use

Health and safety (lost-time accident
	CT		EP
frequency per 1,000 full-time employees)
0.60

2020		0.60

2019		0.98

2018		1.00

2017		1.14

2016				1.44

Definition

Number of accidents per 1,000 full-time employees and directly supervised contractors resulting in time lost from work of one calendar day or more.

Why we measure

Health and safety is a basic human right: everyone has the right to work in a safe and healthy environment, and our Zero Harm philosophy is that everyone should go home safe and healthy, every day, everywhere.

(iii)
CT
Water efficiency (l/l)

4.62l/l

2020	4.62

2019	4.72

2018	5.04

2017	5.09

2016	5.24

Definition

Ratio of the amount of water required to produce one litre of packaged product.

Why we measure

Water is the main ingredient in all of our brands. We aim to improve efficiency, and minimise our water use, particularly in water-stressed areas. This will ensure we can sustain production growth, address climate change risk and respond to the growing global demand for water, as scarcity increases.

of alcohol. Our goal is for people to 'drink better, not more' - because we are proud of our brands and we know that the best way for them to be enjoyed is responsibly.

Performance

We launched a new Positive Drinking strategy in 2018 and this is the second year we have reported against these targets for 2025.

More detail on page 33

Performance

We achieved a milestone safety performance level of 0.60 lost-time accidents (LTAs) per 1,000 employees, our lowest rate ever. This represents a 41% reduction in LTAs compared with 2019. We continued to focus on markets in particular need of support, delivering improvements by increasing compliance with our core standards and programmes. Our performance was helped by the sale of United National Breweries in South Africa, which had a higher LTA rate than Diageo's average.

More detail on page 36-37

Performance

Water efficiency improved by 2.1% compared to 2019 and by 46.0% versus our 2007 baseline. The impact of Covid-19 led to a reduction in packaged volume (which is a denominator in our water efficiency calculation) and a delay to key water recovery and reuse projects in East Africa and Nigeria. The benefits from these investments will be realised in future years.

More detail on page 34

30 DIAGEO Annual Report 2020

Free cash flow						Return on average invested
		EG						CVC
(£ million)						capital (ROIC) (%)
1,634m				12.4%

2020	1,634				2020		12.4

2019	2,608	2019		15.1

2018	2,523		2018		14.3

2017	2,663	2017		13.8

2016	2,097			2016		12.1

REPORT STRATEGIC

Total shareholder return (%)

CVC

(19)%

2020	(19)

2019		27

2018		23

2017		12

2016		17

Definition

Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for loans receivable and other investments, and the net cash cost paid for property, plant and equipment, and computer software.

Why we measure

Free cash flow is a key indicator of the financial management of the business and reflects the cash generated by the business to fund payments to our shareholders and acquisitions.

Performance

Free cash flow was £1,6 billion, primarily driven by the decline in operating profit, lower dividends from joint ventures and associates, increased use of working capital, higher tax payments and higher interest charges.

More detail on page 46

Definition

Profit before finance charges and exceptional items attributable to equity shareholders divided by average invested capital. Invested capital comprises net assets aggregated with exceptional restructuring costs and goodwill at the date of transition to IFRS, excluding post employment liabilities, net borrowings and non-controlling interests.

Why we measure

ROIC is used by management to assess the return obtained from the group's asset base. Improving ROIC builds financial strength to enable Diageo to attain its financial objectives.

Performance

ROIC decreased 267bps against the prior comparable period driven mainly by organic operating profit decline.

More detail on page 46

Definition

Percentage growth in the value of a Diageo share (assuming all dividends and capital distributions are re-invested).

Why we measure

Diageo's Directors have a fiduciary responsibility to maximise long-term value for shareholders. We also monitor our relative TSR performance against our peers.

Performance

TSR was down 19% over the past 12 months driven by the lower year on year share price.

Carbon emissions
	(iv)		CT
(1,000 tonnes CO2e)
507

2020		507

2019		555

2018		586

2017		593

2016		633

Definition

Absolute volume of carbon emissions, in 1,000 tonnes.

Why we measure

Carbon emissions are a key element of Diageo's, and our industry's, environmental impact. Reducing our carbon emissions is a significant part of our efforts to mitigate climate change, positioning us well for a future low-carbon economy, while creating energy efficiencies and savings now.

Performance

Carbon emissions reduced by 8.7% in 2020, and cumulatively by 50.1% against our 2007 baseline, despite increased production volume.

More detail on page 34

Employee engagement (%)	CT		EP

N/A

2020	N/A

2019	75

2018	76

2017	75

2016	77

Definition

Measured through our Your Voice survey; includes metrics for employee satisfaction, loyalty, advocacy and pride.

Why we measure

Employee engagement is a key enabler of our strategy and performance. The survey allows us to measure, quantitatively and qualitatively, how far employees believe we are living our values.

Performance

This year we were unable to conduct an annual Your Voice survey due to Covid-19. In its place we used a pulse survey tool to help us measure engagement, listen to employee feedback and learn from their experience of working during the pandemic. The survey had a response rate of 74%, with 91% reporting that they were 'proud to work at Diageo' and 86% confirming they would 'recommend Diageo as a great place to work'.

More detail on page 33

Relevance to our strategic outcomes:

EG Efficient growth

CVC Consistent value creation

CT Credibility and trust

EP Engaged people

Remuneration

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

See our Directors' remuneration report from page 84 for more detail.

For reward purposes this measure is further adjusted for the impact of exchange rates and other factors not controlled by management, to ensure focus on our underlying performance drivers.
Building on what we have learnt from our drink driving interventions and feedback from our stakeholders, we are evolving our approach to focus on education programmes that promote changes in attitudes as a way to tackle drink driving. As a result, fiscal 2020 will be our final year for #JoinThePact, and we will no longer include it in our reporting.
In accordance with Diageo's environmental reporting methodologies, data for each of the four years in the period ended 30 June 2019 has been restated where relevant.
In accordance with Diageo's environmental reporting methodologies and WRI/WBCSD GHG Protocol, data for each of the four years in the period ended 30 June 2019 has been restated where relevant.
Within PwC's limited assurance scope. See page 184 for further details.

DIAGEO Annual Report 2020

Sustainability performance

Our social and environmental performance

We have a comprehensive set of targets that help us drive, measure and report transparently on our progress. In 2015, we set a range of environmental and social targets for 2020. We have since set additional targets for positive drinking, renewable electricity and plastic packaging.

Proud of our progress, ambitious for the future

We believe our 2020 targets were among the most ambitious and stretching in our industry.

Building on the success of earlier targets, we were among the first companies to set our greenhouse gas (GHG) reduction targets in line with the principles of the Science Based Targets initiative and were an early adopter of absolute, rather than relative, GHG reduction targets.

As we close our 2020 targets this year, we are proud of the significant progress we have made - and are aware that we have more to do.

We have reduced our GHG emissions from direct operations by 509,000 metric tonnes since 2007, delivering our commitment to a 50% absolute reduction. We have also reduced emissions by 33.7% across our total value chain.

We have ensured that over 99.5% of our packaging is recyclable and achieved 45% recycled content in our packaging. In the last three months of this year, we achieved zero waste to landfill at all supply sites and offices.

We also sourced 79% of raw materials for our Africa business locally, narrowly missing our goal of 80%, having exceeded it in 2019. Our targets for supporting communities have helped to drive positive impacts for millions of people within and beyond our business, including, in 2020, supporting 250,000 people through our projects focused on clean water, sanitation and hygiene (WASH).

We delivered on our target for water replenishment in water-stressed areas and achieved a 46.0% improvement in water use efficiency. This represents significant progress, but Covid-19 affected us reaching our efficiency target of 50% due to delayed implementation of water recycling projects in Africa and lower packaged volumes in some markets.

Despite this significant progress, however, we have not achieved all our goals. As we reported last year, we have yet to achieve the full improvements we wanted in the quality of wastewater we discharge, for example, and we have found reducing the overall weight of our packaging by 15% more challenging than we expected. We provide full details of our performance on pages 34-35.

Taking forward what we have learnt

We have adapted our programmes over the years to improve their design as community needs, our business and the global context have changed.

In our communities work, a key improvement has been recognising that inclusion and gender equality should be built into every community programme, rather than treated as a separate objective.

We have also seen the importance of a holistic approach which draws on the strengths of the whole business and furthers the company's wider objectives. Our community WASH programmes, for example, have changed their impact by focusing on communities directly connected to our core business while supporting our successful

drive to replenish water in water-stressed areas.

We have seen how important it is to have total alignment within the business and strong sponsorship from leaders, as well as effective execution. We have also learnt that early investment in infrastructure and a process of continuous improvement are key to success.

Finally, we have seen how we can increase our impact through long-term, strategic NGO partnerships with organisations like CARE International UK and WaterAid.

Committed to a decade of action

We are developing our strategy to address our most material issues and support the delivery of the UN Sustainable Development Goals (SDGs) over the critical decade to 2030. While the launch of our strategy and targets has been delayed by Covid-19 until later this fiscal year, we are clear on our direction of travel and our overall goals. We know we must be leaders in promoting positive drinking, and be global advocates for water stewardship and a low-carbon world. We must champion inclusion and diversity within and beyond our business, and make sure we contribute to building inclusive, thriving communities wherever we live, work, source and sell. We will go further in pioneering sustainability, including through encouraging regenerative agriculture and driving circular economy approaches.

Our strategy will continue to be based on the knowledge that our future success is intertwined with the success of those around us. In line with that thinking, in June 2020 we announced our 'Raising the Bar' programme - a $100 million recovery fund to support pubs and bars as they welcome customers back following the Covid-19 pandemic.

See pages 28-29 for more information.

Developing our 2030 sustainability and responsibility strategy

A rigorous materiality assessment

Examination of external trends shaping our operating environment; alignment to UN SDGs in the critical decade ahead

Extensive engagement with internal and external stakeholders

Findings explored through:

Regional multi-function internal stakeholder workshops in Bangalore, London, Nairobi, New York and Singapore
A detailed workshop with full Diageo Executive Committee
Engagement with Diageo Board

Our areas of focus for the next decade

Promote positive drinking

4 -- Promoting moderation

-- Ensuring responsible marketing and retailing of alcohol -- Preventing harmful use of alcohol

Champion inclusion and diversity

5 -- Including and empowering women, minorities and other under-represented groups -- Fostering an inclusive and diverse culture

6	Pioneer grain-to-glass sustainability	-- Protecting the natural ecosystems our
-- Mitigating or adapting to climate change	business relies on and strengthening
	-- Ensuring access to clean water,	security of raw material supply chains
	sanitation and hygiene	-- Supporting good livelihoods and
	-- Reducing or eliminating waste	working conditions

Built on the foundations of doing business the right way from grain to glass through a strong

commitment to human rights and good governance.

32 DIAGEO Annual Report 2020

Performing against our social targets

Positive drinking (2025 targets, cumulative progress)

Educate 5 million young people, parents and teachers about the dangers of underage drinking		1 million		See pages 24-25 for more

							information about our
UN SDG alignment 3.5; 12.8; 17.16
						approach to pioneering

Collect 50 million pledges never to drink and drive through #JoinThePact(i)			25.3 million
			positive drinking


UN SDG alignment 3.6; 12.8; 17.16

Reach 200 million people with moderation messages from our brands				229.2 million


UN SDG alignment 3.5; 12.8; 17.16

Our 2020 target	KPI		Progress		Commentary
Inclusion and diversity

Build diversity, with 35%(ii) of	% of leadership		39%		This year, 39% of leadership roles in our business were held by women,
leadership positions held by women	positions held				taking us beyond the target we set for 2020, and towards our next milestone
by 2020 (40% by 2025) and measures	by women.				of 40% by 2025. Each of our markets has an inclusion and diversity plan which
implemented to help female employees					includes a focus on developing a strong pipeline of female talent for all roles.
attain and develop in leadership roles.

UN SDG alignment 5.5; 8.1; 10.2; 10.4

Our people

Increase employee engagement to 80%,	Employee satisfaction,		We did not conduct our Your Voice survey because of Covid-19. In its place we used a pulse survey
becoming a top quartile performer on	loyalty, advocacy and		tool to help us measure engagement, listen to employees' feedback and learn from their experience of
measures such as employee satisfaction,	pride, measured		working during the pandemic. The survey had a response rate of 74%, and 91% reported that they were
pride and loyalty.	through the Your		'proud to work at Diageo', with 86% confirming they would 'recommend Diageo as a great place to work'.
		Voice survey.		While these results are not directly comparable year on year with our employee engagement index we are
				encouraged by this strong response.

Inclusive communities

Our community programmes	Number of people		6,600		Our skills programmes have reached more than 146,000 people since 2008,
enable those who live and work in	reached through skills				with typically more than 70% gaining permanent jobs. We helped more than
our communities, particularly women,	and empowerment				6,600 people around the world this year. While the Covid-19 pandemic has
to have the skills and resources to build	programmes.				meant we reached fewer people this year than planned, we have adapted
a better future for themselves. We will					our flagship Learning for Life programme to an online format, as described
evaluate and report on the tangible					on page 28.
impacts of our programmes.

	Number of people		250,000		We have supported WASH programmes in 11 countries this year,
		reached through				benefitting more than 250,000 people.
		community water,
		sanitation and hygiene
	(WASH) programmes.

		Number of women		35,000		We have empowered over 35,000 women through our programmes,
		empowered by our				including those related to entrepreneurship and menstrual health,
UN SDG alignment 1.2; 4.4; 5.5; 5.A; 6.1;	programmes.				taking the total empowered since our programmes began to 435,000.
6.B; 8.1; 8.6; 10.2; 17.16

Sustainable supply chains

Deliver our responsible sourcing	% of potential high-risk	82%		This year, 1,261 of our supplier sites assessed as a potential risk completed
commitments with suppliers to improve	supplier sites audited.				a SEDEX self-assessment. Of these, 412 were assessed as a potential high
labour standards and human rights in					risk, with 82% independently audited over the past three years. Of these
our supply chains.					audits, we commissioned 263, while 73 audits came through SEDEX
						or AIM-PROGRESS mutual recognition audits. 152 of these audits were
UN SDG alignment 8.7; 8.8					conducted in the past year.

Source 80% of our agricultural raw	% of agricultural raw		79%		We sourced 79% of agricultural raw materials locally within Africa for use by
materials locally in Africa by 2020.	materials sourced				our African markets, compared with 82% last year. This percentage fell slightly
		locally in Africa.				as Covid-19 restrictions pushed us just below our target of 80%.
UN SDG alignment 8.3; 12.3


Establish partnerships with farmers to	Number of smallholder		78,600		We support more than 78,600 farmers in Africa in a variety of ways,
develop sustainable agricultural supplies	farmers supported.				including training, access to seeds and fertilisers, micro-loans and financial
of key raw materials.					resilience support.

UN SDG alignment 2.3; 2.4; 8.3; 12.2; 12.3

(i) Building on what we have learnt from our drink driving interventions and feedback from our stakeholders, we are evolving our approach	For our human rights and health and
to focus on education programmes that promote changes in attitudes as a way to tackle drink driving. As a result, fiscal 2020 will be our	safety targets, see pages 36-37.
final year for #JoinThePact, and we will no longer include it in our reporting.

(ii) We increased the 2020 target from 30% to 35% in 2017.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Sustainability performance continued

Performing against our environmental targets(i)

Our 2020 targetKPIPerformance Progress Commentary

Water stewardship

Reduce water use through	% improvement in	2.1%	We are proud of the progress we have made on water stewardship and achieving a 46.0%

a 50% improvement in water	litres of water used	2020	improvement in water use efficiency, although we have fallen short of our 2020 target. This
use efficiency	per litre of packaged	cumulative progress has been made through continuous improvement and innovation
46.0%
	product	projects in our operations worldwide. This year, the impact of Covid-19 included a reduction

		Cumulative	in packaged volume (which is a denominator in our water efficiency calculation) and a delay
		to the commissioning of key water recycling and reuse facilities in East Africa and Nigeria.

			The benefits from these investments will be realised in future years.
			This year, 16,692m3 of water were used for agricultural purposes on land under our
			operational control. We report this separately from water used in our direct operations.
			The volume of water we recycled or reused in our own production was 541,300m3,
UN SDG alignment 6.4
		representing 3.3% of total water withdrawals.

Return 100% of wastewater	% reduction in	6.8%	As indicated in last year's report, we did not meet this target by the 2020 deadline but are

from our operations to the	wastewater	2020	encouraged by the progress we have made in the last 12 months. We continue to meet all
environment safely	polluting power	regulatory requirements on wastewater at our sites and 90% of sites have achieved our 2020
46.4%
	measured in	target. We recognise the importance of returning water to the environment at an equal or

	BOD ('000 tonnes)	Cumulative	better quality than the water we abstract and will continue to explore circular approaches to
		water use.

UN SDG alignment 6.3; 6.6


Replenish the amount of	% of water	39.5%	Significant progress this financial year has resulted in us replenishing 1,400,000m3 of water,

water used in our final product	replenished in	2020	meaning that we have exceeded our cumulative target: we have replenished 116% of the
in water-stressed areas	water-stressed	total water used in our final product in water-stressed sites, representing 21.5% of total water
116%
	areas (m³)	used in water-stressed sites.
	Cumulative	This remains vital work and an area of focus for 2030.
UN SDG alignment 6.1; 6.2; 6.6; 6.B; 3.2; 15.1

Equip our suppliers with	% of key suppliers	86%	We engaged 144 suppliers to disclose their water management practices through CDP's

tools to protect water resources	engaged in water	2020	Supply Chain Water Programme, with an 86% response rate.
in our most water-stressed	management

locations	practices

UN SDG alignment 6.1; 6.A; 6.B; 15.1; 17.16

Carbon

Reduce absolute	% reduction	8.7%	We are proud to have achieved this stretching and important target, with an 8.7% decrease

greenhouse gas emissions	in absolute GHG	2020	in GHG emissions this year. In addition to continuous improvement at our operations and
from direct operations	(kt CO2e)	switching to lower carbon fuel, we have purchased renewable energy attribute certificates
50.1%
by 50%		to support our carbon strategy. Achieving this target is a significant milestone, and we

		Cumulative	will build on it as we continue to decarbonise our business.

			As a signatory to the RE100 global initiative committed to 100% renewable electricity, we
			aim to source 100% of our electricity from renewable sources by 2030. This year, 65.5% of
			electricity consumed was from renewable sources such as wind, hydro and solar (2019 -
			45.4%), therefore exceeding our 2025 interim target of 50%. In the United Kingdom, 100% of
			our electricity came from renewable sources.
			We use the World Resources Institute/World Business Council for Sustainable Development
			Greenhouse Gas Protocol as a basis for reporting our emissions, and we include all facilities
			where we have operational control for the full financial year.
			Diageo's total direct and indirect carbon emissions (location/gross) this year were 710,986
			tonnes (2019 - 746,769 tonnes), comprising direct emissions (Scope 1) of 567,081 tonnes
			(2019 - 599,043 tonnes), and indirect (Scope 2) emissions of 143,905 tonnes (2019 - 147,726
			tonnes). The intensity ratio for this year was 199 grams per litre packaged (2019 - 185 grams
UN SDG alignment 7.2; 7.3; 12.6; 13.3
	per litre packaged).(ii)

Achieve a 30% reduction	% reduction	5.5%	Our global effort across the total value chain to reduce GHG emissions has meant that

in absolute greenhouse	in absolute GHG	2020	we have achieved our 2020 target, with a 33.7% reduction in emissions in our total supply
gas emissions along the	(kt CO2e)	chain since the programme began. Our total supply chain carbon footprint this year was
33.7%
total supply chain		2,922,538 tonnes, a 5.5% improvement on 2019.
		Cumulative	This year we received responses from 88% of the 229 suppliers we engaged through the
			CDP and 51% of these suppliers reported that they had emissions reduction targets.
			Reducing our supply chain footprint is a key element of our decarbonisation strategy and
UN SDG alignment 7.2; 7.3; 7.A; 12.6; 13.3; 17.16		will continue to be a focus in the years ahead.

Ensure all our new refrigeration	% of new	100%	Eliminating HFCs plays a role in reducing our overall carbon footprint. 99.5% of the 53,000

equipment in trade is HFC-free,	equipment	2020	fridges we have bought since July 2015 were HFC-free. Since 2017 100% of the fridges we
with a reduction in associated	sourced HFC-free	have bought were HFC-free and this remains an ongoing policy.
99.5%
greenhouse gas emissions	from 1 July 2015

from 2015	Cumulative


UN SDG alignment 12.6

34 DIAGEO Annual Report 2020

REPORT STRATEGIC

Our 2020 target	KPI	Performance	Progress	Commentary

Waste

Achieve zero waste to landfill	% reduction	39.0%		In the last three months of this year, we achieved zero waste to landfill at all our supply and
	in total waste to		office sites, an important milestone in our ambition to be a zero-waste business(ii). Our
	landfill (tonnes)	2020		progress has been driven by continuous improvement at our sites and by close collaboration
	98.2%
			with partners.
UN SDG alignment 12.5; 12.6		Cumulative

Packaging

Reduce total packaging by	% of total packaging	0.4%		We have made good progress in some areas, but as we reported last year we have found
15%, while increasing recycled	(by weight)	2020		this target challenging and it will remain in place beyond 2020.
content to 45% and making
	11.2%
100% of packaging recyclable

Cumulative

% of recycled 5.3% content (by weight) 2020

45.8%

Cumulative

We have met our commitment to increase recycled content in our packaging, attaining 45.8% recycled content against a 45% target. Including returnable glass volumes drives the total recycled content of our packaging to 51.4%.

We remain committed to reducing the impact of our packaging and will continue to work with suppliers and other partners to provide customers and consumers with formats that advance recycling and a circular economy approach.

% of packaging	0.8%

recyclable (by	2020
weight)
99.5%

	Cumulative

Following another year of progress we have moved to within 0.5% of our target. It is not currently possible to replace the remaining non-recyclable components, but we will continue to explore alternatives for these residual materials in addition to ensuring all our packaging is widely recyclable.

Sustainably source all of our	% of sustainably	99%

paper and board packaging to	sourced paper and	2020
ensure zero net deforestation	board packaging

UN SDG alignment 12.2; 12.6

We define 'sustainably sourced' as Forest Stewardship Council (FSC) or Programme for the Endorsement of Forest Certification (PEFC) certified, or recycled fibre. This year, we engaged all of our 251 suppliers, with 98% responding. Collectively these suppliers have self-reported that 99% of the paper and board packaging they supply meets our sustainable sourcing criteria. Reduced demand due to Covid-19 limited our ability to meet the full 100%, which we were on track to reach.

Our 2025 packaging (plastic) targets(iii)

Achieve 40% average recycled	Tonnes (metric) of	2.5%

content in all plastic bottles	recycled content/	2020
(and 100% by 2030)	total tonnes of
2.5%
	plastics used

Cumulative

UN SDG alignment 12.5; 12.6

In our second year of reporting against this target, we have delivered several opportunities to increase the use of recycled content in plastic (PET) bottles. In North America, for example, Seagram's 7 Crown American whiskey moved all its PET formats to 100% recycled plastic bottles from January 2020. The full impact of the Seagram's 7 project and other projects in the pipeline will advance us towards 40% recycled content by 2025 and 100% by 2030. While just 2% of our packaging is made from plastic (PET), we nonetheless consider this an important target.

Ensure 100% of our plastics will	Tonnes (metric)	4.3%

be designed to be recyclable,	plastics widely	2020
reusable or compostable in	recyclable
85.3%
countries where we operate	(or reusable/

compostable)/ Cumulative total tonnes of

plastic used

UN SDG alignment 12.5; 12.6

We continue to work on pack designs with our suppliers and other partners to remove non-recyclable plastics from our products and to promote better recycling infrastructure in selected markets. This year we eliminated approximately 500 tonnes of non-recyclable plastics.

Baseline year is 2007 except for packaging which is 2009 and water replenishment which is 2015.
Please refer to our reporting methodologies for more information on how data has been compiled, including standards and assumptions used.
These targets were introduced in 2018.
Within PwC's limited assurance; see page 184 for further details.

DIAGEO Annual Report 2020

Sustainability performance continued

Doing business the right way from grain to glass

Doing the right thing, in the right way, is the foundation of our business. That means embedding respect for human rights into the way we work, every day, everywhere. We consider health and safety as a fundamental human right - and the health, safety and wellbeing of our employees is our highest priority.

Making respect for human rights everyone's business

Respect for human rights should be a part of everyone's working day, as enshrined in our Code of Business Conduct. We are continuing to embed human rights into every function of our business, in every country, as part of our commitment to the UN Guiding Principles on Business and Human Rights (UNGP), which we signed in 2014.

We have a well-developed policy framework that addresses human rights and our commitment to integrity. We will not work with anyone who does not align with these standards. We use our comprehensive human rights impact assessment (HRIA) process, which considers our entire value chain, and our Responsible Sourcing programme as part of our risk monitoring process.

In line with the UNGP, we have identified three external risks as particularly salient to our business: labour rights, including the risk of child labour, especially in agricultural supply networks; labour standards for contract workers; and sexual harassment in the hospitality sector. In response, we have developed a child protection toolkit for all markets where we source from smallholder farmers,

to train employees who visit farms about risks to children's safety. We have also delivered training on human rights with a specific focus on modern slavery to our procurement teams and a selection of key roles within the business. Our modern slavery statement is set out on our website. We introduced a Global Brand Promoter Standard in all our markets to protect brand promotion teams from harassment. Our governance process checks that this standard is included in agency contracts and that promoters receive relevant training.

Strengthening our approach

Embedding human rights is a continuous and evolving process. This year, for example, we began integrating the findings of our HRIAs into the overall Diageo risk management process, and we will continue to build on this in the next financial year. Helping our people understand the nature of our business risks and human rights generally is also critical to our success, and we have developed human rights training for all Diageo employees, which we launched on our new online My Learning Hub (for more details on My Learning Hub see the case study on page 27).

We also understand the importance of reviewing our HRIA process to ensure it remains relevant. Applying a gender lens to HRIAs, for example, is critical. We have updated our approach to ensure the voices of women in our supply chain are fully heard throughout the assessment process, building more criteria into our country context reviews and exploring more assessment techniques such as women-only interviews with stakeholders.

Milestones this year

HRIAs conducted in North America (United States/Canada), Middle East (first phase), China and Australia; and action plans developed to address salient risks
Human rights training focused on modern slavery rolled out to our procurement teams and other key roles

Progress against 2020 human rights target

Our 2020 target		KPI		Overall progress

Human rights
Act in accordance with the UN Guiding		Number of markets		17 of 21 markets
Principles on Business and Human Rights,		in which we have carried out human		On track until Covid-19; target extended to December 2021.
by carrying out HRIAs in all markets		rights impact assessments (HRIAs).



Health and safety			sale of United National Breweries (UNB) in South Africa, which had a
Our global Health and Safety strategy aims to address the wellbeing	higher LTA rate than Diageo's average. To keep our people informed
and the safety of our people. At its heart is our global Zero Harm	and help them manage their physical and mental health during the
programme, which is designed to ensure that everyone goes home	pandemic, we launched a number of new health and wellbeing
safe and healthy, every day, everywhere.			resources and engagement campaigns, including a virtual mental
Our relentless focus on our Severe and Fatal Incident Prevention	health awareness week.
(SFIP) programme, specifically designed to identify and effectively	This year, we introduced a new, broader total recordable
control severe and fatal risks in our operations, has driven industry-	accident (TRA) target of achieving 3.5 or fewer per 1,000 employees
leading progress within Diageo. But we are deeply saddened to	and site-basedthird-party contractors, and we achieved a strong rate
report that an employee died in a traffic accident in Tanzania. We	of 2.12. This indicator has enabled markets to apply the same rigour
have, however achieved our lost-time accident (LTA) target of less	to finding the root causes of all levels of accidents and near misses,
than one per 1,000 employees for the third year in a row, at 0.60 . Our	which helps predict and prevent more serious accidents and illnesses.
independent contractors recorded 16 LTAs this year, a significant	There is no acceptable level of accidents, and we want to continue to
improvement on 24 in 2019.(i) Our performance was helped by the	accelerate our health and safety culture and performance. Our aim is to

(i) We do not report an LTA rate for independent contractors due to the difficulty and administrative burden in accurately recording headcount.

36 DIAGEO Annual Report 2020

develop targets and performance measures for 2025 which	We are also working more closely with our contractors to ensure
combine leading and lagging health and safety indicators.	they are aligned with our expectations around Zero Harm and
At the same time, we are continuing to focus on improving	will be including more specific health and safety requirements
our best practice culture and developing people's capabilities.	in future service level agreements.

Progress against 2020 health and safety target

Our 2020 target		KPI	Overall progress

Health and safety
Keep our people safe by achieving less		Number of LTAs	0.60 LTAs per 1,000 employees
than one lost-time accident (LTA) per 1,000		Number of fatalities	1 work-related fatality
employees and no fatalities
	Number of TRAs (new KPI this year)	2.12 TRAs per 1,000 employees and site-basedthird-party contractors


UN SDG alignment
3.9; 8.8

2020 safety data by region					Independent
		Employee LTA rate	Employee TRA rate	contractor LTAs(i)	Fatalities(ii)
North America			0.31	2.21	0	0
Europe and Turkey			1.03	2.15	6	0
Africa			0.35	2.42	6	1
Latin America and Caribbean			1.56	2.51	1	0
Asia Pacific			0.30	1.65	3	0
Diageo (total)			0.60(iii)Δ	2.12	16	1

We do not report an LTA rate for independent contractors due to the difficulty and administrative burden in accurately recording headcount.
Fatalities include any employee work-related fatality arising in their day-to-day work environment, or any work-related fatalities occurring to third parties and contractors (non full-time employees) while on Diageo's premises.
Our performance was helped by sale of United National Breweries (UNB) in South Africa, which had a higher LTA rate than Diageo's average. Previous year baseline data is not restated for health and safety.
Within PwC's independent limited assurance scope.

Non-financial information statement

Focus area Relevant policies and standardsRead more in this reportPage

Positive drinking		-- Marketing and Digital Marketing Policy	-- Promote positive drinking	24-25

		-- Employee Alcohol Global Policy	-- Performing against our social targets	33
Our employees		-- Position papers	-- Champion inclusion and diversity
-- Code of Business Conduct	26

		-- 2019 Great Britain Gender Pay Report	-- Our people	27
Grain-to-glass sustainability		-- Human Rights Global Policy	-- Performing against our social targets	33
-- Environmental Global Policy	-- Pioneer grain-to-glass sustainability	28-29

		-- Sustainable Agriculture Guidelines	-- Performing against our	34-35
		-- Sustainable Packaging Commitments	environmental targets
		-- Water Blueprint	-- Responding to climate-related risks	42-43
Human rights		-- Partnering with Suppliers Standard	-- Doing business the right way from
-- Human Rights Global Policy	36

		-- Modern Slavery Statement	grain to glass
Health and safety		-- Global Brand Promoter Standard	-- Doing business the right way from
-- Health, Safety and Wellbeing Global Policy	36-37

Anti-bribery and corruption		-- Code of Business Conduct	grain to glass
-- Effective risk management	41

Our contribution to the SDGs			-- Performing against our social targets	33

			-- Performing against our	34-35
			environmental targets

REPORT STRATEGIC

DIAGEO Annual Report 2020

Our principal risks and risk management

Effective risk management

Well-managedrisk-taking lies at the heart of our Performance Ambition. Great risk management drives better commercial decisions, protects our assets and supports a growing, resilient and sustainable business.

Insightful reporting.

Develop and embed mitigation actions.

report	Continuous
&	review
Monitor
Risk management	Identify
Mitigate

Assess

Understanding the likelihood of the risk

occurring and the impact.

Review of what is

going on around us

and ensuring we

have the right plans

in place.

Deep dive to identify

our top risks.

Responding to the

Covid-19 pandemic

The Covid-19 pandemic has created multiple different risks for our business. The spread has been rapid and

the impact to the global economic outlook remains uncertain. Protecting our people and our business and supporting our suppliers, customers and communities have been at

the forefront of our response to the pandemic. Risk mitigations have been agile and effective with support and oversight by the Board.

Our approach

We believe that great risk management starts with the right conversations to drive better business decisions. Our focus is to identify and embed mitigation actions for material risks that could impact our current or future performance, and/or our reputation. Our approach is holistic and integrated, bringing together risk management, internal controls and business integrity, ensuring that our activities across this agenda focus on the risks that could have the greatest impact.

Accountability for managing risk is embedded into our management structures. Each market and function undertakes an annual risk assessment, establishes mitigation plans and monitors risk on a continual basis. Similarly, our Executive Audit & Risk Committee regularly assesses risk and the Board independently reviews the assessment. This Committee meets quarterly and received regular reports on

the risks faced across the business and the effectiveness of the actions taken to mitigate these risks. We use internal and external data to monitor our risks and to make proactive interventions. We also establish cross-functional working groups and draw on the advice of experts where necessary to ensure significant risks are effectively managed, and where appropriate escalated to the Executive and Board for consideration.

Further details about our risk management approach are described in the Corporate governance report on page 72 and in the Audit Committee report on page 81.

Focus in the year

The Executive and Board considered the group's principal risks and reviewed our risk appetite, setting the level of risk tolerance we have for

risks that could impact delivery of our strategic objectives. Examples of risks for which we have zero appetite include risks that could: harm our people; impact product quality; cause us to market irresponsibly or otherwise act without integrity; and be non-compliant with laws and regulations, including those relating to financial reporting.

Our principal risks remain unchanged and continue to reflect a challenging external environment.

Emerging risks

There continues to be a focus on identifying and assessing potential emerging risks. These can be newly identified risks or known risks that have evolved over time. The Executive and Board formally review emerging risks. Our corporate strategy team undertakes horizon-scanning to monitor any potential disruptions that could dramatically change our industry and/or our business, from both a risk and opportunity perspective, for the Executive and the Board

to understand the changing landscape and take appropriate actions. We perform scenario planning and draw on external thinking and research to consider the changes around us to understand how our risk profile could change over a longer time period.

Risks relating to sustainability and climate change continue to evolve and a deeper review of this risk and the actions we are taking is provided in pages 42-43.

The Covid-19 pandemic is considered in this report as an emerging risk. Where appropriate, actions to mitigate risks associated with Covid-19 that are related to existing principal risks have been built into the mitigation strategies for those principal risks.

An Executive Working Group, supported by local crisis management teams in our markets, has developed risk mitigation actions to protect our people that included best practice protocols aligned with government strategies and our people's safety. Robust employee safety protocols were implemented including having all employees who were able to do so working remotely, and heightened sanitation measures and restrictions on movement to and from our production and warehousing sites. Pay principles were implemented to support employees globally.

Protocols for a safe return to work have been developed and are being implemented on a location-by-location basis in line with government guidelines and ensuring an environment that supports our employees' well-being and safety as the primary concern.

Our business performance has been impacted by the containment actions adopted by governments around the globe as they seek to mitigate the impact of the pandemic, and the resulting disruption and economic effect on our consumers, customers and suppliers. The potential impacts and mitigation plans of Covid-19 have been built into several of our principal risks on the following pages. Further actions we are taking to protect our business and support our partners and communities are also described within the Strategic report.

38 DIAGEO Annual Report 2020

	Efficient growth		Consistent value creation	Credibility and trust	For more information on our strategic priorities
EG	CVC	CT
					and outcomes, please see pages 17-29.
	Engaged people	V	Risk included in viability assessment
EP

Risk

Impact

How we mitigate

Developments in 2020

Regulatory

Regulators in major

--Multi-year public policy plans, regulatory

-- Trade wars and protectionism have added pressure on tariffs and

restrictions

markets impose

policy risk tracking and economic modelling.

international trade relations. Volatility and uncertainty in the external

indirect tax increases,

-- Positive drinking programmes supported

policy environment, particularly in light of Covid-19 and ongoing

and indirect tax

trade barriers and/

by a global industry platform to promote

anti-alcohol sentiment, continue to put pressure on indirect taxation

Fiscal pressures and/or

or restrictions on

responsible drinking.

and regulation.

failure to address

marketing and

--Evidence-based engagement to build

-- We are well placed to manage risks. We have improved our analysis

perceived growth in

availability.

trust and reputation with governments

and evidence based, public policy campaigning and enhanced our

anti-alcohol sentiment.

Damage to our

and other stakeholders.

network of stakeholders.

corporate reputation.

-- Capability building on government affairs,

-- We have strengthened our capability in navigating marketing and

CVC

alcohol policy and campaigning.

availability regulations, including e-commerce.

-- We are at the forefront of industry initiatives in promoting positive

drinking, and have rapidly adapted to encourage responsible

drinking at home and other responsible initiatives during the

Covid-19 pandemic.

Economic change

Social unrest, liquidity

-- Local and global monitoring of key business

-- The Covid-19 pandemic has created extreme volatility in the short

Significant local volatility

issues, generalised

drivers and performance to prepare for

term as a result of the social restrictions implemented across the

or upheaval, uncertainty

downturn, currency

rapid changes.

world. The impact of the virus on economic conditions over the

instability, inflationary

--Group-level strategic analysis and scenario

medium-term (one to three years) is highly uncertain, in sharp

or failure to react quickly

enough to increasing

pressures, possible

planning to strengthen market strategies and

contrast to the stable and growing GDP performance across most

volatility, including

changes to customs

risk management.

markets experienced in recent years. As a result, volatility is likely

duties and tariffs and/

-- Strategic business reviews by Chief Executive

to increase significantly as many markets, both developed and

pandemics and the

or eroded consumer

emerging, will face challenging economic conditions and higher

United Kingdom's

and senior executives of local strategies.

confidence, impacting

levels of unemployment leading to reduced consumer spending.

exit from the EU.

--Multi-country investment strategy, and local

business forecasting

To mitigate these challenges we will be regularly gathering data and

sourcing strategies.

and/or performance.

obtaining insights which will enable us to assess conditions in the

CVC

-- Hedging strategy and currency monitoring.

markets where we operate and amend our forecasts and investment

-- Economic data is regularly monitored, analysed

decisions appropriately, both in individual markets and at a global

and updated and fed into our models.

level. In the short term we have reduced the planning horizon to

three to six months from twelve months consistent with the current levels of uncertainty. We continue to assess multiple scenarios over the longer term to ensure ongoing viability/liquidity in all eventualities and to ensure our preparedness to invest as conditions improve.

REPORT STRATEGIC

3 Critical industry developments

Failure to shape or participate in critical consumer, customer, channel and/or industry trends could threaten our leadership position and/or revenue streams.

EG CVC CT V

-- Consumers move away from our brands to alternative products.

Failure to identify and exploit rapidly growing channels means our products are not on the shelf.
Less efficient business model compared to key competitors.

-- Highly diversified portfolio of brands to ensure	-- The social distancing measures deployed in response to the
coverage of consumer occasions, trends and	Covid-19 pandemic have had a significant impact on where and
price points.	how people purchase and consume alcohol. In particular, the
-- Rigorous processes of strategy and innovation	on-trade has faced significant disruption globally leading to higher
development at corporate and market level.	consumption in the home which has been coupled with a shift
-- Systematic review of emerging consumer	to on-line purchasing. These trends are likely to continue to some
degree after social restrictions are eased. We will continuously assess
and route to consumer trends at market and
consumer trends and shifting behaviours and are well positioned to
brand level, including growth of disruptive
remain agile and continue to flex commercial strategies.
digital technologies.
-- We are working closely with our e-commerce partners and
-- We focus our innovation on our strategic
customers for financially beneficial and globally consistent
priorities and the biggest consumer
e-commerce solutions.
opportunities through global brand

extensions and new-to-world products.

Non-compliance

-- Severe damage to our

Code of Business Conduct and supporting

-- Creation of a new Chief Business Integrity Officer role and

with laws and

corporate reputation

policies and standards set out compliance

supporting team to elevate the critical role that ethical decision-

and/or significant

requirements.

making plays in our overall governance framework.

regulations

financial penalty.

Risk assessment framework to identify, assess

-- We refreshed our Code of Business Conduct and introduced a new

Non-compliance with

and monitor business and compliance risks.

Dignity At Work policy.

local laws or regulations,

Regular training, communications, annual

-- We delivered interactive Code of Business Conduct e-learning

or breach of our internal

certification and engagement activities to

training sessions.

global policies and

embed employee understanding.

-- New interactive leadership engagement tool to further embed

standards and/or

Well-embeddedSarbanes-Oxley and

compliance understanding and capability.

significant internal

Committee of Sponsoring Organizations

control breakdown.

control assurance programme.

Global third party due diligence process

CVC

supported by technology and central oversight.

Sustainability and

-- Reduced revenues and

Sustainability and responsibility strategy

-- Achievement of the majority of sustainability and responsibility targets.

responsibility

profits via increased

credible with stakeholders and operationalised,

-- 2030 strategy being developed.

taxation, regulation and

delivering against majority of 2020 targets.

Failure to manage climate

--Cross-functional Climate Risk Steering Group continuing to develop

supply chain volatility.

Resource scarcity issues identified and

change risk, particularly

approach to climate change risk reporting, guided by Task Force on

water stress, or to meet

-- Damage to trust and

mitigations in place, including water,

Climate-related Financial Disclosures (TCFD) recommendations.

reputation amongst

agricultural raw materials and energy.

-- Water Blueprint continuing to be embedded with suppliers.

key sustainability goals.

consumers and other

Human rights interventions delivering against

-- Human rights impact assessments in North America (United States/

CVC

stakeholders.

UN Guiding Principles and United Kingdom's

Canada), Middle East (first phase), China and Australia (see page 36).

Modern Slavery Act requirements.	-- Second full year of progress against 2025 positive drinking targets,
-- Key external partnerships in place to strengthen
focused on moderation and reducing harm (see page 33).
delivery and strategy.

DIAGEO Annual Report 2020

Our principal risks and risk management continued

EG Efficient growth

CVC Consistent value creation

CT Credibility and trust

EP Engaged people

Risk included in viability assessment

Risk

Impact

How we mitigate

Developments in 2020

Cyber threat

Financial loss,

--Enterprise-wide cyber risk management processes

-- Use of machine learning and threat intelligence to detect and

Theft, loss and

operational disruption

and policies.

block sophisticated threats.

misappropriation of

and reputational

-- Information Security committee governs, tracks and

-- Conduct continuous breach simulation testing to supplement

our most important

damage.

reports risk and compliance activities.

war gaming, red team and cyber stress-testing activities.

digital assets.

-- Comprehensive IT controls framework extends to

-- Expanded workflow tools and automation tools to increase

manufacturing facilities.

speed, efficiency and consistency of security operations.

CVC

-- Rigorous approach to third party risk management.

-- Continuously reviewing and adapting our cyber strategy to

-- Mandatory global e-learning and regular phishing

tackle risks related to Covid-19 and remote working.

exercises for all employees.

-- Next generation security technologies deployed to

tackle advanced attacks.

Data privacy

Harm to our reputation

-- Global data privacy programme with robust policy,

-- Detailed review of data privacy requirements carried out in

Breach of data protection

with consumers,

training and communications.

respect of information systems and processes, through a

laws or regulations

customers and/or

-- Privacy impact assessments in key risk areas of

structured programme including analysis of access controls,

our people.

the business.

data minimisation and masking, data retention and storage,

Non-compliance

-- Minimum standard for compliance set globally with

record of processing activities, and third party data management.

with data protection

a focus on key risk areas.

regulation.

Significant financial

penalty of up to 4%

of global turnover.

Political instability

Diageo employees,

-- Security function, led by subject matter experts,

-- Significant increase in global volatility often manifesting in civil

and terrorism

sites or supply chain

draws on a global management framework

unrest and violence, across many regions.

threatened and/

to ensure risks are systematically identified

-- The Covid-19 pandemic has caused global disruption to

Impacts from political

or harmed.

and controlled.

communities, business, and economic well being. Its economic

instability and security

-- Our ability to operate

--In-country security managers oversee people

and social impact could exacerbate the underlying conditions

threats including terrorism.

in key markets is

and physical security.

driving volatility and increase the likelihood of further unrest.

CVC

disrupted.

-- Global risk monitoring and horizon-scanning to

-- Unstable geo-politics: resurgent populist nationalism has driven

identify and respond to emerging risks promptly.

erosion of multilateralism, raising the risk of regional conflict,

-- Mandatory global travel risk management program

trade wars and state-sponsoredcyber-attacks. Increasing

for all business travellers.

polarisation and political extremism have also driven increasing

-- Global business continuity and crisis management

rates of far-right activity and terrorism.

-- We have fully activated our global crisis management and

framework with scenario testing.

-- Global and market liaison with governments,

business continuity plans to address Covid-19.

academia, and industry on evolving threat

landscape and best practices.

International tax

Increase in the cost of

-- Ongoing review of our tax policy in light of

-- Increased risk of unilateral tax increases as governments seek to

Significant changes to

doing business arising

changing rules and stakeholder expectations.

fund their spending during the Covid-19 pandemic.

the international tax

from an increase in

-- Monitoring and, where appropriate, expressing

-- Investment by governments in the digitalisation of tax

environment such as

our effective and cash

views on the formulation of tax laws either directly

administration will facilitate enhanced access to and analysis

responding to concerns

tax rates.

or through trade associations or similar bodies.

of our data, which is likely to increase audit activity.

around the 'digital

Changing tax laws

--End-to-end review of our processes to continually

-- The OECD's work on digitalisation may result in changes to

economy' and EU anti-tax

and audit activity

improve our tax control/ governance environment.

how multinationals are taxed and could result in unilateral and

abuse measures could

lead to additional

-- Submission of our country-by-country reports to

punitive tax measures if a consensus-based approach cannot

alter our operating

tax exposures and

the relevant tax authorities on an annual basis to

be found.

uncertainty.

position.

ensure they have full visibility of our tax footprint.

-- In common with other multinationals, we face scrutiny from

certain authorities, as outlined in our contingent liability note.

CVC

Product quality

Harm to consumers

-- Food Safety System 22000 Certification in place

-- Global Food Safety Initiative assurance strategy being rolled out

Contamination of raw

Corporate and brand

for owned brewing and packaging sites, and

across wholly owned breweries and packaging sites, and key

materials or finished

reputation is damaged.

third-party site audit programme in place.

third party production sites.

product, or unsafe

Financial losses due

-- Physical security standards and vetting procedures.

-- Food fraud and food threat training developed for employees.

counterfeit product

to supply disruption,

--Anti-counterfeiting measures embedded in our

-- Brand protection and anti-counterfeit activities focused on

supplied to the market.

product recalls,

packaging deter against reuse and make our

high -risk markets and on new technology to assist with

penalties and a loss

products more difficult to copy.

product verification.

CVC

of consumer trust.

-- Active programme to identify high-risk areas,

-- We are actively working with e-commerce sites to identify

engaging with customs and law enforcement

counterfeit activities and seek to stop those activities promptly.

authorities and participating in industry initiatives

-- Launch of project to develop the next generation security

to monitor and prevent counterfeit activity.

--	Application of unique lot-codes on all products	closures for our brands most at risk.

	for product recall requirements.
--	Food fraud and food threat risk assessments
	regularly undertaken.

40 DIAGEO Annual Report 2020

Reported and substantiated breaches

2018

636

299

273

111

2019

805

421

238

2020

644

384

195

Reported

Reported through SpeakUp

Substantiated breaches

Code-related leavers

Business integrity

We remain deeply committed to operating in the right way in everything we do. Compliance and conducting our business with integrity are non-negotiables, and our approach to risk and compliance helps us go beyond the basics to encourage the right behaviours and attitudes everywhere, every day.

REPORT STRATEGIC

Viability statement

In accordance with the United Kingdom's Corporate Governance Code, the Directors have assessed the viability of the group for the three years to 30 June 2023, considering our current position and prospects, our strategy, the Board's risk appetite, our business model to create a truly sustainable business for the very long term that includes our people, brands, relationships, insight and know-how, infrastructure and financial strength and our principal risks as set

out in the Strategic report. The Directors believe a three-year horizon is appropriate for this assessment, as this aligns with our normal three-year strategic business planning processes.

The three-year business plan is based on our current strategy and has been stress-tested by modelling severe but plausible downside scenarios, linked to our principal risks. In addition, and while still uncertain, the potential financial impact of the Covid-19 pandemic has been modelled in our scenarios. This has required using key assumptions that have a high degree of uncertainty, including but not limited to: the length of lockdown; the potential for a second wave; the recovery of our on-trade business; and increases in direct and indirect taxes.

Key severe but plausible scenarios considered include:

Material negative changes in the macro-economic environment including the impact of Covid-19
Severe marketing and/or route to market restrictions or fiscal changes introduced by local governments
Unfavourable exchange movements in foreign currencies - primarily euro & US dollar to Sterling
A failure to adapt to or participate fully in critical industry developments
Impact of severe climate change
Increased potential tax rate due to changes in the international tax environment.

The principal risks considered in the most likely combination of downside scenarios are identified with the symbol 'V'. None of these scenarios individually threaten the viability of Diageo, therefore the combined impact of these scenarios has been evaluated as the most severe stressed scenario. Stress-testing considers the effectiveness of mitigation actions and internal control systems, and makes certain assumptions about temporary reductions in discretionary spending including capital expenditure, dividend payments and advertising and promotion. It also considers whether additional financing facilities would be required.

Based on the results of this analysis the Directors confirm they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period to 30 June 2023.

Our global Code of Business Conduct (Code), available in 20 languages, was refreshed this year to reiterate our expectations of how we manage compliance risk. The Code sets out what we stand for as a company and how we operate to enable all our employees to understand what is required of them in the conduct of our business across a range of compliance areas.

We undertake annual mandatory global training, with an integrated Annual Certification of Compliance (ACC) for all managers. In 2019, the ACC was completed by 100% of eligible employees. Global training is delivered in

an easily accessible e-learning format with classroom training delivered to those employees who do not have regular access to a computer.

Another area of potential compliance risk is our interactions with third parties. Our Know Your Business Partner programme is designed to help us evaluate the risk of doing business with a

third party prior to entering into a contractual relationship, as well as monitor any changes throughout our interactions. We assess all our business partners for potential compliance risks such as bribery and corruption, money laundering, tax evasion facilitation, data privacy breaches or other reputational red flags, and implement additional due diligence processes for those that pose a potentially higher risk. Central oversight is provided by our global business integrity team which undertakes regular reviews on the effectiveness of the programme.

We encourage our employees, and anyone we do business with, to raise concerns about potential breaches of our Code or policies. Our confidential whistle-blowing help line, SpeakUp, is available via phone or web portal, enabling anyone to report a concern. Additionally, we encourage employees to come forward to their

line manager, legal, HR or risk and compliance and business integrity partners.

This year 644 allegations of breaches were reported. There has been a decline in allegations versus last year, which is in line with external trends and probably due to increased working from home as a result of Covid-19 measures. The substantiation rate of allegations remains similar to last year with 35% of cases confirmed as breaches.

All allegations are taken seriously, investigated and where required consequence management is performed. We monitor all breaches to identify trends or common areas where further action may be required. This year 60 people exited the business as a result of breaches of our Code or policies, versus

79 people in prior year. The reduced number

of breach leavers is due to a reduction in severity and type of breaches this year.

DIAGEO Annual Report 2020

Climate-related risks

Responding to climate-related risks

We are committed to combating climate change and water challenges by decarbonising our value chain, implementing adaptation measures and acting as champions for water stewardship around the world. As well as being the right thing to do, this helps us protect our business as part of our wider approach to mitigating and adapting to climate-related risks.

Reducing our emissions and championing water stewardship

Addressing climate change and its associated impacts, particularly for water, is central to our strategy. This year, we met our stretching targets to reduce absolute greenhouse gas emissions from direct operations by 50%, and by 30% in our supply chain. To reduce our climate impacts further, we are committed to procuring 100% of our electricity from renewable sources by 2030. We have also pledged our commitment to setting a science-based target in line with a 1.5°C future.

Water continues to be our most important strategic priority related to climate risk. Our Water Blueprint helps us drive better water availability, accessibility and quality in our supply chain and communities, while giving us the framework to reduce our overall impact and mitigate our risk. We focus particularly on water-stressed areas in Africa, India and Brazil, which account for approximately a third of our total production by volume (see map opposite). We have made particular progress on water efficiency in Africa (55.8%) and India (54.2%). We are committed to building on these achievements and to setting further ambitious targets for the critical decade ahead.

Our approach to reducing our environmental impacts is described further on page 29.

We report our performance against all our environmental targets on pages 34-35.

Board oversight of climate risk

Joint Executive-level ownership

Ewan Andrew		Dan Mobley
President, Global Supply and
	Corporate Relations Director
Procurement

Cross-functional Climate Risk Steering Group

Supply Climate Risk Mitigation Group

Our Climate Risk Steering Group

Our Climate Risk Steering Group meets quarterly and includes representatives from our Supply, Corporate Relations, Strategy, Treasury, Risk, Corporate Security, Financial Reporting and Brand functions. It aims to ensure we have an integrated, group-wide approach to assessing and mitigating climate-related risks, and that we adopt a strategic approach to adaptation planning for climate change. The Group provides updates to the Executive Committee and the Board.

Direct and indirect carbon emissions by weight (1,000 tonnes CO2e)(i),(ii)

(market-/net-based)

477

2020

490

2019

516

2018

845

2007

171

Direct

Indirect

Carbon emissions by region by year (1,000 tonnes CO2e)(i)(ii)

Region	2007	2018	2019	2020
North America	211	44	54	128
Europe and Turkey	399	279	232	149
Africa	228	225	195	164
Latin America and Caribbean	8	18	19	22
Asia Pacific	150	49	47	37
Corporate	20	8	8	7
Diageo (total)	1,016	623	555	507
UK	276	212	169	85(iii)

Water efficiency by region by year(ii)(iv)

Region	2007	2018	2019	2020
North America	6.88	5.55	5.26	5.03
Europe and Turkey	7.94	6.02	5.29	5.06
Africa	9.48	4.45	4.37	4.19
Latin America and Caribbean	34.84	4.66	4.58	4.93
Asia Pacific	7.06	3.64	3.36	3.72
Diageo (total)	8.56	5.04	4.72	4.62

CO2e figures are calculated using the WRI/WBCSD GHG Protocol guidance available at the beginning of our financial year, the kWh/CO2e conversion factor provided by energy suppliers, the relevant factors to the country of operation, or the International Energy Agency, as applicable.
2007 baseline data, and data for each of the intervening years in the period ended
30 June 2019, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo's environmental reporting methodologies.
Diageo UK total direct and indirect carbon emissions were 85,079, comprising direct emissions (Scope 1) of 85,079 and indirect emissions (Scope 2) of 0. The intensity ratio was 93grams/litre packaged. The UK total energy consumption was 1,049,178mWh, comprising 916,111mWh of direct energy and 133,067mWh of indirect energy.
In accordance with our environmental reporting methodologies, total water used excludes irrigation water for agricultural purposes on land under our operational control. Within PwC's independent limited assurance scope.
Please refer to the reporting methodologies in our Sustainability & Responsibility Performance Addendum for more information on how data has been compiled, including standards and assumptions used.

42 DIAGEO Annual Report 2020

Assessing and mitigating climate risk

As of this year, we have highlighted climate-related risk within our principal risk, sustainability and responsibility (see page 39).

Building on existing analysis and planning, we are taking steps to better understand the direct and indirect impacts of climate change and water stress on our business, so that we can further develop adaptation plans to ensure our supply chains are resilient. We recognise the importance of considering climate-related risks and opportunities in business decisions and strategic planning, and we acknowledge that adopting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) is an important step in addressing climate change risks and supporting a transition to a low-carbon economy.

To increase our understanding of the financial aspects, we carried out sustainability value assessments (SVAs) in three key markets in 2018. These examined the potential impact of water risk for Diageo over five and 10 years, strengthening the business case for water security measures in these markets.

Building on this work, in 2021 we will complete a comprehensive assessment of physical and transition climate risks in countries representing a significant share of our production, and use data modelling climate scenarios to help us develop detailed risk mitigation and climate adaptation plans. This work will be overseen by our Climate Risk Steering Group. We will also update our water risk assessment of our own operations as part of our regular review of the impact of water stress on our supply chain and will extend our understanding of third-party operators' water risk. This work, including SVAs and water risk assessments, will feed into our overall approaches to both climate risk mitigation and climate change adaptation.

Diageo sites located in water-stressed areas

			9
13	11		5	17
14		8

			1
	15		7
		2
	10	18
	16	6	3
	12
			4

REPORT STRATEGIC

Working with others to champion decarbonisation and water stewardship

In March we were proud to partner with the United Nations Global Compact (UNGC) and a number of other leading global companies to launch an industry-driven,CEO-led initiative, the Water Resilience Coalition.

We have also pledged our commitment to setting a science- based target in line with a 1.5°C future, and are advocates for action on carbon and the water crisis, including through these groups:

UNGC's Business Ambition for 1.5°C
UNGC CEO Water Mandate
Alliance for Water Stewardship
We Mean Business coalition
Science Based Targets initiative
WaterAid

We also share knowledge through the Beverage Industry Environment Roundtable (BIER), a coalition of global beverage companies working together to advance environmental sustainability.

21 28

34 20

27 33

Sites

1.	Kenya Brewing,	7.	Mwanza, Tanzania	14.	Agricultural lands,	India	24.	Kumbalgodu, Karnataka	31.	Serampore, West
	Nairobi, Kenya	8.	UBL, Kampala, Uganda		Ceará, Brazil	19.	Alwar, Rajasthan	25.	Malkajgiri, Telangana		Bengal
2.	East Africa Maltings,	9.	IDU, Kampala, Uganda	15.	Messejana, Brazil	20.	Aurangabad,	26.	Meerut, Uttar Pradesh	32.	Sovereign, Karnataka
	Nairobi, Kenya	10.	Accra, Achimota, Ghana	16.	Maracanaú, Brazil		Maharashtra	27.	Nacharam, Telangana	33.	Tern, Andhra Pradesh
3.	Seybrew, Seychelles	11.	Kumasi, Kaasi, Ghana	17.	Meta Abo, Ethiopia	21.	Baddi, Himachal	28.	Pathankot, Punjab	34.	Udaipur, Rajasthan
4.	Isipingo, South Africa	12.	Ogba, Lagos, Nigeria	18.	Marracuene,		Pradesh	29.	Pioneer, Maharashtra
5.	Moshi, Tanzania	13.	Paraipaba, Ceará, Brazil		Mozambique	22.	Baramati, Maharashtra	30.	Rosa, Uttar Pradesh
6.	Dar es Salaam, Tanzania			23.	Hospet, Karnataka

DIAGEO Annual Report 2020

Group financial review

Well positioned to emerge stronger

"This year our business has been significantly impacted by the Covid-19 pandemic. Restrictions imposed during the second half of the fiscal disrupted our operating environment, challenging the consistent performance that Diageo has delivered for eight consecutive half years. As a result, organic net sales were down 8.4% for the full year driven by volume declines on the back of the recent and sudden contraction of the total beverage alcohol industry, driven by the reduction of out of home consumption occasions. We quickly reset our discretionary spend, including A&P that we believed would not be effective in the rapidly changing environment. However, the pandemic still drove full year operating margin dilution of 212bps after delivering 13bps of accretion in the first half. Through disciplined actions to conserve cash we delivered £1.6 billion free cash flow and further strengthened Diageo's liquidity position to ensure we are positioned to continue to invest smartly for the long term. Despite the challenges, our strategy remains unchanged and our agile and high-performance culture give me confidence that we are well positioned to emerge stronger and continue to create value for all of our stakeholders."

Kathryn Mikells

Chief Financial Officer

Reported net sales were down

8.7%

driven by organic declines

Reported operating profit declined

47.1%

driven mainly by exceptional operating items and decline in organic operating profit

Organic volumes were down

11.2%

Organic net sales were down

8.4%

Organic operating profit was down

14.4%

Net cash from operating activities was

£2.3bn

Free cash flow was

£1.6bn

Basic eps of

60.1p

was down 54.0%

Eps before exceptional items decreased

16.4%

to 109.4 pence

Summary financial information

		2020	2019
Volume	EUm	217.0	245.9
Net sales	£ million	11,752	12,867
Marketing	£ million	1,841	2,042
Operating profit before exceptional items	£ million	3,494	4,116
Exceptional operating items(i)	£ million	(1,357)	(74)
Operating profit	£ million	2,137	4,042
Share of associate and joint venture
profit after tax	£ million	282	312
Non-operating exceptional gain(i)	£ million	(23)	144
Net finance charges	£ million	(353)	(263)
Exceptional taxation credit/(charge)(i)	£ million	154	(39)
Tax rate including exceptional items	%	28.8	21.2
Tax rate before exceptional items	%	21.7	20.6
Profit attributable to parent company's
shareholders	£ million	1,409	3,160
Basic earnings per share	pence	60.1	130.7
Earnings per share before exceptional items	pence	109.4	130.8
Recommended full year dividend	pence	69.9	68.6

(i) For further details of exceptional items see pages 130-131.

	Volume		Net sales(i)	Operating prot(ii)	Operating prot
											before exceptionals(iii)
North America
48.4		4,623	2,088	2,034

Europe and Turkey
40.2			2,567		695	757

Africa									(44)		101
28.8				1,346

Latin America and Caribbean										242	248
19.0					908

Asia Pacific
			80.6		2,270		(697)	501

Excluding corporate net sales of £38 million (2019 - £53 million).
Excluding net corporate cost of £147 million (2019 - £210 million).
Excluding exceptional operating charges of £1,357 million (2019 - £74 million) and net corporate operating costs of £147 million (2019 - £189 million).

44 DIAGEO Annual Report 2020

				Operating
	Volume	Net sales	Marketing	profit(i)
%	%	%	%
North America	(2)	4	(5)	4
Europe and Turkey	(11)	(13)	(13)	(25)
Africa	(14)	(16)	(8)	(63)
Latin America and Caribbean	(15)	(20)	(23)	(32)
Asia Pacific	(15)	(16)	(11)	(29)
Diageo - reported growth by region(ii)	(12)	(9)	(10)	(15)

						STRATEGIC
				Operating

	Volume	Net sales	Marketing	profit(i)	REPORT
%	%	%	%

North America	-	2	(6)	4
Europe and Turkey	(11)	(12)	(12)	(24)
Africa	(13)	(13)	(8)	(56)
Latin America and Caribbean	(15)	(15)	(15)	(29)
Asia Pacific	(15)	(16)	(11)	(29)
Diageo - organic growth by region(ii)	(11)	(8)	(10)	(14)

Before exceptional operating items.
Includes Corporate. In the year ended 30 June 2020 corporate net sales were £38 million (2019 - £53 million). Net corporate operating costs were £147 million (2019 - £189 million).

Net sales (£ million)

Reported net sales declined 8.7%

Organic net sales declined 8.4%

Reported net sales declined 8.7%, driven mainly by decline in organic net sales and, to a lesser extent, the negative impact of acquisitions and disposals, partially offset by favourable foreign exchange.

Organic net sales declined 8.4% driven by an 11.2% reduction in volume partially offset by 2.8% positive price/mix. All regions reported declines in organic net sales except for North America and this shift in market mix was the main driver behind the positive price/mix.

12,867	32									Exchange(i)
						355	11,752	Acquisitions and disposals
		(76)	(10)						Reclassiﬁcation(ii)

				(1,416)				Volume
											Price/mix
					Organic

					movement

2019								2020

Exchange rate movements reflect the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.
For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

Operating profit (£ million)

Reported operating profit declined 47.1%

Organic operating profit declined 14.4%

Reported operating profit was down 47.1% mainly driven by exceptional operating items and by decline in organic operating profit. Exceptional operating items were mainly driven by non-cash impairments in India, Korea, Nigeria and Ethiopia due to Covid-19 and challenging trading conditions.

Organic operating profit declined ahead of net sales at 14.4% with first half growth of 4.6% more than offset by impact of Covid-19 in the second half.

For further details on exceptional items see pages 130-131.
Fair value adjustments. For further details on fair value remeasurement see page 48.

4,042								Exceptional operating items(i)
									Exchange

					2				Acquisitions and disposals
							FVA(ii)
	(1,283)	(1)	(34)		2,137	Organic movement

						(589)

2019				2020

Operating margin (%)

31.4%

Exceptional operating items

Reported operating margin declined 1,323bps

Exchange

Acquisitions and disposals

Organic operating margin declined 212bps

Other(i)

Reported operating margin declined 1,323bps mainly driven by

bps

Gross margin

bps

18.2%

exceptional operating items and decline in organic operating margin.

(1,097)

(9)

(8)

Marketing

bps

(174)

(60)

Other operating items

Organic operating margin declined 212bps driven by lower

bps

volumes impacting fixed cost absorption, cost inflation and other

Organic

expense offsetting savings in marketing investment and productivity

movement

benefits from cost efficiencies.

2019

2020

(i) Fair value adjustments and reclassification.

Basic earnings per share (pence)

Basic eps decreased 54.0% from 130.7 pence to 60.1 pence

Eps before exceptional items decreased 16.4% from 130.8 pence to 109.4 pence

Basic eps decreased 70.6 pence principally due to impairments in exceptional items and the decline in organic operating profit. For further detail see pages 130-131.

Eps before exceptional items decreased 21.4 pence driven by decline in organic operating profit, lower income from associates and joint ventures, increased finance charges and the impact of acquisitions and disposal. These were partially offset by tax, lower non-controlling interests and the impact of the share buyback programme.

Includes finance charges net of tax.
Excludes finance charges related to acquisitions, disposals and share buyback.

130.7															Exceptional items after tax
																Acquisitions and disposals(i)

																Organic operating
																prot growth
											1.5	0.1		Associates and joint
	(49.2)	(1.2)					60.1	ventures
					3.9	1.1			Finance charges(ii)

			(24.4)											Tax(iiI)
			(1.2)	(1.2)
										Share buyback(i)

																Non-controlling interests
																Other(iv)

2019													2020

Excludes tax related to acquisitions, disposals and share buyback.
Fair value adjustments and exchange on operating profit.

DIAGEO Annual Report 2020

Group financial review continued

Free cash flow (£ million)

Generated £2,320 million from operating activities(i)(ii) £1,634 million free cash flow(ii)

Net cash from operating activities was £2,320 million, a decrease of £928 million compared to the prior period. Free cash flow was £1,634 million, £974 million lower compared to prior period primarily driven by the decline in operating profit, lower dividends from joint ventures and associates (see note 18(g) page 166), increased use of working capital, higher tax payments and higher interest charges. The tax increase was mainly due to one-off tax settlements and change in payment timing in the first half, which was partially offset by lower tax on reduced earnings in the second half as well as some delay in second half payments associated with Covid-19.

2,608										Exchange(iii)
											Operating proﬁt(iv)
	(1)									Working capital(v)
								1,634	Capex
	(541)	(106)	(47)	(96)		Tax
					(56)	(127)	Interest
									Other(vi)

2019								2020

Net cash from operating activities excludes net capex and movements in loans and other investments (2020 - £(686) million; 2019 - £(640) million).
Net cash from operating activities and free cash flow for the year ended 30 June 2020 benefited by £74 million as a result of the adoption of IFRS 16 on 1 July 2019.
Exchange on operating profit before exceptional items.

Operating profit excludes exchange, depreciation and amortisation, post employment charges and other non-cash items.
Working capital movement includes maturing inventory.
Other items include post employment payments, dividends received from associates and joint ventures, and movements in loans and other investments.

Return on average invested capital (%)(i)

Exchange

ROIC decreased 267bps

Acquisitions and disposals

15.1% bps

Organic operating proﬁt growth

ROIC decreased 267bps against the prior comparable period

(12)

bps

12.4%

Associates and joint ventures

driven mainly by organic operating profit decline.

bps

Tax

(260)

(24)

(22)

Other

bps

2019

2020

(i) ROIC calculation excludes exceptional operating items from operating profit and includes an adverse impact of 18bps as a result of the adoption of IFRS 16 on 1 July 2019.

Income statement

		Exchange (a)	Acquisitions and	Organic	Fair value		2020
	2019	disposals (b)	movement(i)	remeasurement (d)	Reclassification(ii)
£ million	£ million	£ million	£ million	£ million	£ million	£ million
Sales	19,294	(1)	(108)	(1,478)	-	(10)	17,697
Excise duties	(6,427)	33	32	417	-	-	(5,945)
Net sales	12,867	32	(76)	(1,061)	-	(10)	11,752
Cost of sales	(4,866)	(31)	41	193	9	-	(4,654)
Gross profit	8,001	1	(35)	(868)	9	(10)	7,098
Marketing	(2,042)	3	(7)	195	-	10	(1,841)
Other operating items	(1,843)	(5)	8	84	(7)	-	(1,763)
Operating profit before
exceptional items	4,116	(1)	(34)	(589)	2	-	3,494
Exceptional operating items (c)	(74)						(1,357)
Operating profit	4,042						2,137
Non-operating items (c)	144						(23)
Net finance charges	(263)						(353)
Share of after tax results of associates
and joint ventures	312						282
Profit before taxation	4,235						2,043
Taxation (e)	(898)						(589)
Profit for the year	3,337						1,454

For the definition of organic movement see page 62.
For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

46 DIAGEO Annual Report 2020

(a) Exchange

The impact of movements in exchange rates on reported figures for net sales is principally in respect of the translation exchange impact of the weakening of sterling against the US dollar, partially offset by strengthening of sterling against the Brazilian real, the Australian dollar and the euro. The impact of movements in exchange rates on reported figures for operating profit is principally in respect of the transactional exchange impact of the weakening of the Brazilian real, the Colombian peso and the Nigerian naira, broadly offset by translational exchange impact of the strengthening of the US dollar against sterling.

The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2020 is set out in the table below.

			Gains/
		(losses)
	£ million
Translation impact		56
Transaction impact		(57)
Operating profit before exceptional items		(1)
Net finance charges		(2)
Associates - translation impact		(3)
Profit before exceptional items and taxation	(6)

		Year ended	Year ended
	30 June 2020	30 June 2019
Exchange rates
Translation £1 =		$1.26	$1.29
Transaction £1 =		$1.35	$1.33
Translation £1 =		€1.14	€1.13
Transaction £1 =		€1.12	€1.13

(b) Acquisitions and disposals

The acquisitions and disposals movement was mainly attributable to the acquisition of Seedlip and Anna Seed 83, the disposal of United National Breweries and the prior year disposal of a portfolio of 19 brands to Sazerac.

See note 8 for further details.

Exceptional operating items in the year ended 30 June 2020 were £1,357 million before tax (2019 - £74 million).

Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the India cash-generating unit. Having considered the volatility in local share prices, the premiums that businesses controlled by large multinationals trade at and other factors, we assessed a range of fair value less costs of disposal with particular focus on the value a third party may pay for a controlling stake in the current environment. The value in use calculation was above our view of fair value less costs of disposal and was therefore used to determine the recoverable amount of this cash-generating unit. Based on this, in the year ended 30 June 2020, an impairment charge of £655 million in respect of the India cash-generating unit containing the India goodwill was recognised in exceptional operating items. Impairment charges of £78 million in respect of the Old Tavern brand, £38 million in respect of the Bagpiper brand and £1 million in respect of fixed assets in India were also recognised in exceptional operating items. Forecast cash flow assumptions were reduced principally due to the general economic downturn further aggravated by the Covid-19 pandemic, including pandemic related recent regulatory changes, negatively impacting both demand and margins.

An impairment charge of £434 million in respect of the Windsor Premier brand was recognised in exceptional operating items. The forecast cash flow assumptions were reduced principally due to the recent regulatory changes

limiting trade spend for wholesalers and venues and the Covid-19 pandemic negatively impacting the challenging whisky category in Korea.

Having considered both value in use and fair value less cost of disposal, an impairment of £84 million in respect of the group's Nigerian tangible fixed assets was recognised in exceptional operating items. The profit generating ability of the assets were reduced principally due to the deteriorated economic outlook as a result of the combination of the oil price crisis in Nigeria and the Covid-19 pandemic.

An impairment of £55 million in respect of the group's Ethiopian tangible fixed assets was recognised in exceptional operating items. The forecast cash flow assumptions were reduced principally due to the impact of the recent excise duty increase and the Covid-19 pandemic. In line with the group's accounting policy, given the unusual nature and magnitude of the below items, these are reported as exceptional operating items:

Diageo has launched the 'Raising the Bar' programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic. The programme includes a commitment of
$100 million (£81 million) over a period of up to two years from 1 July 2020, to support qualifying outlets across a limited number of iconic global cities and some regional cities in certain key markets. Diageo has also provided other forms of support to help the communities and the industry during the Covid-19 pandemic. Supporting packages for bartenders and bar owners and donations of grain neutral spirit to produce hand sanitisers amounted to £8 million in the year ended 30 June 2020.
In the year ended 30 June 2020, an exceptional charge of

£30 million was recognised in respect of obsolete inventories that have been or will be destroyed as a direct consequence of the Covid-19 pandemic. The amount comprises of a £23 million inventory provision and £7 million directly attributable to handling and destruction costs.

(iii) In the year ended 30 June 2020, an estimated benefit of $105 million (£83 million) for substitution drawback claims (net of legal and broker fees of $2 million (£2 million)) previously filed and to be filed with the US Government in relation to prior years was recognised in exceptional operating items. Following a recent court decision and a related legal assessment, the collection of the excise duty benefit has become virtually certain.

In the year ended 30 June 2019, the group recognised a provision of £35 million for indirect tax in respect of certain channel accounts and regulatory change in Korea in respect of prior years.

An assessment was issued by the Korea Tax Authority in the year ended 30 June 2020 that has resulted in the reversal of the prior year's provision in the amount of £24 million.

On 26 October 2018, the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group Pension Trustees Limited (the claimant) and Lloyds Bank plc (defendant) that UK pension schemes should equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability. The judgment concluded that the claimant has a duty to amend their pension schemes to equalise benefits and provided comments on the method to be adopted to equalise the benefits. This court ruling impacts the majority of companies with a UK defined benefit pension plan that was in existence prior to 1997. For the Diageo Pension Scheme (DPS) an estimate was made of the impact of equalisation which increased the liabilities of the DPS by £21 million, with a corresponding charge to exceptional operating items.

In July 2019 Diageo reached agreement with the French tax authorities resulting in penalty charges of £18 million (see Taxation below).

Non-operatingitems in the year ended 30 June 2020 were £23 million loss before tax (2019 - £144 million income).

In the year ended 30 June 2020, Diageo completed the acquisition of Seedlip and Anna Seed 83 and acquired controlling interests in certain Distill Ventures entities. As a result of these entities becoming subsidiaries of the group a gain of £8 million arose, being the difference between the book value of the associates prior to the transaction and their fair value.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Group financial review continued

The disposal of United National Breweries was completed in the

year ended 30 June 2020, which has resulted in an aggregate exceptional loss of £32 million, including a £4 million cumulative exchange loss

in respect of prior years, recycled from other comprehensive income, and an impairment charge recognised in the period.

The disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.

In the year ended 30 June 2020, the group has reversed $3 million (£2 million) from provisions in relation to the sale of a portfolio of

19 brands to Sazerac on 20 December 2018.

In the year ended 30 June 2019 the aggregate consideration for the disposal of a portfolio of 19 brands to Sazerac was $550 million (£435 million) resulting in a profit before taxation of $198 million

(£155 million).

The group recognised an exceptional loss of £9 million in respect of the disposal of United National Breweries.

The disposal of the Indian wine business has resulted in an exceptional loss of £2 million.

See page 62 for the definition of exceptional items.

(d) Fair value remeasurement

The adjustment to cost of sales reflects the elimination of fair value changes for biological assets in respect of growing agave plants of £9 million gain. The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions of £7 million loss (£10 million loss in respect of the Casamigos contingent consideration liability, £4 million loss in respect of the Copper Dog contingent consideration liability and £7 million gain in respect of the Pierde Almas contingent consideration liability).

(e) Taxation

The reported tax rate for the year ended 30 June 2020 was 28.8% compared with 21.2% for the year ended 30 June 2019.

Included in the tax charge of £589 million for the year ended

30 June 2020 is an exceptional tax credit of £154 million mainly comprising exceptional tax credits on the impairment of the Windsor and USL brands of £105 million and £25 million, respectively, exceptional tax credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively, and a further £7 million exceptional tax credit in respect of obsolete inventories offset by a £20 million exceptional tax charge in respect of substitution drawback claims.

In the year ended 30 June 2019, Diageo reached a resolution with the French tax authorities on the treatment of interest costs for all open periods which resulted in a total exceptional charge of €100 million (£88 million), comprising a tax charge of €69 million (£61 million), penalties of €21 million (£18 million) and interest of €10 million (£9 million). This brought to a close all open issues with the French tax authorities for periods up to and including 30 June 2017. In addition, the tax charge for the year ended 30 June 2019 included an exceptional tax credit of £51 million principally arising from remeasuring the deferred tax liabilities in respect of the Ketel One vodka distribution rights from 25% to 20.5%, an exceptional tax charge of £33 million in respect of the disposal of a portfolio of 19 brands to Sazerac and an exceptional tax credit of £4 million in respect of the equalisation of liabilities for males and females in the Diageo Pension Scheme.

The tax rate before exceptional items for the year ended 30 June 2020 was 21.7%, consistent with our guidance of 21%-22% and compared with 20.6% in the prior comparable period.

We continue to expect a tax rate before exceptional items for the year ending 30 June 2021 to be in the range of 21%-22%.

(f) Dividend

The group aims to increase the dividend each year and the decision in respect of the dividend is made with reference to dividend cover as well as current performance trends including sales and profit after tax 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 2020 dividend cover was 1.6 times. The recommended final dividend for the year ended 30 June 2020, to be put to the shareholders for approval at the Annual General Meeting is 42.47 pence, the same as the final dividend for the year ended 30 June 2019. This brings the full year dividend to 69.88 pence per share, an increase of 2% on the prior year. We will keep future returns of capital, including dividends, under review through year ending 2021 to ensure we allocate Diageo's capital in the best way to maximize value for the business and our stakeholders.

Subject to approval by shareholders, the final dividend will be paid to holders of ordinary shares and US ADRs on the register as of 14 August 2020. The ex-dividend date both for the holders of the ordinary shares and for US ADR holders is 13 August 2020. The final dividend, once approved

by shareholders, will be paid to shareholders on 8 October 2020 and payment to US ADR holders will be made on 14 October 2020. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 17 September 2020.

(g) Share buyback

On 25 July 2019 the Board approved a return of capital programme to return up to £4.5 billion to shareholders over the three year period to 30 June 2022.

During the year ended 30 June 2020 the group purchased approximately 39 million ordinary shares at a cost of £1,282 million (including £7 million of transaction costs) and funded the purchases through a combination of operating cash inflows and incremental borrowings. This amount includes the aggregate consideration of

£26 million (including £17 million settlement payments for the purchases made in the year ended 30 June 2019 and 30 June 2020) in relation to the prior year programme, which was completed on 10 July 2019 resulting in the repurchase of 0.3 million shares in the year ended 30 June 2020. The shares purchased under the share buyback programmes were cancelled. At 30 June 2020 the leverage ratio, calculated as adjusted net debt

to adjusted EBITDA, was 3.3x and the group anticipates leverage to be above the target range of 2.5-3.0x through the year ending 30 June 2021. The company has paused the return of capital programme until leverage is back within the target range.

Movement in net borrowings and equity

Movement in net borrowings

	2020	2019
£ million	£ million
Net borrowings at the beginning
of the year	(11,277)	(9,091)
Free cash flow (a)	1,634	2,608
Acquisitions (b)	(130)	(56)
Sale of businesses and brands (c)	11	426
Share buyback programme	(1,282)	(2,775)
Proceeds from issue of share capital	1	1
Net sale of own shares for share schemes (d)	54	50
Dividends paid to non-controlling interests	(111)	(112)
Net movements in bonds (e)	4,368	1,598
Purchase of shares of non-controlling interests (f)	(62)	(784)
Net movements in other borrowings (g)	(285)	721
Equity dividends paid	(1,646)	(1,623)
Net increase in cash and cash equivalents	2,552	54
Net increase in bonds and other borrowings	(4,089)	(2,331)
Exchange differences (h)	(95)	(22)
Other non-cash items (i)	(86)	113
Adoption of IFRS 16	(251)	-
Net borrowings at the end of the year	(13,246)	(11,277)

48 DIAGEO Annual Report 2020

See page 46 for the analysis of free cash flow.
In the year ended 30 June 2020, Diageo completed the acquisition of Seedlip and Anna Seed 83 as well as a number of smaller transactions and additional investments in the Distill Ventures programme.
Additionally, acquisitions include deferred and contingent consideration paid in respect of prior year acquisitions.
In the year ended 30 June 2019, Diageo acquired the remaining 70% of Copper Dog Whisky Limited that it did not already own, made additional investments in a number of Distill Venture associates and made contingent consideration payments in respect of prior year acquisitions.
In the year ended 30 June 2020, sale of businesses and brands included the sale of United National Breweries, Diageo's wholly owned sorghum beer business. In the year ended 30 June 2019, sale of businesses and brands represented the cash received on the disposal of a portfolio of 19 brands sold to Sazerac net of transaction costs.
Net sale of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £2 million (2019 - £16 million) less receipts from employees on the exercise of share options of £56 million (2019 - £66 million).
In the year ended 30 June 2020, the group issued bonds of $4,100 million (£3,296 million), €1,750 million (£1,594 million) and £298 million (including £2 million discount and fee) and repaid bonds of $1,000 million (£820 million). In the year ended 30 June 2019, the group issued bonds of €2,600 million (£2,270 million) and £496 million (including £4 million discount and fee) and repaid bonds of €1,350 million (£1,168 million).
In the year ended 30 June 2020, Diageo acquired additional shares in United Spirits Limited for INR 5,495 million (£60 million) which took Diageo's percentage of shares owned in United Spirits Limited from 54.78% to 55.94% (excluding 2.38% owned by the USL Benefit Trust). During the year ended 30 June 2020, Diageo completed the purchase of 4% of the share capital of Serengeti Breweries Limited for $3 million (£2 million) which took Diageo's effective economic interest in Serengeti Breweries Limited from 39.2% to 40.2%.
In the year ended 30 June 2019, purchase of shares of non- controlling interests comprised RMB 6,774 million (£775 million) and transaction costs of £9 million in respect of the acquisition of 23.43% of the share capital of Sichuan Shuijingfang Company Limited (SJF) in two separate transactions. This took Diageo's shareholding in SJF from 39.71% to 63.14%.
In the year ended 30 June 2020, the net movement in other borrowings principally arose from foreign exchange swaps and forwards, partially offset by the cash movement on lease liabilities. In the comparable period movements were driven by the issue of commercial paper.
The exchange arising on net borrowings of £95 million is primarily driven by unfavourable exchange movements on US dollar and euro denominated borrowings and cash and cash equivalents, partially offset by a favourable movement on foreign exchange swaps and forwards.
In the year ended 30 June 2020, other non-cash items are principally in respect of leases of £206 million entered into in the year, partially offset by the fair value changes of cross currency interest rate swaps. In the year ended 30 June 2019, other non-cash items are principally in respect of changes in the fair value of borrowings.

Movement in equity

	2020	2019
£ million	£ million
Equity at the beginning of the year	10,156	11,713
Profit for the year	1,454	3,337
Exchange adjustments (a)	(282)	255
Remeasurement of post employment plans
net of taxation	3	36
Purchase of shares of non-controlling
interests (b)	(62)	(784)
Dividends to non-controlling interests	(117)	(114)
Equity dividends paid	(1,646)	(1,623)
Share buyback programme	(1,256)	(2,801)
Other reserve movements	190	137
Equity at the end of the year	8,440	10,156

Exchange movement in the year ended 30 June 2020 primarily arose from exchange losses driven by the Indian rupee, euro and the Turkish lira, partially offset by exchange gains in respect of the US dollar.
In the year ended 30 June 2020, Diageo acquired additional shares in United Spirits Limited for INR 5,495 million (£60 million) and additional shares in Serengeti Breweries Limited for $3 million (£2 million).
In the year ended 30 June 2019, Diageo acquired additional shares in Sichuan Shuijingfang Company Limited (SJF) which was already controlled and therefore consolidated prior to the transaction.

Post employment plans

The net surplus of the group's post employment benefit plans increased by £148 million from £214 million at 30 June 2019 to £362 million at

30 June 2020. The increase in net surplus is primarily attributable to an increase in the market value of the assets held by the post employment schemes, and the cash contribution paid into the plans in excess of income statement charge. These were partially offset by the change in assumptions in the United Kingdom (including an adverse impact due to the decrease in returns from 'AA' rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (from 2.3% to 1.5%) partially offset by a favourable impact of the decrease in inflation rate assumption (from 3.2% to 2.8%)).

The operating profit charge before exceptional items decreased by £3 million from £50 million for the year ended 30 June 2019 to £47 million for the year ended 30 June 2020. The operating profit for the year ended 30 June 2020 includes past service gains of £47 million in respect of the Guinness Ireland Group Pension Scheme (GIGPS), following separate communications to the deferred members in respect of changing their expectations of a full pension prior to reaching the age of 65 and to pensioners in respect of future pension increases

(2019 - £54 million credit due to changes made to future pension increases for members of the Diageo Pension Scheme in the United Kingdom and changes to the GIGPS), and curtailment gains of £12 million (2019 - £4 million) mainly in respect of the Diageo Pension Scheme and the GIGPS.

Total cash contributions by the group to all post employment plans in the year ending 30 June 2021 are estimated to be approximately £140 million.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Business review

North America

North America is the second largest beverage alcohol market worldwide1.

The consumer lies at the heart of our business, which has been more important than ever in the face of shifting consumer behaviours and changes in the external environment. Our focus is on recruiting and re-recruiting consumers into the portfolio through meaningful consumer engagement, sustainable innovation and investments in our brands. Our strategy is enabled by our data driven insights, executional excellence and a consistent focus on developing an advantaged route to market.

1. IWSR, Calendar Year 2019.

Key financials

			Acquisitions				Reported
			and	Organic		2020
	2019	FX	disposals	movement	Other(v)	movement
	£ million	£ million	£ million	£ million	£ million	£ million	%
Net sales	4,460	101	(43)	105	-	4,623	4
Marketing	762	11	3	(49)	-	727	(5)
Operating profit before
exceptional items	1,948	44	(28)	80	(10)	2,034	4
Exceptional operating items(vi)	-					54
Operating profit	1,948					2,088	7

Net sales by markets (%)	Net sales by categories (%)
US Spirits	Spirits
DBC USA	Beer
Canada	Ready to drink
Other (principally	Other
Travel Retail)

Our markets

Diageo North America is headquartered

in New York, having relocated from Norwalk, Connecticut, in January 2020. The business is comprised of US Spirits, Diageo Beer Company USA (DBC USA), and Diageo Canada, headquartered in Toronto.

Supply operations

With nine domestic production facilities across the United States, Canada and the U.S. Virgin Islands, Diageo North America's supply function is one of the largest producers of beverage alcohol on the continent. We have made major investments in innovation and sustainability driving efficiency and best in class operations.

Our new Lebanon, Kentucky whiskey distillery will be carbon neutral, a first for Diageo. With electrified operations, powered by 100% renewable electricity, the distillery will avoid using fossil fuels for production.

	Organic volume	Reported volume	Organic net sales	Reported net sales
Markets:	movement	movement	movement	movement
%	%	%	%
North America	-	(2)	2	4
US Spirits(ii)	(1)	(3)	2	3
DBC USA	7	7	8	10
Canada	7	4	7	7
Spirits	-	(3)	2	3
Beer	(7)	(7)	(6)	(4)
Ready to drink	17	17	19	22

		Organic	Organic	Reported
		volume	net sales	net sales
Global giants, local stars and reserve(i):	movement(iii)	movement	movement
%	%	%
Crown Royal		8	8	10
Smirnoff		(1)	(2)	-
Johnnie Walker		(9)	(13)	(11)
Captain Morgan		(3)	(4)	(2)
Don Julio		21	26	29
Ketel One(iv)		(2)	(4)	(2)
Guinness		(6)	(5)	(3)
Baileys		-	1	3
Bulleit		5	4	7
Cîroc vodka		(15)	(14)	(13)
Casamigos		61	68	72
Tanqueray		-	-	3

Route to consumer

The route to consumer in the United States is through the three-tier system across our spirits and beer portfolio. We have consolidated our U.S. Spirits business into single distributors or brokers in 42 states and the District of Columbia, representing more than 80% of our spirits volume. US Spirits is responsible for the sale of our portfolio of spirits products and manages sales through two divisions focused on Open (distribution through private distributors) and Control (distribution through governmental entities) States. DBC USA sells and markets brands including Guinness and Smirnoff Ice in over 400 beer distributors across the US. Diageo Canada distributes our portfolio of spirits, RTD and beer brands across all Canadian provinces, which operate within a highly regulated federal and provincial system. Diageo Canada manages all sales operations with the provincial liquor control boards and national chain account customers directly, utilising brokers to support execution at the point of sale.

Our strategy in North America is to be consumer-first,occasion-oriented, and focused on developing competitive differentiation in both our brand propositions and our route to consumer.

Spirits brands excluding ready to drink.
Reported US Spirits volume, and net sales, growth include impacts from the disposal of portfolio of 19 brands to Sazerac.
Organic equals reported volume movement.

Ketel One includes Ketel One vodka and Ketel One Botanical.
The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions.
For further details on exceptional operating items see pages 130-131.

50 DIAGEO Annual Report 2020

This includes building key capabilities around commercial execution, Net Revenue Management, E-Commerce and robust performance management all of which

is underpinned by data and analytics.

Sustainability and responsibility

We collected nearly 900,000 pledges never to drink and drive through various #JoinThePact initiatives, while Crown Royal and Captain Morgan leveraged their sports partnerships to promote integrated moderation campaigns through advertising and in-stadium activations.

We announced plans for our new Kentucky	In September, 1,000 employees volunteered a
whiskey distillery to be carbon neutral - a first	day to local community causes through our
for Diageo. It will be powered by 100%	Diageo CAREs programme. We trained more
renewable electricity and will avoid using fossil	than 60 people in specialist hospitality skills
fuels for the production of whiskey. We also	through our Learning Skills for Life programme,
introduced our first 100% recycled PET bottle,	which we have expanded into New Orleans. In
with Seagram's 7 Crown.	June 2020, we created the Diageo Community
We improved water use efficiency by 4.4%,	Fund, with $20 million to support social justice
saving over 101 million litres this year. We have	in America, helping Black communities and
made meaningful progress in our zero waste to	businesses recover from Covid-19.
landfill target, identifying and implementing
options to eliminate waste to landfill in two
remaining sites during the last quarter.

REPORT STRATEGIC

Regional performance

North America delivered net sales growth of 2%, with growth in all three markets, US Spirits, Diageo Beer Company USA and Canada. Strong net sales growth in the first half of the year was only partially offset by lower on-trade sales in the second half. This reflects strong demand in the off-trade channel during Covid-19. US Spirits net sales increased 2%. Tequila net sales grew 36% reflecting strong double-digit growth in Don Julio and Casamigos throughout the year. Crown Royal net sales increased 8% driven by the sustained performance of innovations. Scotch net sales declined 9%. Good growth in Malts was offset by lower sales of Johnnie Walker, as a result of the on-trade channel closure in the second half and lapping the prior year success of "White Walker by Johnnie Walker". Vodka net sales declined 7% due to lower sales of Smirnoff, Ketel One and Cîroc. Bulleit net sales increased 4%. Captain Morgan net sales decreased 5%. Diageo Beer Company USA grew net sales 8% as a result of the continued strong performance of ready to drink products. Beer net sales declined 5% due to the closure of the on-trade channel as a result of Covid-19. Net sales in Canada increased 7% with good broad-based growth across all categories, with the exception of beer, which was more impacted by the on-trade channel closure. North America operating margin increased 75bps. The adverse margin impact from lower fixed cost absorption and a change in category and channel mix resulting from Covid-19 was more than offset by reduced discretionary expenditure.

Market highlights

Net sales in US Spirits were up 2%, with depletions ahead of shipments resulting in a reduction in distributor inventories. Don Julio and Casamigos delivered strong double-digit growth and gained share in the rapidly growing tequila category. While the brands were disproportionately impacted by the on-trade closures, an agile response drove strong demand in at-home occasions. Crown Royal grew net sales 8%, gaining further category share, driven by the continued growth of Crown Royal Regal Apple and Crown Royal Vanilla, and the success of the limited time offer, Crown Royal Peach. Johnnie Walker net sales declined 11% and the brand lost share in the scotch category. A decline in net sales in the first half, due to lapping the highly successful limited edition of "White Walker by Johnnie Walker", was exacerbated in the second half by the on-trade channel closure. Malts continued to perform well with growth from Oban and Lagavulin,

as well as Talisker and Mortlach. Vodka net sales were down 7%. Lower sales of Ketel One reflect its strong presence in the on-trade channel and a decline in Ketel One Botanical, lapping last year's

successful launch. Smirnoff	net sales
declined, although Smirnoff	Zero Sugar
Infusions and seasonal innovations,
including the Smirnoff Red,	White and Berry

limited time offer performed well. Cîroc continued to decline. Bulleit net sales were up 4%. An effective marketing approach drove off-trade sales in the second half and continued share gain in US whiskey. Captain Morgan net sales declined 5% and the brand lost share in the rum category. Baileys net sales grew 1% driven by the launch of Baileys Red Velvet limited edition and growth in Baileys Salted Caramel.

Diageo Beer Company USA net sales increased 8%, despite a reduction in distributors' inventories. This reflected ready to drink growth of 19%, with continued strong growth across the Smirnoff range. Strong sales in the second half were supported by a large-scalemedia campaign to promote Smirnoff's Red, White and Berry limited time offer variants, including Smirnoff Ice and a new Smirnoff Seltzer. Beer net sales declined 5% as a result of the closure of the on-tradeand the Guinness Open Gate Brewery. However, beer gained share in the off-tradedue to Guinness' success in raising brand awareness and connecting with consumers during the Covid-19lockdown.

Net sales in Canada grew 7%, with good growth across all categories except beer, which was more impacted by the on-trade channel closure. Shipments were slightly ahead of depletions, as customers

held more stock to manage volatility in the second half. Vodka grew 6% with Smirnoff No.21 continuing to grow, supported by a new global campaign in the first half and the launch of the redesigned Smirnoff bottle in the second half. Cîroc and

Ketel One both grew strongly. Crown Royal grew double-digit, gaining market share and strengthening its leadership position in the growing Canadian whisky category. Performance was supported by the launch of a new "generosity" campaign connecting the brand to its roots, and successful limited time offer innovations. Scotch grew 7%, with Johnnie Walker Black Label remaining the number-one selling scotch in Canada. Ready to drink net sales continued to deliver double-digit growth, with Smirnoff Ice retaining its position as the number-one selling ready to drink in Canada.

Marketing expenses declined 6%.

This was due to reduced investment in the second half that we believed would have been ineffective during Covid-19, as well as productivity savings during the year.

We believe that our marketing effectiveness tools will enable us to efficiently accelerate investment as consumer demand recovers.

DIAGEO Annual Report 2020

Business review continued

Europe and Turkey

Within the geography of Europe there have been two markets: Europe and Turkey. Across our Europe business we continue to drive execution at scale of our consumer marketing programme and continuously optimising our route to market. We remain focused on executing our strategy through growth of international premium spirits, beer and through premiumisation. Moving forward, we will be structured as six individual markets: Great Britain, Ireland, Turkey, Northern, Southern and Eastern Europe.

Key financials

			Acquisitions				Reported
			and	Organic		2020
	2019	FX	disposals	movement	Other(iii)	movement
	£ million	£ million	£ million	£ million	£ million	£ million	%
Net sales	2,939	(23)	9	(358)	-	2,567	(13)
Marketing	490	(10)	4	(56)	-	428	(13)
Operating profit before
exceptional items	1,014	(7)	(3)	(243)	(4)	757	(25)
Exceptional operating items(iv)	(18)					(62)
Operating profit	996					695	(30)

Net sales by markets (%)	Net sales by categories (%)
	Europe		Spirits
	Turkey		Beer
	Other (principally		Ready to drink
	Travel Retail)		Other


	Organic volume	Reported volume	Organic net sales	Reported net sales
Markets:	movement	movement	movement	movement
%	%	%	%
Europe and Turkey	(11)	(11)	(12)	(13)

Europe	(10)	(10)	(12)	(12)
Turkey	(12)	(12)	(6)	(7)

Spirits	(11)	(11)	(11)	(11)
Beer	(16)	(16)	(20)	(21)
Ready to drink	(3)	(3)	(1)	-

		Organic	Organic	Reported
		volume	net sales	net sales
Global giants and local stars(i):	movement(ii)	movement	movement
%	%	%
Guinness		(19)	(20)	(21)
Johnnie Walker		(17)	(20)	(21)
Baileys		(4)	(6)	(8)
Smirnoff		(14)	(11)	(12)
Captain Morgan		2	6	6
Yenì Raki		(22)	(15)	(15)
Tanqueray		(12)	(15)	(16)
JεB		(18)	(17)	(17)

Spirits brands excluding ready to drink.
Organic equals reported volume movement.
The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions.
For further details on exceptional operating items see pages 130-131.

Our markets

Europe has comprised Great Britain, Ireland, France, Continental Europe (including Northern Europe, Central Europe, Iberia, the Mediterranean and the Europe Partner Markets distribution businesses) and Russia, whilst Turkey is a standalone market. Europe has been managed as a single market with country teams focusing on sales and customer marketing execution but has moved to a six market model, each with end to end accountability.

Supply operations

A number of Diageo's International Supply Chain and Procurement operations are located in Europe including production sites the United Kingdom, Ireland and Italy. The group owns 29 distilleries in Scotland, a Dublin based brewery, distillery, and maturation and packaging facilities in Scotland, England, Ireland and Italy. The team leads all supply chain activities for Europe and manufactures whisky, vodka, gin, rum, beer, cream liqueurs, and other spirit-based drinks which are distributed in over

180 countries.

Following the announcement of a

£150 million investment in whisky tourism in Scotland in 2018, we have begun the transformation of our Scotch whisky visitor experiences through investment in 12 malt whisky distillery visitor centres with a focus on the 'Four Corners distilleries', Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavours of Johnnie Walker. Also, as part of the investment programme, construction to create a global flagship visitor experience for Johnnie Walker in Edinburgh city centre is underway.

Route to consumer

In Great Britain we sell and market our products through Diageo GB (spirits, beer and ready

to drink) and Justerini & Brooks Fine Wines (wines private clients and spirits). Products are distributed through independent wholesalers and directly to retailers. In the on-trade, products are sold through major brewers, multiple retail groups and smaller regional independent brewers and wholesalers. In the Republic of Ireland and Northern Ireland, Diageo sells and distributes directly to the on-trade and the off-trade as well as wholesalers. In France

our products are sold through a joint venture arrangement with Moët Hennessy.

In Continental Europe and Russia, we distribute

52 DIAGEO Annual Report 2020

our spirits brands primarily through our own distribution companies, except in Europe Partner Markets where we typically use distributors.

In Turkey, we sell our products via the distribution network of Mey İçki, our wholly owned subsidiary. Mey İçki distributes both local brands (raki, other spirits and wine) and Diageo's global spirits brands.

Sustainability and responsibility

In our own operations, we achieved our 2020 targets for greenhouse gas emissions reduction and waste. In the United Kingdom, we have reduced GHG emissions by 69% versus the baseline, attributable to ongoing energy efficiency improvements, fuel switching and

renewable energy certificates for indirect and	As in all our regions, promoting positive
direct energy consumption.	drinking, with a focus on moderation, remains
We continued to invest in our Learning	a key priority. Our 'Weekend Not Wasted'
for Life hospitality skills programme, adding	campaign to encourage 18-24-year-olds to
an initiative in Greece to those in the United	drink responsibly was viewed by over 4 million
Kingdom, Italy, Spain, Ireland, Portugal, the	people in the United Kingdom, Spain, Denmark
Netherlands, Belgium and Germany. In doing so,	and Germany. Our 'Smashed' theatre-based
we reached over 1,400 people in total across the	programme to tackle underage drinking, which
region. We also provided further support to the	began in this region, continued to go from
Open Doors initiative in Ireland, with funding to	strength to strength. Through the programme,
establish it as a standalone entity. Open Doors	we reached 119,000 young people in the United
gives opportunities to refugees, asylum seekers	Kingdom, Ireland, Spain, Portugal and Italy.
and non-native English speakers; young people
under 25 with educational barriers; and people
with disabilities.

REPORT STRATEGIC

Regional performance

Europe and Turkey net sales declined 12%. Growth in the first half was more than offset by the impact of Covid-19 in the second half. High on-trade exposure significantly impacted markets across the region through the closures of the channel in many countries. In Europe, beer was particularly impacted, declining 20%. Growth of scotch in the first half was offset by declines in Continental Europe and France in the second half due to on-trade closures. Rum grew 3%, driven by Captain Morgan. Vodka declined 12%, driven mainly by Smirnoff in Continental Europe. Gin declined 9%, driven by declines of Gordon's and Tanqueray mainly in Continental Europe. Travel Retail was also severely impacted. In Turkey, net sales declined 6%, driven by declines in raki and vodka. Total operating margin declined 470bps. Impacts of the closure of the on-trade on volumes and adverse mix, bad debt provisions, along with one-offs and inflationary cost pressures in Turkey more than offset actions driving overhead and marketing spend savings through the second half.

Market highlights

In Europe, net sales were down 12%.	In Continental Europe, net sales	In Europe Partner Markets, net sales
In Great Britain, net sales declined 4%.	declined 15%.	declined 19%. Rum and tequila growth were
Solid first half results were offset by the	Iberia net sales were down 22%.	offset by declines in scotch and beer. Declines
impact of on-trade closures from March	Growth in the first half was offset by the	were mainly due to lockdowns affecting
despite an increase in off-trade sales.	impact of lockdowns affecting the on-trade	the on-trade, and while absolute inventory
The impact was further amplified by the	channel and tourism in the second half,	levels were reduced, they remain elevated
cancellation of significant sporting and	which accounts for a high proportion of	relative to demand. Guinness also responded
cultural events. Continued growth in rum	sales in the market. On-trade investment	with a keg return scheme to support the
and liqueurs were offset by declines in	was placed on hold as resources were	channel and protect product quality.
beer, scotch, wine and vodka. Guinness	deployed to the off-trade to support	Russia net sales were down 8%.
was impacted by on-trade closures and	customers and activations in the off-trade.	Growth in gin was offset by declines in
the decision to support customers, and	In Central Europe, net sales declined	scotch and rum.
maintain product quality, through a keg	9%. Strong double-digit performance in	France net sales declined 5%. Good
return scheme. Focus on e-commerce	the first half was impacted by on-trade	growth in rum was offset by a decline in
was upweighted as partnerships were	lockdowns across the market in the second	scotch, driven by competitive challenges
strengthened on activities to drive	half. Captain Morgan performance was	and category declines in standard scotch,
consumer engagement and sales.	flat while Baileys, Smirnoff and Johnnie	and on-trade closures.
Ireland net sales declined 20%. A	Walker declined.	In Turkey, net sales declined 6%.
soft first half performance was further	In Northern Europe net sales declined	Double-digit growth in the first	half was
exacerbated by on-trade closures. Beer	1%. Good first half performance was offset	offset by on-trade closures from	March.
declined 22%. Rockshore continued to	by the cancellation of key events and	Scotch declined 3%, as Bell's growth was
grow double-digit through Rockshore	on-trade closures in the second half.	offset by Johnnie	Walker and VAT 69. Raki
Cider and high single-digit in Rockshore	Resilient performance due to rum growth,	declined 9%, with volume declines driven
Lager despite Covid-19 lockdown	driven by Captain Morgan Original Spiced	by ongoing impacts from excise increases
restrictions. This was offset by declines	Rum, and gin driven by Gordon's Premium	in the first half and	on-trade restrictions.
in Guinness, driven by closure of the	Pink Distilled Gin and Tanqueray Flor de	Commercial and marketing teams were
on-trade and further impacted by a keg	Sevilla innovations in the second half,	repurposed to focus on growth categories
return scheme to support customers and	was offset by declines in scotch.	and less affected channels.
maintain product quality. Total spirits	In the Mediterranean Hub, net sales	Marketing investment declined 12%,
declined 10%, as off-trade sales increases	declined 26%. Growth in the first half	in line with net sales. On-trade marketing
were not sufficient to offset Covid-19	was offset by on-trade closures and	spend was reduced, with some redeployed
related closures of the on-trade.	significantly reduced tourism which	to digital, while focus was placed on
	severely impacted volume.	e-commerce partnerships to deliver key
		celebrations as well as online platforms.

DIAGEO Annual Report 2020

Business review continued

Africa

In Africa our strategy is to grow through selective participation in beer and spirits, leveraging a broad range of the Diageo Portfolio. Guinness, Malta and several local brands lead our brewing portfolio while Johnnie Walker and Smirnoff are at the heart of our international premium spirits offerings. Locally we produce a range of mainstream spirits. We operate a fit for purpose operating model building resilience into our business and we drive smart investments to manufacturing, innovations and partnerships to unlock growth.

Local sourcing is very important to our strategy, directly supporting our commercial operations whilst bringing wider benefits to local communities, farmers and society as a whole.

Key financials

			Acquisitions			Reported
			and	Organic	2020
	2019	FX	disposals	movement	movement
	£ million	£ million	£ million	£ million	£ million	%
Net sales	1,597	(10)	(41)	(200)	1,346	(16)
Marketing	174	-	-	(14)	160	(8)
Operating profit before
exceptional items	275	(21)	(3)	(150)	101	(63)
Exceptional operating
items(iv)	-				(145)
Operating profit	275				(44)	(116)

Our markets

The region comprises East Africa (Kenya, Tanzania and Uganda), Africa Regional Markets (Ghana, Cameroon, Ethiopia, Indian Ocean and Angola), Nigeria and South Africa.

Supply operations

We have 13 breweries in Africa and ten facilities which provide blending and malting services. In the year ended 30 June 2020 we completed the disposal of our sorghum beer business and our cider plant in South Africa.

In addition, our beer and spirits brands are produced under licence by third parties in 14

Net sales by markets (%)

East Africa

Africa Regional

Markets (ARM)

Nigeria

South Africa

Other (principally

Travel Retail)

Net sales by categories (%)

Spirits

Beer

Ready to drink

Other

African countries and distribute beer and spirits through several 3rd party relationships across the region. In the year ended 30 June 2020 we agreed a contract for AB InBev to manufacture, sell and market Smirnoff ready to drink products and Guinness in South Africa.

Route to consumer

Diageo has wholly owned entities in South Africa, Cameroon, Ethiopia, and Reunion. It has controlling stakes in East Africa Breweries Limited (EABL), Guinness Nigeria, Guinness

	Organic volume	Reported volume	Organic net sales	Reported net sales
Markets:	movement(iii)	movement	movement	movement
%	%	%	%
Africa	(13)	(14)	(13)	(16)
East Africa	(11)	(11)	(10)	(9)
Africa Regional Markets	(12)	(17)	(8)	(13)
Nigeria	(10)	(10)	(20)	(19)
South Africa	(23)	(25)	(25)	(33)
Spirits	(10)	(10)	(14)	(15)
Beer	(16)	(16)	(13)	(13)
Ready to drink	(6)	(17)	(7)	(27)

		Organic	Organic	Reported
		volume	net sales	net sales
Global giants and local stars(i):		movement(ii)	movement	movement
	%	%	%
Guinness		(17)	(16)	(16)
Johnnie Walker		(8)	(18)	(19)
Smirnoff		(25)	(23)	(25)
Malta		(16)	(10)	(13)
Senator		(16)	(13)	(12)
Tusker		(22)	(20)	(20)
Serengeti		15	19	22

Ghana and Seychelles Breweries Limited and a majority stake in a JV in Angola. In addition, Diageo has contract brewing arrangements in several countries across the region, most notably with the Castel Group as well as spirits distribution contracts in almost 30 countries.

Spirits brands excluding ready to drink.
Organic equals reported volume movement.

Africa, Africa Regional Markets, South Africa and Ready to drink reported volume movement impacted by acquisitions and disposals.
For further details on exceptional operating items see pages 130-131.

54 DIAGEO Annual Report 2020

Sustainability and responsibility

Across Africa, more than 78,600 smallholder farmers and suppliers provide us with our raw materials, and we work with farmers to improve crop yield, livelihoods, and environmental and labour standards. We sourced 79% of agricultural raw materials locally within Africa for use by our African markets, compared with 82% last year. This percentage fell slightly as Covid-19 restrictions pushed us just below our target of 80%.

In 2019, we announced a £180 million investment in 11 breweries across Africa that include solar and biomass energy, and water treatment plants. We also co-founded the Africa Plastics Recycling Alliance, through which this year we secured regulatory approval in Nigeria for the use of rPET (recycled polyethylene terephthalate), which will encourage rPET

investment. In Nigeria, through our partnership	Cameroon. In Kenya, we worked with Nature
with the Food Beverage Recycling Alliance and	Kenya, Kenya Forest Services, and community
Lagos State WaterWays Authority, we launched	forest associations to plant 180,000 trees
a clean-up programme to remove plastic waste	in Kisumu county, where our new brewery
from water sources in Lagos. In Ghana, we	is located.
began monthly community clean-ups and a	To promote positive drinking, this year we
plastics buy-back programme, and continued	signed up 1.1 million pledges never to drink
to develop the pioneering GRIPE partnership to	and drive in Nigeria through #JoinThePact.
build plastic collection, recycling and	Through our 'Smashed' theatre-based
reprocessing infrastructure.	programme, we educated 80,000 young people
Through our ongoing partnership	across the region about the dangers of
with the NGO WaterAid, we brought clean	underage drinking.
water and a sanitation programme to 21,000
people in Nigeria. And, with partners such as
Amref Health Kenya, the Kenya Red Cross and
WaterHealth International, we reached over
173,000 people across Ghana, Kenya, South
Africa, Uganda, Ethiopia, Tanzania, Chad and

REPORT STRATEGIC

Regional performance

Africa net sales declined 13%. Growth in the first half was offset by the impact of Covid-19 in the second half. East Africa declined 10% where continued beer growth in Tanzania was offset by lockdown closures affecting the on-trade in Kenya and Uganda. Net sales in Nigeria declined 20%, driven by double-digit declines in beer and scotch. In South Africa, net sales declined 25%, driven by scotch and vodka, as a result of both on-trade and off-trade closures and a troubled economic climate. Africa Regional Markets declined 8%, as strong beer growth in Ghana was offset by on-trade closures and the impact of significant excise increases in Ethiopia. Beer declined 13% as growth of Serengeti was offset by other key beer brands, including Guinness, Tusker and Senator, mainly due to on-trade closures. Spirits declined 14%, mainly impacting Johnnie Walker, Kenya Cane and Smirnoff. Operating margin declined 877bps, driven mainly by volume losses that caused lower fixed cost absorption and excise duty increases. These were partially offset by marketing spend savings and improved overhead management.

Market highlights

In East Africa, net sales declined 10%. Strong first half growth, and a continuation of resilient sales growth in Tanzania in the second half, was offset by volume declines in other markets. Tanzania grew 14% as it was minimally impacted by limited Covid-19 related lockdowns, and benefitted from the ongoing successes of Serengeti Lager and Serengeti Lite. Kenya declined 14%, driven by the high exposure to on-trade closures impacting Senator Keg and other beer sales, which was partially offset by vodka, driven by double-digit growth in Chrome and Triple Ace. Increased focus in the off-trade and e-commerce channels partially recovered lost on-trade sales.

In Africa Regional Markets, net sales declined 8%. Resilient growth in Ghana during the year was offset by double-digitdeclines in Cameroon and Ethiopia. Due to the impact of Covid-19in the second half, beer and spirits inventory levels were reduced. Ghana grew 5%, driven by continued success of the ABC Lager innovation and Malta Guinness growth,

which addressed consumer shifts for portability and non-returnable formats throughout lockdown. Cameroon declined 15% due to one-off production challenges in the first half, with the second half impacted by Covid-19 driving declines in Guinness in the on-trade. Ethiopia declined 24%, as beer and international premium spirits growth was impacted by excise increases, supply issues and the impact of on-trade closures. Impacts of shutdowns were partially offset as markets reprioritised brand packs to capture off-trade consumer shifts.

In Nigeria, net sales declined 20%. First half growth was offset by volume impacts from Covid-19 restrictions as it exacerbated an already challenging economic climate; while VAT and spirits excise increases also impacted consumer demand in a competitive environment. Robust performance of Orijin Bitters, successful spirits innovations, and increased at-home consumption, were offset by declines in beer. Malta Guinness and Guinness were impacted by on-trade

closures. Increased focus on the off-trade and e-commerce channels, through the introduction of trade telesales and consumer platforms together with an online store, reduced some impacts

of lockdown.

South Africa net sales declined 25%. Economic and social challenges in the first half were further exacerbated by the banning of alcohol sales across all channels from 27 March to 31 May. While absolute inventory levels were reduced, they remain elevated relative to demand. Scotch and vodka were most affected with double-digit declines, as a result of the softening economic climate and consumer shifts into the mainstream gin category.

Marketing investment declined 8%. We rapidly reacted to consumer shifts in the second half, through telesales, pack reprioritisation and the redeployment of investment to e-commerce and the off-trade.

DIAGEO Annual Report 2020

Business review continued

Latin America and Caribbean

In Latin America and Caribbean our strategic priority is to continue to lead with scotch, while broadening our category range through tequila, gins, vodka, rum, liqueurs and local spirits. As the industry leaders in spirits, we continue to strategically expand our reach and the breadth and depth of our portfolio of leading brands. Simultaneously, we are enhancing our supply structure enabling the business to widen our price points, providing both the emerging middle class, and an increasing number of affluent consumers with the premium brands they aspire to buy. Our presence is strengthened by our stance on responsible drinking and community development programmes.

Key financials

				Acquisitions				Reported
			Reclassifi-	and	Organic		2020
	2019	FX	cation(i)	disposals	movement	Other(ii)	movement
	£ million	£ million	£ million	£ million	£ million	£ million	£ million	%
Net sales	1,130	(42)	(10)	(1)	(169)	-	908	(20)
Marketing	201	(7)	(10)	-	(29)	-	155	(23)
Operating profit before
exceptional items	365	(26)	-	-	(107)	16	248	(32)
Exceptional operating
items(v)	-						(6)
Operating profit	365						242	(34)

Net sales by markets (%)		Net sales by categories (%)
PUB			Spirits
Mexico			Beer
CCA			Ready to drink
Andean			Other
PEBAC
Other (principally
Travel Retail)

	Organic volume	Reported volume	Organic net sales	Reported net sales
Markets:	movement	movement	movement	movement
%	%	%	%
Latin America and Caribbean	(15)	(15)	(15)	(20)
PUB	(14)	(14)	(7)	(17)
Mexico	(14)	(14)	(19)	(21)
CCA	(17)	(18)	(16)	(16)
Andean	2	3	8	(2)
PEBAC	(29)	(29)	(44)	(47)
Spirits	(16)	(16)	(16)	(21)
Beer	(10)	(10)	(9)	(11)
Ready to drink	-	-	8	2

		Organic	Organic	Reported
		volume	net sales	net sales
Global giants and local stars(iii):		movement(iv)	movement	movement
	%	%	%
Johnnie Walker		(27)	(29)	(33)
Buchanan's		(15)	(14)	(17)
Old Parr		(17)	(16)	(20)
Smirnoff		(7)	4	(2)
Black & White		(9)	(10)	(18)
Tanqueray		6	17	7
Baileys		(15)	(13)	(21)

Our markets

Our Latin America and Caribbean (LAC) business comprises five markets: PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile).

Supply operations

Many of the brands sold in the region are manufactured by our International Supply Centre in Europe, but we also own manufacturing facilities in Mexico that produce tequila, in Brazil to produce cachaça and vodka, and in Guatemala that produce Zacapa rum. We also work with a wide array of local co-packers, bottlers, and licensed brewers throughout Latin America and the Caribbean.

Route to consumer

We drive an efficient route to consumer through differentiated models tailored to each markets' size and needs. In Mexico and Brazil our in-market companies sell to a wide network of retailers, wholesalers, and resellers which make our product available to shoppers in both the on and off premise outlets. In most of Central America and the Caribbean, Argentina, Ecuador, Bolivia, and Venezuela, we partner with geographically exclusive distributors who are in charge of the sales execution and marketing programmes. In Colombia, Peru, and Chile, we use hybrid models where Diageo sells directly to some key accounts while distributors are used to improve our products' physical availability.

For the year ended 30 June 2019 trade investment of £10 million have been reclassified from marketing to net sales.
The adjustment to cost of sales reflects the elimination of fair value changes for biological assets in respect of growing agave plants. The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions.

Spirits brands excluding ready to drink.
Organic equals reported volume movement.
For further details on exceptional operating items see pages 130-131.

56 DIAGEO Annual Report 2020

Sustainability and responsibility

We continued to focus on environmental improvements, particularly around water. In Brazil, we are constructing a new facility in Ceará state, which will bring together production from two existing sites. It will use solar energy, and water and effluent treatment facilities to reduce water consumption in beverage production by up to 40%. In Mexico, we plan to reuse over 25% of the water involved in production. This year we completed the expansion of our production site in Jalisco, Mexico, which includes our largest water treatment plant in the region, and a boiler powered by wood chips and bagasse, a by-product of agave.

We have worked hard to promote positive drinking, especially around reducing drink driving through our partnership with the

United Nations Institute for Training and	reached more than 13,000 students with
Research (UNITAR). In Brazil, we work with	'Sacúdete'; and in Mexico, we reached 5,200
UNITAR and other stakeholders to support	teachers, parents and 7-9-year-olds with
UNITAR's programmes to promote road safety.	'Teiquirisi Club'.
In the Dominican Republic we work with	Our Learning for Life programmes continue
UNITAR, the International Alliance for	to promote skills in the hospitality industry. This
Responsible Drinking, and other industry	year, we began a new, 100% online programme
partners to help the government with its	of training in entrepreneurial skills for women
breathalyser programme, including through	in Atotonilco, Mexico, where we produce
training and by donating equipment for	Don Julio. We also supported 'Weaving the
checkpoints.	Future' in Ceará, Brazil, for women in prison,
We also focused on reducing underage	reaching over 40 women so far. Through the
drinking through local adaptations of our	programme they receive personal skills training,
'Smashed' theatre-based programme. This	as well as technical and professional training in
year, in Brazil we reached 80,000 young people	carnauba straw craftsmanship, to help them
through live and online versions of 'Fala Sério';	prepare for a better life when they are released.
in Peru, we reached 4,700 students in the
second year of 'La Bomba'; in Colombia we

REPORT STRATEGIC

Regional performance

Latin America and Caribbean net sales declined 15%. Performance in the second half continued to be impacted by economic and socio-political pressures in key markets compounded by the impact of the Covid-19 pandemic. All markets declined except Andean which grew 8% due to a strong first half and continued momentum in scotch in Colombia. Scotch overall declined 21% as growth in Buchanan's in Colombia and Brazil, and White Horse in Brazil, were offset by declines in Johnnie Walker across the region. Gin grew double-digit primarily driven by Tanqueray in Brazil. Tequila was down 11% as strong Don Julio performance in Caribbean and Central America was more than offset by a decline in Mexico. Operating margin for the region was down 544bps due to the adverse impact of product mix and lower fixed cost absorption despite actions taken to reduce discretionary spend.

Market highlights

In PUB (Paraguay, Uruguay and Brazil), net	activations. This was fully offset	by	of Johnnie Walker Red Label and Johnnie
sales declined 7%, mainly driven by scotch	the softening of the scotch category,	Walker Black Label. Brands such as
declining 11% across the market. Brazil	challenging trading conditions in the	Buchanan's, Baileys and Smirnoff X1 Lulo
declined 5% as a solid first half was fully	first half, and declines in Don Julio due	benefitted from an agile shift of activations
offset by Covid-19on-trade closures and	to competitive pricing pressure. Tequila	to at-home consumption, streamlined route
domestic and foreign travel restrictions.	production was secured amidst non-	to consumer solutions and the refocusing of
Momentum in gin continued as Tanqueray	essential business closures along with	resources to e-commerce throughout the
and Gordon's grew double digit supported	an enhanced focus on e-commerce and	Covid-19 lockdown.
by major marketing campaigns. In Brazil,	off-trade partnerships.		PEBAC (Peru, Ecuador, Bolivia,
scotch net sales declined 6% as double-digit	In CCA (Caribbean and Central	Argentina and Chile) net sales declined
growth of White Horse and Buchanan's was	America), net sales decreased 16% as	44% driven by continued social unrest
offset by declines in Johnnie	Walker and	broad-based growth in the first	half was	across key markets compounded by
Black & White. Johnnie Walker decline was	subsequently disrupted by restrictions to	the impact of Covid-19. Scotch declined
driven by a strong reliance on the on-trade	curtail the spread of Covid-19. The tequila	significantly, however category share
and border stores as well as the weakening	category grew during the year driven by	leadership was maintained across PEBAC
economy and devaluation impacting	double-digit growth of Don Julio led by	benefiting from new and existing
consumption. Super-premium scotch	strong activations, however all other	distribution partnerships. Strong double-
remained resilient through actions taken	categories declined due to reduced	digit growth of Smirnoff No.21 as it lapped a
to address the at-home occasion via digital	tourism, on-trade closures and Covid-19	softer comparable period and the successful
activations and supporting availability of	related bans of alcohol sales. At-home	Smirnoff Bitter Citric innovation continued
cocktail offerings.		occasion promotions and the launch of	to drive vodka in Argentina.
In Mexico, net sales were down 19% as	e-commerce platforms with our partners	Marketing investment was down
the economic slowdown continued into the	partially offset net sales declines.	15%, in line with the decline in net sales.
second half and was amplified	by Covid-19,	Andean (Colombia and Venezuela)	Despite cost mitigations in the second half,
including the reduction of on-trade	net sales increased 8% driven by Colombia.	support was continued behind key brands
wholesaler inventory and stock returns to	Scotch net sales grew mid-single digit driven	and home occasions with #homehour
support customers. Despite this, the	by Buchanan's, as double digit first half sales	#digitaldrink #onlinedrinkswithfriends
successful Smirnoff X1 Spicy Tamarind	growth was followed by a resilient second	and 'Digital Golden Hour' campaigns.
innovation delivered strong growth	half. Johnnie Walker was flat as	on-trade
building on local cues and strong	closures muted strong first half	performance

DIAGEO Annual Report 2020

Business review continued

Asia Pacific

In Asia Pacific our focus is to grow in both developed and emerging markets across our entire portfolio ranging from international and local spirits to ready to drink formats and beer. We have a clear long-term strategy that enables us to allocate resources behind brands that win in key consumer occasions and categories. We manage our portfolio to meet the increasing demands of the growing middle class and aim to inspire our consumers to drink better, not more. This strategy ensures that we deliver consistent and efficient growth with a key focus on developing our premium and super deluxe segments across the region.

Key financials

			Acquisitions			Reported
			and	Organic	2020
	2019	FX	disposals	movement	movement
	£ million	£ million	£ million	£ million	£ million	%
Net sales	2,688	5	-	(423)	2,270	(16)
Marketing	412	-	-	(47)	365	(11)
Operating profit before
exceptional items	703	5	-	(207)	501	(29)
Exceptional operating items(i)	(35)				(1,198)
Operating profit	668				(697)	(204)

Net sales by markets (%)		Net sales by categories (%)
India				Spirits
Greater China				Beer
Australia				Ready to drink
South East Asia				Other
North Asia
Other (principally
Travel Retail)

Organic volume	Reported volume	Organic net sales	Reported net sales
movement(i)		movement	movement	movement
Markets:	%		%	%	%
Asia Pacific	(15)		(15)	(16)	(16)
India	(15)		(15)	(17)	(16)
Greater China	(4)		(4)	(7)	(7)
Australia	5		5	6	2
South East Asia	(19)		(20)	(23)	(21)
North Asia	(18)		(17)	(15)	(14)
Travel Retail Asia and Middle East	(47)		(47)	(46)	(47)
Spirits	(15)		(15)	(16)	(15)
Beer	(11)		(11)	(12)	(10)
Ready to drink	(4)		(4)	(1)	(5)

		Organic volume	Organic net sales	Reported net sales
Global giants and local stars(ii):		movement(iii)	movement	movement
		%	%	%
Johnnie Walker			(23)	(25)	(24)
McDowell's			(17)	(15)	(15)
Shui Jing Fang(iv)			(9)	(16)	(16)
Guinness			(10)	(12)	(10)
The Singleton			(5)	(1)	2
Royal Challenge			(15)	(15)	(14)
Windsor			(44)	(26)	(28)
(i) For further details on exceptional operating items see pages 130-131.	(iv) Growth figures represent total Chinese
(ii) Spirits brands excluding ready to drink			white spirits of which Shui Jing Fang
(iii) Organic equals reported volume movement.			is the principal brand.

Our markets

Asia Pacific comprises India (including Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), Australia (including New Zealand), South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar), North Asia (Korea and Japan) and Travel Retail Asia and Middle East.

Supply operations

We have distilleries in Chengdu, China that produce Baijiu and in Bundaberg, Australia that produce Bundaberg Rum. Our manufacturing plant in Bali produces the highest quality spirits for the Indonesian market. United Spirits Limited (USL) in India operates 16 manufacturing sites across the country. In addition, USL and Diageo brands are also produced under licence by third party manufacturers. We have bottling plants in Thailand and Australia with ready to drink manufacturing capabilities.

Route to consumer

In South East Asia, spirits and beer are sold through a combination of Diageo companies, joint venture arrangements, and third party distributors. In Thailand, Malaysia and Singapore, we have joint venture arrangements with Moët Hennessy, sharing administrative and distribution costs. Diageo operates wholly owned subsidiaries in the Philippines and Vietnam. In addition, in Vietnam, we own a 45.57% controlling equity stake in Hanoi Liquor Joint Stock Company which manufactures and sells vodka. In Indonesia, Guinness is brewed by, and distributed through third party arrangements.

In Greater China our market presence is established through our 63.14% equity investment in Sichuan Shuijingfang Company Limited which manufactures and sells baijiu, and our wholly owned entity Diageo China Limited, which sells Diageo brands, and a joint venture arrangement with Moët Hennessy where administrative and distribution costs are shared. Diageo operates a wholly owned subsidiary in Taiwan.

In India, we manufacture, market and sell Indian whisky, rum, brandy and other spirits through our 55.94% shareholding in USL. Diageo also sells its own brands through USL.

58 DIAGEO Annual Report 2020

In Australia, we manufacture, market and sell Diageo products. In New Zealand we operate through third party distributors. In North Asia, we have our own distribution company in South Korea. In Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin. Airport shops and airline operators are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.

Sustainability and responsibility

Tackling drink driving and underage drinking remain priorities for us across the region. In Thailand and the Philippines, we have been

building on our partnership with the United	performance for the Federal Parliament.
Nations Institute for Training and Research	Human rights, the environment and
(UNITAR) to address road safety, including by	empowering communities are issues that go
gathering 48,500 pledges in Thailand never to	hand-in-hand. In Tabanan, Bali, for example,
drink and drive through #JoinThePact. In India,	we are supporting the local community through
we trained 2,942 enforcement officials on road	a multi-yeareco-tourism project; while in India,
safety and gathered 3 million pledges never to	our 'water ATM' programme is empowering
drink and drive through our 'Road to Safety'	women as entrepreneurs to run businesses that
programme. To combat underage drinking, we	give people access to clean, low-cost drinking
brought our 'Smashed' theatre-based	water. This year, 200 women joined the
programme to the region and are now running it	intervention, providing water for over 44,000
with local partners in Thailand, Taiwan, Indonesia,	people. We were also proud that, in India, as
Australia and New Zealand. So far, we have	reported last year, we delivered our 2020
reached more than 28,000 young people, parents	carbon emissions and water efficiency targets
and teachers, and in Australia we ran a live	12 months ahead of schedule.

REPORT STRATEGIC

Regional performance

Asia Pacific net sales declined 16%. Despite growth in the first half for the region, all markets other than Australia declined due to the impact of Covid-19. Greater China declined 7% as scotch, liqueurs and beer growth was offset by declines in Chinese white spirits. Australia net sales grew 6%, driven by ready to drink, liqueurs, gin and scotch. India net sales declined 17%, driven by the continued economic slowdown exacerbated by lockdowns impacting both Prestige and Above and Popular segments. South East Asia declined 23%, driven by scotch in Key Accounts and beer in Indonesia. North Asia declined 15%, driven by double-digit decline in scotch, partially offset by beer growth. In Travel Retail Asia and Middle East, net sales declined 46%, as first half declines were further exacerbated by significant declines of travellers due to Covid-19. Scotch declined 20%, driven by Johnnie Walker in Travel Retail Asia and Middle East, South East Asia, and Korea. Operating margin declined 420bps driven mainly by volume loss due to closures which caused lower fixed cost absorption. These impacts were partially offset by a reduction of marketing spend and overhead savings.

Market highlights

In India, net sales declined 17%. First half growth was impacted principally by an economic slowdown which was further exacerbated in the second half by the 42 day nationwide total lockdown of on-trade and off-trade alcohol sales, regulatory changes and continuation of on-trade closures thereafter. Prestige & Above declined 14%, driven by IMFL whisky and scotch. Popular brands declined 23%, driven by Old Tavern Whisky and McDowell's No. 1 Rum. These declines were partially offset by Innovation growth in McDowell's No.1 Luxury and Captain Morgan. Trade investment was optimised and refocused in the off-trade.

In Greater China, net sales declined 7%. Strong performance in scotch, liqueur and beer was offset by a decline in Chinese white spirits. Chinese white spirits declined 16%, as strong first half growth was offset by the impact of Covid-19 on the key Chinese New Year consumption period with consequential reduced sales and inventory reductions through the second half. Resilient scotch growth of 3%, was driven by malts and Johnnie Walker super deluxe growth in Mainland China along with continued growth in malts and Johnnie Walker super deluxe innovation in Taiwan. Beer grew 12% as it lapped a weaker prior year and supported by the launch of the first Guinness Gatehouse in Shanghai. Increased focus behind e-commerce drove improved digital consumer engagement and food delivery partnerships to address at-home

consumption, softened the impact of lockdown driven volume losses. Australia net sales grew 6%. Strong first half growth was partially offset by a weaker but still solid second half performance despite Covid-19 lockdowns. This was mainly due to low exposure to the on-trade and a focus on accelerating e-commerce activities. Scotch grew 4%, driven by the new Johnnie Walker "Game of Thrones Limited Editions A Song of Fire and A Song of Ice" innovations. Rum grew 4%, driven by Captain Morgan and continued growth in Bundaberg. Gin grew double-digit and ready to drink grew 6%, as growth in the core brands was complimented by innovation in both categories such as Gordon's Premium Pink Distilled Gin and Tanqueray Flor de Sevilla.

In South East Asia, net sales declined 23%. Solid growth in Vietnam, driven by Johnnie Walker super deluxe and malts, was offset by Covid-19 related lockdowns across the region. Thailand declined 24%, driven by on-trade closures. Key Accounts declined double-digit due to Covid-19 and a stock-return customer support programme in the second half. Indonesia declined double-digit mainly due to lockdowns impacting Guinness. Activities were upweighted to focus on at-home and small group consumer occasion trends.

In North Asia, net sales declined 15%, with double-digit declines in Japan and Korea. In Japan, declines in the first half were further exacerbated by on-trade lockdowns. In Korea, scotch declined 23%, driven by continued category contraction, regulatory changes limiting trade spend for wholesalers and venues affecting the category, on-trade closures and a reduction of inventory levels. This was partially offset through strong beer growth, driven by Hop House 13 Lager as it lapped launch in the prior period. Increased investment behind the off-trade in South Korea, especially through digital campaigns, contributed to increased at-home consumption.

In Travel Retail Asia and Middle East, net sales declined 46%. First half performance was impacted by challenging trading conditions in the Middle East including some reduction of inventory levels. In

the second half the global travel channel was severely impacted by Covid-19 travel restrictions, with significant declines of passengers. While absolute inventory levels were reduced, it remains at a high level relative to ongoing reduced passenger travel.

Marketing investment declined 11%, as variable trade investment was repurposed and redeployed into the off-trade and e-commerce channel, which focused on home delivery and at-home consumption.

DIAGEO Annual Report 2020

Business review continued

Category review

Key categories

	Organic volume	Organic net sales	Reported net sales
	movement(iii) %	movement %	movement %

Spirits(i)	(11)	(8)	(8)
Scotch	(16)	(17)	(17)
Vodka(ii)(iv)	(8)	(8)	(8)
Canadian whisky	7	8	8
Rum(ii)	(11)	(7)	(7)
Liqueurs	(4)	(4)	(5)
Indian-Made Foreign Liquor (IMFL) whisky	(14)	(14)	(13)
Tequila	12	25	27
Gin(ii)	(9)	(4)	(5)
US whiskey	(1)	3	4
Beer	(15)	(15)	(15)
Ready to drink	5	8	3

Spirits brands excluding ready to drink.
Vodka, rum, gin including IMFL brands.
Organic equals reported volume movement except for vodka (10)%, Canadian whisky 6%, rum (12)%, liqueurs (5)% and ready to drink 1%, which were impacted by acquisitions and disposals.
Vodka includes Ketel One Botanical.

Volume (%)	Net sales (%)	Marketing spend (%)	Scotch	Liqueurs

			Vodka	Gin
			US whiskey	Tequila
			Canadian	Beer
			whisky	Ready to drink

			Rum	Other

			Indian-Made
			Foreign Liquor
			(IMFL) Whisky

Scotch

Scotch represents 23% of Diageo's net sales and declined by 17%. Soft performance in the first half was impacted by ongoing commercial challenges along with political and economic disruption which continued through the year. This was further exacerbated by Covid-19 in the second half. Johnnie Walker declined 22% where growth in Ethiopia, Canada and Australia was offset by most other markets. The brand also lapped strong innovation in the prior year. Buchanan's declined 12% with double-digit growth in Colombia, primarily offset by continued declines in Mexico due to category softness. JεB declined 18% as global lockdowns exacerbated ongoing challenges for the brand in Continental Europe. Old Parr declined 15%, driven by downtrading to primary scotch and the impact of lockdown restrictions in Latin America and Caribbean. The malts portfolio,

whilst in growth in the first half, declined over the full year. Scotch innovations such as the collaborations with HBO's Game of Thrones and Johnnie Walker Black Label 12 Year Old Origin Series were not enough to offset prior year.

Vodka

Vodka represents 11% of Diageo's net sales and declined by 8%. Challenging performance in the first half was further exacerbated by

some category declines and on-trade closures. Smirnoff declined 6% globally, where growth in Mexico and Canada were offset by declines in Continental Europe, Africa, Brazil and US Spirits. Ketel One declined 6% driven mainly by US Spirits where on-trade sales mix was relatively stronger and also lapping the first full year of the Ketel One Botanical innovation. Cîroc declined 17%, driven by continued performance challenges, mainly in US Spirits. Innovations across the vodka portfolio, such as Smirnoff X1

Spicy Tamarind in Mexico, and limited time offers such as Cîroc White Grape, partially offset the declines in other brands and variants.

Canadian whisky

Canadian whisky represents 8% of Diageo's net sales and grew 8%. Crown Royal in US Spirits grew 8% as it gained further category share despite a single digit decline in Crown Royal Deluxe. Positive results were driven by the sustained media investment enabling further momentum across the portfolio including continued double-digit growth of Crown Royal Regal Apple and Crown Royal Vanilla, and the success of the limited time offer variant Crown Royal Peach. In Canada, Crown Royal grew double-digit, gaining market share and strengthening its leadership position in the growing category.

60 DIAGEO Annual Report 2020

Rum

Rum represents 7% of Diageo's net sales and declined by 7%. Growth in the first half was offset by declines due to some category challenges and Covid-19 impacts in US Spirits, India and East Africa. In Europe, Captain Morgan growth was partially offset by declines of Zacapa.

Liqueurs

Liqueurs represent 5% of Diageo's net sales and declined by 4%. Strong Baileys growth in the first half was offset by the impact of Covid-19, as increased off-trade growth, due to successful at-home activities, was not sufficient to fully mitigate the impact of on-trade closures.

IMFL

IMFL whisky represents 5% of Diageo's net sales and declined 14%. Growth in first half was offset by the on-going economic slowdown impacting the category, and nationwide Covid-19 lockdowns closing both on and off-trade outlets and major sporting events.

Tequila

Tequila represents 5% of Diageo's net sales and grew 25%. Casamigos was up strong double- digit despite on-trade closures driven by strong category momentum in key markets and actions taken to strengthen its position in at-home occasions. Don Julio was up 15%, as continued growth in US Spirits was partially offset by Mexico declines due to competitor pricing pressures and lockdowns in the second half.

Gin

Global giants, local stars and reserve(i):

	Organic volume	Organic net sales	Reported net sales
	movement(ii) %	movement %	movement %
Global giants
Johnnie Walker	(20)	(22)	(22)
Smirnoff	(9)	(6)	(6)
Baileys	(3)	(3)	(3)
Captain Morgan	(2)	(2)	-
Tanqueray	(5)	(4)	(4)
Guinness	(15)	(16)	(16)
Local stars
Crown Royal	7	8	10
Yenì Raki	(22)	(15)	(15)
Buchanan's	(14)	(12)	(13)
JεB	(18)	(18)	(18)
Windsor	(44)	(26)	(28)
Old Parr	(17)	(15)	(19)
Bundaberg	3	-	(4)
Black & White	(7)	(5)	(10)
Ypióca	(17)	(14)	(24)
McDowell's	(17)	(15)	(15)
Shui Jing Fang(iii)	(9)	(16)	(16)
Reserve
Scotch malts	(5)	(3)	(1)
Cîroc vodka	(17)	(17)	(16)
Ketel One(iv)	(4)	(6)	(4)
Don Julio	(1)	15	16
Bulleit	4	3	6

Spirits brands excluding ready to drink.
Organic equals reported volume movement.
Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.
Ketel One includes Ketel One vodka and Ketel One Botanical.

REPORT STRATEGIC

Gin represents 5% of Diageo's net sales and declined by 4%. Resilient full year performance in Brazil and Australia was offset by the impact of lockdowns, mainly in Europe.

US whiskey

US whiskey represents 3% of Diageo's

net sales and grew by 3%. Bulleit grew 4% in US Spirits, where it has been gaining category share, and in Canada grew 14%, despite lockdowns. Bulleit strengthened its positioning in the at-home occasion during Covid-19 with effective marketing campaigns across TV and social media.

Beer

Beer represents 15% of Diageo's net sales and declined by 15%. Good first half performance was offset by declines in all regions in the second half driven by on-trade closures and excise increases in Africa. Guinness declined 16%, as growth of Guinness Draught in Can was offset by on-trade volume declines in most markets. The on-trade decline was exacerbated by the Guinness keg return programme to support the on-trade and maintain product quality across Europe and North America. Serengeti continued to grow double-digit in

East Africa but was offset by the decline in Senator Keg and Tusker which are highly exposed to the on-trade. Nigeria declined due to the challenging economic environment, and declines in Kenya and Ethiopia were due to excise increases, with all three markets further impacted by lockdowns. Rockshore continued to grow double-digit driven by Rockshore Cider and Rockshore Lager despite on-trade closures.

Ready to drink

Ready to drink represents 7% of Diageo's net sales and grew 8% driven by Diageo Beer Company USA, Canada, and Australia. Smirnoff Ice Flavour innovations in Diageo Beer Company USA, Smirnoff Ice Smash and Smirnoff Spiked Seltzers all contributed to growth.

Global giants

Global giants represent 39% of Diageo's net sales and declined by 13%. This was driven by declines in Johnnie Walker and Guinness across all regions, while Smirnoff declined in all regions except for Latin America and Caribbean. Good first half performance for all brands except Johnnie Walker was offset by global lockdowns in the second half. Johnnie Walker performance

was also impacted by a continuation of political, and economic challenges in some emerging markets, as well as lapping "White Walker by Johnnie Walker" innovation last year.

Local stars

Local stars represent 20% of Diageo's net sales and declined by 7%. Continued growth of Crown Royal in US Spirits was offset by declines, mainly in Chinese white spirits in China, McDowell's in India, Buchanan's in Latin America and Caribbean and US Spirits and JεB in Iberia and South Africa due to imposed lockdowns. Windsor continued to decline in Korea exacerbated by on-trade closures.

Reserve

Reserve brands represent 21% of Diageo's net sales and declined 4%. Continued growth

in Don Julio and Casamigos in US Spirits

were offset by declines in Chinese white spirits, Johnnie Walker Reserve variants, Cîroc and Ketel One.

DIAGEO Annual Report 2020

Definitions and reconciliation of non-GAAP measures to GAAP measures

Diageo's strategic planning process is based on certain non-GAAP measures, including organic movements. These non-GAAP measures are chosen for planning and reporting, and some of them are used for incentive purposes. The group's management believes these measures provide valuable additional information for users of the financial statements in understanding the group's performance. These non-GAAP measures should be viewed as complementary to, and not replacements for, the comparable GAAP measures and reported movements therein.

It is not possible to reconcile the forecast tax rate before exceptional items and forecast organic operating profit increases to the most comparable GAAP measures as it is not possible to predict, without unreasonable effort, with reasonable certainty, the future impact of changes in exchange rates, acquisitions and disposals and potential exceptional items.

Volume

Volume is a non-GAAP measure that is measured on an equivalent units basis to nine-litre cases of spirits. An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. Therefore, to convert volume of products other than spirits to equivalent units, the following guide has been used: beer in hectolitres, divide by 0.9; wine in nine-litre cases, divide by five; ready to drink in nine-litre cases, divide by 10; and certain pre-mixed products that are classified as ready to drink

in nine-litre cases, divide by ten.

Organic movements

Organic information is presented using pounds sterling amounts on a constant currency basis excluding the impact of exceptional items, certain fair value remeasurement and acquisitions and disposals. Organic measures enable users to focus on the performance of the business which is common to both years and which represents those measures that local managers are most directly able to influence.

Calculation of organic movements

The organic movement percentage is the amount in the row titled 'Organic movement' in the tables below, expressed as a percentage of the absolute amount in the associated relevant row titled '2019 adjusted'. Organic operating margin is calculated by dividing operating profit before exceptional items by net sales after excluding the impact of exchange rate movements, certain fair value remeasurement and acquisitions and disposals.

(a) Exchange rates

'Exchange' in the organic movement calculation reflects the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.

The group changed its method of calculating the exchange impact used to calculate organic growth in its results during the year ending 30 June 2020. 'Exchange' in the organic movement calculation now reflects the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates. Previously, Diageo had calculated the exchange adjustment included in the organic calculation by translating the prior period results at the current period exchange rates. The change simplified processes by aligning management and organic reporting and is more consistent with how Diageo's peer group report.

Exchange impacts in respect of the external hedging of intergroup sales by the markets in a currency other than their functional currency and the intergroup recharging of services

are also translated at prior period weighted average exchange rates and are allocated to the geographical segment to which they relate. Residual exchange impacts are reported as part of the Corporate segment.

(b) Acquisitions and disposals

For acquisitions in the current period, the post acquisition results are excluded from the organic movement calculations. For acquisitions in the prior period, post acquisition results

are included in full in the prior period but are included in the organic movement calculation from the anniversary of the acquisition date in the current period. The acquisition row also eliminates the impact of transaction costs that have been charged to operating profit in the current or prior period in respect of acquisitions that, in management's judgement, are expected to be completed.

Where a business, brand, brand distribution right or agency agreement was disposed of, or terminated, in the reporting period, the group, in the organic movement calculations, excludes the results for that business from the current and prior period. In the calculation of operating profit, the overheads included in disposals are only those directly attributable to the businesses disposed of, and do not result from subjective judgements of management.

In addition, as part of acquisitions and disposals in the reconciliation for operating profit before exceptional items in the year ended 30 June 2019, there is a charge of

£15 million in respect of an increase in the contingent consideration payable to the former owners of the Casamigos brand which was acquired in August 2017.

Exceptional items are those that in management's judgement need to be disclosed separately. Such items are included within the income statement caption to which they relate, and are excluded from the organic movement calculations. It is believed that separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.

Exceptional operating items are those that are considered to be material and unusual or non-recurring in nature and are part of the operating activities of the group such as impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.

Gains and losses on the sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as non-operating exceptional items below operating profit in the consolidated income statement.

Exceptional current and deferred tax items comprising material unusual non-recurring items that impact taxation. Examples include direct tax provisions and settlements in respect of prior years and the remeasurement of deferred tax assets and liabilities following tax rate changes.

(d) Fair value remeasurement

Fair value remeasurement in the organic movement calculation reflects an adjustment to eliminate the impact of fair value changes in biological assets and fair value changes relating to contingent consideration liabilities and equity options that arose on acquisitions recognised in the income statement.

62 DIAGEO Annual Report 2020

Organic movement calculations for the year ended 30 June 2020 were as follows:

				Latin America
	North America	Europe and Turkey	Africa	and Caribbean	Asia Pacific	Corporate	Total
million	million	million	million	million	million	million
Volume (equivalent units)
2019 reported	49.4	45.4	33.6	22.4	95.1	-	245.9
Disposals(v)	(2.1)	(0.1)	(2.7)	-	-	-	(4.9)
2019 adjusted	47.3	45.3	30.9	22.4	95.1	-	241.0
Organic movement	0.1	(5.2)	(4.0)	(3.4)	(14.5)	-	(27.0)
Acquisitions and disposals(v)	1.0	0.1	1.9	-	-	-	3.0
2020 reported	48.4	40.2	28.8	19.0	80.6	-	217.0
Organic movement %	-	(11)	(13)	(15)	(15)	-	(11)

				Latin America
	North America	Europe and Turkey	Africa	and Caribbean	Asia Pacific	Corporate	Total
	£ million	£ million	£ million	£ million	£ million	£ million	£ million

Sales
2019 reported	5,074	5,132	2,235	1,444	5,356	53	19,294
Exchange	(39)	(28)	(4)	3	(8)	2	(74)
Reclassification(iii)	-	-	-	(10)	-	-	(10)
Disposals(v)	(106)	(3)	(114)	(1)	(2)	-	(226)
2019 adjusted	4,929	5,101	2,117	1,436	5,346	55	18,984
Organic movement	98	(388)	(261)	(193)	(718)	(16)	(1,478)
Acquisitions and disposals(v)	42	10	64	-	2	-	118
Exchange	153	(26)	(9)	(59)	15	(1)	73
2020 reported	5,222	4,697	1,911	1,184	4,645	38	17,697
Organic movement %	2	(8)	(12)	(13)	(13)	(29)	(8)
Net sales
2019 reported	4,460	2,939	1,597	1,130	2,688	53	12,867
Exchange(i)	(34)	(19)	(2)	4	1	2	(48)
Reclassification(iii)	-	-	-	(10)	-	-	(10)
Disposals(v)	(75)	(1)	(91)	(1)	(1)	-	(169)
2019 adjusted	4,351	2,919	1,504	1,123	2,688	55	12,640
Organic movement	105	(358)	(200)	(169)	(423)	(16)	(1,061)
Acquisitions and disposals(v)	32	10	50	-	1	-	93
Exchange(i)	135	(4)	(8)	(46)	4	(1)	80
2020 reported	4,623	2,567	1,346	908	2,270	38	11,752
Organic movement %	2	(12)	(13)	(15)	(16)	(29)	(8)
Marketing
2019 reported	762	490	174	201	412	3	2,042
Exchange	(1)	(11)	-	1	(1)	-	(12)
Reclassification(iii)	-	-	-	(10)	-	-	(10)
Disposals(v)	-	-	(1)	-	-	-	(1)
2019 adjusted	761	479	173	192	411	3	2,019
Organic movement	(49)	(56)	(14)	(29)	(47)	-	(195)
Acquisitions and disposals(v)	3	4	1	-	-	-	8
Exchange	12	1	-	(8)	1	3	9
2020 reported	727	428	160	155	365	6	1,841
Organic movement %	(6)	(12)	(8)	(15)	(11)	-	(10)

REPORT STRATEGIC

DIAGEO Annual Report 2020

Definitions and reconciliation of non-GAAP	measures to GAAP	measures continued

				Latin America
North America	Europe and Turkey	Africa	and Caribbean	Asia Pacific	Corporate	Total
	£ million	£ million	£ million	£ million	£ million	£ million	£ million

Operating profit before exceptional items
2019 reported	1,948	1,014	275	365	703	(189)	4,116
Exchange(ii)	12	(16)	(4)	1	8	(1)	-
Acquisitions and disposals(v)	(27)	1	(3)	-	-	-	(29)
2019 adjusted	1,933	999	268	366	711	(190)	4,087
Organic movement	80	(243)	(150)	(107)	(207)	38	(589)
Acquisitions and disposals(v)	(1)	(4)	-	-	-	-	(5)
Fair value remeasurement of contingent
considerations and equity option(iv)	(10)	(4)	-	7	-	-	(7)
Fair value remeasurement of biological
assets	-	-	-	9	-	-	9
Exchange(ii)	32	9	(17)	(27)	(3)	5	(1)
2020 reported	2,034	757	101	248	501	(147)	3,494
Organic movement %	4	(24)	(56)	(29)	(29)	20	(14)
Organic operating margin %
2020	45.2%	29.5%	9.0%	27.1%	22.3%	n/a	30.2%
2019	44.4%	34.2%	17.8%	32.6%	26.5%	n/a	32.3%
Margin movement (bps)	75	(470)	(877)	(544)	(420)	n/a	(212)

1. For the reconciliation of sales to net sales see page 46.

2. Percentages and margin movement are calculated on rounded figures. Notes: Information in respect of the organic movement calculations

(i) The impact of movements in exchange rates on reported figures for net sales is principally in respect of the translation exchange impact of the weakening of sterling against the US dollar, partially offset by strengthening of sterling against the Brazilian real, the Australian dollar and the euro.

(ii) The impact of movements in exchange rates on reported figures for operating profit is principally in respect of the transactional exchange impact of the weakening of the Brazilian real, the Colombian peso and the Nigerian naira, broadly offset by translational exchange impact of the strengthening of the US dollar against sterling.

For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.
Change in contingent consideration re Casamigos was reported as part of acquisitions in year ended 30 June 2019.
In the year ended 30 June 2020 the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows:

					Operating
	Volume	Sales	Net sales	Marketing	profit
	equ. units million	£ million	£ million	£ million	£ million
Year ended 30 June 2019
Acquisitions
Change in contingent consideration re Casamigos	-	-	-	-	15
	-	-	-	-	15
Disposals
Portfolio of 19 brands	(2.2)	(114)	(79)	-	(42)
South African ready to drink	(0.5)	(65)	(43)	-	-
South African cider	-	(4)	(4)	-	(1)
UNB	(2.2)	(43)	(43)	(1)	(1)
	(4.9)	(226)	(169)	(1)	(44)

Acquisitions and disposals	(4.9)	(226)	(169)	(1)	(29)
Year ended 30 June 2020
Acquisitions
Seedlip and Aecorn	0.1	12	12	7	(8)
	0.1	12	12	7	(8)
Disposals
Supply contracts in respect of the 19 brands sold to Sazerac	1.1	42	31	-	3
South African ready to drink	0.3	33	19	-	-
UNB	1.5	31	31	1	-
	2.9	106	81	1	3

Acquisitions and disposals	3.0	118	93	8	(5)

64 DIAGEO Annual Report 2020

Earnings per share before exceptional items

Earnings per share before exceptional items is calculated by dividing profit attributable to equity shareholders of the parent company before exceptional items by the weighted average number of shares in issue.

Earnings per share before exceptional items for the year ended 30 June 2020 and 30 June 2019 are set out in the table below.

	2020	2019
	£ million	£ million
Profit attributable to equity shareholders of the parent company	1,409	3,160
Exceptional operating and non-operating items	1,380	(61)
Exceptional taxation charges/(benefits)	-	10
Tax in respect of exceptional operating and non-operating items	(154)	29
Exceptional items attributable to non-controlling interests	(69)	26
	2,566	3,164

Weighted average number of shares	million	million
Shares in issue excluding own shares	2,346	2,418
Dilutive potential ordinary shares	8	10
	2,354	2,428

	pence	pence
Basic earnings per share before exceptional items	109.4	130.8
Diluted earnings per share before exceptional items	109.0	130.3

1. The impact of the adoption of IFRS 16 on 1 July 2019 on earnings per share before exceptional items for year ended 30 June 2020 is immaterial.

Free cash flow

Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for working capital loans receivable, cash paid or received for investments and the net cash cost paid for property, plant and equipment and computer software that are included in net cash flow from investing activities.

The remaining components of net cash flow from investing activities that do not form part of free cash flow, as defined by the group's management, are in respect of the acquisition and sale of businesses and non-working capital loans to and from associates.

The group's management regards the purchase and disposal of property, plant and equipment and computer software as ultimately non-

discretionary since ongoing investment in plant, machinery and technology is required to support the day-to-day operations, whereas acquisitions and sales of businesses are discretionary.

Where appropriate, separate explanations are given for the impacts of acquisitions and sale of businesses, dividends paid and the purchase of own shares, each of which arises from decisions that are independent from the running of the ongoing underlying business.

Free cash flow reconciliations for the year ended 30 June 2020 and 30 June 2019 are set out in the table below:

	2020	2019
	£ million	£ million
Net cash inflow from operating activities	2,320	3,248
Disposal of property, plant and equipment and computer software	14	32
Purchase of property, plant and equipment and computer software	(700)	(671)
Movements in loans and other investments	-	(1)
Free cash flow	1,634	2,608

1. Free cash flow for the year ended 30 June 2020 has benefited by £74 million as a result of the adoption of IFRS 16 on 1 July 2019.

Return on average total invested capital

Return on average total invested capital is used by management to assess the return obtained from the group's asset base and is calculated to aid evaluation of the performance of the business.

The profit used in assessing the return on average total invested capital reflects operating profit before exceptional items attributable to the equity shareholders of the parent company plus share of after tax results of associates and joint ventures after applying the tax rate before exceptional items for the year. Average total invested capital is calculated using the average derived from the consolidated balance sheets at the beginning, middle and end of the year. Average capital employed comprises average net assets attributable to equity shareholders of the parent company for the year, excluding post employment benefit net assets/liabilities (net of deferred tax) and average net borrowings. This average capital employed is then aggregated with the average restructuring and integration costs net of tax, and goodwill written off to reserves at 1 July 2004, the date of transition to IFRS, to obtain the average total invested capital.

REPORT STRATEGIC

DIAGEO Annual Report 2020

Definitions and reconciliation of non-GAAP measures to GAAP measures continued

Calculations for the return on average total invested capital for the year ended 30 June 2020 and 30 June 2019 are set out in the table below.

	2020	2019
	£ million	£ million
Operating profit	2,137	4,042
Exceptional operating items	1,357	74
Profit before exceptional operating items attributable to non-controlling interests	(114)	(151)
Share of after tax results of associates and joint ventures	282	312
Tax at the tax rate before exceptional items of 21.7% (2019 - 20.6%)	(795)	(881)
	2,867	3,396

Average net assets (excluding net post employment assets/liabilities)	9,063	10,847
Average non-controlling interests	(1,723)	(1,776)
Average net borrowings	12,551	10,240
Average integration and restructuring costs (net of tax)	1,639	1,639
Goodwill at 1 July 2004	1,562	1,562
Average total invested capital	23,092	22,512
Return on average total invested capital	12.4 %	15.1%

Calculation of average net borrowings includes £251million in respect of IFRS 16 adoption for 1 July 2019.
The return on average total invested capital for the year ended 30 June 2020 was adversely impacted by 18bps as a result of the adoption of IFRS 16 on 1 July 2019.

Adjusted net borrowings to earnings before exceptional operating items, interest, tax, depreciation, amortisation and impairment (adjusted EBITDA)

Diageo manages its capital structure with the aim of achieving capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. The group regularly assesses its debt and equity capital levels to enhance its capital structure by reviewing the ratio of adjusted net borrowings to adjusted EBITDA.

Calculations for the ratio of adjusted net borrowings to adjusted EBITDA at 30 June 2020 and 30 June 2019 are set out in the table below.

	2020	2019
	£ million	£ million
Borrowings due within one year	1,995	1,959
Borrowings due after one year	14,790	10,596
Fair value of foreign currency derivatives and interest rate hedging instruments	(686)	(474)
Lease liabilities	470	128
Less: Cash and cash equivalents	(3,323)	(932)
Net borrowings	13,246	11,277
Post employment benefit liabilities before tax	749	846
Adjusted net borrowings	13,995	12,123
Operating profit	2,137	4,042
Depreciation, amortisation and impairment (excluding exceptional items)	494	374
Share of after tax results of associates and joint ventures	282	312
Exceptional impairment	1,345	-
Non-operating items	(23)	144
EBITDA	4,235	4,872
Exceptional operating items (excluding impairment)	12	74
Non-operating items	23	(144)
Adjusted EBITDA	4,270	4,802

Adjusted net borrowings to adjusted EBITDA	3.3	2.5

1. The ratio of adjusted net borrowings to adjusted EBITDA at 30 June 2020 increased by 0.1 times as a result of the adoption of IFRS 16 on 1 July 2019.

66 DIAGEO Annual Report 2020

Tax rate before exceptional items

Tax rate before exceptional items is calculated by dividing the total tax charge on continuing operations before tax charges and credits in respect of exceptional items, by profit before taxation adjusted to exclude the impact of exceptional operating and non-operating items, expressed as a percentage. The measure is used by management to assess the rate of tax applied to the group's continuing operations before tax on exceptional items.

The tax rates from operations before exceptional and after exceptional items for the year ended

30 June 2020 and year ended 30 June 2019 are set out in the table below:

	2020	2019
	£ million	£ million
Tax before exceptional items (a)	743	859
Tax in respect of exceptional items	(154)	29
Exceptional tax charge/(credit)	-	10
Taxation on profit (b)	589	898

Profit before taxation and exceptional items (c)	3,423	4,174
Non-operating items	(23)	144
Exceptional finance charges	-	(9)
Exceptional operating items	(1,357)	(74)
Profit before taxation (d)	2,043	4,235

Tax rate before exceptional items (a/c)	21.7 %	20.6 %
Tax rate after exceptional items (b/d)	28.8 %	21.2 %

1. The tax rate before exceptional items is not materially affected by the adoption of IFRS 16 on 1 July 2019.

This Strategic Report, which has been approved by a duly appointed and authorised committee of the Board of Directors, was signed on its behalf by Siobhán Moriarty, the Company Secretary,

on 4 August 2020.

REPORT STRATEGIC

Other definitions

Volume share is a brand's retail volume expressed as a percentage of the retail volume of all brands in its segment. Value share is a brand's retail sales value expressed as a percentage of the retail sales value of all brands in its segment. Unless otherwise stated, share refers to value share.

Price/mix is the number of percentage points by which the organic movement in net sales differs to the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented.

Shipments comprise the volume of

products made to Diageo's immediate (first tier) customers. Depletions are the estimated volume of the onward sales made by Diageo's immediate customers. Both shipments and depletions are measured on an equivalent units basis.

References to emerging markets include Russia, Eastern Europe, Turkey, Africa, Latin America and Caribbean, and Asia Pacific (excluding Australia, Korea and Japan).

References to reserve brands include, but are not limited to, Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie Walker Gold Label Reserve, Johnnie Walker Aged 18 Years, John Walker & Sons Collection and other Johnnie Walker super premium brands; Roe & Co; The Singleton, Cardhu, Talisker, Lagavulin and other malt brands; Buchanan's Special Reserve, Buchanan's Red Seal; Bulleit Bourbon, Bulleit Rye; Tanqueray No. TEN, Tanqueray ready to drink, Tanqueray Malacca Gin; Cîroc, Ketel

One vodka, Ketel One Botanicals; Don Julio, Casamigos, Zacapa, Bundaberg SDlx, Shui Jing Fang, Jinzu gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón Tequila; Villa Ascenti, Copper Dog whisky, Belsazar, Pierde Almas.

References to global giants include the following brand families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness. Local stars spirits include Buchanan's, Bundaberg, Crown Royal, JεB, McDowell's, Old Parr, Yenì Raki, Black & White, Shui Jing Fang, Windsor and Ypióca. Global giants and local stars exclude ready to drink and beer except Guinness. References to Shui Jing Fang represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.

References to ready to drink also include ready to serve products, such as pre-mix cans in some markets, and progressive adult beverages in the United States and certain markets supplied by the United States.

References to beer include cider and some non-alcoholic products such as Malta Guinness.

The results of Hop House 13 Lager are included in the Guinness figures.

References to the disposal of a portfolio of 19 brands comprise the following brands that were primarily sold in the United States: Seagram's VO, Seagram's 83, Seagram's Five Star, Popov, Myers's, Parrot Bay, Yukon Jack, Romana Sambuca, Scoresby, Goldschlager, Relska, Stirrings, The Club, Booth's, Black Haus, Peligroso, Grind, Piehole and John Begg.

References to the group include Diageo plc and its consolidated subsidiaries.

DIAGEO Annual Report 2020

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Diageo plc published this content on 07 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 10 August 2020 07:43:15 UTC

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I			ly	EG	Efficient growth

n	v
	rt
		est sma		CVC	Consistent value creation

				CT	Credibility and trust
				EP	Engaged people

	5	set of financial and	non-financial indicators.

EG		Organic net sales growth
EG		Organic operating profit	growth
EG		Earnings per share before exceptional items
EG		Free cash flow
CVC		Return on average invested capital
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CT	EP	Reach and impact of positive drinking programmes
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DIAGEO PLC	-9.70%	72.61B
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