Interim Results - 6 Months to 31 Dec 1999, Part 1

Diageo PLC 23 February 2000 PART 1 INTERIM STATEMENT Diageo, the international food and drinks company, today announced its interim results for the six months ended 31 December 1999. 6 months to 6 months to Dec Dec 99 98 Turnover £ 6,596 million £6,267 million Operating profit* £1,151 million £1,099 million EPS* 22.6 pence 20.5 pence *pre exceptional items and goodwill amortisation OPERATING HIGHLIGHTS for the six months ended 31 December 1999 Percentage movements given below and in the Group CEO's comments for turnover, operating profit and marketing expenditure are organic movements (at level exchange and after adjusting for acquisitions and disposals). They include merger cost savings achieved in the period and are before goodwill amortisation and exceptional items. Comparisons are with the equivalent period last year. Diageo Turnover up 7% Marketing spend up 13% Operating profit growth 10% Operating margin up 0.3 percentage points to 17.4% Additional merger cost savings of £40 million Profit before goodwill amortisation, exceptional items and tax £1,087 million £68 million underlying improvement in economic profit Basic EPS excluding goodwill amortisation and exceptional items up 10% to 22.6 pence Interim dividend 8.4 pence per share, up 8% Free cash flow £416 million after merger integration spend of £53 million Spirits and Wine Volume up 6% Volume of nine global priority brands up 9% Turnover up 11% Marketing expenditure up 14% Marketing expenditure up 22% on the nine global priority brands Operating profit growth 14% to £614 million, Europe up 15%, North America up 12%, Asia Pacific up 31%, Latin America down 4% and Rest of World up 36% Operating margin up 0.5 percentage points to 21.3% Note: Volume includes Ready-to-Drink brands at equivalent units (one-tenth of case volume). Volume of the global priority brands excludes Ready-to- Drink. Packaged Food Volume up 4% Turnover up 5% Marketing expenditure up 15% Operating profit level at £271 million Operating margin down 0.6 percentage points to 13.2% Beer Total volume up 1%, with Guinness volume up 2% Turnover up 1% Marketing expenditure up 11% Operating profit growth 14% to £161 million Operating margin up 1.3 percentage points to 13.5% Quick Service Restaurants Dollar system sales up 6% Total restaurants up 6% compared with 31 December 1998 to 10,850 units Worldwide comparable restaurant sales up 0.4% Operating profit growth 5% to £105 million Operating margin up 0.3 percentage points to 22.4% GROUP CHIEF EXECUTIVE'S COMMENTS John McGrath, Group Chief Executive of Diageo, commenting on the six months ended 31 December 1999 said: 'In September 1999, I said that profitable top line growth would be the key contributor to delivering our shareholder value objective and we have achieved profitable top line growth in this period. Turnover is up 7% and operating profit is up 10% overall. To continue this momentum, we have increased the marketing spend behind Diageo's brands by 13% in the period which will further strengthen their leadership positions and drive shareholder value. In our Spirits and Wine business, we have created a new model for the industry. We are focused on those markets with the greatest potential for economic profit improvement. We have created for each of these markets a brand portfolio which will ensure that we capture the largest share of that potential. These results demonstrate that our strategy is being well executed and will drive substantial value in the future. The Spirits and Wine business has delivered on all fronts: top line growth of 11% driven by an overall volume increase of 6%; margin improvement of 0.5 percentage points; operating profit improvement of 14%. Our major markets of North America and Europe generated considerable operating profit growth and accounted for 70% of operating profit improvement. Similarly our strongest brands, the nine global priority brands, grew substantially and contributed over half of the overall improvement. However, growth is now being achieved more consistently throughout the spirits portfolio and in more markets throughout the world. We are confident that the strength of our Spirits and Wine business, with its leadership positions in all major markets and with its pre-eminent brand portfolio, will continue to deliver growth and generate high levels of cash going forward. In Packaged Food, top line growth of 5% was achieved in the period. However, marketing spend was increased by 15% and therefore operating profit was flat. Performance has been mixed between categories. Foodservice continues to perform strongly. The acquisitions we made last year have been successfully integrated, operating margins have improved and strong organic growth has again been achieved in the period. In Refrigerated Baked Goods, mix improvement continued but market share has fallen as low value products such as Regular Biscuits declined further and turnover was flat. In the Ready-to- Serve Soup and Pizza and Hot Snacks categories our Progresso and Totino's brands continue to grow strongly at both the top and the bottom line. In other categories significant incremental marketing spend has driven volume growth for the Green Giant and Pillsbury brands. However, the amount of incremental volume achieved was below our expectations and operating margins fell. In the second half, we are reducing promotional spend in lower value product categories which will impact volume growth in the second half for Pillsbury North America. In Beer, this has been another period of strong operating profit growth, amounting to 14%. The Guinness brand continues to deliver volume growth with a 2% increase despite a slow start in Ireland. Our decision to reduce stock levels in the United States as part of a programme of supply chain improvements in Beer, also had an adverse impact on shipments while depletions were up 10%. In Great Britain, the Guinness brand has achieved further market share gains and volume growth was driven by excellent marketing campaigns particularly around the Rugby World Cup. We continue to invest in the brand throughout the world and marketing spend increased further as a percentage of sales to 10.4%. Overheads have been reduced and operating margin has risen by 1.3 percentage points. The strength of the Guinness brand together with the opportunity which exists to reduce the cost structure of our Beer operations, will result in margin improvement and enable strong operating profit growth to be delivered. Quick Service Restaurants system sales increased as the number of restaurants increased by 324 in the period. Despite a slow start to the year with negative comparable restaurant sales (comps) in the United States in the first quarter, momentum began to build in the second quarter when comps were up 4%. For the six months, worldwide comps were up 0.4%. Operating profit growth was 5% despite an expansion of the organisation in Europe which increased overheads. This expansion will provide the base for further growth of the system in Europe. In the United States, the new restaurant transformation programme continues to produce sales growth in the test restaurants which exceed our expectations. These new ways of delivering the Burger King brand to consumers will be the key to the future growth of our Quick Service Restaurant business. These new formats will build on an already strong consumer franchise as the Burger King brand remains the consumers' favourite choice for hamburgers in the United States. Further improvement in the United States and continued profitable expansion of the system outside the United States will be key to profitable growth of our QSR operations. Commenting on the outlook for the full year John McGrath said: 'In Spirits and Wine, there will be further price increases in the second half, particularly on selected global priority brands and this is expected to have some impact on volume. However, this more favourable price impact, together with further strong mix improvement, mean that we will continue to deliver strong turnover and operating profit growth. In Packaged Food, the tough competitive environment we face in the United States will continue to impact performance in Pillsbury North America in the second half, although we expect strong growth in our Foodservice business and improved performance in International to result in modest total operating profit growth for the full year. In Beer, growth of the Guinness brand and margin improvement will continue. In Quick Service Restaurants, we believe that international growth and further improved performance in the United States will deliver a stronger second half performance.' Sir Anthony Greener, Chairman, commented: 'In this period we have built upon the achievements of the second half of last year and these results demonstrate a high level of overall performance. The merger that we completed two years ago was designed to create a major new force in branded food and drink, operating on a truly international scale and achieving significantly higher rates of topline growth than its two predecessor companies. This we are now achieving. These results show the value creating power of Diageo and going forward we are confident that Diageo can continue to deliver overall levels of topline and operating performance similar to our achievements in the first six months.' The detailed interim statement follows. OPERATING AND FINANCIAL REVIEW for the six months ended 31 December 1999 References to percentage movements are on reported figures unless otherwise stated SPIRITS AND WINE Turnover increased 11% on an organic basis. Turnover was £2,877 million (1998 - £2,732 million) an increase of 5%. Organic growth of 11% offset a £139 million reduction due to brand disposals made since the beginning of the prior year. Organic volume growth was 6% with growth throughout the spirits portfolio. Organic volume growth was 6% driven by growth in total spirits volume, which was up 8% while wine volume was down 7%. The spirits portfolio is now managed as three categories and the relative importance of each category is shown below: Volume Share of growth total volume % % 9 Global priority brands 9 50 35 Local priority brand market units 13 14 Niche spirits brands 5 17 Disposal brands (sold in the period) (17) 4 Total spirits 8 85 Wine (7) 15 Total Spirits and Wine volume 6 100 Mix and price improvements have contributed 5 percentage points of the organic growth in turnover. There has been significant mix improvement in the period as a result of the strong volume growth in the global priority brands. Focused marketing investment has strengthened the market position of the leading brands and has improved the ability to achieve price increases. Marketing spend increased 14% on an organic basis. Investment in marketing was up 10% to £369 million (1998 - £334 million). Marketing spend on the global priority brands now represents 69% of total UDV spend, up 7 percentage points over the comparable period. Marketing spend on other spirits brands was in line with the prior period while spend on wine brands was down 9%. Operating profit increased 14% on an organic basis. Operating profit was £614 million (1998 - £589 million) an increase of 4%. Organic growth of 14% was partly offset by a £36 million reduction in operating profit due to brand disposals made since the beginning of the prior year. Excluding merger synergy, organic operating profit growth was 7%. The performance of the nine global priority brands continues to improve strongly. The performance of the nine global priority brands has strengthened further in the period on all measures including volume up 9% and sales up 15%. This improvement in performance was across all regions except in Latin America. Investment in marketing behind these brands grew 22% and contribution after marketing spend grew 11%. Further price increases were achieved in the period and these, together with the benefits of price increases implemented in the prior year, have led to significant growth in net sales (i.e. sales excluding excise duty) as the chart below shows. Performance in the period against the comparable period was as follows: Volume Net sales growth growth % % Johnnie Walker Black and Deluxe 11 13 Johnnie Walker Red 11 10 Smirnoff 7 15 J&B 3 7 Baileys 15 20 Cuervo 17 22 Gordon's 13 14 Tanqueray 4 4 Malibu 13 17 The performance of the ten leading brand market units (BMUs) was also stronger. In total, volume of the ten leading brand market units was up 10% and net sales were up 14%. The improvement was as follows: Volume Net sales growth growth % % J&B Rare in Spain 10 13 Smirnoff Red in the United States 6 17 Cuervo in the United States 20 23 Smirnoff Red in the United Kingdom 21 20 Baileys in the United States 11 8 Tanqueray in the United States 1 3 Johnnie Walker Black in the United States 9 13 Johnnie Walker Red in the United States (1) - J&B in the United States (18) (15) Baileys in the United Kingdom 32 31 These ten BMUs now represent 18% of Spirits and Wine total volume, 21% of total net sales and 25% of contribution after marketing spend. Marketing spend on the leading ten BMUs was up 28%. In North America, strong performance from the leading brands delivered 12% organic operating profit growth. The new structure in North America, with six regional marketing companies, has continued to deliver improved performance in the period and the leading brands continue to strengthen in terms of relative market position. Organic sales growth was 9%, although sales decreased by 1% due mainly to disposals. Organic volume growth was 4% in total. Spirits volume was up 9% driven by 9% volume growth in the nine global priority brands. This was in part due to distributors' decisions to hold higher stocks in anticipation of scheduled price rises. Price increases and mix improvements delivered a further 7% growth in net sales. Investment in marketing was up 10% on an organic basis and spend increased by 9% on the nine global priority brands. Operating profit increased 12% on an organic basis. Smirnoff, Johnnie Walker Red and Black, and Baileys all grew market share, while the remaining priority brands maintained their leadership positions in their categories. UK performance was driven by new products and the millennium. Volume in the United Kingdom was up 23% in the period. The millennium celebrations encouraged retailers to hold higher stocks of premium spirits to meet an anticipated increase in consumer demand. This increased demand benefited total depletions by approximately 300,000 cases. In addition to strong performances from Smirnoff and Baileys, volume of Gordon's and Bells were up. Market share in the off trade increased and the on trade growth continued, led by the successful introduction of Smirnoff Ice. Successful marketing campaigns continued to deliver growth in all priority brands in Spain. In Spain, focused marketing investment continues to deliver growth in J&B with volumes up 10%, net sales up 13% and improved market share. Volume trends for Baileys, Smirnoff, Malibu and Johnnie Walker Red are also strong and successful advertising campaigns are supporting price increases of between 5% and 8%. The withdrawal of European Duty Free reduced overall volume by 1%. The withdrawal of European Duty Free in July 1999 is estimated to have resulted in a net reduction of 800,000 cases, of which half related to the global priority brands, and a £10 million reduction in operating profit. In Asia Pacific, the market in premium spirits has improved significantly. Strong volume organic growth in Johnnie Walker Black Label and Dimple has led to improved operating margins and an organic increase of over 30% in operating profit. In Thailand, Johnnie Walker Black Label led the growth in premium spirits and volume grew 14%. Volume of lower margin Spey Royal and related brands was up over 50%. In Korea, Dimple volume grew 137%. Depletions rose nearly 70% and market share increased. In Taiwan, volume of Johnnie Walker Black Label and Deluxe labels grew by 12% overall. In Japan, the Scotch market remains in decline but Old Parr outperformed the market while Johnnie Walker Black Label maintained its position. A substantial increase in marketing investment in Australia, particularly behind Smirnoff and Baileys, was not fully matched by short term volume returns and as a result operating profit was lower. In Latin America, turnover declined by 6% and operating profit declined by 4% on an organic basis. Trading conditions were difficult as a result of economic recession in most markets and the natural disaster in Venezuela at the end of the year. Despite this, however, brands such as Johnnie Walker, Baileys and Buchanans Deluxe gained market share in most markets and reinforced their position as category leaders. In Brazil, the global priority brands of Johnnie Walker Black and Red Label and Smirnoff all showed share gains despite significant price increases. In the Rest of the World, organic operating profit increased by 36% as margins improved. In the Rest of the World, turnover grew 7% and operating profit grew 36% on an organic basis. Margins improved driven by volume increases of leading brands such as Johnnie Walker Red and Black, Baileys and Gordon's in markets such as South Africa and Kenya. In Russia, lower costs relating to debtors and stock write-offs also benefited reported profits in the period. While total wine volume was down, premium brands grew. While premium wines, such as the Beaulieu Vineyard brand, where volumes were up 44%, have continued to perform strongly, lower price wines have lost volume in the period both in the United States and Japan. Changes in distribution are proposed and wine brands in this category will be relaunched to address this volume decline. PACKAGED FOOD Turnover increased 5% on an organic basis driven by volume growth of 4%. Turnover was £2,056 million (1998 - £1,926 million). The disposal of non-core brands in the last financial year and the formation of the joint venture with Nestle, for Haagen-Dazs in the United States resulted in a decline in turnover of £101 million while the acquisitions made in Foodservice businesses last year increased turnover in the period by £104 million. Operating profit was flat on an organic basis as marketing spend increased by 15%. Operating profit was £271 million (1998 - £263 million) an increase of 3%. On an organic basis operating profit was flat as marketing spend increased by 15% to £424 million (1998 - £368 million). 90% of this increased spend was behind Pillsbury North America brands. Focus on higher margin products continued in Refrigerated Baked Goods. For Refrigerated Baked Goods, volume growth was 1% while sales were flat as prices were adjusted on selected product lines to protect share. Gross margin improved due to lower raw material costs but operating profit was up only 1% as a result of an 11% increase in marketing spend. Focus remains on the higher margin products within the category. Volume decline has continued in the low margin categories and this reduced market share in the period. Going forward low margin items will be replaced with fast moving, higher margin products and therefore market share is expected to be maintained. Progresso's performance provides a model for delivering profitable top line growth. Progresso Soup continues to perform strongly. Effective advertising continues to drive consumer takeaway, which is ahead of the category. Similarly, the Totino's pizza brand has also performed well. Volume and sales for both brands are up approximately 10% and this has driven strong operating profit growth. Volume performance in low margin categories improved. In Desserts and Specialty Products, which had faced a strong competitive environment in the prior financial year, incremental promotional spend has now delivered improved top line performance. Volume, sales and market share were up but operating profit improved only slightly. Similarly, canned vegetables has improved in volume terms driven by higher promotional spend. However, the volume growth was below expectations and in this low margin category, higher spend has adversely impacted profit. Performance of new products in the Frozen Breakfast category is expected to provide future growth. In Frozen Breakfast, the overall category declined and although market share was increased, volume declined 3%. However, mix improved and turnover declined by only 1%. Within the category, higher margin products performed well but gains in Toaster Pastries, where consumer takeaway was up by 10%, were offset by declines in lower margin segments such as waffles where consumer takeaway was down by 16%. Operating profit fell therefore as a result of this lower volume, increases in overheads as capacity was increased and a 24% increase in advertising spend behind new product introductions. Future growth in Frozen Breakfast will be driven by the roll out of new products which build upon an already proven format. Green Giant Create-A-Meal! was affected by a change in consumer demands. In Green Giant Frozen, total volume and sales were down about 8% due mainly to declines in Green Giant Create-A-Meal! Competition in this segment has increased from new products which include meat. Going forward, the Green Giant brand in the meal category can be expanded from its current vegetable based offerings to respond to this competition. The Mexican category has remained competitive. Old El Paso, which is a key profit generator has improved profitability. Overall market share declined due to intense competition in sauces, however, reduced package sizes in sauces delivered margin improvement in this product. The brand is being repositioned in the Mexican Meals category in preparation for the launch of new products. The first of these was launched in January and generated high levels of trade acceptance. Foodservice continues to perform strongly and now represents over 20% of operating profit. Pillsbury Bakeries and Foodservice continues to expand profitably. The Heinz and Hazelwood acquisitions last year have been successfully integrated and costs have been reduced, resulting in margin improvement of over 2 percentage points. Volume was up over 40% reflecting the benefit of the acquisitions and further strong levels of organic growth. Turnover on an organic basis grew 6% and organic operating profit grew significantly. Topline growth in International continues despite tough trading activities in many areas. In International, on an organic basis, volume grew 1% and turnover grew 4%. Continued softness in Latin America and higher marketing spend to drive growth in other regions has lowered profits. Strong topline results were achieved in Asia Pacific and Europe, where organic volume has increased by 5% and 4%, respectively. The Haagen-Dazs business was transferred to the joint venture with Nestle, in October. In the first quarter Haagen-Dazs volume was down 2% as a result of declines in Novelties, Yogurt and Sorbet, although the core superpremium ice cream segment continued to perform strongly. Since the formation of Ice Cream Partners in October, the combination of Haagen-Dazs' strength in ice cream with Nestle,'s Novelty lines has led to market share gains. Consumer takeaway trends for Pillsbury North America. Total consumer takeaway for Pillsbury North America was up 1.4% against category growth of 1.8%. However, there was a mixed performance by category. Consumer takeaway (US dollar sales) in the 24 weeks ended 18 December 1999 was: Category Pillsbury growth NA growth % % Refrigerated Baked Goods 3.2 1.7 Desserts and Specialty Products 0.2 2.6 Frozen Breakfast (1.3) (0.6) Green Giant Frozen (3.0) (6.8) Green Giant Canned 2.5 5.5 Ready-to-Serve Soup 0.4 10.6 Pizza/Hot Snacks 7.8 8.7 Mexican 3.4 (5.0) Total Pillsbury North America 1.8 1.4 Source: AC Nielsen. Excludes Ice Cream. BEER Turnover 1999 £1,195 million, 1998 £1,166 million. Turnover was up 1% on an organic basis. Turnover benefited by £49 million in the period, following the acquisition of United Beverages Holdings in March 1999. Guinness brand volume up 2%. Comparable total volume was up 1% in the period. Guinness volume continued to grow, although the reported increase for the period was affected by soft trading in Ireland at the beginning of the year and the decision to reduce stock levels in the United States. Organic volume growth by region was as follows: Total volume Guinness % % Ireland - (3) Great Britain 3 3 Africa 9 11 Asia Pacific 2 6 United States (3) (9) Other (including discontinued) (1) 1 Total 1 2 Organic operating profit growth was 14%. Operating profit grew to £161 million from £149 million in the prior period as a result of strong trading performance in Africa and improved operating margin in Europe. In Ireland, market share was maintained and the market improved after a slow start. In Ireland, total volume was flat but market share was maintained and Guinness volume was down 3% in the first half reflecting the slowdown in the overall beer market. However, in the second quarter total volume was up 4% and Guinness volume was up 1%. Prices were increased in May 1999 and this had a favourable profit impact in the period. Marketing spend was increased but cost reductions have led to margin improvement and operating profit is up. In Great Britain, Guinness volume growth of 3% continues to drive profitable growth. In Great Britain, total volume grew 3% and the Guinness brand continues to perform strongly with volume growth of 3%. Effective advertising and promotional activity, particularly around the Rugby World Cup, continued to drive volume. This volume growth, together with the positive price effect from the May 1999 increase, has delivered operating profit growth and further margin improvement. In Spain, Cruzcampo performed well and volume was up 3%. Operating profit from Cruzcampo was £30 million, an increase of 7% on the prior year, driven by increased volume and cost reduction. The sale of Cruzcampo to Heineken was completed on 27 January 2000. In Africa, operating profit increased, driven by strong growth in volume. Total volume in Africa grew 9% with Guinness volume up 11% following increases of 20% in Nigeria, 4% in Ghana and 10% in Cameroon. Strong volume performance on the premium Guinness Foreign Extra Stout brand has contributed to significantly improved profit across the whole region. In North America, increased marketing continues to drive higher depletions while the reduction in inventory levels has impacted volume. Depletions in the United States were up in total by 12% and for the Guinness brand are up 10%. Market share in the taste beer category continues to improve. Supply chain improvements have been introduced and have reduced inventory levels across the US business. Guinness shipments were therefore down 9%. These supply chain initiatives have reduced working capital, improved service levels and reduced costs. In Asia Pacific, operating profit has increased while volume is in line with last year. Turnover in Asia Pacific improved by 4% on an organic basis as volume recovered. Guinness brand volume was up 6% and the resulting mix improvement together with lower overheads have led to increased operating profit. QUICK SERVICE RESTAURANTS 6% growth in restaurant numbers and comparable restaurant sales in line with the prior year have led to a 9% growth in worldwide system sales. System sales were up 9% from £3,325 million to £3,611 million. Reported turnover was up 6% from £443 million to £468 million. At 31 December 1999, there were 10,850 restaurants, an increase of 324 in the period. Organic growth in operating profit was 5%. Operating profit was £105 million (1998 - £98 million). Operating margins rose 0.3 percentage points due to margin improvement in the key markets of the United States and Germany. In the United States, operating performance improved during the period. Burger King had a strong second quarter in the United States with comparable restaurant sales (comps) up 4%. This offset a soft start in the first quarter and comps were flat for the period. Trials of the new restaurant format, which initially includes changes to 'drive-thru' and image, are going well and the resultant increase in sales in these restaurants is higher than anticipated. A review of advertising has been carried out and a new campaign will be implemented in the second half of the year which is expected to result in positive comparable restaurant sales. Additionally, new product launches are scheduled for the balance of the year. Outside the United States, the system continued to deliver strong sales growth. System sales outside the United States increased by 18% against the comparable period. As a result of this growth of the system and in preparation for further strong growth, the organisation has been expanded, primarily in Europe and overheads have risen. Operating profit has therefore not grown in line with system sales in this period. Operating profit from these international operations now represents 15% of total Burger King operating profit. In Europe, the United Kingdom, Germany and Spain continue to perform strongly. In each of the key markets, the United Kingdom, Spain and Germany, system sales were up by over 15%. In the United Kingdom, comps grew 1%, and in Spain comps were up 5%. The strongest performance continued to be in Germany where system sales grew 27% due to 24 new restaurants and comps were up 2%. In addition, company restaurants continued to perform strongly and operating profit grew. Latin America delivered positive comparable restaurant sales and strong operating profit growth. Comps grew 4% in Latin America. In addition, restaurant numbers grew 13% and therefore operating profit grew. FINANCIAL REVIEW Exchange rates Exchange rate movements during the six month period adversely impacted profit before exceptional items and tax by £18 million. The adverse impact of exchange rate movements on the translation of overseas operating profit was £5 million and on transactions in the period was £10 million, giving a total impact on operating profit of £15 million. Exchange rate movements also adversely affected the share of profits of associates by £2 million and the interest charge by £1 million. Based on current exchange rates, it is expected that the adverse impact of exchange rate movements on profit before exceptional items and taxation for the second half will be broadly in line with the first half figures. Associates The group's share of profits of associates before exceptional items was £121 million for the period compared with £111 million for the same period last year, an organic growth of 13%. Goodwill Goodwill amortisation in the year was £7 million, mainly in respect of the Packaged Food acquisitions last year. Exceptional items Exceptional items in the six month period amounted to a total charge before taxation of £325 million, with a net cash inflow of approximately £200 million. The disposals of four European drinks brands resulted in a charge of £244 million, of which £222 million was in respect of goodwill previously written off. The operating cost charge of £79 million comprised £45 million of merger integration charges and a provision for £34 million litigation damages. The damages were awarded by an Australian court in a legal dispute with Burger King's Australian franchisee, Hungry Jack's Pty Ltd; a notice of appeal has been filed and the appeal hearing is set for November 2000. Interest The interest charge in the period increased to £185 million from £159 million in the comparable period. Funding the various share repurchases cost £37 million, partly offset by a £14 million benefit in respect of the disposal of businesses. Taxation The effective rate of taxation on profit before exceptional items for the period was 26.2%, the same as the rate for the six months ended 31 December 1998. The charge is based on an estimate of the effective tax rate for the financial year as a whole. Dividend Diageo will pay an interim dividend of 8.4 pence per share on 13 April 2000, an increase of 8% on last year's interim dividend. Payment to US ADR holders will be made on 20 April 2000. The record date for this dividend will be 10 March 2000. A dividend reinvestment plan is available in respect of this dividend and the plan notice date will be 23 March 2000. Cash flow Free cash inflow was £416 million, compared with an outflow in the prior period of £73 million. Cash inflow from operating activities was £929 million compared with £753 million last year. This inflow was after £53 million of integration costs and a £319 million increase in working capital mainly due to seasonal factors. Net interest payments were £182 million against £239 million in the comparable period (which included the cost of closing out certain long dated financial instruments in August 1998). Purchases of tangible fixed assets in the period amounted to £252 million, an increase of £38 million. Tax payments were £78 million compared with £361 million. The sale of businesses generated £240 million, which was partly offset by acquisitions costing £56 million. 9.5 million ordinary shares were purchased for cancellation in the period at a cost of £54 million, compared with 10.5 million at a cost of £59 million in the same period last year. Balance sheet At 31 December 1999, total shareholders' funds were £4,330 million compared with £4,026 million at 30 June 1999. The principal reasons for the increase reflect £155 million retained income for the period and the reversal of the £222 million goodwill charged to the profit and loss account on disposals. Net borrowings were £5,741 million, a decrease of £315 million from 30 June 1999. This decrease reflects the free cash inflow of £416 million noted above, net receipts from sales/purchases of businesses of £184 million and reductions due to exchange movements of £175 million, partly offset by dividends paid of £398 million and own share purchases of £54 million. Year 2000 Following the completion of the group's Year 2000 systems compliance programmes, a process was set up to monitor and communicate any Year 2000 compliance failures experienced by the businesses over the millennium weekend and subsequently. No major incidents have arisen, though a small number of non-critical issues were reported which were quickly resolved either through technical solutions or by the implementation of a manual workaround. The cost to the group of managing the Year 2000 problem has been £60 million. Diageo's interim statement will be sent to all shareholders. Copies of the group's results presentation to be made to analysts and investors are available upon request. The interim statement and the presentation will be on the Diageo web site www.diageo.com from 9.30am on 24 February 2000. Investor enquiries Catherine James 020 7927 5272 to: Investor.rel@diageo.com Media enquiries to: Kathryn Partridge 020 7927 5225 Media@diageo.com MORE TO FOLLOW IR ILFETFRIVFII

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