Preliminary Results
Diageo PLC
30 August 2007
Preliminary results for the year ended 30 June 2007
Diageo reports continued strong growth in the year with organic top line growth
of 7.3%, operating profit growth of 8.7% and underlying eps growth of 13%.
Guidance is for increased organic operating profit growth in 2008 of 9%.
Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2007
said:
'Diageo's focus on proven brand and market building strategies has again
delivered strong growth in top and bottom line and strong cash flow.
'In North America we outperformed the US spirits market for the third
consecutive year. In Europe we improved performance in the second half and
increased our investment in the growth drivers by brand and market. In
International strong performance by our beer brands and the investment we made
behind our Scotch brands delivered another year of excellent growth. In Asia
Pacific we grew in all markets, gained share in our key markets and improved
performance in the second half.
'Our world leading brands, Johnnie Walker, Smirnoff, Baileys and Guinness along
with Captain Morgan and Buchanan's were the strongest performing brands this
year. Johnnie Walker enhanced its position as the world's leading Scotch whisky
and now sells over 15 million cases. Smirnoff reinforced its position as the
world's number one premium spirits brand and Baileys grew strongly, supported by
the successful launch of the new Baileys flavours. Guinness grew despite the
impact of weak beer markets in Great Britain and Ireland as a result of double
digit growth in International on the back of the Guinness Greatness campaign in
Africa. Captain Morgan is primarily a North American brand but strong
performance in Europe delivered 10% of the brand's growth this year. Finally
Buchanan's delivered excellent growth as the brand continued to gain share in
the fast growing Scotch markets of Latin America.
'Together these regional and brand performances have driven top line growth of
7.3%. Operating margin expansion of 40 basis points resulted in operating profit
growth of 8.7%. Another year of strong cash flow enabled us to return a further
£2.3 billion to shareholders through dividends and our share buyback programme.
'Whilst we watch for any impact the current volatility in financial markets may
have on broader trading conditions, the investments we have made in brands and
markets this year have created an even stronger platform for the future.
Therefore we currently expect increased organic operating profit growth in 2008
of 9%'.
Results at a glance
Reported Organic
2007 2006 movement movement
Volume in millions of equivalent units 141.3 133.8 6% 5%
Net sales £ million 7,481 7,260 3% 7%
Operating profit £ million 2,159 2,044 6% 9%
Profit attributable to parent company's
equity shareholders * £ million 1,489 1,908 (22)%
Basic eps * pence 55.4 67.2 (18)% 13%
* For year ended 30 June 2007 tax rate 32%. For year ended 30 June 2006 tax rate
8%.
• Marketing spend increased by a further 8%
• Operating profit includes a gain of £40 million in respect of exceptional
items
• Using an underlying effective tax rate of 25% eps before exceptional items
increased from 50.5 pence in 2006 to 54.8 pence in 2007, which adjusted for
exchange is a 13% increase
• Return on invested capital increased 70 basis points to 14.4%
• Strong free cash flow of £1,365 million
• Recommended full year dividend per share increase of 5% to 32.7 pence
• £2.3 billion returned to shareholders: £858 million in dividends and
£1,400 million of share buybacks
Unless otherwise stated in this announcement: net sales are sales after
deducting excise duties; percentage movements are organic movements; commentary
refers to organic movements and share refers to volume share. See page 31 for
additional information for shareholders and an explanation of non-GAAP measures
including the reconciliation of basic eps as reported to underlying basic eps.
Regional summary
North America - Focus on priority brands delivered strong top line growth and
operating margin improvement
• Volume up 3%
• Net sales up 7%
• Marketing spend up 5%
• Operating profit up 12%
North America delivered strong top and bottom line growth driven by the priority
brands. Volume growth of spirits was 3%, wine 6% and beer 7%. Price increases
on approximately 50% of the volume together with mix improvements resulted in
net sales for spirits, wine and beer all up 8% while ready to drink net sales,
from a 6% decline in volume, were down only 1%. Smirnoff vodka and Baileys each
delivered double digit net sales growth. Diageo's value share of the distilled
spirits market in the United States grew 0.6 percentage points during fiscal
2007.
Europe - Continued growth in Continental Europe supported by strong second half
performance in Russia, Great Britain and Ireland
• Volume down 2%
• Net sales flat
• Marketing spend up 1%
• Operating profit flat
In Europe strong growth in Continental Europe and Russia from Baileys, Johnnie
Walker and Smirnoff vodka partially offset the first half net sales decline in
Great Britain, Ireland and Spain. In the second half all three of these markets
delivered net sales growth: in Great Britain Smirnoff vodka and Baileys both
grew net sales over 10%; in Ireland the improved performance of the lager brands
drove growth and in Spain Johnnie Walker grew net sales 19%.
International - Continued strong performance of Diageo's Scotch and beer brands
delivered top line growth
• Volume up 16%
• Net sales up 18%
• Marketing spend up 17%
• Operating profit up 19%
International delivered strong growth throughout the region. Diageo's Scotch
brands continued to be the main driver of growth, especially Johnnie Walker with
net sales up 18% and Buchanan's with net sales up 40%. The growth of Diageo's
beer brands in Africa accelerated in the second half fuelled by a new Guinness
campaign. The launch of Baileys flavours contributed to an increase of 21% in
net sales for the Baileys brand. In ready to drink net sales were up 19% led by
Smirnoff Storm in South Africa and Smirnoff Ice in Nigeria and Brazil.
Asia Pacific - Top line growth accelerated in the second half driving improved
operating margin leverage
• Volume up 12%
• Net sales up 13%
• Marketing spend up 22%
• Operating profit up 7%
In Asia Pacific top line growth accelerated in the second half as marketing
spend was increased behind new brand launches in India and in the fast growing
markets of Southeast Asia. Johnnie Walker, Diageo's largest brand in the
region, was the biggest growth driver with further strong net sales growth of
22%. While Korea, China and India continue to be the key growth engines for the
region, performance was broad based as every market delivered net sales growth.
In the second half net sales growth was 17%, driven by Johnnie Walker which grew
net sales 32%. Korea, Thailand and India all improved performance in the second
half.
Financial
• The deficit in respect of post employment plans reduced by £382
million from £801 million at 30 June 2006 to £419 million at 30 June 2007. In
the year ending 30 June 2008, finance income under IAS 19 is expected to be £47
million, broadly in line with the benefit in the year ended 30 June 2007.
• In the year ended 30 June 2007, exchange rate movements reduced
operating profit by £91 million and the net interest charge by £11 million.
• In the year ending 30 June 2008, at current exchange rates, foreign
exchange movements (excluding the exchange impact of re-translating
inter-company balances under IAS 21) are forecast to reduce operating profit by
£65 million and reduce the interest charge by approximately £5 million.
Brand performance summary
Reported Organic Reported Organic
volume volume net sales net sales
movement movement movement movement
% % % %
Global priority brands 6 6 3 7
Local priority brands 4 3 3 7
Category brands 7 6 4 8
Total 6 5 3 7
Key spirits brands*:
Smirnoff vodka 6 6 4 9
Johnnie Walker 14 14 13 16
Captain Morgan 7 7 2 10
Baileys 7 7 6 10
J&B (2) (2) (3) (1)
Jose Cuervo 2 2 (4) 3
Tanqueray 6 6 3 10
Crown Royal - North America 5 5 1 9
Buchanan's - International 41 41 53 40
Windsor - Asia Pacific 15 15 12 15
Guinness 2 2 - 3
Ready to drink (1) (1) (5) -
* Spirits brands excluding ready to drink.
Throughout this announcement certain brands formerly treated as local priority
brands have now been reclassified as category brands and vice versa, to reflect
the change in contribution of these brands in individual countries. All
comparative figures have been restated. See page 32 for additional information
regarding these changes. Ready to drink includes all ready to drink brands.
The global priority brands represent 60% of volume and were the main driver of
top line growth with volume up 6% and net sales up 7%. The growth was driven by
the performance of Johnnie Walker, Smirnoff, Baileys and Captain Morgan across a
number of regions. These are the world's leading brands and this volume growth
represents some huge increases in case volume. Smirnoff, for example, grew by
over a million cases while Johnnie Walker grew by almost two million cases in
the year.
Johnnie Walker volume is now over 15 million cases and the brand extended its
position further as the world's leading Scotch with growth around the globe.
Smirnoff vodka volume was up 6% to 23.2 million cases with growth in each region
but particularly in North America which accounts for over 40% of total Smirnoff
net sales. Net sales grew 9% as a result of price increases in many markets.
Growth of Baileys was driven by the launch of Baileys flavours with particularly
strong performances in North America and International.
While Captain Morgan is primarily a North American brand, it also grew strongly
in Europe.
Outstanding performance of Guinness in International with net sales up 15% and
growth in North America offset the decline in the tough beer markets of Great
Britain and Ireland.
The local priority brands were the biggest driver of overall price and mix
improvement in the year. Crown Royal in North America, Buchanan's in
International and Windsor in Asia Pacific all grew strongly and contributed
significantly to this improvement.
Category brands performance was driven by Diageo's other Scotch brands, as well
as the high value reserve brands.
The overall performance of ready to drink was driven by the continued decline of
the category in Europe offset by strong growth in International.
Interim management statements
As a result of the introduction of the EU Transparency Directive Diageo will be
required to publish interim management statements from the financial year
beginning 1 July 2007.
The interim results announcement and the preliminary results announcement will
form two of the interim management statements. Two further statements are
required, one in the period from mid September to mid November and another in
the period from mid March to mid May. In order to satisfy the first of these
requirements Diageo will continue to issue a trading update at the time of the
AGM in October. In order to satisfy the second Diageo will issue a trading
update in mid May and therefore will discontinue the trading update in late
June.
BUSINESS REVIEW
For the year ended 30 June 2007
OPERATING REVIEW
Analysis by region
North America
Summary:
• Price increases and mix improvements drove top line growth
• Smirnoff vodka and Baileys each delivered double digit net sales
growth and further share gains
• Value share of the US spirits market was up 0.6 percentage points
• Operating margin improved in organic terms by 1.6 percentage points
Key measures: Reported Organic
2007 2006 movement Movement
£ million £ million % %
Volume 3 3
Net sales 2,472 2,510 (2) 7
Marketing spend 364 384 (5) 5
Operating profit 850 829 3 12
Reported performance:
Net sales were £2,472 million in the year ended 30 June 2007 down by £38 million
from £2,510 million in the prior year. Reported operating profit increased by
£21 million to £850 million in the year ended 30 June 2007.
Organic performance:
The weighted average exchange rate used to translate US dollar sales and profit
moved from £1 = $1.78 in the year ended 30 June 2006 to £1 = $1.93 in the year
ended 30 June 2007. Exchange rate impacts decreased net sales by £190 million.
Acquisitions increased net sales by £1 million and there was an organic increase
of £151 million. Exchange rate impacts reduced operating profit by £69 million
and transfers of costs between regions reduced operating profit by £3 million.
There was an organic increase in operating profit of £93 million.
Brand performance: Reported Organic Reported net Organic
volume volume sales movement net sales
movement movement movement
% % % %
Global priority brands 4 4 (2) 7
Local priority brands 3 3 (2) 8
Category brands (2) (2) (1) 5
Total 3 3 (1) 7
Key spirits brands:
Smirnoff vodka 5 5 2 10
Johnnie Walker 5 5 (2) 7
Captain Morgan 6 6 1 9
Baileys 20 20 13 22
Jose Cuervo 1 1 (5) 3
Tanqueray 6 6 1 9
Crown Royal 5 5 1 9
Guinness 4 4 (1) 7
Ready to drink (6) (6) (8) (1)
Price increases and mix improvement drove performance in North America as top
line growth was achieved across spirits, wine and beer.
Smirnoff vodka had another strong year with volume up 5% and net sales up 10% as
price increases have been implemented. Smirnoff continued to benefit from the '
Clearly Smirnoff' campaign and gained 0.2 percentage points of value share.
Johnnie Walker volume was up 5% and stronger growth of Johnnie Walker Black
Label together with price increases on Johnnie Walker Black Label led to net
sales growth of 7%. Share was up 2.0 percentage points on a value basis with
gains on both Johnnie Walker Red Label and Johnnie Walker Black Label.
New television advertising campaigns and successful on trade marketing
programmes increased brand awareness and recruited new consumers to Captain
Morgan resulting in share gains of 1.5 percentage points on a value basis.
Volume was up 6% and price increases on Captain Morgan Original Spiced Rum were
implemented, driving net sales growth of 9%.
Baileys had an outstanding year with volume up 20% and net sales up 22%. This
was driven by the national launch of Baileys flavours and by continued growth of
the core brand.
Jose Cuervo delivered 1% volume growth and 3% net sales growth. Investment has
been focused around the super premium labels as this is the segment that is
driving category growth. As a result these grew by 20%, albeit off a small base.
Tanqueray grew volume 6% and net sales 9%, gaining 0.9 percentage points of
value share in a declining category. This was driven by increased media
investment behind the 'Are You Ready to Tanqueray' campaign and the introduction
of Tanqueray Rangpur which was launched nationally in the second half.
Local priority brand volume increased 3% and net sales increased 8%. Growth of
Crown Royal and US wines were partially offset by a small decline in Seagram's
VO. US wines grew net sales 8% driven by strong growth of the Chalone wines.
Crown Royal volume increased 5% as the NASCAR team sponsorship was up-weighted
for the 2006 season and the brand returned to being advertised on television in
December following two years of limited presence. Price increases were
implemented on approximately 40% of volume and this, combined with the positive
performance of the luxury Crown Royal Extra Rare, drove net sales growth of 9%.
Volume in the category brands declined 2%. Growth of beer and reserve brands
led to mix improvement and net sales grew 5%.
Guinness volume grew 4%, with net sales up 7% as a result of a national price
increase on the brand. Increased marketing activity was focused on Guinness
Draught in Bottle leading to distribution gains and increased levels of
visibility in retail. Additionally, marketing spend on TV media was up.
Ready to drink volume declined 6% whilst net sales were down 1% as a result of
price increases and mix improvement. While Smirnoff ready to drink volume
declined, innovation delivered mix improvements with the introduction of new
Smirnoff Ice flavours and Smirnoff Raw Tea. The continued growth of Parrot Bay
Tropical Malt Beverages and Jose Cuervo Golden Margaritas also contributed to
this.
Europe
Summary:
• Overall performance improved in the second half, with volume growth of
3% and net sales growth of 4%
• Great Britain, Ireland and Spain all delivered net sales growth in the
second half
• In Russia Johnnie Walker and Baileys were the key drivers of very
strong growth
• Focus on premiumisation in growing categories in Continental Europe
Key measures: Reported Organic
2007 2006 movement movement
£ million £ million % %
Volume (1) (2)
Net sales 2,427 2,455 (1) -
Marketing spend 391 389 1 1
Operating profit 723 737 (2) -
Reported performance:
Net sales were £2,427 million in the year ended 30 June 2007 down by £28 million
from £2,455 million in the prior year. Reported operating profit decreased by
£14 million to £723 million in the year ended 30 June 2007.
Organic performance:
The weighted average exchange rate used to translate euro sales and profit moved
from £1 = €1.46 in the year ended 30 June 2006 to £1 = €1.48 in the year ended
30 June 2007. Exchange rate impacts reduced net sales by £23 million.
Acquisitions increased net sales by £6 million, disposals decreased net sales by
£17 million and there was an organic increase of £6 million. Exchange rate
impacts reduced operating profit by £10 million. Acquisitions decreased
operating profit by £1 million, disposals decreased operating profit by £2
million and there was an organic decrease in operating profit of £1 million.
Brand performance: Reported Organic Reported net Organic
volume volume sales movement net sales
movement movement movement
% % % %
Global priority brands (1) (1) (1) -
Local priority brands (6) (6) (3) (2)
Category brands 3 1 (1) 2
Total (1) (2) (1) -
Key spirits brands:
Smirnoff vodka 2 2 3 4
Johnnie Walker 4 4 11 12
Baileys (2) (2) 1 2
J&B (4) (4) (3) (2)
Guinness (6) (6) (5) (4)
Ready to drink (12) (12) (14) (12)
Global priority brand volume declined 1% and net sales were flat as the decline
of Smirnoff ready to drink and of Guinness was offset by strong growth of
Johnnie Walker. Performance in the global priority brands significantly improved
during the second half with volume up 3% and net sales up 4%.
Smirnoff vodka volume increased 2% while net sales increased 4% following price
increases in Ireland and benefiting from the premiumisation strategy in
Continental Europe which focused on building the brand credentials of Smirnoff
Red and Smirnoff Black. With significant improvement in Great Britain, volume in
the second half grew 6% and net sales grew 8%.
Johnnie Walker volume was up 4% and net sales increased 12%. Volume growth was
driven largely from Johnnie Walker Black Label in Greece and Poland and Johnnie
Walker Red Label in Russia, Poland, Bulgaria and the Balkans. Net sales growth
was the result of price increases, up-weighted investment and a premiumisation
strategy in Russia, Greece and Iberia. Volume and net sales further improved in
the second half, with growth of 11% and 24% respectively.
While Baileys volume declined 2%, net sales increased 2%. This was driven by
action taken in Great Britain in the first half to increase net sales per case
and higher net sales per case in Russia as a result of the move to an in market
company. Strong volume performance in Continental Europe and Russia and the
launch of Baileys flavours partially offset the decline in Great Britain. Both
volume and net sales growth across Europe improved during the second half as
volume increased 13% and net sales increased 17%.
J&B volume declined 4% and net sales declined 2%, primarily driven by the
continued decline of the Scotch category in Spain. This was partially offset by
growth in France and Eastern Europe.
Guinness volume declined 6% driven by the continued trend from on to off trade.
Price increases were taken during the year and net sales declined 4%.
Total ready to drink volume and net sales declined 12%, primarily driven by
Smirnoff Ice in Great Britain, Germany and France.
Local priority brand performance was impacted by the decline of Gordon's and
Bell's in Great Britain, as a result of the Christmas pricing strategy to
increase net sales value to the trade and by a decline in Cacique in Spain. This
led to volume down 6% and net sales down 2%.
Category brand volume increased 1% and net sales increased 2%, driven by gains
in Pimm's and Blossom Hill.
Great Britain
In the full year volume and net sales both declined 5%. This reflects decline in
the first half partially offset by growth in the second half. As a result of a
more focused strategy on core spirits during the second half, spirits accounted
for a greater proportion of total net sales and the proportion of ready to drink
and beer fell. This resulted in second half volume growth of 6% ahead of net
sales growth of 1%.
Smirnoff vodka volume declined 1% but net sales increased 1% as a result of
price increases. In the second half, a combination of focus on sales execution
and brand building initiatives resulted in volume up 10% and net sales up 11%.
Baileys volume declined 25% and net sales declined 21% as a result of the
Christmas pricing strategy to increase net sales per case to the off trade. In
the second half net sales were up 12% as a result of increased promotions.
Guinness volume declined 5% while a price increase in February 2007 moderated
the net sales decline to 3%. This was broadly in line with the performance of
the beer market in the United Kingdom. However, positive consumer reaction to a
new advertising campaign meant that Guinness gained share in the on trade and is
now the number four beer in Great Britain.
Local priority brand volume declined 9% and net sales declined 8%, driven by
Gordon's and Bell's. Performance significantly improved during the second half
with a 10% volume and 6% net sales increase.
Category brand volume increased 4% while net sales were flat as growth in Pimm's
and Blossom Hill offset declines in Piat d'Or.
Smirnoff ready to drink net sales declined 14% in line with the segment.
Ireland
The key driver in Ireland continues to be the trend from the on to the off
trade. For the full year, volume was down 2% and net sales were down 1%. While
net sales of beer declined 2%, spirits and wines outperformed in both the on and
off trade with 4% and 7% net sales growth respectively. Smirnoff vodka grew net
sales 7% and Baileys net sales increased 2%. In wine, Blossom Hill increased
net sales by 37%, albeit off a small base.
Guinness volume declined 9% and net sales declined 7%. The second half
performance improved following increased marketing and net sales declined by 5%.
Net sales of the lager brands grew 3% driven by Budweiser with the support of
the successful launch of Bud Light.
Iberia
Volume declined 7% and net sales declined 2%. This was primarily driven by
Spain, where performance was impacted by a declining Scotch category combined
with changes in consumer behaviour following new legislation that increased
drink driving penalties. Price increases across both Spain and Portugal
partially offset the impact of the volume decline.
J&B volume declined 8% and net sales declined 3%. In the second half,
volume and share performance improved as a result of investment in the off trade
and price increases were implemented. This combined with growth in J&B
Reserve led to price mix improvement.
Price increases contributed to Johnnie Walker net sales growth of 4% while stock
level reduction led to a volume decline of 2%. The brand outperformed the Scotch
category in Spain with Johnnie Walker Red Label the only whisky brand growing
within the standard segment. Johnnie Walker Black Label became the number one
deluxe whisky in Spain with share growth of 4.2 percentage points.
Local priority brand volume declined 10%, primarily driven by lower volume in
Cacique down 8%. Growth in premium variants and Cacique 500 and Cacique Origen,
which both gained share, combined with price increases, did improve mix and net
sales were down 3%.
Category brand volume was down 9% primarily because of the decline in low priced
Scotch brands. Mix improvement was delivered as Diageo's malt whisky brands grew
strongly, albeit off a small base and net sales declined 3%.
Rest of Europe
In Continental Europe focus on premiumisation with the relaunch of Smirnoff
Black, reallocation of spending toward key brands and innovation with Baileys
flavours drove volume up 4% and net sales up 5%.
In France volume increased 6% and net sales increased 2%. In a competitive
market, promotional activity for priority brands such as Baileys, Smirnoff and
Johnnie Walker increased.
In Greece total industry spirit sales declined 2%, driven by a decline in the
off trade of 5%. In addition, the port strike during the first half and a
decline in Ursus caused volume to decline 4%. Net sales were flat however as a
result of a premiumisation strategy and price increases across all categories.
Diageo continues to be the leader in whisky, with Johnnie Walker Red Label
leading both the on and off trade. Net sales performance in Johnnie Walker Black
Label, Tanqueray and Cardhu were also strong, with increases of 25%, 39% and 14%
respectively.
In Eastern Europe total volume increased 13% driven by Johnnie Walker Red Label,
Johnnie Walker Black Label, J&B and Baileys. Net sales grew 16% as a
result of premiumisation, in particular the strong growth of Johnnie Walker
Black Label and new routes to market.
In Russia volume grew 25% and net sales grew 63%. The move from a distributor to
a newly created in-market company in July 2006 drove an increase in net sales
per case. Following this move Diageo's regional presence increased to cover 74
cities in Russia and marketing spend increased behind Johnnie Walker Red Label,
Baileys and Captain Morgan. The newly acquired Smirnov brand has shown a
promising start.
International
Summary:
• Strong growth delivered throughout the region
• Diageo's Scotch brands, especially Johnnie Walker and Buchanan's, were
key drivers of net sales growth
• Guinness grew net sales 15% led by strong growth across all major
markets in Africa
• Baileys grew net sales 21% driven by the launch of Baileys flavours
• Global Travel and Middle East grew net sales 8% despite difficult
trading conditions
Reported Organic
Key measures: 2007 2006 movement movement
£ million £ million % %
Volume 16 16
Net sales 1,667 1,456 14 18
Marketing spend 208 183 14 17
Operating profit 499 445 12 19
Reported performance:
Net sales were £1,667 million in the year ended 30 June 2007 up by £211 million
from £1,456 million in the prior year. Reported operating profit increased by
£54 million to £499 million in the year ended 30 June 2007.
Organic performance:
Exchange rate impacts reduced net sales by £46 million. There was an organic
increase in net sales of £257 million. Exchange rate impacts reduced operating
profit by £20 million and transfers of costs between regions reduced operating
profit by £5 million. There was an organic increase in operating profit of £79
million.
Brand performance: Reported Organic Reported net Organic
volume volume sales movement net sales
movement movement movement
% % % %
Global priority brands 15 15 12 17
Local priority brands 19 15 22 24
Category brands 18 18 14 16
Total 16 16 15 18
Key spirits brands:
Smirnoff vodka 11 11 8 17
Johnnie Walker 17 16 18 18
Baileys 19 19 19 21
Buchanan's 41 41 53 40
Guinness 13 13 7 15
Ready to drink 22 22 8 19
Global priority brands achieved strong growth with Guinness net sales up 17% in
Africa and Johnnie Walker and Baileys delivering double-digit net sales growth
across most markets. Smirnoff vodka also performed strongly with Brazil the key
driver.
Johnnie Walker continued to demonstrate the success of its global campaign with
volume up 16% and net sales up 18%, benefiting from increased marketing
investment especially in Latin America and South Africa. Johnnie Walker's Grand
Prix team sponsorship continues to be a powerful platform to drive brand equity
and deliver Diageo's responsible drinking messages.
Guinness delivered strong growth throughout Africa. Growth accelerated in the
second half as the new Guinness Greatness campaign was rolled out. The brand
responded well to increased investment especially in Nigeria, the biggest market
for Guinness in International, which accounts for 50% of the volume in Africa.
Baileys delivered net sales growth in Latin America and Global Travel and Middle
East with Baileys flavours helping to drive the increase.
Performance of the local priority brands was driven by Buchanan's. Malta
Guinness also performed strongly in Nigeria and Ghana with net sales up 14% and
25% respectively, while Tusker grew net sales across East Africa.
Old Parr in Latin America and beer brands, especially Senator in East Africa,
drove growth of category brands.
Ready to drink volume grew 22% and net sales grew 19%. Growth was driven by
Smirnoff Storm, which continued to grow share in the segment in South Africa and
the launch of Smirnoff Ice in Nigeria and Ghana. Smirnoff Ice also continued to
perform well in Brazil.
Africa
Volume in Africa grew 17% with net sales up 19% as a result of price increases
in Ghana and Nigeria and mix improvement in South Africa. Guinness, Senator,
Johnnie Walker Black Label and Smirnoff ready to drink were the main drivers of
growth.
Volume in Nigeria was up 10% as a result of strong growth in a relatively stable
economy. Net sales were up 16% as a price increase was implemented on Guinness.
Investment behind the Guinness Greatness campaign drove Guinness net sales up
18%. Malta Guinness net sales grew 14%.
In East Africa volume was up 27% and net sales up 25%. Senator grew net sales
55%, benefiting from the government's zero-rated tax on non-malt beer in Kenya
that allowed it to compete in the huge low value alcohol segment. Guinness net
sales were up 32% due to the success of the Guinness Greatness campaign and net
sales of Tusker and Pilsner were up 15% and 18% respectively.
In South Africa net sales were up 23% on volume growth of 15%. Mix improvement
was delivered as a result of the growth in Smirnoff ready to drink, which grew
net sales 40% and Diageo's Scotch brands, which grew ahead of the category.
Johnnie Walker led this growth with net sales up 44%. Price increases were
implemented across all key brands during the year.
Volume in Ghana was up 3% and net sales up 16% as a result of growth in Malta
Guinness and Guinness and price increases taken in the year.
In Cameroon trading improved following a substantial decline in volume in the
prior year. Volume was up 10% as Guinness performed strongly and gained 1.4
percentage points of share. Net sales growth up 2% was held back primarily as a
result of a change to third party distribution.
Latin America and Caribbean
Strong growth was delivered in Latin America and Caribbean throughout the year
with volume up 18% and net sales up 22%. Diageo's Scotch brands continued to
drive this growth, especially Johnnie Walker and Buchanan's. Smirnoff and
Baileys also delivered strongly across the region with net sales up 29% and 32%
respectively.
In Venezuela Diageo leads the growing Scotch category and made further share
gains, with share up 0.7 percentage points in the super deluxe Scotch segment
and 2.3 percentage points in the standard Scotch segment.
In Paraguay, Uruguay and Brazil net sales grew 21%. New advertising campaigns
and a broadening of distribution outside of key cities drove growth in Johnnie
Walker with net sales up 19%. Price increases were successfully implemented on
Smirnoff vodka and net sales grew 31% on volume growth of 18%. Smirnoff vodka
is driving growth in the premium vodka segment. Smirnoff ready to drink also
performed well as net sales grew 25%.
In Mexico volume was up 5% and net sales up 9% as Diageo gained share in the
Scotch and liqueurs categories. While Diageo gained share across each Scotch
segment, super deluxe Scotch is the fastest growing segment in the category and
Diageo gained 2.0 percentage points of share. In liqueurs Baileys volume
increased 21% following the launch of Baileys flavours in May 2007.
Global Travel and Middle East
Volume was up 7% and net sales up 8% despite the difficult trading conditions
resulting from conflicts in the Middle East and travel security issues
worldwide. Diageo's Scotch brands were key to this growth. Johnnie Walker Black
Label performed strongly with net sales up 8% as the premium status of the brand
was enhanced through promotional activities such as the golf gift pack in Asia
around the Johnnie Walker Classic golf tournament. The Johnnie Walker super
deluxe labels also continued their strong performance. Baileys grew net sales
11% mainly driven by the global roll out of Baileys flavours.
Asia Pacific
Summary:
• All markets contributed to top line sales growth
• Excellent growth of Johnnie Walker drove overall performance
• Sales growth accelerated in the second half
• Share gains delivered in key categories across a number of markets
Reported Organic
Key measures: 2007 2006 movement movement
£ million £ million % %
Volume 12 12
Net sales 840 763 10 13
Marketing spend 199 171 16 22
Operating profit 196 199 (2) 7
Reported performance:
Net sales were £840 million in the year ended 30 June 2007 up by £77 million
from £763 million in the prior year. Reported operating profit decreased by £3
million to £196 million in the year ended 30 June 2007.
Organic performance:
Exchange rate impacts reduced net sales by £21 million. There was an organic
increase in net sales of £98 million. Exchange impacts reduced operating profit
by £6 million and transfers of costs between regions reduced operating profit by
£9 million. There was an organic increase in operating profit of £12 million.
Brand performance: Reported Organic Reported net Organic
volume volume sales movement net sales
movement movement movement
% % % %
Global priority brands 18 18 14 17
Local priority brands 4 4 3 6
Category brands 4 4 10 14
Total 12 12 10 13
Key spirits brands:
Smirnoff vodka 23 23 25 31
Johnnie Walker 25 25 19 22
Windsor 15 15 12 15
Guinness (5) (5) 5 5
Ready to drink 3 3 1 5
Global priority brands drove overall performance. Johnnie Walker which is
Diageo's largest brand in Asia Pacific, representing nearly a third of net
sales, drove approximately 50% of the net sales growth in the region.
Smirnoff volume grew 23% responding well to increased marketing investment.
Price increases were also implemented in a number of markets and as a result net
sales grew 31%. Growth was driven by India and Australia as Smirnoff Experience
events, promotions and in the case of Australia, the 'Clearly Smirnoff' media
campaign, increased brand awareness.
Johnnie Walker growth accelerated over last year as a result of brand building
marketing, aligned to Johnnie Walker's Grand Prix team sponsorship, mentoring
and PR events. Johnnie Walker Red Label grew net sales over 50% in Thailand and
in China net sales of Johnnie Walker Black Label continued to grow strongly.
Guinness performance was the result of a strategy to drive value. Net sales
increased 5% as price increases and the repatriation of Guinness from a third
party distributor in Korea offset a volume decline of 5%.
Local priority brands grew volume 4% and net sales 6% primarily as a result of
growth in Windsor in Korea.
Significant mix improvement was delivered in category brands with volume up 4%
and net sales up 14%. This was primarily driven by the growth of Benmore in
Thailand offsetting declines in the lower priced Spey Royal and Golden Knight.
Ready to drink volume increased 3% and net sales increased 5%, driven by
Smirnoff Ice in Japan which was re-launched in fiscal 2006. In Australia, a
decline in Bundaberg ready to drink was offset by new brand launches.
Marketing spend in Asia Pacific increased 22%. This growth was driven by
investments made in the high growth potential markets such as India and China,
although the rate of growth in marketing spend in China has now moderated
following the significant upweight in fiscal 2005 and 2006. The growth in
marketing was targeted behind priority brands such as Johnnie Walker and
Smirnoff vodka and behind the launch of new brands in India.
In Australia volume increased 3% and net sales grew 4%. In ready to drink net
sales grew 1% as a net sales decline in Bundaberg of 4% was offset by growth in
both Johnnie Walker and Smirnoff ready to drink variants, with net sales up 12%
and 5% respectively. Johnnie Walker and Smirnoff net sales growth was driven by
new line extensions and formats. In spirits Diageo outperformed the spirits
category. Smirnoff vodka grew volume 15% as a result of media investment behind
the 'Clearly Smirnoff' campaign and price increases led to net sales growth of
22%. Johnnie Walker's cricket sponsorship and a new advertising campaign led to
volume up 8%. Net sales were up 11% as a price increase was implemented on
Johnnie Walker Red Label.
In Korea volume increased 8% and net sales were up 13%. Windsor continued to
perform strongly, driving overall performance as net sales grew 15%. Diageo has
outperformed the growing whisky category and therefore extended its leadership
position with Windsor now the number one Scotch brand in Korea. Positive brand
mix was delivered as the growth of Windsor more than offset the decline of
Dimple and this, combined with price increases and the repatriation of Guinness
from a third party distributor, drove net sales growth ahead of volume growth.
During the year Diageo Korea and several employees were subject to
investigations regarding various regulatory and control matters, some of which
are continuing. Since the year end, Diageo Korea's import licence has been
cancelled by the National Tax Service after one of these investigations found a
number of Diageo salesmen were involved in sales to unlicensed wholesalers.
Therefore, from the end of July 2007 Diageo has operated through a third party
distributor.
In Japan volume declined 1%, while net sales grew 8%. Volume performance
continued to be impacted by the decline in the Scotch category while the growth
of Smirnoff Ice following the re-launch drove mix improvement. Although share
has been lost in the standard and deluxe segments, Diageo has focused investment
on the super deluxe brands and delivered growth significantly ahead of the
segment.
In Thailand while the whisky category declined, Diageo continued to outperform.
Volume was up 4% and net sales were significantly ahead, up 21%, driven by
Diageo's strategy to drive mix improvement and a reduction in excise duties on
certain brands. Diageo leads across premium, deluxe and super deluxe Scotch
segments and has increased its value share of the overall category by 5.4
percentage points. Johnnie Walker Black Label gained further share in the deluxe
segment whilst Johnnie Walker Red Label drove the growth in the premium whisky
segment, with net sales up 54%. In the standard segment, mix improvement has
been achieved through focus on Benmore in preference to the lower priced Spey
Royal. Volume of Spey Royal therefore declined as did volume of Golden Knight in
the economy segment.
In China volume grew 41% and net sales grew 61% as Johnnie Walker Black Label
continued to take share. In January 2007 Diageo made its first investment in the
Chinese white spirits category through a minority stake in Sichuan Chengdu
Quanxing Group Co. Ltd.
In Taiwan while the overall Scotch category is in decline, the deluxe segments
are in growth. Diageo's focus on the Johnnie Walker deluxe labels has resulted
in volume up 1% and net sales up 4%.
In India Johnnie Walker is the leading Scotch and continued to lead the growth
of the category with volume up 30%, led by Johnnie Walker Black Label, up 41%.
In the year Diageo took steps to widen its participation both within and across
categories, launching a number of new brands. Haig was introduced to compete in
the premium whisky segment and the joint venture with Radico Khaitan launched
its first new whisky brand, Masterstroke, into the Indian made foreign liquor
segment. In the vodka category Smirnoff continued to gain share with volume up
37%, whilst Shark Tooth vodka was introduced into the prestige vodka segment and
performed well on launch. The introduction of these new brands resulted in a
dilution of mix, however net sales still grew 36% on volume growth of 44%.
Corporate revenue and costs
Net sales were £75 million in the year ended 30 June 2007, down by £1 million
from £76 million in the prior year.
Net operating costs were £109 million, down from £166 million in the prior year.
£40 million of this decrease relates to the exceptional gain on the sale of the
Park Royal land in the United Kingdom. Excluding this exceptional gain, net
operating costs decreased £17 million as a result of transfer of costs to the
regions and there was an underlying reduction in net operating costs of £4
million.
FINANCIAL REVIEW
Condensed consolidated income statement
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Sales 9,917 9,704
Excise duties (2,436) (2,444)
Net sales 7,481 7,260
Operating costs (5,322) (5,216)
Operating profit 2,159 2,044
Disposal of investments and businesses (1) 157
Net finance charges (212) (186)
Associates' profits 149 131
Profit before taxation 2,095 2,146
Taxation (678) (181)
Profit from continuing operations 1,417 1,965
Discontinued operations 139 -
Profit for the year 1,556 1,965
Attributable to:
Equity shareholders 1,489 1,908
Minority interests 67 57
1,556 1,965
Sales and net sales
On a reported basis, sales increased by £213 million from £9,704 million in the
year ended 30 June 2006 to £9,917 million in the year ended 30 June 2007. On a
reported basis, net sales increased by £221 million from £7,260 million in the
year ended 30 June 2006 to £7,481 million in the year ended 30 June 2007.
Exchange rate movements decreased reported sales by £358 million and reported
net sales by £280 million, principally arising from the weakening of the US
dollar. Acquisitions and disposals resulted in a net decrease in reported sales
and reported net sales of £24 million and £10 million, respectively for the
year.
Operating costs
On a reported basis operating costs increased by £106 million in the year ended
30 June 2007 due to an increase in marketing costs of £35 million, from £1,127
million to £1,162 million, an increase in cost of sales of £82 million, from
£2,921 million to £3,003 million, and a decrease in other operating expenses of
£11 million, from £1,168 million to £1,157 million. Offset within other
operating expenses in the year ended 30 June 2007 are profits on disposal of
property, plant and equipment, including an exceptional gain of £40 million on
the disposal of land at Park Royal in the United Kingdom. There were no
exceptional items in operating costs in the year ended 30 June 2006. Excluding
exceptional items, operating costs increased by £146 million from £5,216 million
in the year ended 30 June 2006 to £5,362 million in the year ended 30 June 2007.
Post employment plans
Post employment costs for the year ended 30 June 2007 of £56 million (2006 - £87
million) included amounts charged to operating profit of £104 million (2006 -
£106 million) partly offset by finance income of £48 million (2006 - £19
million). At 30 June 2007, Diageo's deficit before taxation for all post
employment plans was £419 million (2006 - £801 million).
Operating profit
Reported operating profit for the year ended 30 June 2007 increased by £115
million to £2,159 million from £2,044 million in the prior year. Exceptional
operating gains of £40 million were generated in the year ended 30 June 2007.
There were no comparable exceptional operating gains or costs in the year ended
30 June 2006. Excluding the exceptional gain relating to Park Royal, operating
profit for the year increased by £75 million from £2,044 million in the year
ended 30 June 2006 to £2,119 million in the current year.
Exchange rate movements reduced operating profit for the year ended 30 June 2007
by £91 million.
Disposal of investments and businesses
In the year ended 30 June 2007 a loss before taxation of £1 million arose from
the disposal of businesses. In the year ended 30 June 2006 gains before taxation
on the disposal of businesses were £157 million, representing a gain of £151
million on the sale of the group's remaining 25 million shares of common stock
of General Mills and a gain on the sale of other businesses of £6 million.
Net finance charges
Net finance charges increased by £26 million from £186 million in the year ended
30 June 2006 to £212 million in the year ended 30 June 2007.
The net interest charge increased by £58 million from £193 million in the prior
year to £251 million in the year ended 30 June 2007. This increase principally
resulted from the increase in net borrowings in the year and the increase in US
dollar and euro interest rates. Exchange rate movements reduced net interest by
£11 million.
Other net finance income of £39 million (2006 - £7 million) included income of
£48 million (2006 - £19 million) in respect of the group's post employment
plans. This movement principally reflects the increase in the value of the
assets held by the post employment plans between 1 July 2005 and 30 June 2006.
Other finance income for the year ended 30 June 2007 of £7 million (2006 -
charge of £2 million) includes income of £6 million (2006 - charge of £2
million) in respect of exchange rate translation differences on inter-company
funding arrangements that do not meet the accounting criteria for recognition in
equity. Other finance charges of £16 million (2006 - £15 million) in respect of
the unwinding of the discount on discounted provisions were recognised during
the year. Other finance income in the year ended 30 June 2006 also included £5
million dividend income in respect of the group's interest in General Mills.
Associates
The group's share of profits of associates after interest and tax was £149
million for the year ended 30 June 2007 compared to £131 million in the prior
year. Diageo's 34% equity interest in Moet Hennessy contributed £136 million to
share of profits of associates after interest and tax (2006 - £122 million).
Profit before taxation
Profit before taxation decreased by £51 million from £2,146 million to £2,095
million in the year ended 30 June 2007, primarily as a result of increased
operating profit in the year which was more than offset by the £151 million gain
on disposal of General Mills shares in the year ended 30 June 2006.
Taxation
The reported effective tax rate for the year ended 30 June 2007 is 32.4%
compared with 8.4% for the year ended 30 June 2006. The underlying effective
tax rate for continuing operations for the year ended 30 June 2007 is 25.1%,
compared with 24.9% for the year ended 30 June 2006. Factors that increased the
reported effective tax rate for the year ended 30 June 2007 were a provision for
the settlement of tax liabilities relating to the Guinness/GrandMet merger,
lower carrying value of deferred tax assets primarily following a reduction in
tax rates and the tax impact of an intragroup reorganisation of certain brand
businesses. The effective tax rate in the prior year was reduced following the
agreement of certain brand values with tax fiscal authorities that resulted in
recognising an increase in the group's deferred tax assets of £313 million. The
underlying effective tax rate is expected to be 26% for the year ending 30 June
2008.
Discontinued operations
In the year ended 30 June 2007 profit after tax in respect of the disposal of
businesses was £139 million. This profit represents a tax credit of £82 million
in respect of the recognition of capital losses that arose on the disposal of
Pillsbury and Burger King and a tax credit of £57 million following resolution
with the tax authorities of various audit issues including prior year disposals.
There was no profit or loss from discontinued operations in the year ended 30
June 2006.
Exchange rates
The estimated effect of exchange rate movements on the results for the year
ended 30 June 2007 as compared with the results for the year ended 30 June 2006
was as follows:
Gains/(losses)
£ million
Operating profit
Translation impact (73)
Transaction impact (18)
Associates
Translation impact (2)
Transaction impact -
Interest and other finance charges
Translation impact 11
Net exchange movements on short term inter-company loans 8
Net exchange movements on net debt not meeting hedge
accounting criteria 1
Total exchange effect on profit before taxation (73)
Year ended 30 June Year ended 30 June
2007 2006
Exchange rates
Translation US$/£ rate 1.93 1.78
Translation €/£ rate 1.48 1.46
Transaction US$/£ rate 1.87 1.81
Transaction €/£ rate 1.45 1.45
The weakening of the US dollar had adverse translation and transaction effects
on operating profit and a favourable impact on US dollar denominated interest
charges.
Outlook for the impact of exchange rate movements
For the year ending 30 June 2008 the impact of exchange rate movements based on
current exchange rates (excluding the exchange impact of retranslating trading
and short term loan inter-company balances under IAS 21) is projected to have an
adverse impact of £75 million on operating profit and a positive impact of
approximately £5 million on interest.
Dividend
The directors recommend a final dividend of 20.15 pence per share, an increase
of 5.2% on last year's final dividend. The full dividend will therefore be 32.7
pence per share, an increase of 5.1% from the year ended 30 June 2006. Subject
to approval by shareholders, the final dividend will be paid on 22 October 2007
to shareholders on the register on 14 September 2007. Payment to US ADR holders
will be made on 26 October 2007. A dividend reinvestment plan is available in
respect of the final dividend and the plan notice date is 1 October 2007.
Cash flow
Extract from the consolidated cash flow statement Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Cash generated from operations 2,272 2,199
Interest paid (net) (237) (171)
Dividends paid to equity minority interests (41) (40)
Taxation (368) (393)
Net (purchase)/sale of other investments (6) 7
Payment into escrow in respect of UK pension fund (50) -
Net capital expenditure (205) (241)
Free cash flow 1,365 1,361
Free cash flow increased by £4 million to £1,365 million in the year ended 30
June 2007. Cash generated from operations increased from £2,199 million to
£2,272 million in the year ended 30 June 2007. This £73 million increase is
primarily a result of higher operating profit of £115 million. This increase was
supplemented by reduced net capital expenditure of £36 million and reduced
taxation payments of £25 million, but offset by an increase in net interest
payments of £66 million, due to increased net borrowings during the year and
higher interest rates and a payment of £50 million into an escrow account as
contingency funding in the event that the deficit in the UK pension fund is not
covered by future investment returns.
In the year ended 30 June 2007, Diageo invested £70 million in business
acquisitions (2006 - £209 million) and purchased 141 million shares as part of
the share buyback programme (2006 - 164 million shares) at a cost including fees
of £1,405 million (2006 - £1,407 million). Net payments to acquire shares for
employee share schemes totalled £25 million (2006 - £32 million). Equity
dividends of £858 million were paid during the year (2006 - £864 million).
Diageo continues to target a range of ratios which are currently broadly
consistent with an A band credit rating. In 2008, assuming similar levels of
free cash flow and acquisition activity to those that arose in 2007, Diageo
would expect, under this capital structure, to have the financial capacity to
fund a share buyback programme of approximately £1 billion.
Balance sheet
At 30 June 2007, total equity was £4,170 million compared with £4,681 million at
30 June 2006. This decrease was mainly due to the shares repurchased for
cancellation or holding as treasury shares of £1,405 million and the dividend
paid out of shareholders' equity of £858 million partly offset by the profit for
the period of £1,556 million.
Net borrowings were £4,845 million at 30 June 2007, an increase of £763 million
from net borrowings at 30 June 2006 of £4,082 million. The principal components
of this increase were payments of £1,405 million to repurchase shares and a £858
million equity dividend offset by free cash inflow of £1,365 million and
exchange movements of £211 million.
Economic profit
Economic profit increased by £71 million from £564 million in the year ended 30
June 2006 to £635 million in the year ended 30 June 2007. See page 39 for the
calculation and definition of economic profit.
DIAGEO CONSOLIDATED INCOME STATEMENT
Year ended 30 June 2007 Year ended 30 June 2006
Notes £ million £ million
Sales 2 9,917 9,704
Excise duties (2,436) (2,444)
Net sales 7,481 7,260
Cost of sales (3,003) (2,921)
Gross profit 4,478 4,339
Marketing expenses (1,162) (1,127)
Other operating expenses (1,157) (1,168)
Operating profit 2 2,159 2,044
Sale of General Mills and other businesses 3 (1) 157
Net interest payable 4 (251) (193)
Net other finance income 4 39 7
Share of associates' profits after tax 149 131
Profit before taxation 2,095 2,146
Taxation 5 (678) (181)
Profit from continuing operations 1,417 1,965
Discontinued operations 6 139 -
Profit for the year 1,556 1,965
Attributable to:
Equity shareholders of the parent company 1,489 1,908
Minority interests 67 57
1,556 1,965
Pence per share
Basic earnings 55.4p 67.2p
Diluted earnings 55.0p 66.9p
Average shares 2,688m 2,841m
DIAGEO CONSOLIDATED STATEMENT OF
RECOGNISED INCOME AND EXPENSE
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Exchange differences on translation of foreign operations excluding
borrowings (269) (76)
Exchange differences on borrowings and derivative net investment
hedges
199 52
Effective portion of changes in fair value of cash flow hedges
- Gains taken to equity 28 39
- Transferred to income statement 35 4
Fair value movement on available for sale securities - (148)
Actuarial gains on post employment plans 328 459
Tax on items taken directly to equity (99) (97)
Net income recognised directly in equity 222 233
Profit for the year 1,556 1,965
Total recognised income and expense for the year 1,778 2,198
Attributable to:
- equity shareholders of the parent company 1,719 2,146
- minority interests 59 52
Total recognised income and expense for the year 1,778 2,198
DIAGEO CONSOLIDATED BALANCE SHEET
30 June 2007 30 June 2006
£ million £ million £ million £ million
Non-current assets
Intangible assets 4,383 4,534
Property, plant and equipment 1,932 1,952
Biological assets 12 13
Investments in associates 1,436 1,341
Other investments 128 69
Other receivables 17 12
Other financial assets 52 42
Deferred tax assets 771 1,113
Post employment benefit assets 38 14
8,769 9,090
Current assets
Inventories (note 7) 2,465 2,386
Trade and other receivables 1,759 1,681
Other financial assets 78 71
Cash and cash equivalents (note 8) 885 699
5,187 4,837
Total assets 13,956 13,927
Current liabilities
Borrowings and bank overdrafts (note 8) (1,535) (759)
Other financial liabilities (43) (36)
Trade and other payables (1,888) (1,803)
Corporate tax payable (673) (681)
Provisions (60) (56)
(4,199) (3,335)
Non-current liabilities
Borrowings (note 8) (4,132) (4,001)
Other financial liabilities (104) (78)
Other payables (38) (37)
Provisions (274) (306)
Deferred tax liabilities (582) (674)
Post employment benefit liabilities (457) (815)
(5,587) (5,911)
Total liabilities (9,786) (9,246)
Net assets 4,170 4,681
Equity
Called up share capital 848 883
Share premium 1,341 1,340
Other reserves 3,186 3,168
Retained deficit (1,403) (889)
Equity attributable to equity shareholders of
the parent company 3,972 4,502
Minority interests 198 179
Total equity (note 10) 4,170 4,681
DIAGEO CONSOLIDATED CASH FLOW STATEMENT
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million £ million £ million
Cash flows from operating activities
Profit for the year 1,556 1,965
Discontinued operations (139) -
Taxation 678 181
Share of associates' profits after taxation (149) (131)
Net interest and other net finance income 212 186
Losses/(gains) on disposal of businesses 1 (157)
Depreciation and amortisation 210 214
Movements in working capital (180) (192)
Dividend income and other items 83 133
Cash generated from operations 2,272 2,199
Interest received 42 64
Interest paid (279) (235)
Dividends paid to minority interests (41) (40)
Taxation paid (368) (393)
Net cash from operating activities 1,626 1,595
Cash flows from investing activities
Disposal of property, plant and equipment 69 16
Purchase of property, plant and equipment (274) (257)
Net (purchase)/disposal of other investments (6) 7
Payment into escrow in respect of
UK Pension fund (50) -
Disposal of businesses 4 772
Purchase of businesses (70) (209)
Net cash (outflow)/inflow from investing activities (327) 329
Cash flows from financing activities
Proceeds from issue of share capital 1 3
Net purchase of own shares for share schemes (25) (32)
Own shares repurchased (1,405) (1,407)
Net increase in loans 1,226 309
Equity dividends paid (858) (864)
Net cash used in financing activities (1,061) (1,991)
Net increase/(decrease) in net cash and cash equivalents 238 (67)
Exchange differences (50) (11)
Net cash and cash equivalents at beginning of the year 651 729
Net cash and cash equivalents at end of the year 839 651
Net cash and cash equivalents consist of:
Cash and cash equivalents 885 699
Bank overdrafts (46) (48)
839 651
NOTES
1. Basis of preparation
The consolidated financial statements are prepared in accordance with
International Financial Reporting Standards as endorsed and adopted for use in
the European Union (IFRS). This consolidated financial information has been
prepared on the basis of accounting policies consistent with those applied in
the consolidated financial statements for the year ended 30 June 2006. IFRS is
subject to ongoing review and endorsement by the EU or possible amendment by
interpretative guidance from the International Accounting Standards Board
(IASB).
The following interpretations, issued by the International Financial Reporting
Interpretations Committee (IFRIC), are effective for the first time in the
current financial year and have been adopted by the group with no significant
impact on its consolidated results or financial position:
IFRIC 4 - Determining whether an arrangement contains a lease (effective
for annual periods beginning on or after 1 January 2006).
IFRIC 5 - Rights to interests arising from decommissioning, restoration
and environmental rehabilitation funds (effective for annual periods beginning
on or after 1 January 2006).
IFRIC 6 - Liabilities arising from participating in a specific market:
waste electrical and electronic equipment (effective for annual periods
beginning on or after 1 December 2005).
IFRIC 7 - Applying the restatement approach under IAS 29 - Financial
reporting in hyperinflationary economies (effective for annual periods beginning
on or after 1 March 2006).
IFRIC 8 - Scope of IFRS 2 - Accounting for share based payments
(effective for annual periods beginning on or after 1 May 2006).
IFRIC 9 - Reassessment of embedded derivatives (effective for annual
periods beginning on or after 1 June 2006).
The following standards and interpretations, issued by the IASB or IFRIC, have
not yet been adopted by the group:
Amendment to IAS 1 - Presentation of financial statements: capital disclosures
(effective for annual periods beginning on or after 1 January 2007)
Amendment to IAS 23 - Borrowing costs (effective for annual periods beginning on
or after 1 January 2009)
IFRS 8 - Operating segments (effective for annual periods beginning on or after
1 January 2009)
IFRIC 11 - Group and treasury share transactions (effective for annual periods
beginning on or after 1 March 2007)
IFRIC 12 - Service concession arrangements (effective for annual periods
beginning on or after 1 January 2008)
IFRIC 13 - Customer loyalty programmes (effective for annual periods beginning
on or after 1 July 2008)
IFRIC 14 - IAS 19 - The limit on a defined benefit asset, minimum funding
requirements and their interaction (effective for annual periods beginning on
or after 1 January 2008)
The amendment to IAS 1 requires additional disclosures in the Annual Report on
the objectives, policies and processes for managing capital. Appropriate
additional disclosures will be included in the 2008 Annual Report.
The amendment to IAS 23 generally eliminates the option to expense borrowing
costs attributable to the acquisition, construction or production of a
qualifying asset as incurred and instead requires the capitalisation of such
borrowing costs as part of the cost of specific assets. The group is currently
assessing the impact of the amendment on the results and net assets of the
group.
IFRS 8 contains requirements for the disclosure of information about an entity's
operating segments and also about the entity's products and services, the
geographical areas in which it operates, and its major customers. The standard
is concerned only with disclosure and replaces IAS 14 - Segment reporting. The
group is currently assessing the impact this standard would have on the
presentation of its consolidated results.
The group does not currently believe the adoption of the interpretations would
have a material impact on the consolidated results or financial position of the
group.
The information in this preliminary announcement does not constitute the
statutory accounts of the group within the meaning of Section 240 of the
Companies Act 1985. The statutory accounts of Diageo plc for the year ended 30
June 2006, which were prepared under IFRS, have been filed with the registrar of
companies. KPMG Audit Plc has reported on those accounts and on the statutory
accounts for the year ended 30 June 2007. Both the audit reports were
unqualified and did not contain any statement under section 237 of the Companies
Act 1985.
2. Business and geographical analyses
Business analysis is presented under the categories of Diageo North America,
Diageo Europe, Diageo International, Diageo Asia Pacific and Corporate,
reflecting the group's management and internal reporting structure. The Diageo
Asia Pacific business was established in January 2007. The results for the year
ended 30 June 2006 have been revised for the new business structure.
Business analysis:
Year ended Year ended
30 June 2007 30 June 2006
Operating profit/ Operating
Sales (loss) Sales profit/(loss)
£ million £ million £ million £ million
North America 2,915 850 2,968 829
Europe 3,765 723 3,834 737
International 2,031 499 1,784 445
Asia Pacific 1,131 196 1,042 199
9,842 2,268 9,628 2,210
Corporate 75 (109) 76 (166)
9,917 2,159 9,704 2,044
Net corporate operating costs and trading losses decreased from £166 million to
£109 million in the year ended 30 June 2007. Corporate revenues and costs are
in respect of central costs including finance, human resources and legal as well
as certain information system, service centre, facilities and employee costs
that are not directly allocated to the geographical operating units. They also
include the revenues and costs related to rents receivable in respect of
properties not used by Diageo in the manufacture, sale or distribution of
premium drinks, exchange movements on short term inter-company trading balances
and the results of Gleneagles Hotel.
Geographical analysis of sales and operating profit by destination:
Year ended Year ended
30 June 2007 30 June 2006
Sales Operating profit Sales Operating profit
£ million £ million £ million £ million
North America 2,958 873 2,999 842
Europe 3,912 636 3,977 597
Asia Pacific 1,179 215 1,085 218
Latin America 813 214 671 163
Rest of World 1,055 221 972 224
9,917 2,159 9,704 2,044
Sales and operating profit by geographical destination have been stated
according to the location of the third party customers.
Certain businesses reported for internal management purposes within Diageo
International have been reported within the appropriate market in the
geographical analysis above. Corporate sales and operating loss (principally
central costs) are incurred in Europe.
30 June 30 June
2007 2006
Analysis of total assets: £ million £ million
North America 842 872
Europe 1,063 1,190
International 808 789
Asia Pacific 406 350
Moet Hennessy 1,348 1,303
Corporate and other 9,489 9,423
13,956 13,927
Corporate and other total assets consist primarily of brands that are
capitalised in the balance sheet, property, plant and equipment, maturing whisky
inventories and other assets that are not readily allocable to the group's
operating segments.
Weighted average exchange rates used in the translation of income statements
were US dollar - £1 = $1.93 (2006 - £1 = $1.78) and euro - £1 = €1.48 (2006 -
£1 = €1.46). Exchange rates used to translate assets and liabilities at the
balance sheet date were US dollar - £1 = $2.01 (30 June 2006 - £1 = $1.85) and
euro - £1 = €1.48 (30 June 2006 - £1 = €1.45). The group uses exchange rate
transaction hedges to mitigate the effect of exchange rate movements.
The festive holiday season provides the peak period for sales. Approximately 30%
of annual sales volume arises in the last three months of each calendar year.
3. Exceptional items
Exceptional items are those that in management's judgement, need to be disclosed
by virtue of their size or incidence in order for the user to obtain a proper
understanding of the financial information.
In the year ended 30 June 2007, operating profit included an exceptional gain of
£40 million in respect of the sale of the site of the former brewery at Park
Royal in the United Kingdom. An exceptional loss on business disposals of £1
million also arose in the year to 30 June 2007. In the year ended 30 June 2006,
the gain on sale of shares in General Mills of £151 million and gains of £6
million related to business disposals were identified as pre-tax exceptional
items.
4. Net interest and other finance charges
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Interest payable (332) (229)
Interest receivable 78 27
Market value movements on interest rate instruments 3 9
Net interest payable (251) (193)
Net finance income in respect of post employment plans 48 19
Investment income - dividends receivable from General Mills - 5
Other unwinding of discounts (16) (15)
32 9
Net exchange movements on certain financial instruments 7 (2)
Net other finance income 39 7
5. Taxation
The £678 million taxation charge for the year ended 30 June 2007 comprises a UK
tax charge of £87 million and a foreign tax charge of £591 million. In the year
ended 30 June 2006, the taxation charge of £181 million included an exceptional
tax credit of £315 million that arose mainly as a consequence of agreement with
fiscal authorities of the carrying value of certain brands, which resulted in an
increase to the group's deferred tax assets of £313 million.
6. Discontinued operations
In the year ended 30 June 2007, a tax benefit of £82 million arose from the
recognition of capital losses arising on the prior year disposal of the
Pillsbury and Burger King businesses. In addition, a tax credit of £57 million
arose following resolution with tax authorities of various audit issues
including prior year disposals.
7. Inventories
30 June 2007 30 June 2006
£ million £ million
Raw materials and consumables 239 236
Work in progress 14 17
Maturing inventories 1,745 1,644
Finished goods and goods for resale 467 489
2,465 2,386
8. Net borrowings
30 June 2007 30 June 2006
£ million £ million
Debt due within one year and overdrafts (1,535) (759)
Debt due after one year (4,132) (4,001)
Fair value of interest rate hedging instruments (20) (44)
Fair value of foreign currency swaps and forwards (29) (17)
Obligations under finance leases (14) (9)
(5,730) (4,830)
Less: Cash and cash equivalents 885 699
Other liquid resources - 49
Net borrowings (4,845) (4,082)
In the year ended 30 June 2007, the group issued a US $600 million global bond
repayable in January 2012 with a coupon of 5.125%, a US $600 million global bond
repayable in September 2016 with a coupon of 5.5%, a US $600 million global bond
repayable in September 2036 with a coupon of 5.875% and a €750 million Euro
floating rate bond with a spread of 24 bps to 3 month EURIBOR, repayable in May
2012. A US $500 million bond, a €300 million medium term note, a US $200
million medium term note and a US $5 million retail note matured and were repaid
in the year.
9. Reconciliation of movement in net borrowings
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Net borrowings at beginning of the year (4,082) (3,706)
Adoption of IAS 39 on 1 July 2005 3
Restated net borrowings at beginning of the year (3,703)
Increase/(decrease) in net cash and cash equivalents before
Exchange 238 (67)
Cash flow from change in loans (1,226) (309)
Change in net borrowings from cash flows (988) (376)
Exchange differences 211 15
Other non-cash items 14 (18)
Net borrowings at end of the year (4,845) (4,082)
10. Movements in total equity
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Total equity at beginning of the year 4,681 4,626
Adoption of IAS 39 on 1 July 2005 164
Restated total equity at beginning of the year 4,790
Total recognised income and expense for the year 1,778 2,198
Dividends paid to equity shareholders (858) (864)
Dividends paid to minority interests (41) (40)
New share capital issued 1 3
Share trust arrangements 77 16
Tax on share trust arrangements 12 6
Purchase of own shares for cancellation or holding as treasury
Shares (1,405) (1,407)
Purchase of own shares for holding as treasury shares for share
scheme hedging (76) (21)
Acquisition of minority interest 1 -
Net movement in total equity (511) (109)
Total equity at end of the year 4,170 4,681
Total equity at the end of the year includes gains of £42 million in respect of
cumulative translation differences (2006 - gains of £107 million) and £2,333
million (2006 - £2,070 million) in respect of own shares held as treasury
shares.
11. Dividends
Year ended Year ended
30 June 2007 30 June 2006
£ million £ million
Amounts recognised as distributions to equity holders in the
year
Final dividend paid for the year ended 30 June 2006 of 19.15p
(2005 - 18.2p) per share 524 529
Interim dividend paid for the six month period ended
31 December 2006 of 12.55p (2005 - 11.95p) per share 334 335
858 864
A final dividend of 20.15 pence per share for the year ended 30 June 2007 (2006
- 19.15 pence per share) was recommended by the board on 29 August 2007. This
dividend is recommended for approval by shareholders at the Annual General
Meeting to be held on 16 October 2007 and as the approval will be after the
balance sheet date it has not been included as a liability.
12. Contingent liabilities and legal proceedings
(i) Guarantees In connection with the disposal of Pillsbury, Diageo has
guaranteed the debt of a third party to the amount of $200 million (£100
million) until November 2009. Including this guarantee, but net of the amount
provided in the consolidated financial information, at 30 June 2007 the group
has given performance guarantees and indemnities to third parties of £106
million.
There has been no material change since 30 June 2007 in the group's performance
guarantees and indemnities.
(ii) Colombian litigation An action was filed on 8 October 2004 in the United
States District Court for the Eastern District of New York by the Republic of
Colombia and a number of its local government entities against Diageo and other
spirits companies. The complaint alleges several causes of action. Included
among the causes of action is a claim that the defendants allegedly violated the
Federal RICO Act by facilitating money laundering in Colombia through their
supposed involvement in the contraband trade to the detriment of government
owned spirits production and distribution businesses. Diageo is unable to
quantify meaningfully the possible loss or range of loss to which the lawsuit
may give rise. Diageo intends to defend itself vigorously against this lawsuit.
(iii) Alcohol advertising litigation A number of similar putative class actions
are pending in state and federal courts in the United States against Diageo plc,
Diageo North America Inc and other Diageo entities, along with a large group of
other beverage alcohol manufacturers, brewers and importers. All have been
brought by the same national counsel. In each action, the plaintiffs seek to
pursue their claims on behalf of parents and guardians of people under the legal
drinking age who illegally bought alcohol beverages during the period from 1982
to the present. Plaintiffs allege several causes of action, principally for
negligence, unjust enrichment and violation of state consumer fraud statutes.
Some complaints include additional claims based on conspiracy, nuisance and
other legal theories. Diageo is unable to quantify meaningfully the possible
loss or range of loss to which these actions may give rise. Diageo intends to
defend itself vigorously against these claims.
(iv) Turkish customs litigation In common with other beverage alcohol importers,
litigation is ongoing against Diageo's Turkish subsidiary in the Turkish Civil
Courts in connection with the methodology used by the Turkish customs
authorities in assessing the importation value of and duty payable on the
beverage alcohol products sold in the domestic channel in Turkey. The matter
involves multiple cases against Diageo's Turkish subsidiary at various stages of
litigation including a group of cases under correction appeal following an
adverse finding at the Turkish Supreme Court. Diageo is unable to quantify
meaningfully the possible loss or range of loss to which these cases may give
rise. Diageo's Turkish subsidiary intends to defend its position vigorously.
(v) Other The group has extensive international operations and is defendant in a
number of legal proceedings incidental to these operations. There are a number
of legal claims against the group, the outcome of which cannot at present be
foreseen.
Save as disclosed above, neither Diageo, nor any member of the Diageo group, is
or has been engaged in, nor (so far as Diageo is aware) is there pending or
threatened by or against it, any legal or arbitration proceedings which may have
a significant effect on the financial position of the Diageo group.
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Definitions
Unless otherwise stated, percentage movements given throughout this announcement
for volume, sales, net sales, marketing spend and operating profit are organic
movements (at level exchange rates and after adjusting for the effect of
exceptional items, acquisitions and disposals) for continuing operations.
Comparisons are with the equivalent period in the last financial year. For an
explanation of organic movements please refer to 'Reconciliation to GAAP
measures' in this announcement.
Volume has been 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 and ready
to drink in nine litre cases divide by 10, with certain pre-mixed products that
are classified as ready to drink divided by 5.
Net sales are sales after deducting excise duties.
Exceptional items are those that in management's judgement need to be disclosed
by virtue of their size or incidence in order for the user to obtain a proper
understanding of the financial information. Such items are included within the
income statement caption to which they relate.
References to ready to drink include progressive adult beverages in the United
States. References to Smirnoff ready to drink include Smirnoff Ice, Smirnoff
Black Ice, Smirnoff Twisted V, Smirnoff Mule, Smirnoff Spin, Smirnoff Storm,
Smirnoff Caesar, Smirnoff Caipiroska, Smirnoff Signatures, Smirnoff Source,
Smirnoff Fire and Smirnoff Raw Tea. References to Smirnoff Black Ice include
Smirnoff Ice Triple Black in the United States.
Volume share is a brand's volume when compared to the volume of all brands in
its segment. Value share is a brand's retail sales when compared to the retail
sales of all brands in its segment. Unless otherwise stated, share refers to
volume share. Share of voice is the media spend on a particular brand when
compared to all brands in its segment. The share and share of voice data
contained in this announcement is taken from independent industry sources in the
markets in which Diageo operates.
This announcement contains forward-looking statements that involve risk and
uncertainty. There are a number of factors that could cause actual results and
developments to differ materially from those expressed or implied by these
forward-looking statements, including factors beyond Diageo's control. Please
refer to page 41 - 'Cautionary statement concerning forward-looking statements'
for more details.
This announcement includes names of Diageo's products which constitute
trademarks or trade names which Diageo owns or which others own and license to
Diageo for its use.
Certain brands formerly treated as local priority brands have now been
classified as category brands and vice versa to reflect the change in
contribution of these brands in individual countries. All comparative figures
have been restated.
Changes to local priority brand classification
These changes reflect the classification of brands to a regional basis rather
than a single market basis.
Previous classification New classification
Europe
Archers Great Britain Archers Europe
Bell's Great Britain Bell's Europe
Cacique Spain Cacique Europe
Cardhu Spain Cardhu Europe
Gordon's gin Great Britain Gordon's gin Europe
Budweiser Ireland Budweiser Europe
Carlsberg Ireland Carlsberg Europe
Harp Ireland Harp Europe
Smithwicks Ireland Smithwicks Europe
International
Bell's South Africa Bell's International
Buchanan's Venezuela Buchanan's International
Malta Africa Malta International
Pilsner Kenya Pilsner International
Tusker Kenya Tusker International
Red Stripe Jamaica Red Stripe International
Asia Pacific
Old Parr Japan Old Parr Asia Pacific
Dimple/Pinch Korea Dimple/Pinch Asia Pacific
Bundaberg rum Australia Bundaberg rum Asia Pacific
Windsor Premier Korea Windsor Premier Asia Pacific
In North America the following changes were made to reflect the priority brand
focus of the region.
Moved from local priority brands to category brands:
Goldschlager
Gordon's gin
Myers
Romana Sambuca
Rumple Minze
Moved from category brands to local priority brands:
Chalone and other US wines
The following brands remain local priority brands in the North America region:
Buchanan's
Crown Royal
Seagrams 7 Crown
Seagrams VO
Beaulieu Vineyard
Sterling Vineyard
Reconciliation to GAAP measures
(i) Organic movement
Organic movement in volume, sales, net sales, operating profit, operating margin
and basic earnings per share are measures not specifically used in the
consolidated financial statements themselves (non-GAAP measures). The
performance of the group is discussed using these measures.
In the discussion of the performance of the business, certain information is
presented using sterling amounts on a constant currency basis. This strips out
the effect of exchange rate movements and enables an understanding of the
underlying performance of the market that is most closely influenced by the
actions of that market's management. The risk from exchange rate movement is
managed centrally and is not a factor over which local managers have any
control.
Acquisitions and disposals and exceptional items also impact the reported
performance and therefore the reported movement in any period in which they
arise. Management adjusts for the impact of such transactions in assessing the
performance of the underlying business.
The underlying performance on a constant currency basis and excluding the impact
of acquisitions and disposals and exceptional items is referred to as 'organic'
performance. Organic movement calculations enable the reader to focus on the
performance of the business which is common to both periods.
Organic movement in volume, sales, net sales, operating profit and operating
margin
Diageo's strategic planning and budgeting process is based on organic movement
in volume, sales, net sales, operating profit and operating margin, and these
measures closely reflect the way in which operating targets are defined and
performance is monitored by the group's management. Therefore organic movement
measures most closely reflect the way in which the business is managed.
These measures are chosen for planning, budgeting, reporting and incentive
purposes since they represent those measures which local managers are most
directly able to influence and they enable consideration of the underlying
business performance without the distortion caused by fluctuating exchange
rates, acquisitions, disposals and exceptional items.
The group's management believes these measures provide valuable additional
information for users of the financial statements in understanding the group's
performance since they provide information on those elements of performance
which local managers are most directly able to influence and focus on that
element of the core brand portfolio which is common to both periods. They
should be viewed as complementary to, and not replacements for, the comparable
GAAP measures.
The organic movement calculations for volume, sales, net sales and operating
profit for the year ended 30 June 2007 were as follows:
1. Volume (1)(a)(b)
Acquisitions
and disposals Organic movement
2006 units million units million 2007 Organic
units million units million movement %
North America 48.8 - 1.4 50.2 3
Europe 41.4 0.1 (0.6) 40.9 (2)
International 32.1 0.2 5.0 37.3 16
Asia Pacific 11.5 - 1.4 12.9 12
Total 133.8 0.3 7.2 141.3 5
2. Sales (a)(b)
Acquisitions
2006 and Organic 2007 Organic
Reported Exchange(3) disposals(4) movement Reported movement
£ million £ million £ million £ million £ million %
North America 2,968 (225) 2 170 2,915 6
Europe 3,834 (32) (26) (11) 3,765 -
International 1,784 (73) - 320 2,031 19
Asia Pacific 1,042 (28) - 117 1,131 12
Corporate 76 - - (1) 75 (1)
Total sales 9,704 (358) (24) 595 9,917 6
3. Net sales (a)(b)
Acquisitions
2006 and disposals Organic 2007 Organic
Reported Exchange(3) (4) movement Reported movement
£ million £ million £ million £ million £ million %
North America 2,510 (190) 1 151 2,472 7
Europe 2,455 (23) (11) 6 2,427 -
International 1,456 (46) - 257 1,667 18
Asia Pacific 763 (21) - 98 840 13
Corporate 76 - - (1) 75 (1)
Total net sales 7,260 (280) (10) 511 7,481 7
Excise duties 2,444 2,436
Total sales 9,704 9,917
4. Operating profit (a)(b)
Transfers,(2)
2006 Exceptional acquisitions and Organic 2007 Organic
Reported items(5) Exchange(3) disposals(4) movement Reported movement
£ million £ million £ million £ million £ million £ million %
North America 829 - (69) (3) 93 850 12
Europe 737 - (10) (3) (1) 723 -
International 445 - (20) (5) 79 499 19
Asia Pacific 199 - (6) (9) 12 196 7
Corporate (166) 40 14 17 (14) (109) (9)
Total 2,044 40 (91) (3) 169 2,159 9
Notes - Information relating to the current period
(1) Differences between the reported volume movements and organic volume
movements are due to acquisitions and disposals.
(2) Transfers represent the movement between operating units of certain
activities, the most significant of which were the reallocation of certain
supply and other overheads from corporate to the regions and the reallocation of
certain prior year transaction exchange differences into corporate. Transfers
reduced restated prior year operating profit for North America, International
and Asia Pacific profits by £3 million, £5 million and £9 million, respectively
and reduced costs in Corporate by £17 million.
(3) The exchange adjustments for sales, net sales and operating profit are
principally in respect of the US dollar.
(4) The only acquisition in the year ended 30 June 2007 that affected sales,
net sales and operating profit was the acquisition of the Smirnov brand in
Russia which was reported in Europe. The other acquisition impacting the
calculation of organic growth in the period was the acquisition of The 'Old
Bushmills' Distillery Company Limited in August 2005. Disposals affecting the
period were the disposal of United Beverages Limited and Three Barrels (both
Europe) and contributed volume, sales, net sales and operating profit of 213k
equivalent units, £35 million, £17 million and £2 million, respectively, in the
year ended 30 June 2006.
(5) Exceptional items in the year to 30 June 2007 represents a gain on the
disposal of land at the Park Royal site. There were no operating exceptional
items in the year ended 30 June 2006.
Notes - Information relating to the organic movement calculations
a) The organic movement percentage is the amount in the column
headed 'Organic movement' in the tables above expressed as a percentage of the
aggregate of the columns headed 2006 Reported, the column headed Exchange and
the amounts in respect of transfers (see note (2) above) and disposals (see note
(4) above) included in the column headed Transfers, acquisitions and disposals.
The inclusion of the column headed Exchange in the organic movement calculation
reflects the adjustment to exclude the effect of exchange rate movements by
recalculating the prior period results as if they had been generated at the
current period's exchange rates. Organic movement percentages are calculated as
the organic movement amount in £ million, expressed as the percentage of the
prior period results at current year exchange rates and after adjusting for
transfers, disposals and exceptional items. The basis of calculation means that
the results used to measure organic movement for a given period will be adjusted
when used to measure organic movement in the subsequent period.
b) Where a business, brand, brand distribution right or agency agreement
was disposed of, or terminated, in the current period, the group, in organic
movement calculations, adjusts the results for the comparable prior period to
exclude the amount the group earned in that period that it could not have earned
in the current period (i.e. the period between the date in the prior period,
equivalent to the date of the disposal in the current period, and the end of the
prior period). As a result, the organic movement numbers reflect only comparable
performance. Similarly, if a business was disposed of part way through the
equivalent prior period then its contribution would be completely excluded from
that prior period's performance in the organic movement calculation, since the
group recognised no contribution from that business in the current period. In
the calculation of operating profit the overheads included in disposals were
only those directly attributable to the businesses disposed, and do not result
from subjective judgements of management. For acquisitions, a similar adjustment
is made in the organic movement calculations. For acquisitions subsequent to the
end of the equivalent prior period, the post acquisition results in the current
period 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 only included from the anniversary of the acquisition date in the
current period.
c) Organic movement in operating margin is the difference between the
2007 reported operating margin (operating profit excluding exceptional items
expressed as a percentage of sales) and an operating margin where the amounts
for each of sales and operating profit are the aggregate of those captions in
the columns headed 2006 Reported, the column headed Exchange and the amounts in
respect of transfers (see note (2) above) and disposals (see note (4) above)
included in the column headed Transfers, acquisitions and disposals. Organic
movement in operating margin is calculated as the movement amount in margin
percentage, expressed in basis points between the operating margin for the prior
period results at current year exchange rates and after adjusting for transfers,
disposals and exceptional items and the operating margin for the current period
results adjusted for current period exceptional items. The basis of calculation
means that the results used to measure organic movement for a given period will
be adjusted when used to measure organic movement in the subsequent period.
Underlying movement in earnings per share
The group's management believes basic earnings per share on an underlying
organic movement basis provides valuable additional information for users of the
financial statements in understanding the group's overall performance. The
group's management believes that the comparison of movements on both a reported
and underlying basis provides information as to the individual components of the
movement in basic earnings per share being: the impact of exceptional items,
fluctuating exchange rates, acquisitions and disposals arising in the period and
the application of an underlying effective tax rate. These measures should be
viewed as complementary to, and not a replacement for, the comparable GAAP
measures such as basic and diluted earnings per share and reported movements
therein. These GAAP measures reflect all of the factors which impact on the
business.
The underlying movement calculation in earnings per share for the year ended 30
June 2007 was as follows:
Pence per share
(5)
Reported basic eps for year ended 30 June 2006 67.2
Exceptional items (1) (16.7)
Tax equalisation (4) -
Basic eps before exceptional items and after tax equalisation for year ended 30 June 2006 50.5
Disposals (2) (a) 0.1
Exchange (3) (d) (2.0)
Adjusted basic eps for year ended 30 June 2006 48.6
Reported basic eps for year ended 30 June 2007 55.4
Exceptional items and discontinued operations (1) (6.6)
Tax equalisation (4) 6.0
Basic eps before exceptional items and after tax equalisation for year ended 30 June 2007 54.8
Exchange (3) (d) (0.1)
Acquisitions (2) (b) 0.1
Adjusted basic eps for year ended 30 June 2007 54.8
Reported basic eps movement amount (11.8)
Basic eps before exceptional items and after tax equalisation movement amount 4.3
Underlying movement amount (after impact of acquisitions and exchange) (c) 6.2
Reported basic eps growth (18)%
Basic eps growth before exceptional items and after tax equalisation 9%
Underlying growth (c) 13%
Notes - Information relating to the current period
1) The exceptional items (after tax and attributable to equity
shareholders) in the year ended 30 June 2007 were £39 million representing a
gain of £40 million in respect of the sale of land at the Park Royal site and a
loss of £1 million relating to disposal of businesses. Discontinued operations
in the year ended 30 June 2007 represent tax credits of £139 million on prior
business disposals. The exceptional items reported by the group for the year
ended 30 June 2006 were £472 million representing a gain of £151 million
relating to the gain on disposal of General Mills shares, a gain of £6 million
relating to the disposal of other businesses and taxation on exceptional items
totalling £315 million, primarily related to the increase in the group's
deferred tax balances.
2) Acquisitions in the year ended 30 June 2007 are in respect of the
acquisition of the Smirnov brand in Russia. Acquisitions impacting the
calculation of organic growth made in the year ended 30 June 2006 were in
respect of the acquisition of The 'Old Bushmills' Distillery Company Limited in
August 2005. Disposals affecting the year are the disposal of United Beverages
Limited and Three Barrels and the impact of the disposal of General Mills
shares.
3) Exchange - the exchange adjustments for operating profit, net
finance charges and taxation are principally in respect of the US dollar.
Transaction exchange adjustments are taxed at the underlying effective tax rate
for the period.
4) Tax equalisation - the impact of adjusting the group's reported
tax rate on operating profit from continuing businesses to the underlying
effective tax rate on profit from continuing businesses before exceptional items
(see (v) below).
5) All amounts are derived from amounts in £ million divided by the
weighted average number of shares in issue for the year ended 30 June 2007 of
2,688 million (2006 - 2,841 million).
Notes - Information relating to the organic movement calculations
a) Where a business, brand, brand distribution right or agency
agreement or investment was disposed of, or terminated, in the current period,
the group, in underlying movement calculations, adjusts the profit for the
period attributable to equity shareholders for the comparable prior period to
exclude the following: i) the amount the group earned in that period that it
could not have earned in the current period (i.e. the period between the date in
the prior period, equivalent to the date of the disposal in the current period,
and the end of the prior period), ii) a capital return in respect of the
reduction in interest charge had the disposal proceeds been used entirely to
reduce borrowings, and iii) taxation at the rate applying in the jurisdiction in
which the asset or business disposed was domiciled. As a result, the underlying
movement numbers reflect only comparable performance. Similarly, if a business
or investment asset was disposed of part-way through the equivalent prior period
then its impact on the profit for the year attributable to equity shareholders
(i.e. after adjustment for a capital return from use of the proceeds of the
disposal to reduce borrowings and tax at the rate applying in the jurisdiction
in which the asset or business disposed was taxed) would be excluded from that
prior period's performance in the underlying movement calculation, since the
group recognised no contribution from that business in the current period.
b) Where a business, brand, brand distribution right or agency agreement or
investment is acquired subsequent to the end of the equivalent prior period, in
underlying movement calculations the group adjusts the profit for the current
period attributable to equity shareholders to exclude the following: i) the
amount the group earned in the current period that it could not have earned in
the prior period, ii) a capital charge in respect of the increase in interest
charge had the acquisition been funded entirely by an increase in borrowings,
and iii) taxation at the rate applying in the jurisdiction in which the business
acquired is domiciled. As a result, the underlying movement numbers reflect
only comparable performance. Similarly, if a business or investment asset was
acquired part way through the equivalent prior period then its impact on the
profit for the year attributable to equity shareholders (i.e. after adjustment
for a capital charge for the funding of the acquisition and tax at the rate
applying in the jurisdiction in which the acquired business is taxed) would be
adjusted only to include the results from the anniversary of the acquisition in
the current period's performance in the underlying movement calculation, since
the group recognised a full period's contribution from that business in the
current period.
c) Organic movement percentages for basic earnings per share are calculated
as the underlying movement amount in pence (p), expressed as the percentage of
the prior period results at current year exchange rates, and after adjusting for
exceptional items, tax equalisation and acquisitions and disposals. The basis of
calculation means that the results used to measure underlying movement for a
given period will be adjusted when used to measure underlying movement in the
subsequent period.
d) The exchange effects of IAS 21 in respect of short term inter-company
funding balances as recognised in other finance charges / income are removed
from both the current and prior period as part of the underlying movement
calculation.
(ii) Free cash flow
Free cash flow is a non-GAAP measure that comprises net cash from operating
activities as well as the net purchase and disposal of investments and property,
plant and equipment that form part of net cash from investing activities. The
group's management believe the measure assists users of the financial statements
in understanding the group's cash generating performance as it comprises items
that arise from the running of the ongoing business.
The remaining components of net cash from investing activities that do not form
part of free cash flow, as defined by the group's management, are in respect of
the purchase and disposal of subsidiaries, associates and businesses. The
group's management regards the purchase and disposal of property, plant and
equipment as ultimately non-discretionary since ongoing investment in plant and
machinery is required to support the day-to-day operations, whereas purchases
and disposals of businesses are discretionary. However, free cash flow does not
necessarily reflect all amounts that the group either has a constructive or
legal obligation to incur. Where appropriate, separate discussion is given for
the impacts of acquisitions and disposals of businesses, equity dividends and
purchase of own shares - each of which arises from decisions that are
independent from the running of the ongoing underlying business.
The free cash flow measure is also used by management for their own planning,
budgeting, reporting and incentive purposes since it provides information on
those elements of performance which local managers are most directly able to
influence.
(iii) Return on average total invested capital
Return on average total invested capital is a non-GAAP measure that is used by
management to assess the return obtained from the group's asset base. This
measure is not specifically used in the consolidated financial statements, but
is calculated to aid comparison of the performance of the business.
The profit used in assessing the return on total invested capital reflects the
operating performance of the business after applying the underlying effective
tax rate for the period stated before exceptional items and interest. Average
total invested capital is calculated using the average derived from the
consolidated balance sheets at the beginning, middle and the end of the period.
Capital employed comprises net assets for the period, excluding post employment
benefit liabilities (net of deferred tax) and net borrowings. This average
capital employed is then aggregated with the average restructuring and
integration costs net of tax, which have been charged to exceptional items, and
goodwill written off to reserves at 1 July 2004, the date of transition to IFRS,
to obtain the average total invested capital.
Calculations for the return on average total invested capital for the year ended
30 June 2007 and 30 June 2006 were as follows:
2007 2006
£ million £ million
Operating profit before exceptional items 2,119 2,044
Associates after interest and taxation 149 131
Dividends receivable from investments - 5
Underlying effective tax rate at 25.1% (2006 - 24.9%) (569) (543)
1,699 1,637
Average net assets (excluding net post employment liabilities) 4,839 5,527
Average net borrowings 4,494 3,899
Average integration costs (net of tax) 931 931
Goodwill at 1 July 2004 1,562 1,562
Average total invested capital 11,826 11,919
Return on average total invested capital 14.4% 13.7%
(iv) Economic profit
Economic profit is a non-GAAP measure that is used by management to assess the
group's return from its asset base compared to a standard cost of capital
charge. The measure is not specifically used in the consolidated financial
statements, but is calculated to aid comparison of the performance of the
business.
The profit used in assessing the return from the group's asset base and the
asset base itself are the same as those used in the calculation for the return
on average total invested capital (see (iii) above). The standard capital charge
applied to the average total invested capital is currently 9%, being
management's assessment of a constant minimum level of return that the group
expects to generate from its asset base. Economic profit is calculated as the
difference between the standard capital charge on the average invested assets
and the actual return achieved by the group on those assets.
Calculations for economic profit for the year ended 30 June 2007 and 30 June
2006 were as follows:
2007 2006
£ million £ million
Average total invested capital (see (iii) above) 11,826 11,919
Operating profit before exceptional items 2,119 2,044
Associates after interest and taxation 149 131
Dividends receivable from investments - 5
Underlying effective tax rate at 25.1% (2006 - 24.9%) (569) (543)
1,699 1,637
Capital charge at 9% of average total invested capital (1,064) (1,073)
Economic profit 635 564
(v) Underlying effective tax rate
The underlying effective tax rate is a non-GAAP measure that reflects the tax
charge on profit from continuing businesses before exceptional items as a
percentage of profit from continuing businesses before exceptional items. The
group's management believe the measure assists users of the financial statements
in understanding the group's effective tax rate as it reflects the tax arising
on the profits from the ongoing business.
The components of the reported tax charge which do not form part of the
underlying effective tax rate, as defined by the group's management, relate to
tax on items reported as exceptional, movement on deferred tax assets arising
from intragroup reorganisations which are due to changes in estimates in
expected future utilisation, any other tax charge or credit that arises from
intra group reorganisations and items which are offset by credits or debits in
discontinued operations.
The underlying effective tax rate is also used by management for their own
planning, budgeting, reporting and incentive purposes since it provides
information on those elements of performance which management is most directly
able to influence.
The group's reported tax rate for the year ended 30 June 2007 is 32.4% (2006 -
8.4%). Adjusting the reported tax rate for the provision for the settlement of
tax liabilities relating to the Guinness/GrandMet merger and a lower carrying
value of deferred tax assets primarily following a reduction in tax rates and
the tax impact of an intragroup reorganisation of certain brand businesses, the
group has an underlying effective tax rate of 25.1% on profit before exceptional
items in the year ended 30 June 2007. Adjusting the reported tax rate for tax
exceptional items outlined in note 1 (Underlying movement in earnings per share)
above, the underlying effective tax rate for the year ended 30 June 2006 was
24.9% on profit before exceptional items.
Cautionary statement concerning forward-looking statements
This announcement contains 'forward looking statements' within the meaning of '
Safe Harbor' provisions of the United States Private Securities Litigation
Reform Act of 1995 with respect to the financial condition, results of
operations and business of Diageo and certain of the plans and objectives of
Diageo with respect to these items. In particular, all statements that express
forecasts, expectations and projections with respect to future matters,
including trends in results of operations, margins, growth rates, overall market
trends, the impact of interest or exchange rates, the availability of financing
to Diageo, anticipated cost savings or synergies and the completion of Diageo's
strategic transactions, are forward-looking statements. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. There are a
number of factors that could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking statements,
including factors that are outside Diageo's control.
These factors include, but are not limited to:
• increased competitive product and pricing pressures and unanticipated
actions by competitors that could impact Diageo's market share, increase
expenses and hinder growth potential;
• the effects of future business combinations, partnerships,
acquisitions or disposals, existing or future, and the ability to realise
expected synergies and/or costs savings;
• Diageo's ability to complete existing or future acquisitions and
disposals;
• legal and regulatory developments, including changes in regulations
regarding consumption of, or advertising for, beverage alcohol, changes in tax
law (including tax rates) or accounting standards, changes in taxation
requirements, such as the impact of excise tax increases with respect to the
business, and changes in environmental laws, health regulations and the laws
governing pensions;
• developments in the alcohol advertising class actions and any similar
proceedings or other litigation directed at the drinks and spirits industry;
• developments in the Colombian litigation and any similar proceedings;
• changes in consumer preferences and tastes, demographic trends or
perception about health related issues;
• changes in the cost of raw materials and labour costs;
• changes in economic conditions in countries in which Diageo operates,
including changes in levels of consumer spending;
• levels of marketing spend, promotional and innovation expenditure by
Diageo and its competitors;
• renewal of distribution or licence manufacturing rights on favourable
terms when they expire;
• termination of existing distribution or licence manufacturing rights
on agency brands;
• technological developments that may affect the distribution of
products or impede Diageo's ability to protect its intellectual property rights;
and
• changes in financial and equity markets, including significant
interest rate and foreign currency exchange rate fluctuations, which may affect
Diageo's access to or increase the cost of financing or which may affect
Diageo's financial results.
All oral and written forward-looking statements made on or after the date of
this announcement and attributable to Diageo are expressly qualified in their
entirety by the above factors and the 'risk factors' contained in the Annual
Report on Form 20-F for the year ended 30 June 2006 filed with the US Securities
and Exchange Commission (SEC). Any forward-looking statements made by or on
behalf of Diageo speak only as of the date they are made. Diageo does not
undertake to update forward-looking statements to reflect any changes in
Diageo's expectations with regard thereto or any changes in events, conditions
or circumstances on which any such statement is based. The reader should,
however, consult any additional disclosures that Diageo may make in any
documents which it publishes and/or files with the SEC. All readers, wherever
situated, should take note of these disclosures.
The information in this announcement does not constitute an offer to sell or an
invitation to buy shares in Diageo plc or any other invitation or inducement to
engage in investment activities.
This announcement includes disclosure about Diageo's debt rating. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organisation. Each rating should be evaluated independently of any other
rating.
Past performance cannot be relied upon as a guide to future performance.
For further information
Diageo's preliminary results presentation to investors and analysts will be
broadcast at 09.30 (UK time) on Thursday 30 August 2007. The presentation can
be viewed live on the Diageo website www.diageo.com. Prior to the event the
presentation slides will be available to download from Diageo's home page.
You will be able to listen to a live broadcast of the presentation and Q&A
session by calling one of the following numbers. This is a listen only option
and you will not be able to participate:
France + 33 1 70 75 00 04
Germany + 49 69 2222 52104
Ireland + 353 1 246 0036
Netherlands + 31 20 710 9321
Spain + 34 91 414 1544
UK + 44 20 7019 0812
USA (toll free) + 877 818 6787
Passcode: Diageo results
After the presentation the slides and accompanying text will be available to
download from Diageo's homepage. A transcript of the Q&A session will be
available to download from our website later that afternoon.
You will be able to view a recording of the presentation and question and answer
session on the Diageo website from 14.00 (UK time) on the day. This facility
will be available until 28 September 2007.
A press conference will take place beginning at 12.30 (UK time) on 30 August
2007 and will be broadcast live from a link on www.diageo.com.
Diageo management will host a conference call for investors and analysts at
15.00 (UK time) on Thursday 30 August 2007. Call this number to participate:
France + 33 1 70 75 00 04
Germany + 49 69 2222 52104
Ireland + 353 1 246 0036
Netherlands + 31 20 710 9321
Spain + 34 91 414 1544
UK + 44 20 7019 0812
USA (toll free) + 877 818 6787
Passcode: Diageo results
The teleconference will be available on instant replay from 17.00 (UK time) and
will be available until 28 September 2007. A transcript of the teleconference
will be available to be downloaded from our website by mid-day on Friday 31
August. The number to call is:
UK/Europe +44 20 7970 8414
USA/Canada +1 203 369 4862
Investor enquiries to: Darren Jones +44 (0) 20 7927 4223
Catherine James +44 (0) 20 7927 5272
Investor.relations@diageo.com
Media enquiries to: Isabelle Thomas +44 (0) 20 7927 5967
Jennifer Crowl +44 (0) 20 7927 5749
Media@diageo.com
This information is provided by RNS
The company news service from the London Stock Exchange
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