Preliminary Results
Diageo PLC
31 August 2006
31 August 2006
Preliminary results for the year ended 30 June 2006
Diageo delivers strong top line and double digit EPS growth
Paul Walsh, Chief Executive of Diageo, commenting on the year ended 30 June 2006
said:
'Diageo's strong full year performance is the result of brand building marketing
campaigns, better sales execution to build superior relationships with our
customers and successful new product launches.
'North America continues to deliver industry beating top line growth; a more
cost effective European business is driving operating profit and margin growth;
and the rate of sales growth in International has accelerated following new
brand introductions and increased investment.
'Strong top line growth has delivered organic operating margin expansion and
organic operating profit growth in line with our guidance at the beginning of
the year despite pressure on input costs. At the same time we have increased
marketing investment creating a stronger platform for future growth. We have
delivered another year of strong free cash flow and through our dividends and
share buybacks we have returned a further £2.3 billion to our shareholders.
'With well-positioned brands and a more efficient and effective organisation, we
enter the new financial year with confidence. We expect that organic net sales
growth will be in line with that achieved in the current year and we plan to
deliver organic operating profit growth of at least 7% for the year and to
return a further £1.4 billion to shareholders through our continuing buyback
programme.'
Results at a glance
Reported Organic
2006 2005 movement movement
Volume in millions of equivalent units 133.8 125.4 7% 6%
Net sales after deducting excise duties £ million 7,260 6,677 9% 6%
Operating profit before exceptional items £ million 2,044 1,932 6% 7%
Operating profit after operating exceptional items £ million 2,044 1,731 18%
Profit attributable to parent company's equity
shareholders £ million 1,908 1,344 42%
Basic eps before exceptional items Pence 50.5 39.7 27% 10%
Basic eps Pence 67.2 45.2 49%
Key highlights
• Growth across all businesses with net sales, after deducting excise
duties, of spirits up 8%, wine up 8%, beer up 4% and ready to drink up 2%
• At 8% organic growth, marketing increased as a percentage of net sales,
after deducting excise duties
• Further operating margin improvement of 30 basis points on an organic
basis
• Double digit eps growth
• Return on invested capital up 90 basis points to 13.7%
• Another year of strong free cash flow at £1,361 million
• Share buyback doubled in the year to £1,400 million
• Recommended full year dividend per share increase of 5% to 31.1 pence
Percentage movements in this document are organic movements unless otherwise
stated. These movements and operating margins are before exceptional items.
Commentary, unless otherwise stated, refers to organic movements. Share, unless
otherwise stated, 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 basic eps as adjusted and the organic
eps movement calculation. The financial statements for the year ended 30 June
2006 have been prepared in accordance with IFRS as endorsed and adopted for use
in the European Union.
Regional Summary
North America - Continued outperformance and share gains
• Volume up 5%
• Net sales, after deducting excise duties, up 7%
• Marketing up 6%
• Operating profit before exceptional items up 6%
Diageo's North America business continues to outperform the market and gain
share. As a result of proven marketing campaigns and stronger execution of on
and off trade sales programmes, top line growth has been achieved across the
business with net sales, after deducting excise duties, up 8% for spirits, 7%
for wine, 11% for beer and 3% for ready to drink. The priority spirits brands
continued to perform strongly, especially Smirnoff vodka, Captain Morgan and
Jose Cuervo which each delivered double digit growth in net sales, after
deducting excise duties. Diageo's premium beer brands, Guinness, Red Stripe and
Smithwicks, continue to broaden their consumer appeal through effective
advertising campaigns and targeted product placement. In wine, following its
acquisition in February 2005, Chalone has provided another growth engine and the
performance of that business is ahead of expectations.
Europe - Building a more cost effective organisation
• Volume up 1%
• Net sales, after deducting excise duties, unchanged year on year
• Marketing reduced by 4%
• Operating profit before exceptional items up 6%
The European business has implemented change in the year to build a more cost
effective organisation focused on profitable growth opportunities. The decline
in the ready to drink segment in Europe and the challenges inherent in the Irish
beer market have adversely impacted top line growth. However, Diageo's spirits
brands in Europe and the beer brands outside of Ireland have performed well.
This is the result of focus on those brands and markets which will generate
future growth and a fuller innovation pipeline. Cost initiatives implemented in
the year have improved operating margins and driven operating profit growth.
International - Growth across all key markets
• Volume up 14%
• Net sales, after deducting excise duties, up 13%
• Marketing up 28%
• Operating profit before exceptional items up 9%
Diageo is well-positioned to take advantage of the opportunities in these
markets. Top line growth is accelerating and the International business is
delivering share gains for the key brands. The successful implementation of
turnaround plans in Nigeria, Korea and Taiwan have also contributed to the
improvement. This excellent top line growth has facilitated very high levels of
increased marketing investment behind the growth of key brands, particularly
Johnnie Walker in expanding markets such as China and Mexico, and behind
innovation.
Financial
• The deficit in respect of post employment plans reduced by £493
million from £1,294 million at 30 June 2005 to £801 million at 30 June 2006. As
a consequence, in the year ending 30 June 2007, finance income under IAS 19 will
increase year on year by approximately £30 million
• In the year ended 30 June 2006, foreign exchange movements reduced
operating profit by £25 million and had no impact on the interest charge
• In the year ending 30 June 2007, at current exchange rates foreign
exchange movements are estimated to reduce operating profit by £75 million and
reduce the interest charge by approximately £10 million (excluding the exchange
impact of re-translating short term inter-company loans under IAS 21)
• Brand performance summary
Reported Organic Reported Organic
Equivalent volume volume net sales* net sales*
units movement movement movement movement
million % % % %
Global priority brands 78.9 6 6 8 6
Local priority brands 23.1 2 2 8 3
Category brands 31.8 13 10 11 9
Total 133.8 7 6 9 6
Key brands:
Smirnoff vodka 21.9 9 9 12 10
Smirnoff ready to drink 5.0 1 1 1 (2)
Johnnie Walker 13.7 11 11 11 11
Guinness 11.1 (1) (1) 5 3
Captain Morgan (excl. ready to drink) 7.1 8 8 17 13
Baileys 7.0 4 4 4 3
J&B 5.9 - - (1) (1)
Crown Royal 4.6 5 5 13 8
Jose Cuervo (excl. ready to drink) 4.5 9 9 15 11
Tanqueray 2.0 6 6 12 8
Buchanan's 1.1 19 19 15 20
Windsor 0.7 12 12 23 9
* Net sales, after deducting excise duties.
Diageo acquired Bushmill's Irish Whiskey on 25 August 2005 for approximately
£200 million.
OPERATING AND FINANCIAL REVIEW
For the year ended 30 June 2006
OPERATING REVIEW
Analysis by region
North America
Summary:
• Top line growth across the business - spirits 8%, wine 7%, beer 11%
and ready to drink 3%
• Increased spend on proven marketing campaigns
• Well executed on and off trade sales programmes
• Growth of the premium beer brands supported by effective advertising
and targeted product placement
• In wine, Chalone is another growth driver - performing ahead of
expectations
Key measures: Reported Organic
2006 2005 movement movement
£ million £ million % %
Volume 5 5
Net sales after deducting excise duties 2,510 2,194 14 7
Marketing 384 341 13 6
Operating profit before exceptional items 829 779 6 6
Reported performance:
Net sales, after deducting excise duties, were £2,510 million in the year ended
30 June 2006 up by £316 million from £2,194 million in the prior year.
Operating profit before exceptional items increased by £50 million to £829
million in the year ended 30 June 2006.
Organic performance:
The weighted average exchange rate used to translate US dollar sales and profits
moved from £1 = $1.86 in the year ended 30 June 2005 to £1 = $1.78 in the year
ended 30 June 2006. The strengthening of the US dollar resulted in a £110
million increase in net sales, after deducting excise duties. Acquisitions added
£34 million of net sales, after deducting excise duties, and there was an
organic increase in net sales, after deducting excise duties, of £169 million.
Transfers between business segments increased prior year net sales, after
deducting excise duties, by £3 million. Operating profit before exceptional
items increased by £2 million as a result of foreign exchange impacts.
Acquisitions increased operating profit before exceptional items by £1 million
and organic growth of £47 million was achieved.
Organic brand performance: Reported Organic Reported net Organic
volume sales*
movement volume movement net sales*
movement movement
% % % %
Global priority brands 7 7 14 8
Local priority brands 2 2 10 5
Category brands 2 (1) 24 7
Total 5 5 14 7
Key brands:
Smirnoff vodka 9 16 11
Smirnoff ready to drink (3) 1 (5)
Johnnie Walker 1 10 5
Captain Morgan (excl. ready to drink) 9 19 14
Baileys 7 13 7
Jose Cuervo (excl. ready to drink) 9 16 11
Crown Royal 6 14 8
Tanqueray 5 13 7
Guinness 7 15 9
Beaulieu Vineyard - 5 1
Sterling Wines 3 15 10
* Net sales, after deducting excise duties
Diageo continued to outperform the market in an industry where the increase in
the US legal drinking age population and the trend towards more premium products
across all beverage alcohol categories are helping to drive growth.
The global priority brands again led the growth with volume up 7% and net sales,
after deducting excise duties, up 8%.
The spirits brands, excluding ready to drink, delivered 8% growth in net sales,
after deducting excise duties, reflecting strong performances from Smirnoff,
Captain Morgan and Jose Cuervo.
Smirnoff benefited from targeted profile raising activity. In the off trade,
volume was driven by concentrated activity on high visibility feature and
display initiatives across Smirnoff vodka, as well as innovation in flavours.
These activities and the focus on proven growth drivers, such as quality account
management, delivered strong growth for Smirnoff vodka with volume up 9% and net
sales, after deducting excise duties, up 11%.
Johnnie Walker continued to outperform the scotch category with volume up 1% and
net sales, after deducting excise duties, up 5%. Both Johnnie Walker Red Label
and Johnnie Walker Black Label grew share. Higher marketing and public
relations investment behind the successful Mentor programme and increased
relationship marketing underpinned these strong results.
Captain Morgan had a good year. Excluding ready to drink, volume was up 9% and
net sales, after deducting excise duties, were up 14%, benefiting from increased
media spending, particularly in television to drive awareness and trial, strong
display executions and the launch of Tattoo.
Baileys continued its turnaround from last year with volume and net sales, after
deducting excise duties, both up 7%.
The Jose Cuervo Tradicional and Reserva variants delivered double-digit growth
benefiting from the trend towards premium tequila. Product innovation also made
a strong contribution to growth as the super premium range was further extended
with the introduction of Black Medallion in February. A range of flavours was
also introduced during the year. Excluding ready to drink, Jose Cuervo volume
increased 9% and net sales, after deducting excise duties, rose 11%.
A strong second half performance from Crown Royal resulted in full year volume
up 6% and net sales, after deducting excise duties, up 8% as the investment
behind NASCAR was increased. The second half also saw the launch of an ultra
premium offering, Crown Royal Extra Rare.
The 'Tony Sinclair - Ready to Tanqueray' campaign has reinvigorated the
Tanqueray brand with volume up 5%. Price increases, taken over the year in
certain markets, have led to an increase in net sales, after deducting excise
duties, of 7%.
In line with the trend towards premium beers, Guinness continued to show strong
performance with volume up 7%. A price increase across all variants in October
2005 meant that net sales, after deducting excise duties, grew 9%.
In wine, Beaulieu Vineyard volume was flat, but net sales, after deducting
excise duties, increased 1%. Sterling Wines volume was up 3% with net sales,
after deducting excise duties, up 10% as price increases were taken across a
variety of labels. The Chalone wine brands are delivering ahead of
expectations, as a result of a strong contribution from innovation with the
introduction of new varietals.
Total ready to drink volume was up 2% led by the continued growth of Jose
Cuervo's pre-mixed margarita offerings and the launch of the Captain Morgan's
Parrot Bay ready to drink product. The introduction of new Smirnoff Twisted V
flavours, strong growth of Smirnoff Ice in Canada and the regional launch of
Smirnoff Raw Tea partially offset declines in the Smirnoff Ice brand in the US.
In category brands, volume decreased by 1% but net sales, after deducting excise
duties, were up 7%. This reflected the decision to shift operational focus
toward the more profitable reserve brands such as Ciroc and Don Julio and away
from the high volume standard brands such as Popov and Gordon's vodka.
Marketing spend for the year was up 6% and excluding ready to drink, up 9%. This
reflects an accelerated investment in spirits, offset by a reduction in spend on
ready to drink.
Europe
Summary:
• Net sales, after deducting excise duties, were unchanged year on year
as growth in core spirits offset tough market conditions in beer and ready to
drink
• Spirits demonstrated healthy volume growth at 3%
• Innovation is increasing brand visibility with new and existing
customers
• Marketing spend was reduced by 4% and prioritised against specific
opportunities such as Johnnie Walker throughout Europe and J&B in
France
Key measures: Reported Organic
2006 2005 movement movement
£ million £ million % %
Volume 2 1
Net sales after deducting excise duties 2,455 2,499 (2) -
Marketing 389 403 (4) (4)
Operating profit before exceptional items 737 702 5 6
Reported performance:
Net sales, after deducting excise duties, were £2,455 million in the year ended
30 June 2006 down by £44 million from the prior year. Operating profit before
exceptional items increased by £35 million from £702 million to £737 million.
Organic performance:
Disposals net of the impact of acquisitions decreased net sales, after deducting
excise duties, by £16 million and there was an organic decrease in net sales,
after deducting excise duties, of £4 million and an adverse impact of exchange
of £1 million. Transfers between business segments decreased prior year net
sales, after deducting excise duties, by £23 million. Operating profit before
exceptional items decreased by £5 million as a result of foreign exchange
impacts. Acquisitions increased operating profit before exceptional items by £4
million and organic growth of £39 million was achieved. Transfers between
business segments decreased prior year operating profit before exceptional items
by £3 million.
Organic brand performance: Reported Organic Reported net Organic
volume volume sales* net sales*
movement movement movement movement
% % % %
Global priority brands 1 1 (1) (1)
Local priority brands (2) (2) (1) (1)
Category brands 6 2 (3) 2
Total 2 1 (2) -
Key brands:
Smirnoff vodka 8 8 7
Smirnoff ready to drink (22) (21) (21)
Johnnie Walker 3 6 6
Baileys 1 - -
J&B (3) (5) (5)
Guinness (3) - -
* Net sales, after deducting excise duties.
Spirits demonstrated resilient growth with volume and net sales, after deducting
excise duties, up 3%, while beer, volume down 3% and ready to drink, volume down
22%, held back total performance. The shift from the on to the off trade in
Ireland again negatively impacted overall beer performance. Wine volume grew 7%
driven by Blossom Hill's robust growth in Great Britain and Ireland.
Smirnoff vodka, excluding ready to drink, continued to grow strongly, delivering
volume growth of 8% and growth of net sales, after deducting excise duties, of
7%. A pan-European advertising campaign, focusing on the quality credentials of
Smirnoff, continued to build the distinctiveness of the brand, although
marketing spend was reduced by 9%.
Johnnie Walker Red Label volume grew 1% while net sales, after deducting excise
duties, were flat. However, very strong volume growth of Johnnie Walker Black
Label, up 14% and Johnnie Walker Super Deluxe, up 21%, delivered overall growth
in Johnnie Walker, with volume up 3%, and had a positive mix impact as net
sales, after deducting excise duties, increased 6%. Growth was driven mainly by
increased demand in Southern Europe, Russia and Eastern Europe and the
favourable impact of advertising, especially the sponsorship of Team McLaren
Mercedes Formula One. Marketing spend was up 19% as a result of increased
activities in sports sponsorship.
Europe accounts for over half of Baileys volume worldwide and brand volume was
up a further 1% year on year, driven by growth in France, Italy, Russia and
Central and Eastern Europe. Net sales, after deducting excise duties, were flat.
Excluding ready to drink, both volume and net sales, after deducting excise
duties, grew by 1%.
The majority of J&B's volume in Europe is sold in Spain, where the
decline of the scotch category led to a 3% decrease in overall volume of J&B.
However, elsewhere in Europe, especially in France and Eastern Europe,
J&B performed well.
Guinness volume declined 3% although pricing offset weak volumes and net sales,
after deducting excise duties, were flat year on year. Guinness sales
progressed well in Russia during the year following Diageo's agreement in July
2005 with Heineken NV for the production and distribution of Guinness in Russia.
Despite a year on year decline in ready to drink, Diageo has managed costs and
increased the margin on ready to drink, even though contribution in absolute
terms was down.
Total local priority brand performance was negatively impacted by the decline of
Diageo's beer volume in Ireland.
Marketing spend was reduced by 4% driven by a 23% reduction in spending on ready
to drink.
Great Britain
Volume was flat and net sales, after deducting excise duties, were down 1% as
the decline in ready to drink continued to cause a negative mix impact.
The total spirits market in Great Britain was broadly flat as growth in the off
trade offset declines in the on trade. Diageo maintained leadership across all
key categories and excluding ready to drink, grew spirits volume by 2%.
Growth in spirits was attributable to Smirnoff vodka in particular, which
continued to gain share as volume grew 6% and net sales, after deducting excise
duties, grew 8%. Smirnoff performance was driven by marketing programmes focused
on quality and on trade activity around signature cocktails. Smirnoff ready to
drink volume declined 19%, a rate similar to the prior year.
Total Baileys volume declined 2% and net sales, after deducting excise duties,
declined by 4%. Excluding Baileys Glide, Baileys volume declined 1% whilst net
sales, after deducting excise duties, grew 1%. The majority of Baileys is sold
in the off trade where there has been increased competition from value brands,
however while volume declined, the brand maintained its value share. Baileys
grew in the on trade driven by distribution gains and price increases.
Total Guinness volume declined 1% whilst net sales, after deducting excise
duties, grew 1% driven by a price increase on Guinness Draught. While volume in
the on trade beer market in Great Britain declined 3% as consumers shifted to
consumption at home, Guinness Draught gained share in the on trade, growing
volume 1% and net sales, after deducting excise duties, by 4%. Media activities
were focused on quality attributes and Dublin brewed Guinness, as well as the
first year of a four-year sponsorship of the rugby premiership. This helped to
generate growth in the second half and increase share.
Local priority brand volume declined 2% and net sales, after deducting excise
duties, fell 6%, mainly due to the decline in Archers ready to drink. Gordon's
volume grew 1% and net sales, after deducting excise duties, were up 4%. Bell's
Extra Special volume grew 2% although net sales, after deducting excise duties,
were down.
Category brand volume grew 4% and net sales, after deducting excise duties,
increased 2% driven by Blossom Hill, which continued to grow strongly with
volume up 13%, and the launch in May 2006 of a new product, Quinn's, an
alcoholic fruit ferment blended drink, into the on and off trade.
Ireland
The performance in Ireland reflects the continuing change in market dynamics
from on to off trade, high levels of competitor investment, and consumer
migration to value brands. While the total beverage alcohol market grew 2%, the
on trade was down 3% and the off trade was up 7%. The on trade now represents
51% of the total market.
Volume declined 3% and net sales, after deducting excise duties, were down 1%.
This was due to weak performance in beer, where volumes were down 6%, partly
offset by growth in wine and spirits, where volume grew 18% and 7% respectively.
The impact on net sales, after deducting excise duties, of declining beer volume
was partly offset by price increases.
Guinness volume declined 8% whilst net sales, after deducting excise duties,
declined 3% as a result of price increases introduced in June 2005 and May 2006.
Guinness was impacted by increased levels of competitor investment and the
movement to the off trade where Guinness' share is lower. In the year there was
innovation on the Guinness brand with positive consumer response to the launch
of the limited edition Brewhouse Series. In the second half, Guinness
Mid-Strength, a lower alcohol by volume format, began consumer trials in 80
outlets.
The introduction of new packaging on Harp, new marketing executions on Carlsberg
and Harp and increased distribution have helped reinvigorate both brands. As a
result both Carlsberg and Harp have maintained volume year on year and net
sales, after deducting excise duties, have increased 7% and 2% respectively.
Smirnoff continued to be the number one vodka in Ireland and outperformed the
vodka category in both the on and off trade.
Baileys volume declined 2% and net sales, after deducting excise duties, fell 8%
due to increased competition from lower value brands.
Iberia
In Iberia, volume and net sales, after deducting excise duties, both declined
3%. In Spain, spirits penetration is declining in all age groups versus other
leisure categories and this has negatively impacted the Spanish business, whilst
in Portugal trading conditions continued to be tough as a result of tightening
consumer expenditure.
J&B faced increased pressure as the standard whisky segment in Spain
continued to decline as consumers continued to switch to dark rums. Therefore,
while J&B gained share in the Spanish on trade, overall Iberian volume
declined 7% and net sales, after deducting excise duties, fell 10%. Marketing
spend increased 3% behind J&B driven by investment in Spain.
Johnnie Walker volume declined 2%, however net sales, after deducting excise
duties, were up 2% driven by the growth of Johnnie Walker Black Label, Super
Deluxe and price increases throughout Iberia. Johnnie Walker Black Label and
Super Deluxe combined grew volume by 4% and net sales, after deducting excise
duties, by 11%. Johnnie Walker Red Label volume declined 3% despite a good
performance in Spain, where it is the only standard whisky brand growing volume
and share in the on trade. Total Diageo share in the standard scotch segment in
Spain increased by 0.3 percentage points.
Across Iberia, Baileys volume was down 6% and net sales, after deducting excise
duties, declined 5% driven by contraction in the on trade. Jose Cuervo volume
grew 13% and net sales, after deducting excise duties, were up 15% due to
continued consumer interest in the tequila category.
Local priority brand volume grew 5% and net sales, after deducting excise
duties, were up 7%. Dark rums grew robustly in the on and off trade with Cacique
volume up 6% and net sales, after deducting excise duties, up 9% as a result of
repositioning the brand.
Category brand volume declined 8% and net sales, after deducting excise duties,
fell 9%. Pampero volume declined 14% with net sales, after deducting excise
duties, down 12% as marketing spend was focused on Cacique. In total, Diageo's
rum brands grew volume 2% and net sales, after deducting excise duties, grew 5%.
Rest of Europe
In the rest of Europe, solid performances in Italy and Central and Eastern
Europe and the growth of super premium brands in Russia drove volume growth of
6% and growth in net sales, after deducting excise duties, of 4%.
Johnnie Walker Red Label volume in the rest of Europe was up 2% and net sales,
after deducting excise duties, were up 1%. Johnnie Walker Black Label and Super
Deluxe experienced strong growth with volume up 25% and net sales, after
deducting excise duties, up 28% from key markets such as Greece, Russia and
Northern Europe.
Captain Morgan delivered volume growth of 29% driven by Northern Europe and
Russia with net sales, after deducting excise duties, up 23%.
J&B performed well in France, its second largest market, with volume up
9% benefiting from effective on trade advertising and promotion. Baileys
enjoyed strong sales in France and Italy.
Ready to drink volume in the rest of Europe declined by 27%, as a result of the
continued decline in the segment in France.
Russia continued its momentum with robust volume growth of 25% and net sales,
after deducting excise duties, up 26% driven by Johnnie Walker, as the trend
towards premium products in Russia continued. Johnnie Walker is the number one
scotch in Russia and Baileys holds the same position in the imported liqueur
category.
Diageo has announced the acquisition of the Smirnov brand in Russia through a
company in which Diageo holds a 75% stake. This company will unite the Smirnoff/
Smirnov brands under common ownership and will be the exclusive distributor of
Diageo spirits brands and the Smirnov vodka brand in Russia.
International
Summary:
• Strong performance across all regions as investment accelerated growth
• Innovation has improved competitive positions in key categories across
the region
• Performance in Nigeria, Korea and Taiwan has been turned around
Reported Organic
Key measures: 2006 2005 movement movement
£ million £ million % %
Volume 14 14
Net sales after deducting excise duties 2,219 1,922 15 13
Marketing 354 269 32 28
Operating profit before exceptional items 644 615 5 9
Reported performance:
Net sales, after deducting excise duties, were £2,219 million in the year ended
30 June 2006, up by £297 million from £1,922 million in the prior year.
Operating profit before exceptional items increased by £29 million to £644
million in the year ended 30 June 2006.
Organic performance:
Net sales, after deducting excise duties, increased by £31 million as a result
of exchange rate impacts. Acquisitions added net sales, after deducting excise
duties, of £9 million and there was an organic increase in net sales, after
deducting excise duties, of £252 million. Transfers between business segments
increased prior year net sales, after deducting excise duties, by £5 million.
Operating profit before exceptional items increased by £29 million despite
unfavourable exchange rate movements of £23 million. Acquisitions increased
operating profit before exceptional items by £1 million and organic growth of
£54 million was achieved. Transfers between business segments reduced prior
year operating profit before exceptional items by £3 million.
Organic brand performance: Reported Organic Reported net Organic
volume volume sales* net sales*
movement movement movement movement
% % % %
Global priority brands 11 11 14 13
Local priority brands 4 4 12 5
Category brands 24 22 20 18
Total 14 14 15 13
Smirnoff vodka 9 14 13
Smirnoff ready to drink 41 47 44
Johnnie Walker 16 13 16
Baileys 11 8 6
Guinness (2) 7 3
Buchanan's 20 15 21
Windsor 12 23 9
* Net sales, after deducting excise duties.
Good economic conditions in many markets, further investment in the brands and
the organisation and a focus on market place execution have resulted in the
International business growing strongly in all regions. Growth has been driven
by the global priority brands, with Johnnie Walker in particular experiencing
strong growth on the back of upweighted investment. This investment has been
focused around the sponsorship of Team McLaren Mercedes Formula One, which has
been particularly successful in driving growth of Johnnie Walker Black Label and
Super Deluxe variants, where net sales, after deducting excise duties, grew 17%.
The sponsorship has also provided a strong platform for Diageo's responsible
drinking programmes.
Smirnoff vodka grew net sales, after deducting excise duties, by 13% with
particularly strong growth in India and Brazil. Smirnoff ready to drink volume
grew over 40%. This performance has been delivered through strengthened
distribution and sales execution and advertising campaigns on Smirnoff Ice in
Brazil and Australia, as well as the launch of Smirnoff Ice in Venezuela and
Smirnoff Storm in South Africa.
Baileys grew volume by 11% driven by growth in Global Duty Free and Japan.
Promotional activity in Global Duty Free and the decline of Baileys Glide in
Australia have, however, resulted in adverse mix with net sales, after deducting
excise duties, growing by 6%.
Guinness volume declined 2% whilst net sales, after deducting excise duties,
were up 3%. Performance was held back as a result of a decline in Cameroon,
although this was partly offset by strong performances in Nigeria and Ghana
where price increases accelerated the growth of net sales, after deducting
excise duties, ahead of volume. South East Asia and Japan also experienced good
growth.
Local priority brand performance was led by the growth of Buchanan's in
Venezuela, and the return to growth of Windsor in Korea, driven in particular by
new packaging on the 12 and 17 year-old variants. Growth of Bundaberg in
Australia and Bell's in South Africa were offset by declines in Dimple in Korea,
and Tusker and Pilsner in Kenya.
The growth of the scotch category across the region has been the main driver of
the growth in category brands. Investment behind Diageo's scotch brands has
enabled the International region to capitalise on market opportunities. Amongst
the successes was Old Parr, which grew significantly across Latin America with
volume and net sales, after deducting excise duties, up nearly 60%. The newly
launched whisky brands, continued to perform strongly in Thailand and the
successful relaunch of Harp in Nigeria also contributed to the overall growth in
category brands.
Ready to drink grew volume by 22% and net sales, after deducting excise duties,
by 21%. This was led by the growth of Smirnoff throughout International and
Bundaberg and Johnnie Walker in Australia.
Asia Pacific
Increased marketing investment, growing markets in India and China, share gains
in Korea and Thailand and continued growth in ready to drink in Australia led to
volume up 15%, and net sales, after deducting excise duties, up 11% in Asia
Pacific.
In Australia, ready to drink has driven growth of 6% in net sales, after
deducting excise duties, with Smirnoff, Johnnie Walker and Bundaberg all showing
good growth. Smirnoff ready to drink delivered share gains of 3.4 percentage
points, boosted by the successful launch of Smirnoff Twist ready to drink. In
spirits, whilst Baileys has declined in volume and lost share, Johnnie Walker
Red Label, Johnnie Walker Black Label, Bundaberg and Smirnoff have all gained
share in a spirits market that was up 6% in the year.
In Korea, the trading environment for spirits has stabilised as a result of
improved economic conditions, however Diageo's strong performance was the result
of gaining share, most notably on Windsor. The brand has been revitalised with
new packaging and the introduction of a 21-year-old variant and net sales, after
deducting excise duties, grew 9%. Johnnie Walker volume grew 36% and net sales,
after deducting excise duties, grew 52%. Johnnie Walker Super Deluxe grew
volume 58% and net sales, after deducting excise duties, by 82%, albeit off a
small base, as it gained from the new focus on modern on trade outlets and
marketing activities to build brand equity. Dimple volume declined by 22% in the
year, as renovations on the brand failed to turn around performance.
In Japan, volume grew 3% and net sales, after deducting excise duties, grew by
1%. Strong performances from Baileys, which grew volume by 65% and Guinness, up
14%, offset a 45% volume decline in Smirnoff ready to drink as a result of a
temporary withdrawal in the first half. The brand performed well following the
relaunch in the second half.
In Thailand, Diageo clearly outperformed the market and the competition, with
growth in each of its brands despite the decline in the imported whisky segment.
Benmore and Golden Knight together account for over 450,000 cases and have made
significant share gains in the standard and economy whisky segments
respectively, although this strong growth has resulted in an adverse mix.
Johnnie Walker recorded volume growth of 32% and growth in net sales, after
deducting excise duties, of 20% driven by Johnnie Walker Red Label.
Performance in Taiwan improved as volume and net sales, after deducting excise
duties, both grew 11%. Johnnie Walker Green Label in particular has performed
well, benefiting from a new campaign and a market where malt whisky is growing
strongly.
Performance in China has continued strongly with volume up 57% and net sales,
after deducting excise duties, up 81%, albeit from a small base. Johnnie Walker
Black Label represents a significant proportion of Diageo's business in China,
and has driven this growth with volume up 89% and net sales, after deducting
excise duties, up 124%, supported by a significant upweight in investment. This
investment included activities surrounding the sponsorship of Team McLaren
Mercedes Formula One at the Shanghai Grand Prix, as well as three new local
advertising executions.
The Indian business benefited from activities surrounding Johnnie Walker's
sponsorship of the cricket Super Series in Australia, and the Smirnoff 'Life is
Calling' campaign. Volume grew 29% and net sales, after deducting excise duties,
grew 37%. While there is increasing evidence of consumers upgrading to premium
and branded products, competitive activity is becoming more intense, with
evidence of increased consolidation in the sector, and an increasing number of
new brand launches.
Africa
Africa delivered volume growth of 10% and growth in net sales, after deducting
excise duties, of 9%. This was the result of strong performances in Nigeria and
South Africa, offset by a decline in Cameroon.
In Nigeria volume grew 20% and net sales, after deducting excise duties, grew
13%. Harp was relaunched in 2005 and as a result share has increased by 3.7
percentage points. This growth has, however, led to adverse mix. Guinness
delivered volume growth of 4% and net sales, after deducting excise duties, grew
9% as a result of a price increase in October 2004.
In East Africa, difficult economic conditions due to drought and rising fuel
prices together with a duty increase, saw consumers trade down to lower value
brands. Volume grew 20% and net sales, after deducting excise duties, grew 11%
with Senator, a low priced beer introduced in 2005, having performed well.
South Africa saw significant mix improvement as volume grew 6% and net sales,
after deducting excise duties, grew 19%. This mix improvement was the result of
a strong performance by Diageo's scotch brands as Johnnie Walker volume
increased by 36% and Bell's grew volume by 15%. The switch in consumer
preference towards dark spirits resulted in Smirnoff vodka volume declining by
7%, although Smirnoff ready to drink grew by 48%, driven by the launch of
Smirnoff Storm.
In Ghana, volume grew 6% whilst price increases and a change in invoicing
arrangements agreed with the authorities following the acquisition of Ghana
Breweries Ltd, led net sales, after deducting excise duties, to grow by 17%.
Guinness volume for the year was flat with net sales, after deducting excise
duties, up 13%. Volume of Malta increased by 13% as it continued to enjoy an
advantaged price position over its competitive set.
Trading in Cameroon was heavily impacted by aggressive promotional activity by a
competitor. As a result, Guinness volumes were down 37% and net sales, after
deducting excise duties, were down by 35%.
Latin America and Caribbean
Diageo has continued to invest behind brand building programmes, improvements in
customer relationships and sales execution to capitalise on the growth in
consumer demand from buoyant economies across Latin America. Volume grew by 17%
and net sales, after deducting excise duties, by 21%.
In the Brazilian hub, which includes Paraguay and Uruguay, growth was driven by
scotch and ready to drink. Johnnie Walker grew net sales, after deducting excise
duties, by 40%. In Brazil, Johnnie Walker benefited from investment both above
and below the line as Johnnie Walker Red Label share grew 3.4 percentage points
and Johnnie Walker Black Label delivered share gains of 1.8 percentage points.
Smirnoff ready to drink grew net sales, after deducting excise duties, over 100%
as the continued success of Smirnoff Ice has extended Smirnoff's leadership in
the buoyant ready to drink segment.
Volume grew 23% and net sales, after deducting excise duties, grew 36% in
Venezuela, as strong economic fundamentals have translated into increased
consumer demand across all sectors. Diageo leads the super deluxe, deluxe and
standard scotch segments. Johnnie Walker Red Label performed strongly with
volume and net sales, after deducting excise duties, up 25% and Buchanan's
delivered growth in net sales, after deducting excise duties, of 40%. A new
campaign for Smirnoff Ice has driven significant growth in volume and net sales,
after deducting excise duties, albeit off a small base.
In Mexico, volume grew 55% and net sales, after deducting excise duties, grew
41%. As a result Diageo gained 4.9 percentage points of share in the scotch
category. Johnnie Walker Red Label grew volume 32% and Buchanan's volume
increased 51% as a result of strengthened customer relationships, sustained
brand building investment and a particular focus on the on trade.
Global Duty Free
The focus on sales execution and innovation within Global Duty Free has driven
strong volume growth of 16% and growth in net sales, after deducting excise
duties, of 18%. Packaging innovation such as the Johnnie Walker Blue Label
Magnum and marketing activity around the sponsorship of Team McLaren Mercedes
Formula One has led to a 21% growth in net sales, after deducting excise duties,
for Johnnie Walker. Baileys delivered growth of 29% in net sales, after
deducting excise duties, as major sampling activities were carried out in Europe
and Asia associated with the launch of the new flavour innovations.
Corporate revenue and costs
Reported Performance:
Net sales, after deducting excise duties, were £76 million in the year ended 30
June 2006, up by £14 million from £62 million in the prior year. Net operating
costs before exceptional items increased by £2 million to £166 million in the
year ended 30 June 2006.
Organic Performance:
Transfers between business segments increased prior year net sales, after
deducting excise duties, by £15 million, and there was an organic decrease in
net sales, after deducting excise duties, of £1 million. Net corporate
operating costs before exceptional items decreased by £6 million as a result of
transfers between business segments and there was a decrease of £1 million as a
result of foreign exchange impacts. An organic increase of £9 million in
corporate net operating costs, before exceptional items, was driven mainly by an
increase in investment behind innovation.
FINANCIAL REVIEW
Condensed consolidated income statement
Year ended 30 June 2006 Year ended 30 June 2005
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
£ million £ million £ million £ million £ million £ million
Sales 9,704 - 9,704 8,968 - 8,968
Excise duties (2,444) - (2,444) (2,291) - (2,291)
Net sales 7,260 - 7,260 6,677 - 6,677
Operating costs (5,216) - (5,216) (4,745) (201) (4,946)
Operating profit 2,044 - 2,044 1,932 (201) 1,731
Disposal of investments/
businesses 157 157 214 214
Net finance charges (186) - (186) (141) - (141)
Associates' profits 131 - 131 121 - 121
Profit before taxation 1,989 157 2,146 1,912 13 1,925
Taxation (496) 315 (181) (677) 78 (599)
Profit from continuing
operations 1,493 472 1,965 1,235 91 1,326
Profit after tax from
disposal of businesses - - 73 73
Profit for the year 1,493 472 1,965 1,235 164 1,399
Attributable to:
Equity shareholders 1,436 472 1,908 1,180 164 1,344
Minority interests 57 - 57 55 - 55
1,493 472 1,965 1,235 164 1,399
Adoption of IFRS
The financial statements for the year ended 30 June 2006 have been prepared in
accordance with International Financial Reporting Standards as endorsed and
adopted for use in the European Union (IFRS). The results for the comparative
year ended 30 June 2005 are also presented in accordance with IFRS. For further
information related to the conversion to IFRS please see note 1 'Basis of
preparation' and note 12 'Explanation of transition to IFRS'.
Sales and net sales after deducting excise duties
On a reported basis, sales increased by £736 million (8%) from £8,968 million in
the year ended 30 June 2005 to £9,704 million in the year ended 30 June 2006. On
a reported basis, net sales, after deducting excise duties, increased by £583
million (9%) from £6,677 million in the year ended 30 June 2005 to £7,260
million in the year ended 30 June 2006. Acquisitions and disposals contributed a
net increase to reported sales and net sales, after deducting excise duties, of
£46 million and £27 million respectively in the year and foreign exchange rate
movements also beneficially impacted reported sales by £186 million and reported
net sales, after deducting excise duties, by £140 million, principally arising
from strengthening of the US dollar.
Operating costs
On a reported basis operating costs before exceptional items increased by £471
million principally due to an increase in cost of goods sold of £318 million and
an increase in marketing costs of 11% from £1,013 million to £1,127 million.
Overall, the impact of exchange rate movements increased total operating costs
before exceptional items by £165 million. There were no exceptional operating
costs in the year (2005 - £201 million). In the prior year exceptional operating
costs comprised £149 million in respect of contributions to be made to the
Thalidomide Trust, £29 million of accelerated depreciation and £30 million of
Seagram integration costs less £7 million in respect of the disposal of
property, plant and equipment. On a reported basis, operating costs increased by
£270 million (5%) from £4,946 million in the year ended 30 June 2005 to £5,216
million in the year ended 30 June 2006.
Post employment plans
Post employment costs for the year ended 30 June 2006 of £87 million (2005 - £80
million) comprised amounts charged to operating profit of £106 million (2005 -
£89 million) and finance income of £19 million (2005 - £9 million). At 30 June
2006, Diageo's deficit before taxation for all post employment plans was £801
million (2005 - £1,294 million).
Operating profit
Operating profit before exceptional items for the year increased by £112 million
to £2,044 million from £1,932 million in the prior year. Exchange rate movements
reduced operating profit before exceptional items for the year ended 30 June
2006 by £25 million. There were no exceptional operating charges in the year
ended 30 June 2006, compared to costs in respect of the year ended 30 June 2005
of £201 million.
Non-operating exceptional items
Non-operating exceptional items before taxation were a gain of £157 million in
the year ended 30 June 2006 compared with a gain of £214 million in the year
ended 30 June 2005. The gain in the year to 30 June 2006 represents a gain of
£151 million on sale of the group's remaining 25 million shares of common stock
of General Mills and a gain on sale of other businesses of £6 million. In the
year ended 30 June 2005 non-operating exceptional items included a gain of £221
million on the disposal of 54 million shares of common stock of General Mills
and a net charge of £7 million in respect of the disposal of other businesses.
Net finance charges
Net finance charges increased by £45 million from £141 million in the year ended
30 June 2005 to £186 million in the year ended 30 June 2006.
The net interest charge increased by £43 million from £150 million in the prior
year to £193 million in the year ended 30 June 2006; £23 million of this
increase resulted from higher debt and higher interest rates year on year, £13
million resulted from the loss of interest income on the Burger King
subordinated debt repaid in July 2005 and £10 million from the termination of
certain financing arrangements. In addition, the interest charge increased by
£6 million as a result of exchange rate movements. Partly offsetting these
increases, net interest also includes an interest credit of £9 million related
to derivative instruments arising on the application of IAS 39 - Financial
instruments: recognition and measurement.
Other net finance income of £7 million (2005 - income of £9 million) included
income in respect of the group's post employment plans of £19 million (2005 -
income of £9 million) which year on year improvement principally results from
lower interest costs in the pension plans from the unwinding of discounted
liabilities. In addition, other net finance charges include a charge of £15
million (2005 - £7 million) in respect of the unwinding of discounted
liabilities, a £2 million charge (2005 - charge of £8 million) in respect of
foreign exchange translation differences on inter-company funding arrangements
that do not meet the accounting criteria for recognition in equity and
investment income of £5 million (2005 - £17 million) in respect of dividends on
General Mills shares.
Associates
The group's share of profits of associates after interest and tax was £131
million for the year compared to £121 million last year. Diageo's 34% equity
interest in Moet Hennessy contributed £122 million to share of profits of
associates after interest and tax (2005 - £113 million).
Profit before taxation
After exceptional items, profit before taxation increased by £221 million from
£1,925 million to £2,146 million in the year ended 30 June 2006.
Taxation
The effective tax rate before exceptional items for the year ended 30 June 2006
is 24.9% compared with 35.4% for the year ended 30 June 2005. The higher
effective tax rate in the year ended 30 June 2005 mainly resulted from the
reduction in the carrying value of deferred tax assets following a change in tax
rate in the relevant territory.
The effective tax rate for continuing operations for the year ended 30 June 2006
after exceptional items is 8.4% compared with 31.1% for the year ended 30 June
2005. The effective tax rate in the current year has been reduced following the
agreement of certain brand values with fiscal authorities that resulted in
recognising an increase in the group's deferred tax assets of £313 million.
This amount has been accounted for as exceptional income. The profit arising on
the sale of General Mills shares in the year and the comparative year is not
subject to tax.
Profits after tax from disposal of businesses
Profits after tax from the disposal of businesses in the prior year of £73
million are in respect of the release of provisions established on the disposal
of Burger King and Pillsbury.
Exchange rates
Diageo does not hedge the translation of its foreign currency results into
sterling. Transactional foreign exchange rate risk is hedged for those
currencies in which there is an active market. The group seeks to hedge between
80% and 100% of forecast transactional exchange rate risk, for up to a maximum
of 21 months forward, using forward currency exchange contracts. The gain or
loss on the hedge is recognised in equity to the extent the hedge is effective
and subsequently recognised in the income statement at the same time as the
underlying hedged transaction effects the income statement.
Effect of exchange rate movements on the results for the year ended 30 June 2006
as compared with the results for the year ended 30 June 2005:
Year ended
30 June 2006
Gains/(losses)
£ million
Operating profit before exceptional items
Translation impact 46
Transaction impact (71)
(25)
Interest and other finance charges
Translation impact (6)
Net exchange movements on short term inter-company loans 6
Total FX effect on profit before exceptional items and taxation (25)
Year ended Year ended 30
30 June 2006 June 2005
Exchange rates
Translation US$/£ rate 1.78 1.86
Translation €/£ rate 1.46 1.46
Transaction US$/£ rate 1.81 1.72
Transaction €/£ rate 1.45 1.48
The strengthening of the US dollar had a positive translation effect on
operating profit and an adverse impact on US dollar denominated interest
payments. The negative transaction impact was mainly driven by the move in the
transaction US$ exchange rate from £1 = $1.72 to £1 = $1.81.
Outlook for the impact of exchange rate movements
For the year ending 30 June 2007 the impact of exchange rate movements based on
current exchange rates is estimated to have an adverse impact of £75 million on
operating profit and a positive impact of between £5 million to £10 million on
interest. For the full year, each one cent movement from current rates for
either the US dollar or the Euro impacts profit before exceptionals and taxation
by approximately £3 million respectively.
Dividend
The directors recommend a final dividend of 19.15 pence per share, an increase
of 5% on last year's final dividend. The full dividend would therefore be 31.1
pence per share, an increase of 5% from the year ended 30 June 2005. Subject to
approval by shareholders, the final dividend will be paid on 23 October 2006 to
shareholders on the register on 15 September 2006. Payment to ADR holders will
be made on 27 October 2006. A dividend reinvestment plan is available in respect
of the final dividend and the plan notice date is 2 October 2006.
Cash flow
Extract from the consolidated cash flow statement Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Cash generated from operations 2,199 2,273
Interest paid (net) (171) (179)
Dividends paid to equity minority interests (40) (49)
Tax paid (393) (320)
Net sale/(purchase) of investments 7 (6)
Net capital expenditure (241) (276)
Free cash flow 1,361 1,443
Cash generated from operations decreased by £74 million to £2,199 million in the
year ended 30 June 2006. There was an increase in profit after tax in the year
of £566 million to £1,965 million at 30 June 2006 which was offset by the
year-on-year impact of working capital movements on the cash flow of £281
million (an outflow of £192 million in the year ended 30 June 2006 and an inflow
of £89 million in the prior year). Of this movement in year-on-year working
capital, £179 million reflects the presentation of exceptional non-cash charges
within working capital movements in the prior year following the implementation
of IFRS, thus operating working capital impact on cash flow was £102 million.
The decrease in cash generated from operations was partially offset by reduced
interest payments (down £8 million to £171 million) and reduced capital
expenditure (down £35 million to £241 million). However increased tax payments
(up £73 million to £393 million) contributed to an overall decrease in free cash
flow of £82 million to £1,361 million from £1,443 million in the prior year.
In the year ended 30 June 2006, the group generated proceeds from the disposal
of shares of General Mills of £651 million (2005 - £1,210 million) and issued
new share capital under employee share schemes generating proceeds of £3 million
(2005 - £6 million). These inflows were mainly offset by payments of £1,428
million to repurchase shares to be held as treasury shares, the payment of £209
million to acquire Bushmills Irish Whiskey in August 2005 and £864 million
equity dividends paid. Diageo's stance on capital structure is unchanged: it
continues to target a range of ratios that are currently broadly consistent with
an A band credit rating. Diageo expects to continue the share repurchase
programme at broadly the current level in the next financial year.
Balance sheet
At 30 June 2006, total equity was £4,681 million compared with £4,626 million at
30 June 2005. This increase was mainly due to the profit for the year of £1,965
million and an actuarial gain on the group's post employment plans (net of tax)
of £374 million offset by the dividends paid out of shareholders' equity of £864
million and shares repurchased of £1,428 million.
Net borrowings were £4,082 million at 30 June 2006, an increase of £379 million
from 1 July 2005 net borrowings of £3,703 million. The principal components of
this increase are summarised above.
Economic profit
Economic profit increased by £101 million from £463 million in the year ended 30
June 2005 to £564 million in the year ended 30 June 2006. See page 38 for
calculation and definition of economic profit.
DIAGEO CONSOLIDATED INCOME STATEMENT
Year ended 30 June 2006 Year ended 30 June 2005
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
Notes £ million £ million £ million £ million £ million £ million
Sales 2 9,704 - 9,704 8,968 - 8,968
Excise duties (2,444) - (2,444) (2,291) - (2,291)
Net sales 7,260 - 7,260 6,677 - 6,677
Cost of sales 4 (2,921) - (2,921) (2,603) (29) (2,632)
Gross profit 4,339 - 4,339 4,074 (29) 4,045
Marketing (1,127) - (1,127) (1,013) - (1,013)
Other operating expenses 4 (1,168) - (1,168) (1,129) (172) (1,301)
Operating profit 2 2,044 - 2,044 1,932 (201) 1,731
Sale of General Mills 4
shares 151 151 221 221
Sale of other businesses 4 6 6 (7) (7)
Net interest 3 (193) - (193) (150) - (150)
Other net finance income 3 7 - 7 9 - 9
Share of associates' profits
after tax 131 - 131 121 - 121
Profit before taxation 1,989 157 2,146 1,912 13 1,925
Taxation 5 (496) 315 (181) (677) 78 (599)
Profit from continuing
operations 1,493 472 1,965 1,235 91 1,326
Discontinued operations
Profit after tax from
disposal of businesses - - 73 73
Profit for the year 1,493 472 1,965 1,235 164 1,399
Attributable to:
Equity shareholders 1,436 472 1,908 1,180 164 1,344
Minority interests 57 - 57 55 - 55
1,493 472 1,965 1,235 164 1,399
Basic earnings per share
Continuing operations 67.2p 42.8p
Discontinued operations - 2.4p
67.2p 45.2p
Diluted earnings per share
Continuing operations 66.9p 42.8p
Discontinued operations - 2.4p
66.9p 45.2p
Average shares 2,841m 2,972m
DIAGEO CONSOLIDATED STATEMENT OF
RECOGNISED INCOME AND EXPENSE
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million £ million £ million
Exchange differences on translation of foreign operations
- group 24 95
- associates 22 21
Exchange differences on hedge of net investment in foreign
operations (21)
Effective portion of changes in fair value of net investment (49)
hedges
Effective portion of changes in fair value of foreign exchange
cash flow hedges
- gains taken to equity 38
- transferred to other operating expenses for the year 11
Effective portion of changes in fair value of interest rate cash
flow hedges
- gains taken to equity 1
- transferred to interest receivable/payable for the year (7)
Fair value movement on available for sale securities
- unrealised gains arising during the year (including
exchange) 33
- realised gains reclassified to profit for the year (181)
Actuarial gains/(losses) on post employment plans 459 (238)
Tax on items taken directly to equity (97) 33
Net income/(expense) recognised directly in equity 233 (89)
Profit for the year
- group 1,834 1,278
- associates 131 121
Profit for the year 1,965 1,399
Total recognised income and expense for the year 2,198 1,310
Impact of IAS 39 adoption on 1 July 2005 (net of tax)
- group 170
- associates (6)
Impact of adoption of IAS39 164
2,362
Attributable to:
Equity shareholders of the parent company 2,146 1,250
Minority interests 52 60
Total recognised income and expense for the year 2,198 1,310
DIAGEO CONSOLIDATED BALANCE SHEET
30 June 2006 30 June 2005
£ million £ million £ million £ million
Non-current assets
Intangible assets 4,534 4,409
Property, plant and equipment 1,952 1,919
Biological assets 13 14
Investments in associates 1,341 1,261
Other investments 69 719
Other receivables 12 44
Other financial assets 42 32
Deferred tax assets 1,113 778
Post employment benefit assets 14 12
9,090 9,188
Current assets
Inventories (note 8) 2,386 2,347
Trade and other receivables 1,681 1,569
Cash and cash equivalents 699 787
Other financial assets 71 30
4,837 4,733
Total assets 13,927 13,921
Current liabilities
Borrowings and bank overdrafts (759) (869)
Trade and other payables (1,803) (1,872)
Other financial liabilities (36) -
Corporate tax payable (681) (777)
Provisions (56) (88)
(3,335) (3,606)
Non-current liabilities
Borrowings (4,001) (3,677)
Other payables (37) (95)
Other financial liabilities (78) (9)
Provisions (306) (304)
Deferred tax liabilities (674) (298)
Post employment benefit liabilities (815) (1,306)
(5,911) (5,689)
Total liabilities (9,246) (9,295)
Net assets 4,681 4,626
Equity
Called up share capital 883 883
Share premium 1,340 1,337
Other reserves 3,168 3,181
Retained deficit (889) (942)
Equity attributable to equity shareholders of 4,502 4,459
the parent company
Minority interests 179 167
Total equity (note 7) 4,681 4,626
DIAGEO CONSOLIDATED CASH FLOW STATEMENT
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million £ million £ million
Cash flows from operating activities
Profit for the year 1,965 1,399
Profit after tax from discontinued businesses - (73)
Taxation 181 599
Share of associates' profits after tax (131) (121)
Net interest and finance charges 186 141
Net non-operating exceptional gains (157) (214)
Depreciation and amortisation 214 241
Movements in working capital (192) 89
Dividend income 115 134
Other items 18 78
Cash generated from operations 2,199 2,273
Interest paid (235) (325)
Interest received 64 146
Dividends paid to equity minority interests (40) (49)
Taxation paid (393) (320)
Net cash from operating activities 1,595 1,725
Cash flows from investing activities
Net disposal/(purchase) of investments 7 (6)
Disposal of property, plant and equipment 16 18
Purchase of property, plant and equipment (257) (294)
Disposal of shares in General Mills 651 1,210
Disposal of businesses 121 (16)
Purchase of subsidiaries (209) (258)
Net cash from investing activities 329 654
Cash flows from financing activities
Proceeds from issue of share capital 3 6
Net purchase of own shares for share trusts (11) (29)
Own shares repurchased for cancellation or holding
as treasury shares (1,428) (710)
Increase/(decrease) in loans 309 (379)
Redemption of guaranteed preferred securities - (302)
Equity dividends paid (864) (849)
Net cash used in financing activities (1,991) (2,263)
Net (decrease)/increase in cash and cash
equivalents (67) 116
Exchange differences (11) (55)
Net cash and cash equivalents at beginning of the year 729 668
Net cash and cash equivalents at end of the year 651 729
Net cash and cash equivalents consist of:
Cash and cash equivalents 699 787
Bank overdrafts (48) (58)
651 729
NOTES
1. Basis of preparation
The consolidated financial statements are prepared in accordance with applicable
International Financial Reporting Standards, as endorsed and adopted for use in
the European Union (IFRS). The group is complying with IFRS for the first time
for the year ended 30 June 2006 and the accounting policies applicable to the
group from 1 July 2005 are those available on Diageo's website, www.diageo.com.
Comparative information is presented for the year ended 30 June 2005 prepared
under IFRS. This involved preparation of an opening IFRS balance sheet as at 1
July 2004, which is the group's date of transition to IFRS reporting.
IFRS 1 - First-time adoption of International Financial Reporting Standards
permits certain optional exemptions from full retrospective application of IFRS
accounting policies and the following options have been adopted:
• Business combinations: Business combinations prior to the date of
transition have not been restated onto an IFRS basis.
• Cumulative translation differences: The cumulative translation
difference arising on consolidation has been deemed to be zero at the
date of transition.
• Share-based payments: Full retrospective application has been adopted.
• Financial instruments: The group has adopted the provisions of IAS 39
• Financial instruments: recognition and measurement from 1 July 2005.
Financial instruments in the year ended 30 June 2005 remain recorded
in accordance with previous UK GAAP accounting policies, and the
adjustment to IAS 39 is reflected in the balance sheet at 1 July 2005.
Further details of the impact of the transition to IFRS are presented in note
12.
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 2005, which were prepared under UK GAAP, 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 2006. 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 and Corporate, reflecting the group's
management and internal reporting structure.
Business analysis:
Year ended Year ended
30 June 2006 30 June 2005
Operating profit/ Operating
Sales (loss) Sales profit/(loss)*
£ million £ million £ million £ million
North America 2,968 829 2,622 779
Europe 3,834 737 3,860 702
International 2,826 644 2,424 615
9,628 2,210 8,906 2,096
Corporate 76 (166) 62 (164)
9,704 2,044 8,968 1,932
* Operating profit for the year ended 30 June 2005 is before exceptional
operating charges of £201 million.
Corporate revenues and costs are in respect of central costs including finance,
human resources and legal as well as certain information system, business
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 and the results of
Gleneagles Hotel. Net corporate operating costs increased £2 million to £166
million.
30 June 2006 30 June 2005
£ million £ million
Total assets:
North America 872 872
Europe 1,190 1,074
International 1,139 1,125
Moet Hennessy 1,303 1,214
Corporate and other 9,423 9,636
13,927 13,921
Total assets for 'Corporate and other' includes the group's brands and maturing
inventories owned for the future production of whisky.
Geographical analysis of sales and operating profit by destination:
Year ended Year ended
30 June 2006 30 June 2005
Operating profit Operating
Sales Sales profit*
£ million £ million £ million £ million
North America 2,999 842 2,658 795
Europe 3,977 597 3,974 561
Asia Pacific 1,085 218 918 213
Latin America 671 163 564 159
Rest of World 972 224 854 204
9,704 2,044 8,968 1,932
* Operating profit for the year ended 30 June 2005 is before exceptional
operating charges of £201 million.
Sales and operating profit by geographical destination have been stated
according to the location of the third party customers.
Certain businesses included within Diageo International for internal management
purposes have been reported within the appropriate geographic operating region
in the geographical analysis above. Corporate sales and operating loss
(principally central costs) are incurred in Europe.
Weighted average exchange rates used in the translation of profit and loss
accounts were US dollar - £1 = $1.78 (2005 - £1 = $1.86) and euro - £1 = €1.46
(2005 - £1 = €1.46). Exchange rates used to translate assets and liabilities at
the balance sheet date were US dollar - £1 = $1.85 (2005 - £1 = $1.79) and euro
- £1 = €1.45 (2005 - £1 = €1.48).
The holiday season provides the peak period for sales. Approximately 30% of
annual sales volume occurs in the last three months of each calendar year.
3. Net interest and other finance charges
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Interest payable (229) (271)
Interest receivable 27 121
Market value movements on interest rate instruments 9
Net interest (193) (150)
Investment income - dividends receivable from General Mills 5 17
Net finance income in respect of post employment plans 19 9
Unwinding of discounts on provisions and debtors (15) (7)
Other finance charges - (2)
9 17
Net exchange movements on short term intercompany loans (2) (8)
Other net finance income 7 9
4. Exceptional items
The group separately presents certain items as 'exceptional'. These are items
which, 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.
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Operating costs
Park Royal brewery accelerated depreciation - (29)
Provision for contributions to the Thalidomide Trust - (149)
Seagram integration costs - (30)
Disposal of fixed assets - 7
- (201)
Disposals
Shares in General Mills 151 221
Other 6 (7)
157 214
Discontinued operations
Disposal of Burger King - 53
Exceptional items before taxation 157 66
In addition, exceptional income of £313 million has been recognised within
taxation related to the agreement of certain brand values within fiscal
authorities that resulted in the recognition of an increase in the group's
deferred tax assets.
5. Income taxes
The £181 million total taxation charge for the year ended 30 June 2006 comprises
a UK tax charge of £134 million and a foreign tax charge of £47 million.
Exceptional tax credits amounted to £315 million in the year (2005 - £78
million) including a £313 million increase in the group's deferred tax assets
following agreement of certain brand carrying values with fiscal authorities.
In addition, in the year ended 30 June 2005 there was a tax credit on
discontinued operations of £20 million.
6. Dividends
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Amounts recognised as distributions to equity holders in the Year
Final dividend paid for the year ended 30 June 2005 of 18.2p
(2004 - 17.0p) per share 529 512
Interim dividend paid for the six month period ended
31 December 2005 of 11.95p (2004 - 11.35p) per share 335 337
864 849
A final dividend of 19.15 pence per share for the year ended 30 June 2006 (2005
- 18.2 pence per share) was recommended by the board on 30 August 2006. This
dividend is recommended for approval by shareholders at the annual general
meeting to be held on 17 October 2006 and as the approval will be after the
balance sheet date it has not been included as a liability.
7. Movements in total equity
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Total equity at beginning of the year 4,626
Adoption of IAS 39 on 1 July 2005 164
Restated total equity at beginning of the year 4,790 5,229
Total recognised income and expense for the year 2,198 1,310
Dividends paid to equity shareholders (864) (849)
Dividends paid to minority interests (40) (60)
New share capital issued 3 6
Share trust arrangements 16 (2)
Tax on share trust arrangements 6 -
Purchase of own shares for cancellation - (61)
Purchase of own shares held as treasury shares (1,428) (649)
Redemption of preferred securities (net) - (298)
Net movement in total equity (109) (603)
Total equity at end of the year 4,681 4,626
Total equity at the end of the year includes gains of £107 million in respect of
cumulative translation differences (2005 - gains of £121 million) and charges of
£2,070 million (2005 - £649 million) in respect of own shares held as treasury
shares. The increase in shares held as treasury shares of £1,428 million
represents treasury shares acquired under the share repurchase programme of
£1,407 million and other treasury shares acquired to hedge share option schemes
of £21 million.
8. Inventories
30 June 2006 30 June 2005
£ million £ million
Raw materials and consumables 236 237
Work in progress 17 19
Maturing stocks 1,644 1,561
Finished goods and goods for resale 489 530
2,386 2,347
9. Reconciliation of movement in net borrowings
Year ended Year ended
30 June 2006 30 June 2005
£ million £ million
Net borrowings at beginning of the year (3,706) (4,156)
Adoption of IAS 39 on 1 July 2005 3
Restated net borrowings at beginning of the year (3,703)
(Decrease)/increase in net cash and cash equivalents (67) 116
Cash flow from change in loans (309) 379
Change in net borrowings from cash flows (376) 495
Exchange differences 15 (136)
Other non-cash items (18) 91
Net borrowings at end of the year (4,082) (3,706)
The group issued the following bonds or medium term notes in the year: a US $750
million global bond issued on 28 October 2005 which matures on 28 October 2015,
a US $250 million medium term note issued on 10 November 2005 which matures on
10 November 2008, a US $600 million bond issued on 30 March 2006 which matures
on 1 April 2013 and a US $400 million floating rate note issued on 30 March 2006
which matures on 30 March 2009. A US $500 million global bond matured and was
repaid in the year.
10. Net Borrowings
30 June 2006 30 June 2005
£ million £ million
Debt due within one year and overdrafts (759) (869)
Debt due after one year (4,001) (3,677)
Fair value of interest rate hedges (44) -
Obligations under finance leases (9) (9)
(4,813) (4,555)
Less: Cash and cash equivalents 699 787
Other liquid resources 49 30
Fair value of foreign exchange net investment hedges (17) 32
Net borrowings (4,082) (3,706)
The balance sheet classifications 'Other financial assets' include £9 million of
assets in respect of the fair value of interest rate hedges and other liquid
resources of £49 million. The balance sheet classifications 'Other financial
liabilities' include £53 million of liabilities in respect of the fair value of
interest rate hedges, £9 million of obligations under finance leases and £17
million in respect of the fair value of foreign currency net investment hedges.
11. 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 (£108
million) until November 2009. Including this guarantee, but net of the amount
provided in the consolidated financial statements, the group has given
performance guarantees and indemnities to third parties at 30 June 2006 of £168
million. There has been no material change since 30 June 2006 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 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 alcoholic 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 on
other legal theories. The litigation is ongoing and Diageo intends to defend
itself vigorously against these claims.
(iv) 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.
12. Explanation of transition to IFRS
These are the group's first consolidated annual financial statements prepared in
accordance with IFRS. As permitted by IFRS 1, the group has adopted certain
optional exemptions from full retrospective application of IFRS accounting
policies, including the adoption of IAS 39 - Financial instruments recognition
and measurement with effect from 1 July 2005 (see note 1). Subject to those
exemptions, the accounting policies applied in preparing the consolidated
financial statements for the year ended 30 June 2006, the comparative
information presented in these financial statements for the year ended 30 June
2005, and an opening IFRS balance sheet at 1 July 2004 (the group's date of
transition) are available on Diageo's website, www.diageo.com, along with an
explanation of how the transition from UK GAAP to IFRS has affected the group's
financial performance and financial position. In addition, the impact of the
adoption of IAS 39 on the group's consolidated balance sheet at 1 July 2005 is
given.
In preparing the comparative information and the opening IFRS balance sheet, the
group has adjusted amounts reported previously in financial statements prepared
in accordance with its former basis of accounting under UK GAAP. Set out in the
following tables is the UK GAAP to IFRS reconciliation of profit for the year
ended 30 June 2005 and a reconciliation of total equity at 1 July 2004 and 30
June 2005.
Reconciliation of profit for the year
Year ended
30 June 2005
£ million
Profit after taxation under UK GAAP 1,439
Reversal of goodwill recycled to income statement on disposal (IAS 38) 247
Amortisation of deferred tax assets (IAS 12) (267)
Foreign exchange differences on inter-company funding loans (IAS 21) (8)
Share based payments (IFRS 2) (9)
Other (3)
Profit for the year under IFRS 1,399
Reconciliation of total equity
30 June 2005 1 July
£ million 2004
£ million
Total shareholders' funds and minority interests under UK GAAP 3,834 4,183
Valuation of net post employment benefit liability (IAS 19) (52) (54)
Net deferred tax asset on brands and group re-organisations (IAS 12) 423 706
De-recognition of final dividend creditor (IAS 10) 530 513
Elimination of revaluation reserve (IAS 16) (111) (113)
Other 2 (6)
Total equity under IFRS 4,626 5,229
Net impact of implementation of IAS 39 164
Total equity under IFRS at 1 July 2005 4,790
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Definitions
Unless otherwise stated, percentage movements given throughout this announcement
for volume, sales, net sales, after deducting excise duties, marketing and
operating profit are organic movements (at level exchange rates and after
adjusting for acquisitions and disposals) for continuing operations. They are
before exceptional items. Comparisons are with the equivalent period in the
last financial year. For an explanation of organic movements please refer to
Diageo's annual report for the year ended 30 June 2005 and '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 less 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 flavoured malt 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 Fire, Smirnoff Raw Tea, Smirnoff Caipiroska and
Smirnoff Signatures. 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. The share data contained in this
announcement is taken from independent industry sources in the markets in which
Diageo operates. 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 of voice data 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 39 - '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.
Reconciliation to GAAP measures
(i) Organic movement
Organic movement in volume, sales, net sales after deducting excise duties,
operating profit before exceptional items 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 foreign 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 foreign exchange is managed
centrally and is not a factor over which local managers have any control.
Acquisitions and disposals 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 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 after deducting excise duties, and
operating profit before exceptional items
Diageo's strategic planning and budgeting process is based on organic movement
in volume, sales, net sales after deducting excise duties and operating profit
before exceptional items, 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 and disposals.
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 a replacement for, the comparable
GAAP measures: sales, net sales after deducting excise duties, operating profit
and reported movements in individual income statement captions. These GAAP
measures reflect all of the factors which impact on the business.
The organic movement calculations for volume, sales, net sales after deducting
excise duties and operating profit before exceptional items for the year ended
30 June 2006 were as follows:
1. Volume (1) (a) (b)
Organic Organic
2005 Acquisitions movement 2006 movement
units units units units
million million Million million %
North America 46.5 0.2 2.1 48.8 5
Europe 40.8 0.3 0.3 41.4 1
International 38.1 0.3 5.2 43.6 14
Total 125.4 0.8 7.6 133.8 6
2. Sales (a) (b)
Acquisitions
and disposals
2005(2) (5) Organic 2006 Organic
Reported Transfers(3) Exchange(4) movement Reported movement
£ million £ million £ million £ million £ million £ million %
North America 2,622 3 129 41 173 2,968 6
Europe 3,860 (23) 1 (7) 3 3,834 -
International 2,424 5 56 12 329 2,826 13
Corporate 62 15 - - (1) 76 (2)
Total 8,968 - 186 46 504 9,704 6
3. Net sales after deducting excise duties (a) (b)
Acquisitions
and disposals
2005(2) (5) Organic 2006 Organic
Reported Transfers(3) Exchange(4) movement Reported movement
£ million £ million £ million £ million £ million £ million %
North America 2,194 3 110 34 169 2,510 7
Europe 2,499 (23) (1) (16) (4) 2,455 -
International 1,922 5 31 9 252 2,219 13
Corporate 62 15 - - (1) 76 (2)
Total 6,677 - 140 27 416 7,260 6
Excise duties 2,291 2,444
Sales 8,968 9,704
4. Operating profit before exceptional items (a) (b)
Acquisitions
and disposals
2005(2) (5) Organic 2006 Organic
Reported Transfers(3) Exchange(4) movement Reported movement
£ million £ million £ million £ million £ million £ million %
North America 779 - 2 1 47 829 6
Europe 702 (3) (5) 4 39 737 6
International 615 (3) (23) 1 54 644 9
Corporate (164) 6 1 - (9) (166) (6)
Total 1,932 - (25) 6 131 2,044 7
Notes - Information relating to the current period
(1) Differences between the reported volume movements and organic volume
movements are due to acquisitions.
(2) Results for 2005 have been restated for the impacts of implementing IFRS.
(3) Transfers represent the movement between operating units of certain
activities, the most significant of which were the reallocation of the Guinness
Storehouse visitor centre in Dublin from Europe into the Corporate business
segment and the transfer of the costs in respect of a global information
technology project from Corporate into Europe and International.
(4) The exchange adjustments for sales, net sales after deducting excise
duties, and operating profit before exceptional items are principally in respect
of the US dollar.
(5) The only acquisition in the year ended 30 June 2006 was the acquisition of
The 'Old Bushmills' Distillery Company Limited. Other acquisitions impacting the
calculation of organic growth in the year were in respect of the acquisition of
The Chalone Wine Group (North America), Ursus Vodka Holdings B.V. (Europe) and
Ghana Breweries Limited (International). Disposals affecting the year were
principally the disposal of United Beverages Limited (Europe) and contributed
sales, net sales after deducting excise duties, and operating profit before
exceptional items of £35 million, £35 million and £nil million, respectively, in
the year ended 30 June 2005 and had no impact on volume.
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 2005 Reported, Transfers, Exchange and the
amounts in respect of disposals (see note 5 above) included in the column headed
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 disposals. 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 before exceptional items 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.
Organic movement in earnings per share
The group's management believes basic earnings per share on an organic movement
basis, provides valuable additional information for users of the financial
statements in understanding the group's overall performance. The group's
management believe that the comparison of movements on both a reported and
organic 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
changes in the effective rate of tax. 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 thereon. These
GAAP measures reflect all of the factors which impact on the business.
The organic movement calculation in earnings per share for the year ended 30
June 2006 was as follows:
pence per share
(5)
Reported basic eps for year ended 30 June 2005 45.2
Exceptional items (1) (5.5)
Basic eps before exceptional items for year ended 30 June 2005 39.7
Disposals (2) (a) 0.3
Exchange (3) (d) (0.7)
Tax equalisation to 25% (4) 6.7
Adjusted basic eps for year ended 30 June 2005 46.0
Reported basic eps for year ended 30 June 2006 67.2
Exceptional items (1) (16.7)
Basic eps before exceptional items for the year ended 30 June 2006 50.5
Acquisitions (2) (b) 0.2
Exchange (3) (d) 0.1
Adjusted basic eps for year ended 30 June 2006 50.8
Reported basic eps movement amount 22.0
Basic eps before exceptional items movement amount 10.8
Organic movement amount (after impact of acquisitions and exchange) (c) 4.8
Reported basic eps growth 49%
Basic eps before exceptional items growth 27%
Organic growth (c) 10%
Notes - Information relating to the current period
1) The exceptional items (after tax and attributable to equity
shareholders) reported by the group for the year ended 30 June 2006 were a gain
of £472 million (2005 - a gain of £164 million) equating to 16.7 pence per share
for the year ended 30 June 2006 and 5.5 pence per share for the year ended 30
June 2005.
2) Acquisitions in the year ended 30 June 2006 are in respect of the
acquisition of The 'Old Bushmills' Distillery Company Limited. Acquisitions
impacting the calculation of organic growth in the period were in respect of the
acquisition of The Chalone Wine Group (North America), Ursus Vodka Holdings B.V.
(Europe) and Ghana Breweries Limited (International). Disposals affecting the
period are the disposal of United Beverages Limited (Europe) and the impact of
the disposal of 25 million shares of the common stock of General Mills.
3) Exchange - the exchange adjustments for operating profit before
exceptional items, net finance charges and taxation before exceptional items are
principally in respect of the US dollar. Transaction exchange adjustments are
taxed at the effective tax rate for the period.
4) Tax equalisation - the impact of equalising the effective rate of
tax on profit before exceptional items and tax from the reported rate to 25%.
The group's underlying effective rate of tax before exceptional items is
expected to be 25%.
5) All amounts are derived from amounts in £ million divided by the
weighted average number of shares in issue for the period to 30 June 2006 of
2,841 million (2005 - 2,972 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 organic 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 organic 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 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.
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
organic 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 organic 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 organic 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 organic 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 organic movement for a given
period will be adjusted when used to measure organic movement in the subsequent
period.
d) The exchange effects of IAS 21 in respect of short term intercompany
funding balances as recognised in other finance charges / income are removed
from both the current and prior period as part of the organic 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 believes 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, relate to 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.
The calculation of free cash flow is set out in the 'Cash flow' section of the
Financial Review in this document.
(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 the 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 as 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 years
ended 30 June 2006 and 30 June 2005 were as follows:
2006 2005
£ million £ million
Operating profit before exceptional items 2,044 1,932
Associates after interest and taxation 131 121
Dividends receivable from investments 5 17
Effective tax rate 24.9% (2005 - 25%)* (543) (518)
1,637 1,552
Average net assets 5,527 5,835
Average net borrowings 3,899 3,781
Average integration costs (net of tax) 931 921
Average goodwill 1,562 1,562
Average total invested capital 11,919 12,099
Return on average total invested capital 13.7% 12.8%
* The effective tax rate for 2005 has been adjusted to 25% to achieve a
comparable measure in the year of IFRS adoption (2005 effective rate of tax on
profit before tax and exceptional items under IFRS was 35%)
(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 9% 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.
Economic profit is calculated as the difference between a 9% capital charge on
the average invested assets and the actual return achieved by the group on those
assets. The profit used in assessing the return from the group's asset base and
the asset base itself is the same as that used in the calculation for the return
on average total invested capital (see (iii) above).
Calculations for economic profit for the year ended 30 June 2006 and 30 June
2005 were as follows:
2006 2005
£ million £ million
Average total invested capital (see (iii) above) 11,919 12,099
Operating profit before exceptional items 2,044 1,932
Associates after interest and taxation 131 121
Dividends receivable from investments 5 17
Effective tax rate 24.9% (2005 - 25%)* (543) (518)
1,637 1,552
Capital charge at 9% of average total invested capital (1,073) (1,089)
Economic profit 564 463
* The effective tax rate for 2005 has been adjusted to 25% to achieve a
comparable measure in the year of IFRS adoption (2005 effective rate of tax on
profit before tax and exceptional items under IFRS was 35%)
Cautionary statement concerning forward-looking statements
This document contains statements 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. These forward-looking
statements are made pursuant to the 'Safe Harbor' provisions of the United
States Private Securities Litigation Reform Act of 1995. 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
accounting standards, taxation requirements, such as the impact of excise tax
increases with respect to the business, environmental laws 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, promotional and innovation expenditure by Diageo
and its competitors;
• renewal of distribution rights on favourable terms when they expire;
• termination of existing distribution 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 2005 filed with the US Securities
and Exchange Commission. 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 documents it files
with the US Securities and Exchange Commission.
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 document 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 analysts and investors will be
broadcast at 09.30 (UK time) on Thursday 31 August 2006. The presentation will
be available on the Diageo website www.diageo.com and also at www.cantos.com.
Prior to the event the presentation slides will also be available to download
from Diageo's home page.
You will be able to listen to a live broadcast of the presentation and to the
question and answer session.
The number to call is:
France + 33 1 70 75 00 02
Germany + 49 69 2222 52100
Ireland + 353 1 246 0034
Netherlands + 31 20 710 0075
Spain + 34 91 414 1545
UK + 44 20 7019 0810
USA (toll free) + 877 951 7311
Passcode: Diageo results
After the presentation the slides and accompanying text will be available to
download from Diageo's homepage.
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 29 September 2006.
A press conference will take place beginning at 12.30 (UK time) on Thursday 31
August and will be broadcast live from a link on www.diageo.com.
Diageo management will host a conference call for analysts and investors at
15.00 (UK time) on Thursday 31 August 2006. Call this number to participate:
France + 33 1 70 75 00 02
Germany + 49 69 2222 52100
Ireland + 353 1 246 0034
Netherlands + 31 20 710 0075
Spain + 34 91 414 1545
UK + 44 20 7019 0810
USA (toll free) + 877 951 7311
Passcode: Diageo results
The teleconference will be available on instant replay from 17.00 (UK time) and
will be available until 29 September 2006. The number to call is:
UK/Europe +44 20 7108 6299
USA/Canada +1 203 369 4739
Investor enquiries to: Darren Jones +44 (0) 20 7927 4223
Sandra Moura +44 (0) 20 7927 4326
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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