17th Feb 2005 07:01
Diageo PLC17 February 2005 17 February 2005 Press release Diageo Interim results for the six months ended 31 December 2004 Continued growth across all key measures with organic growth of 3% volume, 5%net sales (after deducting excise duties) and 8% operating profit beforeexceptional items in the first half of fiscal '05. Results at a glance This is the first time that results have been presented under Diageo's realignedgeographic organisation. First half First half Reported Organic* 2005 2004 movement movementVolume equivalent 69.2 66.9 3% 3% units m Turnover £ million 4,984 5,060 (2)% 5%Net sales £ million 3,705 3,795 (2)% 5%(after deducting excise duties) Marketing £ million 575 612 (6)% 2%investment Operating £ million 1,192 1,181 1% 8%profit before exceptional items Operating % 23.9 23.3 0.6 ppts 0.6 pptsmargin before exceptional items * Organic movement before exceptional items. See page 29 for an explanation oforganic movement and a reconciliation to GAAP measures. Other financial highlights First half First half 2005 2004 Operating profit £ million 1,172 1,162 Basic eps before exceptional items Pence 30.0 30.3 Free cash flow £ million 636 620 Profit for the period £ million 869 891 Basic eps Pence 29.0 29.3 Interim dividend per share Pence 11.35 10.60 Return on invested capital % 17.9 17.6 Chief Executive's comments "Diageo's aim is to consistently deliver across key performance measures and inthis half we have again delivered top line organic growth and margin improvementand increased return on capital. This is the tenth consecutive set of results inwhich we have delivered these improvements. Our main engines for growth during the half year have been our global prioritybrands, where volume increased by a further 4%, and our North American business,where organic operating profit is up 12%. Even in Europe, where the consumerenvironment is far more challenging, we have delivered 4% organic operatingprofit growth. The performance of our International business, where organicoperating profit was also up 4%, reflected improving trading conditions in LatinAmerica, partially offset by difficult trading conditions in Korea, Taiwan andNigeria, and a 13% increase in marketing investment. We have made a good start to the year and we can maintain our full year guidanceof 6% organic operating profit growth despite absorbing an increase in the costof executing additional productivity initiatives in the second half." Paul S Walsh, Chief Executive 17 February 2005 DIAGEO INTERIM RESULTS For the six months ended 31 December 2004 Key features of the half year • North America Diageo's volume in North America grew 5%, significantly ahead of the market which grew about 2%. Diageo has gained share in the United States across all three categories - spirits, wine and beer. This strong top line growth together with mix improvement and cost reduction means that Diageo's business in North America delivered organic operating profit growth of 12% • Europe Trading conditions in Europe are tough and the ready to drink market continues to contract but these results show that focus on leading brands with strong consumer appeal, Smirnoff, Guinness, Baileys, and a focus on cost does deliver operating profit growth • International The strength of Diageo's International business is in its broad geographic reach and brand range. This has allowed us to deliver organic operating profit growth despite facing difficult trading conditions in Nigeria, Taiwan and Korea. Strong volume growth in Latin America and innovation-led growth in Australia drove net sales (after deducting excise duties) up 9%. Investment was increased in the new growth markets such as China and marketing behind all the global priority brands was up over 20% • The global priority brands remain our fastest growth brands with volume up 4% • Marketing investment has been focused on the core spirits brands and spend excluding ready to drink brands grew 7% • Diageo's decision to dispose of most of its shares in General Mills improved return on invested capital and freed up cash for debt reduction and share buybacks. It did however negatively impact eps. Excluding the impact of the sale of General Mills shares and adverse currency movements, Diageo delivered eps growth of 12% • Financial highlights Net sales after deducting excise duties 5%*Operating profit 8%*Operating margin 0.6ppts*Free cash flow at £636 million £16 millionReturn on invested capital 0.3 ppts * Organic movement before exceptional items. See page 29 for an explanation of organic movement and a reconciliation to GAAP measures. OPERATING AND FINANCIAL REVIEW For the six months ended 31 December 2004 OPERATING REVIEW See explanatory notes on page 29 for definitions. Analysis by brand Equivalent Volume Net sales* units million movement movement % % Global priority brandsSmirnoff 13.5 5 2Johnnie Walker 7.1 4 9Guinness 5.9 - 7Baileys 4.5 3 2J&B 3.5 (1) 1Captain Morgan 3.5 11 11Jose Cuervo 2.2 11 10Tanqueray 1.0 (4) -Total global priority brands 41.2 4 5Local priority brands 12.9 1 1Category brands 15.1 4 7Total 69.2 3 5 * after deducting excise duties Smirnoff's overall performance was driven by the core brand's strong performanceacross all three regions. Smirnoff ready to drink performance was mixed withgrowth in North America and International offset by a volume decline in Europe.Volume and net sales (after deducting excise duties) of Smirnoff excluding readyto drink increased by 6%. Johnnie Walker also achieved strong performance with broad based growth acrossall three regions. Johnnie Walker Red Label and Johnnie Walker Black Label bothgrew volume and net sales (after deducting excise duties), while even fastergrowth of the Johnnie Walker super deluxe variants delivered mix improvement. Guinness volume was flat, impacted by difficult trading conditions in Africa,particularly Nigeria, offset by improved performance in Europe. Price increaseswere successfully implemented in many markets including Great Britain, Irelandand Africa. Baileys overall performance was held back by a decline in volume and net sales(after deducting excise duties) in North America. This decline was the result oflower sales of Baileys Minis which were launched in the prior period. In othermarkets, Baileys achieved good growth with volume up 6%. J&B's performance continues to reflect the decline of the scotch categoryin Spain, which is J&B's single biggest market, and represents nearly 50%of total J&B volume. Captain Morgan, Jose Cuervo and Tanqueray are predominantly North Americanbrands. The performance of Captain Morgan remained strong, boosted byinnovation. Jose Cuervo rebounded, delivering double digit volume and net sales(after deducting excise duties) growth. Tanqueray continues to underperform theNorth America imported gin segment due in part to a price increase implementedin certain regions of the United States in the six months ended 31 December2004. Overall ready to drink volume increased 2% although performance and the generalhealth of the segment varies globally. Successful innovation initiatives drovestrong growth in North America and International, particularly in Australia andSouth Africa. Volume declined in Europe due to the contraction of the segmentand increased regulations and duties. Analysis by market North America Summary: • Global priority brands account for 60% of total volume, while local priority brands represent 25% and category brands account for the remaining 15% • Share gains in the spirits, wine and beer categories • Volume growth of 5%, supported by innovation initiatives, together with price increases and mix improvement delivered 8% net sales (after deducting excise duties) growth • Operating profit before exceptional items grew 12% and operating margin was up 1.1 percentage points driven by strong brand performance, lower marketing and incremental Seagram synergy of £20 million • Consolidation phase of distribution strategy essentially completed Key measures: First half First half Reported Organic 2005 2004 movement movement £ million £ million % % Volume 5 5Turnover 1,384 1,457 (5) 8Net sales (after deducting excise duties) 1,167 1,228 (5) 8Marketing 187 202 (7) 2Operating profit before exceptional items 454 453 - 12 Reported performance: Turnover was £1,384 million in the six months ended 31 December 2004 down by £73million from £1,457 million in the comparable prior period. Operating profitbefore exceptional items increased by £1 million to £454 million in the sixmonths ended 31 December 2004. Organic performance: The weighted average exchange rate used to translate US dollar turnover movedfrom £1 = $1.65 in the six months ended 31 December 2003 to £1 = $1.85 in thesix months ended 31 December 2004. The weakening of the US dollar resulted in a£171 million reduction in turnover that was partly offset by organic growth of£100 million. Operating profit before exceptional items increased by £1 million,this increase reflecting organic growth of £47 million offset by £46 million ofadverse exchange rate movement effects. Organic brand performance: Volume movement Net sales* movement % % Smirnoff 6 10Johnnie Walker 6 14Jose Cuervo 10 8Baileys (5) (6)Captain Morgan 12 12Tanqueray (6) (2)Guinness 2 4Total global priority brands 6 7Local priority brands 4 7Category brands 3 14Total 5 8 * after deducting excise duties Smirnoff excluding ready to drink grew volume 5% while maintaining the priceincrease of a year ago. That price increase together with the strong growth ofthe flavoured vodka variant Smirnoff Twist drove net sales (after deductingexcise duties) up 7%. Smirnoff Twist grew nearly 30% and now constitutes about20% of Smirnoff volume, excluding ready to drink. The growth in Smirnoff hasbeen due in part to an improvement in the brand's appeal amongst legal drinkingage to 29-year-old consumers. Smirnoff ready to drink volume grew 10% driven by the strong performance ofSmirnoff Twisted V, launched in the fourth quarter of calendar 2003. Theperformance of Smirnoff ready to drink resulted in favourable mix and net sales(after deducting excise duties) growth of 10% for total Smirnoff. In the UnitedStates, Smirnoff grew share of both the vodka category and the ready to drinksegment. Smirnoff marketing investment decreased 3%. Smirnoff Red marketing was lowerperiod on period as the prior period included one time investments related tothe Icon package launch and image campaign. This was partially offset by anincrease in Smirnoff ready to drink marketing to support increased media andprogrammes focused on introducing target consumers to Smirnoff Twisted V. Johnnie Walker volume grew 6% while net sales (after deducting excise duties)was up 14%. A price increase in selected regions of the United States coupledwith growth in Black Label and the super deluxe variants drove this miximprovement. Johnnie Walker Black Label volume increased 6% and grew share inthe United States on higher pricing. Strong consumer demand for super premiumbrands benefited the super deluxe variants, including Johnnie Walker Green Labellaunched in October 2004. Johnnie Walker Red Label volume growth slowed to 1%and Red Label lost share as competitive pressures increased in the premiumscotch segment. Jose Cuervo grew volume and share of the United States tequila category and thebrand's first television advertising campaign was launched. Net sales (afterdeducting excise duties) grew 8% with some adverse impact from flat volume inthe higher value Jose Cuervo Margarita Mix variants. Excluding these variants,Jose Cuervo volume grew 10% while net sales (after deducting excise duties) wasup 13%. Baileys volume decreased 5% and share declined as the prior period included thepipeline fill related to the Minis launch but competitive pressures have alsoincreased. Marketing investment declined 7% as advertising in the comparableperiod had been increased to support the Minis launch. Captain Morgan continued to deliver strong performance with volume and net sales(after deducting excise duties) both up 12% driven by Original Spiced Rum andthe launch of new Parrot Bay Flavors. Strong volume growth drove share gains ofover 2 percentage points. Tanqueray volume decreased 6%, although net sales (after deducting exciseduties) fell only 2% due to a price increase taken in the first quarter.Tanqueray continued to lead the imported gin segment. Guinness volume increased 2% and grew share driven by growth in Guinness Draughtin Bottles and Guinness Extra Stout. Net sales (after deducting excise duties)increased by 4%. Local priority brand performance accelerated with volume up 4% and net sales(after deducting excise duties) up 7%. Crown Royal, with volume up 7%, grewshare of the North American whiskey category. Net sales (after deducting exciseduties) growth also benefited from higher pricing in certain regions of theUnited States. Beaulieu Vineyard and Sterling Vineyards continued to performstrongly with combined volume up 27%, while net sales (after deducting exciseduties) growth of 14% was negatively impacted by a mix shift to lower valuevariants. Growth of Crown Royal, Beaulieu Vineyard and Sterling Vineyards whichconstitute about 30% of Diageo's local priority brand net sales (after deductingexcise duties), offset mixed performance across the remaining North Americalocal priority brands and delivered mix improvement. Volume of the category brands grew 3% with Popov up 8% and Gordon's vodka up 3%,along with growth in beer led by Red Stripe and Smithwick's. Performance in Canada, which constitutes 10% of North America volume, wasnegatively impacted by ongoing external labour issues. This included a strike inthe province of Quebec resulting in the closure of most beverage alcoholretailers from November 2004 and the dispute in the National Hockey League whichhas negatively impacted the on-trade channel. In the prior period marketing was increased to support the Smirnoff Icon packagelaunch and image campaign as well as the launch of Baileys Minis. In the currentperiod marketing expenditure increased 2% as investment was focused to maximisethe impact of other large scale fully integrated marketing programmes andinnovation initiatives in the half. Johnnie Walker marketing increased tosupport increased advertising, successful consumer relationship marketingprogrammes and holiday gift packaging. Marketing investment was also increasedto support the launch of Johnnie Walker Green Label and Captain Morgan ParrotBay Flavors. In the half year, Diageo essentially completed the consolidation phase of itsdistribution strategy with Moet Hennessy in the United States which commenced inFebruary 2002. Over the last two and a half years, Diageo has created 39dedicated distributor sales teams and staffed them with over 2,100 sales personsselling Diageo's brands. On 1 July 2004, Diageo moved the distribution of its brands formerly managed bySchieffelin & Somerset into its existing United States Spirits operation,simplifying the management of the brands and reducing costs. On 8 February 2005, Diageo completed the acquisition of The Chalone Wine GroupLtd. for US$275 million (£143 million). The acquisition increases the range ofpremium brands in Diageo's North American wine business and is expected to yieldsignificant synergy for that business. Europe Summary: • Great Britain, Ireland and Spain account for 65% of Europe's volume and 70% of net sales (after deducting excise duties) • Global priority brands account for 65% of total volume; while local priority brands represent 16% and category brands account for the remaining 19% • Increased regulations and duties on ready to drink beverages, health-related legislation, such as the on-trade smoking ban in Ireland, and weak economic conditions, form the backdrop of Diageo's performance in Europe • Total volume was up 1%, while net sales (after deducting excise duties) declined 1%. Performance, excluding ready to drink, was stronger, with both volume and net sales (after deducting excise duties) growing 2% during the period • Marketing was down 3%. Investment behind ready to drink declined 49% in response to the decline in the segment. Excluding ready to drink, marketing was up 5% • Operating profit was up 4% due to stronger pricing in Spain, Great Britain and Greece as well as lower overall marketing Key measures: First half First half Reported Organic 2005 2004 movement movement £ million £ million % % Volume 1 1Turnover 2,240 2,247 - 1Net sales (after deducting excise duties) 1,448 1,481 (2) (1)Marketing 241 268 (10) (3)Operating profit before exceptional items 459 432 6 4 Reported performance: Turnover in Europe was down in the six months ended 31 December 2004 at £2,240million. Operating profit before exceptional items increased by 6% from £432million to £459 million. Organic performance: Turnover decreased by £7 million compared with the six months ended 31 December2003. This decrease primarily arose from a £29 million reduction due to exchangerate impacts offset by organic growth of £26 million. The exchange impactresults primarily from a weakening of the euro compared to the comparable periodin 2003. Operating profit before exceptional items increased by £27 million as aresult of £19 million of organic growth and a beneficial exchange rate movementeffect of £8 million.Organic brand performance Volume Net sales* movement movement % % Smirnoff - (12)Johnnie Walker 3 5Guinness 1 6Baileys 6 6J&B (1) -Total global priority brands 2 -Local priority brands (5) (5)Category brands 6 -Total 1 (1) * after deducting excise duties Smirnoff volume was flat as 4% growth in the Smirnoff brand, excluding ready todrink, offset losses in ready to drink volume, down 21%. Net sales (afterdeducting excise duties) declined 12%, as a 26% decline in ready to drink netsales (after deducting excise duties) was only partially compensated by 4%growth in the Smirnoff brand, excluding ready to drink. Johnnie Walker volume grew 3% driven by strong performances in the smallermarkets. Both Johnnie Walker Red Label and Johnnie Walker Black Label performedwell in Russia, Poland and Portugal while Johnnie Walker Super Deluxe grew inGreece, Portugal and Spain. Net sales (after deducting excise duties) grew 5%due to stronger pricing in Johnnie Walker's two largest markets, Greece andSpain. Guinness volume was up 1% as the brand returned to growth in Great Britain andslowed its decline in Ireland. Both markets had solid performances in theon-trade with growth in the off-trade due to new packaging. Baileys continued to grow, with volume up 6% due to strong performances inseveral markets. Volume in Great Britain, Baileys biggest European market, grew6%. Spain grew volume 5% on the back of a new advertising campaign and growth inthe on-trade. The launch of Baileys Minis and a successful coffee house campaigndrove 10% volume growth in Germany. J&B volume declined 1%. Volume in Spain, J&B's largest market, wasdown 4% as a result of a declining whisky category and stronger pricing. Thiswas partially offset by strong performances in Portugal up 9% and Turkey up 10%.Net sales (after deducting excise duties) were flat despite declining volume asa result of stronger pricing throughout Europe. Local priority brand volume declined 5% with a corresponding decline in netsales (after deducting excise duties). In Great Britain, Gordon's Gin grew in adeclining category. However, in Ireland, lagers deteriorated as a result of thecompetitive environment and a cold summer in 2004 compared to the unusually hotsummer of 2003. In Spain, Cacique continued to grow with volume up 3%. Category brands grew volume 6%. Blossom Hill continued on a strong trajectorygrowing 15% in Great Britain. Pampero performed well in Spain and Italy whilestandard scotch was particularly strong in Greece with Haig up 31%. Great Britain Volume growth was 2% and net sales (after deducing excise duties) grew 1%.Excluding ready to drink, performance was stronger with volume up 3% and netsales (after deducing excise duties) up 6% following price increases on Baileys,Smirnoff Red and Guinness. Smirnoff Red volume grew 4%, with net sales (after deducting excise duties)growing 6% as a result of a price increase in April. Share in the period grew 1percentage point due to a strong marketing programme, increased distribution andconsistent promotional activities. Smirnoff ready to drink volume declined 18%,however, the brand grew share by 1 percentage point and is the leader in theready to drink segment with a 29% share. Guinness returned to growth with volume up 2% and net sales (after deductingexcise duties) up 6%, benefiting from a price increase put through in April. Newpackaging for Guinness Draught in cans drove off-trade growth while a solidperformance in the on trade enabled Guinness to hold share flat for the period.Marketing investment increased 6% to support a programme of consistent TVpresence. Baileys volume was up 6% while net sales (after deducting excise duties) grew5%. The brand had another good period with share up 10 percentage pointsbenefiting from major retailers aggressively supporting Baileys as a strategy todrive footfall through the Christmas period. Local priority brand volume declined 4%. Bell's retained its leadership of theblended whisky segment despite lower volume. Gordon's Gin grew volume 7%, andshare 3 percentage points, as a result of an effective advertising andpromotional campaign and the successful re-launch of Gordon's Sloe Gin. Ireland The results for Ireland reflect the ongoing difficulties in the on-trade. Thecontinuing shift from the on-trade to the off-trade was further exacerbated bythe smoking ban introduced in March 2004 and as a result, Diageo's volumedeclined 3%. Guinness turned in a strong performance driven by a range of successfulprogrammes supporting the brand and benefiting from a cool summer in 2004.Volume decline slowed to 1% and net sales (after deducting excise duties) grew5% with some benefit from pricing. The on-trade in the Republic of Irelandremains Guinness' largest channel, accounting for nearly 80% of volume. In thischannel, share was up by 1 percentage point despite the challenging dynamicstaking place in the on-trade. Spirits performed well. Baileys volume grew 6% and Smirnoff volume was up 12%.The Smirnoff relaunch in 2004 was successful and the brand remains the numberone vodka brand in Ireland. Local priority brand volume was down 10% due to weak performance in lagers andSmithwick's. Budweiser, Carlsberg and Harp performance was held back by a coolsummer in 2004 and an increasingly competitive environment in the off-trade. Spain Volume grew 1% in a spirits market that declined by 2%. While Cacique, Baileys,and Smirnoff drove growth, performance also benefited from trade buy-in ahead ofincreases in both duty and price. A price rise was put through in April 2004 anda second price increase was made on 1 January 2005 in conjunction with a 2%increase in duty. As a result of stronger pricing, net sales (after deductingexcise duties) grew 4%. J&B volume was down 4%. However, stronger pricing meant that net sales(after deducting excise duties) was down only 1%. Despite a 1 percentage pointdecrease in share, J&B remains the leader with a 25% share of thestandard whisky segment. The remaining global priority brands performed well. Baileys volume was up 5%and net sales (after deducting excise duties) increased 9%, in the wake ofstronger pricing. Johnnie Walker volume was up 1% thanks to Johnnie Walker BlackLabel, growth of 18% - albeit off a small base - which offset a 2% decline inJohnnie Walker Red Label. Johnnie Walker Black Label also grew share 1percentage point while Johnnie Walker Red Label's share remained flat. Local priority brand volume was up 3%. The dark rum segment continued to growalbeit at a more moderate rate as consumers continue to shift away from whiskyand white rum. Cacique volume grew 3% and net sales (after deducting exciseduties) were up 9%. The brand lost share due to numerous new entries, however,it is still the leader of the dark rum segment with a 34% share. Category brand performance was strong. Volume increased 15% as a result ofGordon's Gin, which grew 14% due to favourable pricing versus the competitionand continued momentum behind Pampero, which was up 16%. Rest of Europe The rest of Europe represents 35% of total European volume and 30% of net sales(after deducting excise duties). Total volume was up 3%, with volume excludingready to drink up 4% offsetting a sharp 24% decline in ready to drink. Net sales(after deducting excise duties) declined 1% as a result of lower ready to drinksales in Germany, Switzerland and the Nordics. Excluding ready to drink, netsales (after deducting excise duties) were up 4% reflecting stronger pricing inGreece and Portugal. In Greece, volume was up 3% with strong growth in Jose Cuervo and Haig. France'svolume was up 4% as a result of growth in Smirnoff Red, Smirnoff ready to drinkand J&B. Germany's volume fell 4% as growth in Baileys and Smirnoff Redonly partially offset a 65% decline in Smirnoff ready to drink volume due to anincrease in duties and regulations. In Italy, total volume was up 1% as Pamperogrowth of 26% was offset by weaker volume for Johnnie Walker and Smirnoff. Russia delivered a strong performance, albeit from a relatively small base.Volume grew 28%, while net sales (after deducting excise duties) were up 33%.Johnnie Walker and Baileys, with volume up 30% and 26% respectively, droveperformance, together with the launch of Smirnoff ready to drink in the summerof 2004. Johnnie Walker Red Label, Johnnie Walker Black Label and Baileys allincreased share and are the clear leaders in their respective segments. On 19 November 2004, Diageo announced that it had reached an agreement toacquire the Ursus vodka and Ursus Roter brands. The total cash investment willbe approximately €145 million (£102 million) for the acquisition of the brandsand the termination of certain existing production and distribution agreementsin respect of the brands. The completion of the transaction is subject toregulatory clearances. International Summary: • Global priority brands account for 53% of total volume, while local priority brands represent 15% and category brands account for the remaining 32% • International volume growth was achieved through strong growth in Latin America and parts of Asia Pacific. Volume growth together with price increases in Latin America and Africa and overall favourable mix delivered 9% net sales (after deducting excise duties) growth • Strong volume growth from the global priority brands together with price increases on Smirnoff and Guinness offset the continued decline of the scotch category in Korea and mixed volume performance across Africa and Asia Pacific • Significant investments were made in the period to position Diageo for long term growth including an increase in marketing of 23% on global priority brands and the launch of a redesigned Guinness bottle in Nigeria holding back operating profit growth • Emerging markets of Brazil, India and China continue to grow rapidly driven by growth in Johnnie Walker and Smirnoff First half First half Reported OrganicKey measures: 2005 2004 movement movement £ million £ million % % Volume 5 4Turnover 1,332 1,327 - 9Net sales (after deducting excise duties) 1,062 1,057 - 9Marketing 147 142 4 13Operating profit before exceptional items 352 374 (6) 4 Reported performance: Reported turnover in the six months ended 31 December 2004 was £1,332 million,up £5 million on the prior period figure of £1,327 million. Operating profitbefore exceptional items was down 6% at £352 million for the six months ended 31December 2004. Organic performance: Turnover in International markets was up £5 million compared with the six monthsended 31 December 2003. There were unfavourable exchange losses of £103 million,offset by a £106 million improvement in organic performance. A small acquisitioneffect has also been adjusted in reaching organic turnover growth. There was a £22 million decrease in reported operating profit before exceptionalitems. This decrease was due to organic improvements in brand performance of £13million offset by unfavourable exchange rate movements of £35 million(principally driven by weakness in the US dollar). Organic brand performance: Volume Net sales* movement movement % % Johnnie Walker 5 10Smirnoff 14 22Guinness (1) 10Baileys 5 3Total global priority brands 6 11Local priority brands 1 (1)Category brands 4 13Total 4 9 * after deducting excise duties Johnnie Walker and Smirnoff led volume growth in global priority brands. JohnnieWalker volume grew 5% driven by strong performance across Latin America andglobal duty free offset by a volume decline in Taiwan. Smirnoff volume was up14% with strong growth in both Smirnoff Red, up 11% and Smirnoff ready to drink,up 31%. Smirnoff performance was particularly strong in Latin America, AsiaPacific and India with volume growth of 22%, 20% and 41% respectively. Smirnoffready to drink volume was up 30% in Latin America driven by strong performancein Brazil, Paraguay and Uruguay as a result of repositioning of the brand andthe launch of the Black Ice variant. Smirnoff price increases in Latin Americacoupled with the growth in the ready to drink segment delivered favourable price/ mix benefits. Guinness volume declined 1% driven by mixed results across Africa. Volume inNigeria declined 15% while net sales (after deducting excise duties) grew 5% aseconomic conditions tightened and price increases in excess of inflation wereimplemented. The decline in Nigeria, which represents 46% of Guinness volume inAfrica was due in part to increased competition for disposable incomepredominantly from mobile phone companies and a significant decrease inliquidity because of banking regulation changes. Price increases wereimplemented across a number of countries in Africa in the current and previousfiscal years resulting in 11 percentage points of price/mix benefit. Baileys volume grew 5% driven by growth of 17% in Latin America offset byweakness in Australia where volume declined 14%. The growth in Latin America wasled by Chile, where volume doubled to over 60,000 equivalent units as the creamliqueur segment continues to develop. Volume of local priority brands grew 1% but performance was mixed. Strong growthfrom Bundaberg (Australia), Buchanan's (Venezuela), Pilsner (Kenya) and Bell's(South Africa) offset declines in Windsor (Korea) and Malta Guinness (Africa).Bundaberg continued to perform strongly supported by new packaging and increasedmedia investment. Bundaberg ready to drink grew share of the segment and becamethe number 1 selling ready to drink product in Australia benefiting from thesuccess of recently launched new variants. Trading conditions and pricing aboveinflation in Nigeria disproportionately impacted Malta Guinness and overallvolume declined 8%. Local priority brand net sales (after deducting exciseduties) declined 1% driven in part by the negative impact of Windsor's declineon mix. Category brands grew 4% with mixed volume performance across the scotch, rum,gin and beer brands. Net sales (after deducing excise duties) increased 13%primarily due to the growth of higher value brands such as Buchanan's and OldParr coupled with significant declines in lower value brands such as Spey Royaland Pilsner. Overall marketing investment grew 13% with spend behind global priority brandsup 23% to support increased media in Latin America on Smirnoff and JohnnieWalker and an upweighted media campaign on Baileys in Mexico. Additionally,there was a significant increase in marketing in China focused on JohnnieWalker. This was offset by a decrease in marketing in Korea due to the declinein the scotch category and investment in Bundaberg in Australia decreased as thecomparable period included the sponsorship of the Rugby World Cup. Asia Pacific Scotch represents 44% of Diageo's volume across the Asia Pacific region andperformance was mixed. The total scotch category declined 12% in Korea due tothe residual effects of the consumer credit crunch and the continued erosion ofconsumer confidence. Windsor lost share in Korea with volume declining 21% butDiageo maintained its leadership of the scotch category. In Taiwan the scotch category has become increasingly competitive. JohnnieWalker volume declined 47% and lost share to a local competitor. Volume wasnegatively impacted in part by the effect of a prior period price increase. Volume declined 22% in Thailand driven by Spey Royal with volume down 34% as thebrand increased price and lost share in the highly competitive standard scotchsegment. Johnnie Walker volume declined 17% but net sales (after deductingexcise duties) increased 4% benefiting from growth in the super deluxe variantsand the discontinuance of certain price promotions. India and China continue to experience rapid economic expansion and increases inconsumer purchasing power and affinity for international spirits. In China,rapid growth of the scotch category continued with volume of Johnnie Walker up67%, to 90,000 equivalent units, supported by new marketing initiatives focusedon building brand awareness through advertising and expanding consumerrelationship marketing programmes. In India, Smirnoff grew volume and sharedriven by the launch of Smirnoff Flavors while Johnnie Walker volume was up 7%. Ready to drink volume growth of 20% boosted performance in Australia. Bundaberg,Smirnoff and Johnnie Walker each posted double digit volume increases on theirrespective ready to drink variants. Growth was driven by line extensions andshare gains. Performance in spirits was mixed with Bundaberg, Baileys andSmirnoff registering share gains while Johnnie Walker Red Label lost share asaggressive discount programmes were eliminated. Latin America The improved economic environment coupled with currency stability provided alift to performance across Latin America with the scotch and vodka categoriesleading the growth. Total volume in Latin America increased 14% driven by theglobal and local priority brands which grew 17% and 23%, respectively. InBrazil, Paraguay, and Uruguay, Johnnie Walker grew volume 10% and sharebenefited from new media spend. Smirnoff, excluding ready to drink, grew volume26% boosted by higher media spend and a new packaging launch. A price increasewas also implemented on Smirnoff. In Brazil, Johnnie Walker Red Label, JohnnieWalker Black Label and Smirnoff maintained leadership positions of theirrespective segments. Volume of Johnnie Walker and Buchanan's were each up over 70% in Venezuela andboth grew share as Diageo maintained its leadership in the super deluxe, deluxeand standard scotch segments. Performance in Mexico was strong with overallvolume up 39% driven by growth and share gains across the scotch category forBuchanan's, Johnnie Walker Red Label and J&B. Baileys also grew volume22% and share boosted by a new media campaign. Africa Overall volume in Africa grew 3% but results were mixed reflecting tradingdifficulties in some markets there. The improving economic environment in Kenyaand growth in South Africa offset the deteriorating trading conditions inNigeria and the Ivory Coast. Excluding Nigeria, Guinness volume grew 13% largelybecause of volume growth and share gains in Cameroon and Ghana. Guinness ExtraSmooth performed exceptionally well in Cameroon after its launch in June 2004,capturing 4% of the beer market principally at the expense of competitive lagerbrands. The Ivory Coast, which is the fifth largest Guinness market in Africa,saw volume decline over 40% impacted by the deteriorating political and securitysituation. Beer performance in Kenya was strong with volume up nearly 20% as performance ofTusker and Pilsner rebounded and a new value lager was launched. Increasingconsumer confidence and strengthening currency boosted performance in SouthAfrica as Johnnie Walker, J&B and Bell's each posted double-digit volumegrowth. Volume of Smirnoff in South Africa, which represents 91% of Smirnoff inAfrica, grew 6% due in part to the introduction of Smirnoff Triple Spin, a newready to drink variant. In December 2004, Diageo completed the purchase of Ghana Breweries Limited, asubsidiary of Heineken, and retains a majority ownership in the newly formedentity - Guinness Ghana Breweries Limited. Global duty free Volume decreased 1% and net sales (after deducting excise duties) declined 2%reflecting volume growth in Johnnie Walker offset by a volume decline inBaileys. Performance was impacted by the weakening of the US dollar. Corporate revenue and costs Reported turnover in the six months ended 31 December 2004 was £28 million, down£1 million versus the prior period. Net corporate operating costs and tradinglosses decreased 6% to £73 million. Corporate revenues and costs are in respectof central costs including finance, human resources and legal as well as certaininformation system, service centre, facilities and employee costs that are notdirectly allocated to the geographical operating units. Additionally, they alsoinclude the revenues and costs related to rents receivable in respect ofproperties not used by Diageo in the manufacture, sale or distribution ofpremium drinks and the results of Gleneagles Hotel. FINANCIAL REVIEW Summary consolidated profit and loss account Six months ended 31 December 2004 Six months ended 31 December 2003 Before Exceptional Before Exceptional exceptional items exceptional items items Total items Total £ million £ million £ million £ million £ million £ million Turnover 4,984 - 4,984 5,060 - 5,060Operating costs (3,792) (20) (3,812) (3,879) (19) (3,898)Operating profit 1,192 (20) 1,172 1,181 (19) 1,162Associates' profits 109 - 109 273 (11) 262Investment income 8 - 8 - - -Disposal of fixed assets (25) (25) (8) (8)Finance charges (74) - (74) (157) - (157)Profit before taxation 1,235 (45) 1,190 1,297 (38) 1,259Taxation (296) 14 (282) (324) 6 (318)Profit after taxation 939 (31) 908 973 (32) 941Minority interests (39) - (39) (50) - (50)Profit for the period 900 (31) 869 923 (32) 891 Turnover On a reported basis, turnover decreased by £76 million from £5,060 million inthe period ended 31 December 2003 to £4,984 million in the period ended 31December 2004. Turnover was adversely impacted by exchange rate movements of£303 million, principally arising from weakening of the US dollar. Operating costs On a reported basis, operating costs decreased by £86 million (2%) from £3,898million in the period ended 31 December 2003 to £3,812 million in the periodended 31 December 2004. Operating costs included exceptional operating costs of£20 million (2003 - £19 million). On a reported basis before exceptional items,excise duties increased by £14 million from £1,265 million in the comparableprior period to £1,279 million, whilst cost of goods sold decreased by £52million and marketing investment was down 6% from £612 million to £575 million.Marketing investment on global priority brands (excluding ready to drink) was£324 million while marketing spend on ready to drink brands was £70 million.Overall, the impact of exchange rate movements reduced total operating costsbefore exceptional items by £230 million. Exceptional operating costs Operating profit for the period is after £20 million of exceptional operatingcosts. Exceptional operating costs include £14 million of accelerateddepreciation in respect of the Park Royal brewery which, as announced in April2004, will close in the summer of 2005. Also included in exceptional operatingcosts are £6 million of costs related to the integration of the Seagram spiritsand wine businesses, acquired in December 2001 (2003 -£19 million). Operating profit Reported operating profit before exceptional items increased by £11 million from£1,181 million for the period ended 31 December 2003 to £1,192 million for theperiod ended 31 December 2004. Exchange rate movements reduced operating profitbefore exceptional items for the six months ended 31 December 2004 by £73million (mainly arising from a £57 million impact of a weakening US dollar). Post employment plans Post employment costs for the period ended 31 December 2004 of £42 million (2003- £62 million) included amounts charged to operating profit of £49 million (2003- £54 million) partly offset by finance income of £7 million (2003 - charges of£8 million). In October 2004 4.0 million shares in General Mills with a marketvalue of £100 million were transferred to the group's UK pension fund. Associates The group's share of profits of associates before exceptional items was £109million for the period compared to £273 million in the comparable period lastyear. Diageo ceased to equity account for its share of the results of GeneralMills from 23 June 2004. In the six months ended 31 December 2003 General Millscontributed £153 million to share of profits of associates. Diageo's 34% equityinterest in Moet Hennessy contributed £100 million to share of profits ofassociates before exceptional items (2003 - £110 million). Investment income Income from fixed asset investments was £8 million, arising on dividendsreceivable from General Mills. Finance charges Finance charges decreased from £157 million in the period ended 31 December 2003to £74 million in the six months ended 31 December 2004. The net interest charge decreased by £68 million (47%) from £146 million in thecomparable prior period to £78 million in the six months ended 31 December 2004;£33 million of this decrease results from the cessation of equity accounting forGeneral Mills. The balance of the reduction in the net interest charge mainlyresults from the interest impact of increased trading cash inflow (£26 million)and from the disposal of General Mills shares (£9 million) partly offset by anincreased charge arising from the funding of the share repurchases of £5million. Other finance income of £4 million included income of £7 million (2003 - chargeof £8 million) in respect of the group's post employment plans. This beneficialmovement principally reflects the increase in the value of the assets held bythe post employment plans between 1 July 2003 and 30 June 2004. Non operating exceptional items Non operating exceptional items before taxation were a charge of £25 million inthe six months ended 31 December 2004 compared with a charge of £8 million inthe six months ended 31 December 2003. This charge comprised a loss on disposalof part of the group's investment in General Mills of £28 million and a net gainon disposal of other fixed assets of £3 million. In October 2004, 49.9 millionshares in General Mills were sold for £1.2 billion and a further 4.0 millionshares were transferred to the group's UK pension fund. These disposalsgenerated a loss before tax of £28 million after writing back goodwillpreviously written off to reserves of £247 million and other costs, includingthe costs of terminating related hedge instruments, of £25 million. Profit before taxation After exceptional items, the profit before taxation and minority interestsdecreased by £69 million from £1,259 million to £1,190 million in the six monthsended 31 December 2004. Exchange rates Based on current exchange rates, it is estimated that in the year ending 30 June2005 there will be an adverse impact from exchange rate movements on profitbefore exceptional items and taxation of £80 million (translation exchange onlyon reported share of profits of associates). Similarly, based on currentexchange rates, the impact of exchange rate movements on profit beforeexceptional items and taxation for the year ending 30 June 2006 is estimated tobe adverse £80 million. Taxation The effective rate of taxation on profit before and after exceptional items forthe period was 24%, compared with 25% for the six months ended 31 December 2003primarily as a consequence of the sale of the General Mills shares. Dividend An interim dividend of 11.35 pence per share will be paid on 6 April 2005, anincrease of 7% on last year's interim dividend. The interim dividend will bepaid to shareholders on the register on 4 March 2005. Payment to US ADR holderswill be made on 12 April 2005. The record date for this dividend will also be 4March 2005. A dividend reinvestment plan is available in respect of the interimdividend and the plan notice date is 14 March 2005. In the AGM statement in October 2004 Diageo announced that while final decisionson annual dividends will continue to be taken in the light of earningsperformance, inflation and other external factors, the Diageo Board wouldexpect, from February 2006, to hold the company's dividend increase toshareholders to around 5% annually to gradually rebuild dividend cover. Cash flowSummary cash flow statement First half First half 2005 2004 £ million £ million Operating cash inflow 1,001 971Interest and dividends paid to minority interests (118) (162)Dividends from associates and fixed asset investments 20 90Taxation (152) (179)Net purchase of investments (2) (5)Net capital expenditure (113) (95)Free cash flow 636 620 Free cash flow increased 3% to £636 million from £620 million in the priorperiod, principally as a result of increased operating cash flows (up £30million to £1,001 million), reduced net interest payments (down £47 million to£93 million) offset by reduced dividends received from associates and fixedasset investments (down £70 million to £20 million). In the six months ended 31 December 2004, Diageo repurchased 48.2 million sharesfor cancellation or to be held as treasury shares (2003 - 36.4 million shares)at a cost of £353 million (2003 - £256 million). A net £54 million (2003 - £16million) was spent on the purchase of shares for the employee share trusts. InOctober 2004, at the time of the AGM, Diageo reiterated the company's capitalpolicy. Diageo continues to believe that the company is in a good position tomaintain a single A credit rating and to continue the share repurchase programmeat the current level even with the acquisition of the Chalone Wine Group and theproposed acquisition of the Ursus vodka brand. Balance sheet At 31 December 2004, total shareholders' funds were £4,103 million compared with£3,692 million at 30 June 2004. The increase was mainly due to the £533 millionretained income for the period and goodwill previously written off and recycledthrough the profit and loss account on the disposal of General Mills of £247million, offset by £353 million for the repurchase of own shares. Net borrowings were £3,474 million at 31 December 2004, a decrease of £670million from 30 June 2004 net borrowings of £4,144 million. The principalcomponents of this decrease were the free cash inflow of £636 million and theproceeds from the sale of General Mills shares of £1,210 million, offset bypayments of £407 million to repurchase shares (including net payments for sharetrust shares), the payment of £302 million to redeem guaranteed preferredsecurities, and a £512 million equity dividend payment. Economic profit Economic profit decreased by £27 million from £522 million to £495 million inthe six months ended 31 December 2004. The decline was due to the change inaccounting in respect of General Mills. See page 33 for calculation anddefinition of economic profit. Conversion to International Financial Reporting Standards ("IFRS") Diageo will be required to present IFRS compliant financial statements for thefinancial year starting 1 July 2005. In September 2005, Diageo will presentresults for the year ending 30 June 2005 under UK GAAP. The income statement,balance sheet and cash flow will also be available restated under IFRS (see IAS39 exception below), together with quantitative reconciliations of equity andnet profit, and explanations of differences to the corresponding UK GAAPreporting. The adoption of IFRS will result in changes to the presentation of the financialstatements and to the amount and timing of recognition of assets, liabilities,profits and losses. IFRS standards continue to be revised and be subject to newinterpretations. However, based on current expectations of the standards thatDiageo will need to comply with and on the work carried out to date, the mostsignificant implications of the conversion to IFRS for the group are describedbelow: IAS 10 - Events after the balance sheet date, requires that dividends declaredto holders of equity instruments after the balance sheet date are not recognisedas a liability. Amounts of proposed dividends are noted but not provided for.Related Shares:
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