1st Sep 2005 07:02
Diageo PLC01 September 2005 Preliminary results for the year ended 30 June 2005 1 September 2005 Diageo has achieved organic growth in net sales (after deducting excise duties)of 4% and operating margin expansion of 0.6 percentage points resulting inorganic operating profit growth of 7%. Continued strong generation of free cashflow at £1.4 billion. EPS before exceptional items 49.1 pence per share.Recommended full year dividend 29.55 pence per share. Results at a glance Reported Organic 2005 2004 movement movement Volume equivalent 125.6 122.1 3% 3% units million Turnover £ million 9,036 8,891 2% 4% Net sales (after deducting excise duties) £ million 6,729 6,682 1% 4%Marketing investment £ million 1,023 1,039 (2)% 1%Operating profit before exceptional items £ million 1,944 1,911 2% 7% Operating margin before exceptional items % 21.5 21.5 - 0.6 ppts Other organic growth highlights • Net sales (after deducting excise duties) of global priority brands excluding ready to drink grew 6%• Marketing increased 5% excluding ready to drink• Restructuring costs of nearly £90 million charged to operating profit to improve efficiency and reduce costs in future years Other financial highlights 2005 2004Operating profit after operating exceptionals £ million 1,736 1,871Profit for the year £ million 1,375 1,392Basic eps before exceptional items Pence 49.1 48.2Basic eps Pence 46.3 45.9Recommended final dividend per share Pence 18.2 17.0Free cash flow £ million 1,441 1,450 Return on invested capital % 14.9 14.5Share buybacks £ million 710 306 % movements are organic movements. These movements and operating margins arebefore exceptional items. See page 29 for additional information forshareholders and an explanation of non GAAP measures. • Restated for the change in accounting treatment for Diageo's General Mills shareholding eps before exceptional items grew 9% Paul Walsh, Chief Executive of Diageo, commenting on the year ended 30 June 2005said: 'The range of Diageo's premium drink brands together with our geographic reachgives us the ability to consistently deliver top and bottom line growth andstrong cash flow. That is exactly what we have delivered this year. At the sametime we have continued to build our brands, with over £1 billion of marketinginvestment. We have also improved our routes to market, particularly in theworld's biggest premium drinks market, the United States and made value creatingacquisitions of brands which widen our brand range even further. We have successfully resolved our exposure to Burger King, monetised themajority of our shares in General Mills and provided certainty as to the valuewe will receive from our remaining shares when they are sold as we expect theywill be in a couple of months. With the completion of these transactions Diageo's balance sheet is now asfocused on our position as the world's leading premium drinks company as ouroperations have been for a number of years. Therefore, given the continuedstrong performance of our free cash flow, we will now be able to increase theamount of our share buy back programme. For fiscal '06 we are proposing aprogramme of around £1.4 billion. As we said at our recent trading update, we expect that in '06 volume growthwill again be 3% and net sales (after deducting excise duties) will be 4%.Better pricing and a stabilising ready to drink trend may give us theopportunity to improve on the net sales (after deducting excise duties) growthwe achieved this year. We believe operating profit growth can be similar to thatachieved in '05 even after allowing for higher growth in marketing spend andhigher pension costs.' Key features of the year • In North America, strong top line growth together with overheadreduction delivered organic operating profit growth of 11%. Volume grew 4% andDiageo gained share in the United States across all three categories - spirits,wine and beer - in a market which is estimated to have grown by 3.5%. Althoughvolume for the ready to drink sector was flat, Diageo gained share. • In Europe, operating profit grew 3% despite challenging tradingconditions and further contraction of the ready to drink segment. Volume and netsales (after deducting excise duties) were down 1% and 2% respectively.Excluding ready to drink, volume and net sales (after deducting excise duties)increased 1% as price increases on global priority brands were offset by weaklocal priority brands in Ireland. There was an incremental £25 million spent onrestructuring initiatives, which was offset by savings of £17 million. • The International business delivered operating profit growth of 4%while increasing marketing investment by 15%. Strong volume growth in LatinAmerica and some Asian markets together with a number of price increases drovenet sales (after deducting excise duties) up 9%. Marketing investment wasincreased in new growth markets such as China and behind the global prioritybrands where spend was up over 25%. • The global priority brands continue to be the engine for growth withvolume and net sales (after deducting excise duties), excluding ready to drink,up 3% and 6% respectively. • Ready to drink now represents 6% of Diageo's volume and around 10% ofnet sales (after deducting excise duties). Weakness in the ready to drinksegment continued and volume and net sales (after deducting excise duties)declined 3% and 5% respectively. This reduced overall net sales (afterdeducting excise duties) growth by over 1 percentage point. • Excluding ready to drink, marketing investment grew 5%. Spend onglobal priority brands, excluding ready to drink, increased 6%. Spend on readyto drink brands was reduced 21% to reflect the decline of the segment acrossEurope and the consolidating competitive environment in North America. • Diageo's decision to dispose of nearly 50 million shares in GeneralMills improved return on invested capital and raised £1,210 million. Excludingthe impact of the sale of the General Mills shares, Diageo delivered eps growthof 9%. • The restructuring programme, which began in fiscal 2004, has continuedat a cost of nearly £90 million in the year (2004 - £50 million) focused onstreamlining operations in Europe. Incremental synergy of £68 million isexpected to accrue in fiscal 2006. • A further £710 million was returned to shareholders via our on-marketshare repurchase programme. Net sales after deducting excise duties Up 4%Operating profit Up 7%Operating margin Up 0.6 pptsFree cash flow at £1,441 million - Return on invested capital Up 0.4 pptsEPS Up 2% OPERATING AND FINANCIAL REVIEW For the year ended 30 June 2005 % movements are organic movements. These movements and operating margins arebefore exceptional items. See page 29 for additional information forshareholders and an explanation of non GAAP measures. OPERATING REVIEW Organic volume and net sales (after deducting excise duties) movement by brand Equivalent Volume Net sales* units million movement movement % %Global priority brandsSmirnoff 25.2 3 -Johnnie Walker 12.3 5 12Guinness 11.4 (2) 5Baileys 6.7 1 (1)Captain Morgan 6.5 10 11J&B 5.9 (1) -Jose Cuervo 4.5 7 9Tanqueray 1.9 (3) 1 Total global priority brands 74.4 3 4 Local priority brands 22.7 - 1 Category brands 28.0 4 3 Total 125.1 3 4 * after deducting excise duties Organic volume totalled 125.1 million equivalent units. Reported volume, whichincludes 0.5 million equivalent units in respect of the acquisitions of Ursus,the Chalone Wine Group Ltd., and a controlling interest in Ghana Breweries,totalled 125.6 million equivalent units. Smirnoff's performance reflected the continued strong growth of the base brandoffset by declines in Smirnoff ready to drink volume of 4% and net sales (afterdeducting excise duties) of 7%. The base Smirnoff brand grew across all threeregions resulting in volume and net sales (after deducting excise duties) growthof 5% and 7% respectively. Smirnoff ready to drink volume declined with growthin International offset by a further decline in Europe. Johnnie Walker also grew across all three regions. Total volume growth acrossthe Johnnie Walker marque was 5%. The faster growth of the Johnnie Walker superdeluxe variants delivered mix improvement and drove net sales (after deductingexcise duties) growth of 12%. The beer market has been tough in all three of Guinness' major markets and thishas resulted in a 2% volume decline. However, product and packaging innovationand a robust pricing strategy in these three markets led to a 5% increase in netsales (after deducting excise duties). Baileys volume was up year on year despite weakness in Baileys Glide and Minis.The decline in these two variants has also had an adverse impact on mix. Thecore Baileys brand however has continued to grow and build share in the keymarket of Great Britain. In North America, where over 85% of Captain Morgan's volume is sold, performanceremained strong. This together with successful innovation, such as the launchof Captain Morgan Tattoo, delivered double-digit increases in volume and netsales (after deducting excise duties). J&B's volume declined 1% reflecting the decline of the standard scotchsegment in Spain, offset by growth in markets such as South Africa and Korea.Increased pricing in Spain, J&B's single biggest market, mitigated theeffect of the volume decline on net sales (after deducting excise duties). Jose Cuervo has returned to strong growth year on year with growth of premiumvariants delivering mix improvement. Tanqueray has under-performed the imported gin segment in North America wherenearly 80% of its volume is sold. The brand's performance towards the end ofthe year has improved since new advertising has been aired. Stronger pricingdelivered mix improvement. Analysis by region North America Summary: • Volume grew 4%, net sales (after deducting excise duties) grew 6% and operating profit grew 11% • Diageo has created a leading position in the world's most profitable beverage alcohol market. The strong growth of the spirits sector along with Diageo's superior route to market are reflected in the results which have been achieved. • Volume growth was led by the global priority brands, which grew 5%. Local priority brands and the category brands also showed consistent volume growth with both up 3%. • This strong performance in the US spirits market has resulted in an overall share gain of 0.5 percentage points to 25.4%. • Ready to drink volume was flat, net sales (after deducting excise duties) grew 2% and marketing investment declined 7% as competitors exited and Diageo grew share of the segment. Key measures: Reported Organic 2005 2004 movement movement £ million £ million % % Volume 4 4Turnover 2,619 2,641 (1) 6Net sales (after deducting excise duties) 2,191 2,220 (1) 6Marketing 341 359 (5) -Operating profit before exceptional items 778 757 3 11 Reported performance: Turnover was £2,619 million in the year ended 30 June 2005 down by £22 millionfrom £2,641 million in the comparable prior period. Operating profit beforeexceptional items increased by £21 million to £778 million in the year ended 30June 2005. Organic performance: The weighted average exchange rate used to translate US dollar turnover movedfrom £1 = $1.74 in the year ended 30 June 2004 to £1 = $1.86 in the year ended30 June 2005. The weakening of the US dollar resulted in a £183 millionreduction in turnover that was offset by organic growth of £146 million and thenet impact of acquisitions and disposals which contributed £15 million ofturnover. Operating profit before exceptional items increased by £21 million,reflecting organic growth of £78 million offset by £57 million of adverseexchange rate movement effects. Organic brand performance: Volume Net sales* movement movement % % Smirnoff 4 5Johnnie Walker 3 11Jose Cuervo 6 7Baileys (3) (2)Captain Morgan 11 12Tanqueray (4) -Guinness 5 9Total global priority brands 5 6Local priority brands 3 6Category brands 3 1Total 4 6 * after deducting excise duties In North America, global priority brands represent 61% of volume, local prioritybrands account for 23% of volume while category brands represent the remaining16%. Smirnoff vodka grew volume 6% and net sales (after deducting excise duties) 8%behind strong base brand performance and even faster growth of Smirnoff Twist.Share of the vodka category grew by 0.8 percentage points. Smirnoff ready to drink volume was flat although net sales (after deductingexcise duties) grew 2%. While share of the segment grew 5.9 percentage points,growth was impacted by comparison against the Smirnoff Twisted V launch in late2003. In the prior year, marketing investment behind Smirnoff vodka increased nearly50% to support the Icon packaging launch. Consequently, year on year Smirnoffvodka marketing declined while Smirnoff ready to drink marketing was focused oncontinuing to build awareness of Smirnoff Twisted V. Johnnie Walker volume grew 3% and share increased due in part to increasingdemand from ethnic minority and 21-29 year old adults. Net sales (afterdeducting excise duties) increased 11% driven by the higher growth of the superdeluxe variants and price increases. Johnnie Walker Black Label grew volume 2%and net sales (after deducting excise duties) grew 9% as a price increase wasimplemented in certain areas of the United States. Johnnie Walker Red Label lostshare in its segment as competitive pressure increased. Johnnie Walker GreenLabel was launched in October 2004 and contributed to the growth in the superdeluxe variants. Marketing investment increased 7% to support this launch andbehind increased gift packaging programmes. Jose Cuervo volume was up 6%, led by growth in Cuervo Gold and Jose CuervoClassico. Marketing investment increased 10% as the brand launched its firsttelevision advertising campaign. While share declined 0.9 percentage points ascompetitive pressures from super and ultra premium tequilas increased, JoseCuervo remains the category leader. Baileys had a difficult start to the year as Minis failed to sustain its initiallaunch success. In the second half of the year however the brand's volumeperformance has improved. Captain Morgan continues to grow very strongly with volume up 11% and net sales(after deducting excise duties) up 12% as the brand gained 2.2 percentage pointsof share. Growth was driven primarily by Captain Morgan Original Spiced Rum,together with the successful launch of Captain Morgan Tattoo and Parrot BayPassion Fruit. Marketing investment increased 14% to support these launches aswell as increased advertising and on trade marketing programmes. Tanqueray volume fell 4% and the brand lost share although it remains theleading imported gin. A price increase was taken in certain states mitigatingthe volume decline and therefore net sales (after deducting excise duties) wereflat. Marketing investment declined 2% in the year as campaigns were withdrawnto prepare for the fourth quarter launch of a new advertising campaign. Guinness volume grew 5%, significantly outperforming the import beer category.This was due to growth across all variants: Guinness Draught in Bottle, GuinnessExtra Stout and Guinness Draught. This performance is the result of successfulmarketing particularly around the low calorie message and the consumer trendtowards premium brands and taste. Net sales (after deducting excise duties)increased 9% as a result of stronger pricing. The local priority brands performed well with volume growth and mix improvementdriven by the strong performance of Crown Royal. Volume of Crown Royal was up7%, and net sales (after deducting excise duties) increased 11% benefiting froma price increase in select states. Crown Royal also grew share by 0.4 percentagepoints. Beaulieu Vineyards and Sterling Vineyard continue to grow strongly withvolume up 12% and 19% respectively, boosted by the significant growth of lowervalue variants, BV Century Cellers and Sterling Vintners Collection. Thesevolume increases were partially offset by a decline in volume of Buchanan's, 7Crown and VO, all down 1%. Category brands grew volume 3% led by growth in beer such as Smithwicks and RedStripe as well as value vodkas such as Popov and Gordon's Vodka. Net sales(after deducting excise duties) grew only 1% principally due to the growth invalue vodkas. Overall marketing investment was flat as growth in Crown Royal, Captain Morganand Jose Cuervo was offset by the decline in Smirnoff. The growth in marketingspend for Crown Royal is primarily related to the brand's sponsorship of NASCAR.The Captain Morgan and Jose Cuervo marketing increases were driven by increasedmedia investment. Diageo has signed new distributor agreements in a further three states in thepast year, bringing the total number of states that have signed new distributionagreements to 39 and the District of Columbia. Across the United States, thereare 2,100 distributor sales persons who are exclusively selling over 80% ofDiageo's spirits and wines volume. Performance in Canada, which represents 10% of total North America volume, wasnegatively affected by a strike in the province of Quebec, which impacted theholiday selling season and the destocking of the Canadian Liquor Control Boardand consequently volume declined 3%. In February 2005, Diageo completed the acquisition of the Chalone Wine GroupLtd. for US$285 million (£153 million) and has since successfully integrated thebrands. In fiscal 2005, Chalone contributed nearly 50,000 equivalent units and£14 million in net sales (after deducting excise duties). Europe Summary: • Volume declined 1%, net sales (after deducting excise duties) were down 2% and operating profit increased 3%. • Europe remains a difficult business environment with increased regulation on ready to drink products, health related legislation, a continued shift from the on trade to the off trade and weak economic conditions. • There were £25 million of incremental restructuring charges, partially offset by a reduction of £17 million in costs, which resulted in a 1 percentage point reduction in organic operating profit growth. • Marketing declined 7%, partially driven by a 44% reduction in spend on ready to drink as a result of the continued contraction of the ready to drink segment. • Excluding ready to drink volume and net sales (after deducting excise duties) grew 1%. Key measures: Reported Organic 2005 2004 movement movement £ million £ million % % Volume - (1)Turnover 3,852 3,847 - -Net sales (after deducting excise duties) 2,494 2,535 (2) (2)Marketing 403 435 (7) (7)Operating profit before exceptional items 692 666 4 3 Reported performance: Turnover in Europe increased in the year ended 30 June 2005 by £5 million to£3,852 million. Operating profit before exceptional items increased by 4% from£666 million to £692 million. Organic performance: Turnover increased by £5 million compared with the year ended 30 June 2004.This increase arose due to organic growth of £8 million offset by an overallreduction in turnover arising from disposals and acquisitions of £3 million.Exchange rate movements had no overall impact on turnover in the year.Operating profit before exceptional items increased by £26 million as a resultof £18 million of organic growth, beneficial exchange rate movement effect of £7million and the impact of acquisitions of £1 million. Organic brand performance Volume Net sales* movement movement % % Smirnoff (3) (12)Johnnie Walker 1 2Guinness (2) 5Baileys 2 -J&B (3) (2)Total global priority brands (1) (2)Local priority brands (4) (4)Category brands 4 1Total (1) (2) * after deducting excise duties In Europe, global priority brands represent 64% of the volume, local prioritybrands account for 16%, while category brands represent the remaining 20% of thevolume. Smirnoff's performance reflects the continued decline of the ready to drinksegment in Europe. Last year Smirnoff ready to drink represented nearly 20% oftotal Smirnoff volume and this has fallen to 15% in 2005. Smirnoff vodka grewvolume 3% and net sales (after deducting excise duties) grew 4% with goodperformances and stronger pricing in Great Britain, Ireland and Spain; allmarkets in which it is the leading vodka brand. Smirnoff ready to drink volumeand net sales (after deducting excise duties) declined over 25% and consequentlymarketing on ready to drink was reduced by more than 40%. However, supportbehind Smirnoff vodka was up 7% as there was increased investment behind thelaunch of Smirnoff Norsk and Penka in Great Britain. Johnnie Walker volume grew 1% and net sales (after deducting excise duties)increased 2%. Volume for Johnnie Walker Black Label and Johnnie Walker superdeluxe variants was up 3% and 50% respectively as a result of increased focus onsuper premium brands in Greece, Russia and Spain. Johnnie Walker Red Labelvolume was flat as growth in Russia and Greece offset weakness in France andSpain. Marketing was up 6% as a result of increased activities in Greece,Russia and Spain. Almost 95% of Guinness volume in Europe is sold in Great Britain and Ireland,and therefore the declining beer market in both countries heavily impactedvolume, which declined 2%. Robust pricing has offset volume weakness with netsales (after deducting excise duties) up 5%. Baileys volume was up 2% driven by strong growth in Great Britain, Germany andRussia. Net sales (after deducting excise duties) were flat due to adverse mixas the prior year saw the launch of Baileys Glide. Excluding ready to drink,net sales (after deducting excise duties) were up 2%. J&B volume declined 3% due to the continued contraction of the standardwhisky segment. However net sales (after deducting excise duties) were down by2% due to improved pricing in Spain and Portugal. Local priority brand volume and net sales (after deducting excise duties) weredown 4% as lagers in Ireland continue to decline due to difficult on trademarket conditions. Category brands grew volume 4% as strong performances from smaller brands offseta 3% decline in Gordon's Gin outside of Great Britain. Blossom Hill continuedto grow in Great Britain with volume up 18%. Pampero performed well in Spainand Italy with volume up 8% and 20% respectively, while Haig was particularlystrong in Greece with volume up 29%. Marketing in Europe was down 7% due to a 44% reduction in spend on ready todrink. Marketing, excluding ready to drink, decreased 1% in response to softmarket conditions. However investment in key brands was up-weighted withmarketing for Smirnoff excluding ready to drink up 7% driven by increases inGreat Britain and Ireland. Johnnie Walker marketing grew 6% to support thebrand's growth in Greece and Russia. Investment was also increased behindspecific opportunities such as Baileys and Guinness in Great Britain, lagers inIreland and Cacique in Spain. The acquisition of the Ursus vodka and the Ursus Roter brands for €146 million(£99 million) was completed on 25 February 2005 and Diageo began selling thebrands in Greece late in March. Great Britain Through a period of weakening economic and market conditions, Diageo deliveredoverall top line growth with volume and net sales (after deducting exciseduties) up 1% and 2% respectively. This growth has been achieved through sharegains in vodka, gin and cream liqueurs. A focused pricing strategy has resultedin price increases on Smirnoff Red, Guinness, Baileys, Gordon's, and Pimms.This strength in core spirits, together with the continued growth of wines,helped offset the negative mix impact of the decline in the ready to drinksegment. Excluding ready to drink, volume grew 3% while net sales (afterdeducting excise duties) were up 7%. In a buoyant category, Smirnoff vodka continued to outperform. Volume grew 5%and net sales (after deducting excise duties) were up 8% as a result of a pricerise in June 2004. Share increased by 1 percentage point due to a strongmarketing programme, increased distribution and consistent promotionalactivities. Share of voice increased 13 percentage points to 29% as a result ofa 28% increase in marketing investment which includes support for the launch ofNorsk and Penka. Smirnoff ready to drink volume declined 19%, however, thebrand remains the segment leader with a 28% share. In a weak beer market, Guinness volume declined 1%, although price increases inApril 2004 and February 2005 led to net sales (after deducting excise duties)growth of 4%. New promotional packaging for Guinness Draught in cans drove offtrade growth, while a solid performance in the on trade enabled the brand tohold share. Marketing investment grew 1% and as result share of voice increased1 percentage point to 17%. Baileys Glide has not built on its initial success, and volume of the producthalved in the year. Consequently, total Baileys volume increased 2% and netsales (after deducting excise duties) were down 3% as a result of the adversemix impact. Core Baileys volume and net sales (after deducting excise duties)were up 3%. Stock in trade was successfully reduced following the increase inthe prior year in preparation for the July 2004 launch of a new bottle with amodern and contemporary look. Marketing investment for Baileys (excludingGlide) was up 3% to support the launch of the new bottle as well as widereaching media and sampling campaigns. Local priority brand performance was mixed. Gordon's volume grew 2% driven by aneffective advertising campaign and the successful re-launch of Gordon's Sloegin. Already the leading gin brand in Great Britain, share increased 2percentage points to 41%. Bell's volume was flat as the brand recovered fromtough trading conditions over the Christmas period when competitors pursued anaggressive discounting strategy. It remains the market leader with 15% share.Archers volume declined 12% driven by a 21% decline in the ready to drinkvariant Archers Aqua. Category brand volume was up 9% driven by 18% growth in Blossom Hill which, as aresult of its continued strong performance, has become Diageo Great Britain'sbiggest off trade brand. Ireland The results for Ireland reflect the ongoing difficulties in the on trade as wellas growth in the value wine and spirits segments. The shift from the on tradeto the off trade was further exacerbated by the smoking ban introduced in theRepublic of Ireland in March 2004. The on trade declined 5% and now represents53% of the market while the off trade grew 11% driven by strong growth in winesand spirits. These market dynamics have a major impact on performance in Irelandas the majority of Diageo's business is in the on trade. As a result, volumedeclined 4% and net sales (after deducting excise duties) were down 5%. Although Guinness volume was down 3%, net sales (after deducting excise duties)were up 4% due to pricing. The brand's performance in the first half wasstronger as it benefited from a cool summer in 2004 compared to the abnormallyhot summer in 2003. In the on trade, which accounts for nearly 90% of Guinness'volume, share was up by nearly 1 percentage point in the Republic of Ireland andremained flat in Northern Ireland despite the challenging market dynamics. In spirits, Smirnoff vodka performed well and it continues to be the number onevodka brand in Ireland. Volume increased 11% as a result of the successfulintroduction of a new bottle and new advertising in 2004. Baileys volume was up2% with most of the growth coming during the Christmas period as a result of anew and extended marketing campaign. Local priority volume declined 9% due to continued weak performance in beer.However, performance in the second half was stronger due in part to increasedmarketing investment. Spain In Spain, volume declined 1% in a spirits market that contracted by 2%. Thefirst half saw a trade buy-in ahead of the January 2005 increase in both dutyand price. As a result of stronger pricing across a number of brands, net sales(after deducting net excise duties) grew 3%. J&B volume declined 4%, while net sales (after deducting excise duties)were down only 1% due to higher pricing. Despite a 1 percentage point decreasein share, J&B remains the leader of the standard whisky segment with a25% share. Johnnie Walker volume declined 3% while net sales (after deducting exciseduties) grew 2% due to stronger pricing on Johnnie Walker Red Label and 6%volume growth in Johnnie Walker Black Label. Johnnie Walker Red Label share wasflat while Johnnie Walker Black Label grew share by 1 percentage point. Baileys volume increased 1% and net sales (after deducting excise duties) wereup 4%, again as a result of stronger pricing. Off a small base, Jose Cuervovolume was up 38% and net sales (after deducting excise duties) increased 50%driven by the introduction of new premium variants and increased consumerinterest in the tequila category. Local priority brand volume was flat while net sales (after deducting exciseduties) increased 4% as the result of higher pricing. The dark rum segmentcontinues to grow, although at a more moderate pace, as consumers continue toshift away from whisky and white rum. Cacique volume was flat, while net sales(after deducting excise duties) were up 6% due to pricing. Although the brandlost share due to numerous new entries, it is still the leader of the dark rumsegment with 21% share. Category brand volume was up 7%. Continued momentum behind Pampero led volumeto grow 8% and net sales (after deducting excise duties) to increase by 19%.Gordon's volume was up 6% and net sales (after deducting excise duties) grew 7%due to favourable pricing versus the competition. Rest of Europe The rest of Europe represents about a third of Diageo's European business.Total volume declined 1% and net sales (after deducting excise duties) were down4% driven by the decline in the ready to drink segment in Germany, Switzerlandand the Nordics. Performance excluding ready to drink was stronger with volumeup 1% and net sales (after deducting excise duties) up 2% as a result of volumegrowth in Russia and robust pricing in Greece. In Greece, volume increased 6% and net sales (after deducting excise duties)were up by 5%. Stronger pricing of Johnnie Walker, Smirnoff, Jose Cuervo andHaig was slightly offset by a 16% decline in ready to drink net sales (afterdeducting excise duties). In a tough market, volume in France declined by 1% asweakness in Johnnie Walker and Gordon's was partially offset by growth inSmirnoff vodka and J&B. Volume in Germany and Switzerland was down morethan 8% as a result of ready to drink volumes declining 71% and 48% respectivelyas higher duties and increased regulations of the ready to drink category wereintroduced during the year. Russia continued its strong growth trajectory, albeit from a relatively smallbase. Volume grew 51%, while net sales (after deducting excise duties) were up47%. Johnnie Walker and Baileys were the key growth drivers with volume up 56%and 45% respectively. Johnnie Walker Black Label, Johnnie Walker Red Label andBaileys are the clear leaders in their segments. Diageo entered an agreementwith Heineken for the production and distribution of Guinness in Russia whichbecame effective as of July 2005. International Summary • Strong growth with volume up 4%, net sales (after deducting excise duties) up 9%, marketing up 15% and operating profit up 4%. • Volume growth was achieved through high growth in Latin America and parts of Asia Pacific. This together with price increases in Latin America and Africa and overall mix improvement delivered a 5 percentage point improvement in price and mix. • Global priority brands performed strongly with volume up 6%. Net sales (after deducting excise duties) grew 12% due to price increases on Smirnoff in Latin America and Guinness in Africa and mix improvement in Johnnie Walker, which offset a decline in volume in Nigeria, Taiwan and Korea. • Significant investments were made in the period to position Diageo for long term growth including an increase in marketing of 27% on global priority brands, the launch of a redesigned Guinness bottle in Nigeria at a cost of £13 million and the launch of a number of product innovations. • The emerging markets of Brazil, India and China continue to grow rapidly resulting in strong Johnnie Walker and Smirnoff growth. Reported OrganicKey measures: 2005 2004 movement movement £ million £ million % % Volume 5 4Turnover 2,503 2,340 7 8Net sales (after deducting excise duties) 1,982 1,864 6 9Marketing 279 245 14 15Operating profit before exceptional items 627 646 (3) 4 Reported performance: Reported turnover in the year ended 30 June 2005 was £2,503 million, up £163million on the prior year figure of £2,340 million. Operating profit beforeexceptional items was down 3% at £627 million for the year ended 30 June 2005. Organic performance: Turnover in International markets was up £163 million compared with the yearended 30 June 2004. There were unfavourable exchange effects of £45 million,offset by a £194 million improvement in organic performance. Acquisitionscontributed turnover of £14 million in the year to 30 June 2005. There was a £19 million decrease in reported operating profit before exceptionalitems. This decrease was mainly due to organic improvements in brandperformance of £21 million offset by unfavourable exchange rate movements of £41million. Organic brand performance: Volume Net sales* movement movement % % Johnnie Walker 8 16 Smirnoff 13 21Guinness (4) 5Baileys 1 1Total global priority brands 6 12Local priority brands - 1Category brands 4 8Total 4 9 * after deducting excise duties In International, global priority brands account for 53% of total volume, whilelocal priority brands represent 15% and category brands account for theremaining 32%. Growth in Johnnie Walker was driven by the brand's strong performance acrossLatin America and in China and India, offset by weakness in Taiwan andAustralia. Higher growth in the Johnnie Walker super deluxe variants gave riseto significant mix benefits. Strong volume growth was achieved in both Smirnoff vodka, up 9% and Smirnoffready to drink, up 32%. Smirnoff performance was particularly strong in LatinAmerica, Asia Pacific and India with volume growth of 22%, 15% and 36%respectively. In Latin America, Smirnoff ready to drink grew volume 40% due toa repositioning of the brand in Brazil and the launch of the Smirnoff Black Icevariant. In South Africa, Smirnoff ready to drink volume was up 15% driven byinnovation initiatives. Price increases in Latin America coupled with the growthin the ready to drink segment delivered favourable mix benefits. Guinness volume decline of 4% is primarily due to a 20% volume decline inNigeria, as the rest of international delivered strong volume growth of 8%. Thekey drivers of growth were Cameroon, Japan and Ghana as a result of bothinnovation and packaging initiatives. Net sales (after deducting excise duties)grew 9 percentage points ahead of volume supported by higher pricing in Nigeria. Baileys volume grew 1% with volume growth in Latin America offset by declines inAustralia and global duty free. Growth in Latin America was as a result ofstrong volume performance in Mexico primarily supported by a new media campaign. In local priority brands, strong volume growth from Buchanan's (Venezuela),Pilsner (Kenya) and Bell's (South Africa) was offset by significant declines inWindsor (Korea) and Malta Guinness (Africa). Mix improvement in the category brands was due to the growth of higher valuebrands such as Buchanan's (outside of Venezuela) and Old Parr, which was offsetby a significant decline in Spey Royal, a value brand, in Thailand. Overall marketing investment grew 15% with spend behind global priority brandsup 27%. In South Africa investment in the global priority brands was up 40%. Thedrivers included the launch of Smirnoff Triple Spin, the re-launch of Baileysand promotional activities for Smirnoff and J&B. In Nigeria, promotionalactivities focused around the launch of the redesigned Guinness bottle. In LatinAmerica, higher media spend supported the continued growth of Johnnie Walker andSmirnoff. Asia Pacific In Korea, the trading environment for beverage alcohol remains tough due to adifficult economy. The whisky category declined 7% losing share to cheaper localsubstitutes. While Diageo maintained its leadership in scotch, premium brandssuch as Windsor and Dimple, both lost share and volume declined 16% and 14%respectively. This was offset by strong volume growth in J&B of 49% andtherefore overall volume was down 10%. Net sales (after deducting exciseduties) declined 13% due to the negative mix impact of the volume decline inWindsor and Dimple. In Japan, the global priority brands were up 8% in volume and 14% in net sales(after deducting excise duties). Guinness grew share driven by expanded on tradedistribution and increased media spend. Smirnoff ready to drink grew share 13percentage points in the off trade. In Thailand, volume was up 1% and mix improvement led to stronger net sales(after deducting excise duties) growth. Johnnie Walker reversed its first halfvolume decline with overall volume up 1% and net sales (after deducting exciseduties) benefited from higher pricing across all variants and positive mix.Additionally, increased media spend supported price increases on JohnnieWalker Red Label and Johnnie Walker Black Label. This was offset by weak SpeyRoyal performance with volume down 36% as the brand increased price and lostshare in the highly competitive standard scotch segment. However, this lostvolume was offset by the successful launches of Golden Knight, in January 2005,and Benmore, in March 2005, which compete in the value whisky and standardscotch segments respectively. Trading conditions in Taiwan were difficult with increased competition from bothlower priced local scotch brands and single and blended malt brands. JohnnieWalker Black Label lost share and volume declined by 36%, primarily driven by avolume decline in the first half. However, the brand performed strongly in thesecond half with volume up 17%. Growth in the Johnnie Walker super deluxevariants delivered mix improvement and overall Johnnie Walker volume and netsales (after deducting excise duties) declined 26% and 16% respectively. Diageo grew share and maintained its leadership position in both the spiritscategory and ready to drink segment in Australia. The Australian spirits marketwas down 4% and Diageo's performance was mixed with volume of Bundaberg andSmirnoff up, but Johnnie Walker and Baileys down. Bundaberg grew share due tothe launch of Bundaberg Distillers No. 3, new packaging and increased mediaspend. Ready to drink volume grew 10% driven by further successful lineextensions. In India, volume increased 26% off a small base, primarily driven by growth inthe global priority brands. This was supported by a significant investment inmarketing concentrated on increasing brand awareness of Smirnoff vodka andJohnnie Walker. Smirnoff vodka delivered the highest growth, with volume up 36%and share up 2 percentage points driven by the launch of Smirnoff Flavours andtargeted marketing campaigns. A price increase was also implemented on Smirnoffvodka. Johnnie Walker continued its strong performance with volume up 24%. China too experienced rapid volume and net sales (after deducting excise duties)growth primarily driven by an increase in Johnnie Walker volume of 78%. JohnnieWalker Black Label benefited from a significant increase in marketinginvestment. Additionally, in April 2005, Diageo successfully hosted the JohnnieWalker Classic, a premier golf tournament, in Beijing. Growth in the globalpriority brands was also supported by a new route to market model for Guinness,Baileys and Smirnoff vodka, all of which registered volume increases, althoughoff smaller bases. Latin America and the Caribbean There was strong growth across all Latin American markets with overall regionvolume up 11% and net sales (after deducting excise duties) up 20%. The keydrivers of growth were the global priority brands with Johnnie Walker andSmirnoff growing volume 13% and 22% respectively as well as strong growth in thelocal priority brands. Performance in Brazil, Paraguay and Uruguay benefited from generally strongeconomies and volume was up 21% and net sales (after deducting excise duties) up31%. Johnnie Walker contributed to the strong performance with overall volume up10% and net sales (after deducting excise duties) up 19% due to growth in thepreviously declining super deluxe variants. Smirnoff vodka grew volume 21%boosted by higher media spend and a new packaging launch. In Brazil, JohnnieWalker Red Label, Johnnie Walker Black Label and Smirnoff vodka all increasedshare as a result of increased media spend, and maintained leadership of theirrespective categories. In Venezuela, a significant improvement in the economic environment led tostrong growth with volume up 23% and net sales (after deducting excise duties)up 50%. The key drivers of growth were volume and mix improvement on JohnnieWalker and Buchanan's both of which increased volume over 60% and grew share.Diageo maintained its leadership of the super deluxe, deluxe and standard scotchsegments as a result of new media spend. Smirnoff Ice was launched in Venezuelain October 2004 and has positioned itself as the leader within the ready todrink segment supported by increased media spend. Performance in Mexico was strong with overall volume up 43% and net sales (afterdeducting excise duties) up 54% primarily driven by growth and share gainsacross the scotch category. Buchanan's increased share by 4 percentage pointsand Johnnie Walker Red Label and J&B each increased share by 2 percentagepoints. Baileys accelerated growth with volume up 26% and share increased 2percentage points lifted by improved brand visibility from wider distributionand a new media campaign. In Jamaica, volume declined 1% while net sales (after deducting excise duties)were up 11% as a result of price increases on Guinness and Red Stripe. Africa Africa delivered volume growth of 2% despite the weakness of the importantNigerian beer market. Price increases were achieved in a number of major marketsincluding Nigeria and overall net sales (after deducting excise duties) grew 8%.Underlying margin expansion was offset by the cost of the new bottle design inNigeria. In Nigeria, the beer market declined 10% due in part to reduced liquidity andincreased competition for disposable income, from such items as mobile phones.Guinness, the premium priced brand in the beer market, was more affected by thedownturn with volume down 20% while share declined. Similarly, Malta Guinness,which retails at a premium price, lost share and declined in volume. Marketinginvestment increased 18% to support promotional activities, including the launchof a redesigned Guinness bottle in August 2004, which re-enforced Guinness'quality positioning. Harp, which was re-launched in April 2005, grew share andvolume. Guinness Extra Smooth was successfully launched in June 2005. Whileoverall volume in Nigeria declined 19%, net sales (after deducting exciseduties) only declined 2% as a result of higher pricing. In Kenya, Diageo's performance in beer was strong with volume up 13%. Strongvolume performance of premium variants delivered mix benefits for Tusker,Pilsner volume remained robust, and Senator, driven by the launch of the kegvariant in July 2004, grew share by 4 percentage points. Performance was strong in Cameroon and, although the beer market declined by 4%,Guinness grew volume by 21% benefiting from the successful launch of GuinnessExtra Smooth in June 2004 which captured 5% of the beer market. Volume increased10% as this strong performance was offset by volume declines in Harp andGordon's Spark. Net sales (after deducting excise duties) increased 12%, drivenby price and mix. 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. Guinness delivered high volume growthin Ghana with Guinness FES increasing share by 2 percentage points. MaltaGuinness also gained share and increased volume by 26%. Overall volume increased15% and net sales (after deducting excise duties) increased 22%, driven by priceincreases. In South Africa, overall volume increased 8% and net sales (after deductingexcise duties) increased 11%, primarily driven by positive brand mix. The scotchmarket was up 14% and Diageo's joint venture, brandhouse, delivered strongresults with Johnnie Walker, J&B and Bell's all delivering strong volumegrowth and share gains. The performance of these brands was driven by anincrease in marketing of 34% focused on building brand awareness. Smirnoff inSouth Africa, which represents 90% of Smirnoff volume in Africa, registeredstrong growth with volume up 5% and net sales (after deducting excise duties) up6% due in part to the introduction of Smirnoff Triple Spin, a new ready to drinkvariant. Smirnoff vodka, positioned as a premium white spirit in the on trade,grew share by 1 percentage point. Global Duty Free Volume growth in Europe, Australia and parts of Asia in the second half,reversed the declining trend of the first half, and overall volume and net sales(after deducting excise duties) remained flat year on year. Strongerperformances from Johnnie Walker Black Label and Johnnie Walker super deluxevariants due to aggressive marketing and promotion initiatives at airports andprice increases on Smirnoff vodka, offset a volume decline in Baileys. Corporate revenue and costs Reported turnover in the year ended 30 June 2005 was £62 million, down £1million versus the prior year. Net corporate operating costs before exceptionalitems reduced by 3% to £153 million in the year to 30 June 2005 compared to theprior year. FINANCIAL REVIEW Summary consolidated profit and loss account Year ended 30 June 2005 Year ended 30 June 2004 Before Before exceptional exceptional items Exceptional items Exceptional items Total items Total £ million £ million £ million £ million £ million £ million Turnover 9,036 - 9,036 8,891 - 8,891Operating costs (7,092) (208) (7,300) (6,980) (40) (7,020)Operating profit 1,944 (208) 1,736 1,911 (40) 1,871Associates' profits 185 - 185 451 (13) 438Investment income 17 - 17 - - -Disposal of fixed assets (19) (19) (35) (35)Disposal of businesses 46 46 (10) (10)Finance charges (143) - (143) (295) - (295) Profit before taxation 2,003 (181) 1,822 2,067 (98) 1,969Taxation (481) 98 (383) (517) 30 (487)Profit after taxation 1,522 (83) 1,439 1,550 (68) 1,482Minority interests (64) - (64) (90) - (90) Profit for the year 1,458 (83) 1,375 1,460 (68) 1,392Dividends (866) - (866) (833) - (833) Transferred to reserves 592 (83) 509 627 (68) 559 Turnover On a reported basis, turnover increased by £145 million (2%) from £8,891 millionin the year ended 30 June 2004 to £9,036 million in the year ended 30 June 2005. Turnover was adversely impacted by exchange rate movements of £228 million,principally arising from weakening of the US dollar. Operating costs On a reported basis, operating costs increased by £280 million (4%) from £7,020million in the year ended 30 June 2004 to £7,300 million in the year ended 30June 2005. Operating exceptional items increased by £168 million from £40million to £208 million. On a reported basis before exceptional items, exciseduties increased by £98 million from £2,209 million for the year to 30 June 2004to £2,307 million, whilst cost of goods sold increased by £7 million andmarketing investment was down 2% from £1,039 million to £1,023 million.Marketing investment on global priority brands (excluding ready to drink) was£587 million while marketing spend on ready to drink brands was £128 million.Reported group overheads increased by £23 million in the year to 30 June 2005 to£1,176 million. Overall, the impact of exchange rate movements reduced totaloperating costs before exceptional items by £137 million. Exceptional operating costs Operating profit for the period is after £208 million of exceptional operatingcosts. Exceptional operating costs include a charge of £149 million which is thediscounted value of increasing the annual payments to the Thalidomide Trust.Diageo currently makes an annual payment of £2.8 million to the Trust althoughin the year ended 30 June 2005 an additional contribution of £4.4 million wasmade. Based on the current negotiations it is expected that the future annualpayment will increase to around £6.5 million per annum. This amount will beindex-linked and is expected to be a final settlement payable over the period to2037. Also included in exceptional costs is £29 million of accelerateddepreciation in respect of the Park Royal brewery which, as announced in April2004, closed in June 2005 and £30 million (2004 - £40 million) of final costsRelated Shares:
Diageo