Preliminary Results

31st Aug 2006 07:01

Diageo PLC31 August 2006 31 August 2006 Preliminary results for the year ended 30 June 2006 Diageo delivers strong top line and double digit EPS growth Paul Walsh, Chief Executive of Diageo, commenting on the year ended 30 June 2006said: 'Diageo's strong full year performance is the result of brand building marketingcampaigns, better sales execution to build superior relationships with ourcustomers and successful new product launches. 'North America continues to deliver industry beating top line growth; a morecost effective European business is driving operating profit and margin growth;and the rate of sales growth in International has accelerated following newbrand introductions and increased investment. 'Strong top line growth has delivered organic operating margin expansion andorganic operating profit growth in line with our guidance at the beginning ofthe year despite pressure on input costs. At the same time we have increasedmarketing investment creating a stronger platform for future growth. We havedelivered another year of strong free cash flow and through our dividends andshare buybacks we have returned a further £2.3 billion to our shareholders. 'With well-positioned brands and a more efficient and effective organisation, weenter the new financial year with confidence. We expect that organic net salesgrowth will be in line with that achieved in the current year and we plan todeliver organic operating profit growth of at least 7% for the year and toreturn a further £1.4 billion to shareholders through our continuing buybackprogramme.' Results at a glance Reported Organic 2006 2005 movement movementVolume in millions of equivalent units 133.8 125.4 7% 6%Net sales after deducting excise duties £ million 7,260 6,677 9% 6%Operating profit before exceptional items £ million 2,044 1,932 6% 7%Operating profit after operating exceptional items £ million 2,044 1,731 18%Profit attributable to parent company's equityshareholders £ million 1,908 1,344 42%Basic eps before exceptional items Pence 50.5 39.7 27% 10%Basic eps Pence 67.2 45.2 49% Key highlights • Growth across all businesses with net sales, after deducting excise duties, of spirits up 8%, wine up 8%, beer up 4% and ready to drink up 2% • At 8% organic growth, marketing increased as a percentage of net sales, after deducting excise duties • Further operating margin improvement of 30 basis points on an organic basis • Double digit eps growth • Return on invested capital up 90 basis points to 13.7% • Another year of strong free cash flow at £1,361 million • Share buyback doubled in the year to £1,400 million • Recommended full year dividend per share increase of 5% to 31.1 pence Percentage movements in this document are organic movements unless otherwisestated. These movements and operating margins are before exceptional items.Commentary, unless otherwise stated, refers to organic movements. Share, unlessotherwise stated, refers to volume share. See page 31 for additional informationfor shareholders and an explanation of non-GAAP measures including thereconciliation of basic eps as reported to basic eps as adjusted and the organiceps movement calculation. The financial statements for the year ended 30 June2006 have been prepared in accordance with IFRS as endorsed and adopted for usein the European Union. Regional Summary North America - Continued outperformance and share gains • Volume up 5% • Net sales, after deducting excise duties, up 7% • Marketing up 6% • Operating profit before exceptional items up 6% Diageo's North America business continues to outperform the market and gainshare. As a result of proven marketing campaigns and stronger execution of onand off trade sales programmes, top line growth has been achieved across thebusiness with net sales, after deducting excise duties, up 8% for spirits, 7%for wine, 11% for beer and 3% for ready to drink. The priority spirits brandscontinued to perform strongly, especially Smirnoff vodka, Captain Morgan andJose Cuervo which each delivered double digit growth in net sales, afterdeducting excise duties. Diageo's premium beer brands, Guinness, Red Stripe andSmithwicks, continue to broaden their consumer appeal through effectiveadvertising campaigns and targeted product placement. In wine, following itsacquisition in February 2005, Chalone has provided another growth engine and theperformance of that business is ahead of expectations. Europe - Building a more cost effective organisation • Volume up 1% • Net sales, after deducting excise duties, unchanged year on year • Marketing reduced by 4% • Operating profit before exceptional items up 6% The European business has implemented change in the year to build a more costeffective organisation focused on profitable growth opportunities. The declinein the ready to drink segment in Europe and the challenges inherent in the Irishbeer market have adversely impacted top line growth. However, Diageo's spiritsbrands in Europe and the beer brands outside of Ireland have performed well.This is the result of focus on those brands and markets which will generatefuture growth and a fuller innovation pipeline. Cost initiatives implemented inthe year have improved operating margins and driven operating profit growth. International - Growth across all key markets • Volume up 14% • Net sales, after deducting excise duties, up 13% • Marketing up 28% • Operating profit before exceptional items up 9% Diageo is well-positioned to take advantage of the opportunities in thesemarkets. Top line growth is accelerating and the International business isdelivering share gains for the key brands. The successful implementation ofturnaround plans in Nigeria, Korea and Taiwan have also contributed to theimprovement. This excellent top line growth has facilitated very high levels ofincreased marketing investment behind the growth of key brands, particularlyJohnnie Walker in expanding markets such as China and Mexico, and behindinnovation. Financial • The deficit in respect of post employment plans reduced by £493million from £1,294 million at 30 June 2005 to £801 million at 30 June 2006. Asa consequence, in the year ending 30 June 2007, finance income under IAS 19 willincrease year on year by approximately £30 million • In the year ended 30 June 2006, foreign exchange movements reducedoperating profit by £25 million and had no impact on the interest charge • In the year ending 30 June 2007, at current exchange rates foreignexchange movements are estimated to reduce operating profit by £75 million andreduce the interest charge by approximately £10 million (excluding the exchangeimpact of re-translating short term inter-company loans under IAS 21) • Brand performance summary Reported Organic Reported Organic Equivalent volume volume net sales* net sales* units movement movement movement movement million % % % % Global priority brands 78.9 6 6 8 6Local priority brands 23.1 2 2 8 3Category brands 31.8 13 10 11 9Total 133.8 7 6 9 6 Key brands:Smirnoff vodka 21.9 9 9 12 10Smirnoff ready to drink 5.0 1 1 1 (2)Johnnie Walker 13.7 11 11 11 11Guinness 11.1 (1) (1) 5 3Captain Morgan (excl. ready to drink) 7.1 8 8 17 13Baileys 7.0 4 4 4 3J&B 5.9 - - (1) (1)Crown Royal 4.6 5 5 13 8Jose Cuervo (excl. ready to drink) 4.5 9 9 15 11Tanqueray 2.0 6 6 12 8Buchanan's 1.1 19 19 15 20Windsor 0.7 12 12 23 9 * Net sales, after deducting excise duties. Diageo acquired Bushmill's Irish Whiskey on 25 August 2005 for approximately£200 million. OPERATING AND FINANCIAL REVIEW For the year ended 30 June 2006 OPERATING REVIEW Analysis by region North America Summary: • Top line growth across the business - spirits 8%, wine 7%, beer 11% and ready to drink 3% • Increased spend on proven marketing campaigns • Well executed on and off trade sales programmes • Growth of the premium beer brands supported by effective advertising and targeted product placement • In wine, Chalone is another growth driver - performing ahead of expectations Key measures: Reported Organic 2006 2005 movement movement £ million £ million % %Volume 5 5Net sales after deducting excise duties 2,510 2,194 14 7Marketing 384 341 13 6Operating profit before exceptional items 829 779 6 6 Reported performance: Net sales, after deducting excise duties, were £2,510 million in the year ended30 June 2006 up by £316 million from £2,194 million in the prior year.Operating profit before exceptional items increased by £50 million to £829million in the year ended 30 June 2006. Organic performance: The weighted average exchange rate used to translate US dollar sales and profitsmoved from £1 = $1.86 in the year ended 30 June 2005 to £1 = $1.78 in the yearended 30 June 2006. The strengthening of the US dollar resulted in a £110million increase in net sales, after deducting excise duties. Acquisitions added£34 million of net sales, after deducting excise duties, and there was anorganic increase in net sales, after deducting excise duties, of £169 million.Transfers between business segments increased prior year net sales, afterdeducting excise duties, by £3 million. Operating profit before exceptionalitems increased by £2 million as a result of foreign exchange impacts.Acquisitions increased operating profit before exceptional items by £1 millionand organic growth of £47 million was achieved. Organic brand performance: Reported Organic Reported net Organic volume sales* movement volume movement net sales* movement movement % % % %Global priority brands 7 7 14 8Local priority brands 2 2 10 5Category brands 2 (1) 24 7Total 5 5 14 7 Key brands:Smirnoff vodka 9 16 11Smirnoff ready to drink (3) 1 (5)Johnnie Walker 1 10 5Captain Morgan (excl. ready to drink) 9 19 14Baileys 7 13 7Jose Cuervo (excl. ready to drink) 9 16 11Crown Royal 6 14 8Tanqueray 5 13 7Guinness 7 15 9Beaulieu Vineyard - 5 1Sterling Wines 3 15 10 * Net sales, after deducting excise duties Diageo continued to outperform the market in an industry where the increase inthe US legal drinking age population and the trend towards more premium productsacross all beverage alcohol categories are helping to drive growth. The global priority brands again led the growth with volume up 7% and net sales,after deducting excise duties, up 8%. The spirits brands, excluding ready to drink, delivered 8% growth in net sales,after deducting excise duties, reflecting strong performances from Smirnoff,Captain Morgan and Jose Cuervo. Smirnoff benefited from targeted profile raising activity. In the off trade,volume was driven by concentrated activity on high visibility feature anddisplay initiatives across Smirnoff vodka, as well as innovation in flavours.These activities and the focus on proven growth drivers, such as quality accountmanagement, delivered strong growth for Smirnoff vodka with volume up 9% and netsales, after deducting excise duties, up 11%. Johnnie Walker continued to outperform the scotch category with volume up 1% andnet sales, after deducting excise duties, up 5%. Both Johnnie Walker Red Labeland Johnnie Walker Black Label grew share. Higher marketing and publicrelations investment behind the successful Mentor programme and increasedrelationship marketing underpinned these strong results. Captain Morgan had a good year. Excluding ready to drink, volume was up 9% andnet sales, after deducting excise duties, were up 14%, benefiting from increasedmedia spending, particularly in television to drive awareness and trial, strongdisplay executions and the launch of Tattoo. Baileys continued its turnaround from last year with volume and net sales, afterdeducting excise duties, both up 7%. The Jose Cuervo Tradicional and Reserva variants delivered double-digit growthbenefiting from the trend towards premium tequila. Product innovation also madea strong contribution to growth as the super premium range was further extendedwith the introduction of Black Medallion in February. A range of flavours wasalso introduced during the year. Excluding ready to drink, Jose Cuervo volumeincreased 9% and net sales, after deducting excise duties, rose 11%. A strong second half performance from Crown Royal resulted in full year volumeup 6% and net sales, after deducting excise duties, up 8% as the investmentbehind NASCAR was increased. The second half also saw the launch of an ultrapremium offering, Crown Royal Extra Rare. The 'Tony Sinclair - Ready to Tanqueray' campaign has reinvigorated theTanqueray brand with volume up 5%. Price increases, taken over the year incertain markets, have led to an increase in net sales, after deducting exciseduties, of 7%. In line with the trend towards premium beers, Guinness continued to show strongperformance with volume up 7%. A price increase across all variants in October2005 meant that net sales, after deducting excise duties, grew 9%. In wine, Beaulieu Vineyard volume was flat, but net sales, after deductingexcise duties, increased 1%. Sterling Wines volume was up 3% with net sales,after deducting excise duties, up 10% as price increases were taken across avariety of labels. The Chalone wine brands are delivering ahead ofexpectations, as a result of a strong contribution from innovation with theintroduction of new varietals. Total ready to drink volume was up 2% led by the continued growth of JoseCuervo's pre-mixed margarita offerings and the launch of the Captain Morgan'sParrot Bay ready to drink product. The introduction of new Smirnoff Twisted Vflavours, strong growth of Smirnoff Ice in Canada and the regional launch ofSmirnoff Raw Tea partially offset declines in the Smirnoff Ice brand in the US. In category brands, volume decreased by 1% but net sales, after deducting exciseduties, were up 7%. This reflected the decision to shift operational focustoward the more profitable reserve brands such as Ciroc and Don Julio and awayfrom the high volume standard brands such as Popov and Gordon's vodka. Marketing spend for the year was up 6% and excluding ready to drink, up 9%. Thisreflects an accelerated investment in spirits, offset by a reduction in spend onready to drink. Europe Summary: • Net sales, after deducting excise duties, were unchanged year on year as growth in core spirits offset tough market conditions in beer and ready to drink • Spirits demonstrated healthy volume growth at 3% • Innovation is increasing brand visibility with new and existing customers • Marketing spend was reduced by 4% and prioritised against specific opportunities such as Johnnie Walker throughout Europe and J&B in France Key measures: Reported Organic 2006 2005 movement movement £ million £ million % %Volume 2 1Net sales after deducting excise duties 2,455 2,499 (2) -Marketing 389 403 (4) (4)Operating profit before exceptional items 737 702 5 6 Reported performance: Net sales, after deducting excise duties, were £2,455 million in the year ended30 June 2006 down by £44 million from the prior year. Operating profit beforeexceptional items increased by £35 million from £702 million to £737 million. Organic performance: Disposals net of the impact of acquisitions decreased net sales, after deductingexcise duties, by £16 million and there was an organic decrease in net sales,after deducting excise duties, of £4 million and an adverse impact of exchangeof £1 million. Transfers between business segments decreased prior year netsales, after deducting excise duties, by £23 million. Operating profit beforeexceptional items decreased by £5 million as a result of foreign exchangeimpacts. Acquisitions increased operating profit before exceptional items by £4million and organic growth of £39 million was achieved. Transfers betweenbusiness segments decreased prior year operating profit before exceptional itemsby £3 million. Organic brand performance: Reported Organic Reported net Organic volume volume sales* net sales* movement movement movement movement % % % %Global priority brands 1 1 (1) (1)Local priority brands (2) (2) (1) (1)Category brands 6 2 (3) 2Total 2 1 (2) - Key brands:Smirnoff vodka 8 8 7Smirnoff ready to drink (22) (21) (21)Johnnie Walker 3 6 6Baileys 1 - -J&B (3) (5) (5)Guinness (3) - - * Net sales, after deducting excise duties. Spirits demonstrated resilient growth with volume and net sales, after deductingexcise duties, up 3%, while beer, volume down 3% and ready to drink, volume down22%, held back total performance. The shift from the on to the off trade inIreland again negatively impacted overall beer performance. Wine volume grew 7%driven by Blossom Hill's robust growth in Great Britain and Ireland. Smirnoff vodka, excluding ready to drink, continued to grow strongly, deliveringvolume growth of 8% and growth of net sales, after deducting excise duties, of7%. A pan-European advertising campaign, focusing on the quality credentials ofSmirnoff, continued to build the distinctiveness of the brand, althoughmarketing spend was reduced by 9%. Johnnie Walker Red Label volume grew 1% while net sales, after deducting exciseduties, were flat. However, very strong volume growth of Johnnie Walker BlackLabel, up 14% and Johnnie Walker Super Deluxe, up 21%, delivered overall growthin Johnnie Walker, with volume up 3%, and had a positive mix impact as netsales, after deducting excise duties, increased 6%. Growth was driven mainly byincreased demand in Southern Europe, Russia and Eastern Europe and thefavourable impact of advertising, especially the sponsorship of Team McLarenMercedes Formula One. Marketing spend was up 19% as a result of increasedactivities in sports sponsorship. Europe accounts for over half of Baileys volume worldwide and brand volume wasup a further 1% year on year, driven by growth in France, Italy, Russia andCentral and Eastern Europe. Net sales, after deducting excise duties, were flat.Excluding ready to drink, both volume and net sales, after deducting exciseduties, grew by 1%. The majority of J&B's volume in Europe is sold in Spain, where thedecline of the scotch category led to a 3% decrease in overall volume of J&B. However, elsewhere in Europe, especially in France and Eastern Europe, J&B performed well. Guinness volume declined 3% although pricing offset weak volumes and net sales,after deducting excise duties, were flat year on year. Guinness salesprogressed well in Russia during the year following Diageo's agreement in July2005 with Heineken NV for the production and distribution of Guinness in Russia. Despite a year on year decline in ready to drink, Diageo has managed costs andincreased the margin on ready to drink, even though contribution in absoluteterms was down. Total local priority brand performance was negatively impacted by the decline ofDiageo's beer volume in Ireland. Marketing spend was reduced by 4% driven by a 23% reduction in spending on readyto drink. Great Britain Volume was flat and net sales, after deducting excise duties, were down 1% asthe decline in ready to drink continued to cause a negative mix impact. The total spirits market in Great Britain was broadly flat as growth in the offtrade offset declines in the on trade. Diageo maintained leadership across allkey categories and excluding ready to drink, grew spirits volume by 2%. Growth in spirits was attributable to Smirnoff vodka in particular, whichcontinued to gain share as volume grew 6% and net sales, after deducting exciseduties, grew 8%. Smirnoff performance was driven by marketing programmes focusedon quality and on trade activity around signature cocktails. Smirnoff ready todrink volume declined 19%, a rate similar to the prior year. Total Baileys volume declined 2% and net sales, after deducting excise duties,declined by 4%. Excluding Baileys Glide, Baileys volume declined 1% whilst netsales, after deducting excise duties, grew 1%. The majority of Baileys is soldin the off trade where there has been increased competition from value brands,however while volume declined, the brand maintained its value share. Baileysgrew in the on trade driven by distribution gains and price increases. Total Guinness volume declined 1% whilst net sales, after deducting exciseduties, grew 1% driven by a price increase on Guinness Draught. While volume inthe on trade beer market in Great Britain declined 3% as consumers shifted toconsumption at home, Guinness Draught gained share in the on trade, growingvolume 1% and net sales, after deducting excise duties, by 4%. Media activitieswere focused on quality attributes and Dublin brewed Guinness, as well as thefirst year of a four-year sponsorship of the rugby premiership. This helped togenerate growth in the second half and increase share. Local priority brand volume declined 2% and net sales, after deducting exciseduties, fell 6%, mainly due to the decline in Archers ready to drink. Gordon'svolume grew 1% and net sales, after deducting excise duties, were up 4%. Bell'sExtra Special volume grew 2% although net sales, after deducting excise duties,were down. Category brand volume grew 4% and net sales, after deducting excise duties,increased 2% driven by Blossom Hill, which continued to grow strongly withvolume up 13%, and the launch in May 2006 of a new product, Quinn's, analcoholic fruit ferment blended drink, into the on and off trade. Ireland The performance in Ireland reflects the continuing change in market dynamicsfrom on to off trade, high levels of competitor investment, and consumermigration to value brands. While the total beverage alcohol market grew 2%, theon trade was down 3% and the off trade was up 7%. The on trade now represents51% of the total market. Volume declined 3% and net sales, after deducting excise duties, were down 1%.This was due to weak performance in beer, where volumes were down 6%, partlyoffset by growth in wine and spirits, where volume grew 18% and 7% respectively.The impact on net sales, after deducting excise duties, of declining beer volumewas partly offset by price increases. Guinness volume declined 8% whilst net sales, after deducting excise duties,declined 3% as a result of price increases introduced in June 2005 and May 2006. Guinness was impacted by increased levels of competitor investment and themovement to the off trade where Guinness' share is lower. In the year there wasinnovation on the Guinness brand with positive consumer response to the launchof the limited edition Brewhouse Series. In the second half, GuinnessMid-Strength, a lower alcohol by volume format, began consumer trials in 80outlets. The introduction of new packaging on Harp, new marketing executions on Carlsbergand Harp and increased distribution have helped reinvigorate both brands. As aresult both Carlsberg and Harp have maintained volume year on year and netsales, after deducting excise duties, have increased 7% and 2% respectively. Smirnoff continued to be the number one vodka in Ireland and outperformed thevodka category in both the on and off trade. Baileys volume declined 2% and net sales, after deducting excise duties, fell 8%due to increased competition from lower value brands. Iberia In Iberia, volume and net sales, after deducting excise duties, both declined3%. In Spain, spirits penetration is declining in all age groups versus otherleisure categories and this has negatively impacted the Spanish business, whilstin Portugal trading conditions continued to be tough as a result of tighteningconsumer expenditure. J&B faced increased pressure as the standard whisky segment in Spaincontinued to decline as consumers continued to switch to dark rums. Therefore,while J&B gained share in the Spanish on trade, overall Iberian volumedeclined 7% and net sales, after deducting excise duties, fell 10%. Marketingspend increased 3% behind J&B driven by investment in Spain. Johnnie Walker volume declined 2%, however net sales, after deducting exciseduties, were up 2% driven by the growth of Johnnie Walker Black Label, SuperDeluxe and price increases throughout Iberia. Johnnie Walker Black Label andSuper Deluxe combined grew volume by 4% and net sales, after deducting exciseduties, by 11%. Johnnie Walker Red Label volume declined 3% despite a goodperformance in Spain, where it is the only standard whisky brand growing volumeand share in the on trade. Total Diageo share in the standard scotch segment inSpain increased by 0.3 percentage points. Across Iberia, Baileys volume was down 6% and net sales, after deducting exciseduties, declined 5% driven by contraction in the on trade. Jose Cuervo volumegrew 13% and net sales, after deducting excise duties, were up 15% due tocontinued consumer interest in the tequila category. Local priority brand volume grew 5% and net sales, after deducting exciseduties, were up 7%. Dark rums grew robustly in the on and off trade with Caciquevolume up 6% and net sales, after deducting excise duties, up 9% as a result ofrepositioning the brand. Category brand volume declined 8% and net sales, after deducting excise duties,fell 9%. Pampero volume declined 14% with net sales, after deducting exciseduties, down 12% as marketing spend was focused on Cacique. In total, Diageo'srum brands grew volume 2% and net sales, after deducting excise duties, grew 5%. Rest of Europe In the rest of Europe, solid performances in Italy and Central and EasternEurope and the growth of super premium brands in Russia drove volume growth of6% and growth in net sales, after deducting excise duties, of 4%. Johnnie Walker Red Label volume in the rest of Europe was up 2% and net sales,after deducting excise duties, were up 1%. Johnnie Walker Black Label and SuperDeluxe experienced strong growth with volume up 25% and net sales, afterdeducting excise duties, up 28% from key markets such as Greece, Russia andNorthern Europe. Captain Morgan delivered volume growth of 29% driven by Northern Europe andRussia with net sales, after deducting excise duties, up 23%. J&B performed well in France, its second largest market, with volume up9% benefiting from effective on trade advertising and promotion. Baileysenjoyed strong sales in France and Italy. Ready to drink volume in the rest of Europe declined by 27%, as a result of thecontinued decline in the segment in France. Russia continued its momentum with robust volume growth of 25% and net sales,after deducting excise duties, up 26% driven by Johnnie Walker, as the trendtowards premium products in Russia continued. Johnnie Walker is the number onescotch in Russia and Baileys holds the same position in the imported liqueurcategory. Diageo has announced the acquisition of the Smirnov brand in Russia through acompany in which Diageo holds a 75% stake. This company will unite the Smirnoff/Smirnov brands under common ownership and will be the exclusive distributor ofDiageo spirits brands and the Smirnov vodka brand in Russia. International Summary: • Strong performance across all regions as investment accelerated growth• Innovation has improved competitive positions in key categories across the region• Performance in Nigeria, Korea and Taiwan has been turned around Reported Organic Key measures: 2006 2005 movement movement £ million £ million % %Volume 14 14Net sales after deducting excise duties 2,219 1,922 15 13Marketing 354 269 32 28Operating profit before exceptional items 644 615 5 9 Reported performance: Net sales, after deducting excise duties, were £2,219 million in the year ended30 June 2006, up by £297 million from £1,922 million in the prior year.Operating profit before exceptional items increased by £29 million to £644million in the year ended 30 June 2006. Organic performance: Net sales, after deducting excise duties, increased by £31 million as a resultof exchange rate impacts. Acquisitions added net sales, after deducting exciseduties, of £9 million and there was an organic increase in net sales, afterdeducting excise duties, of £252 million. Transfers between business segmentsincreased prior year net sales, after deducting excise duties, by £5 million.Operating profit before exceptional items increased by £29 million despiteunfavourable exchange rate movements of £23 million. Acquisitions increasedoperating profit before exceptional items by £1 million and organic growth of£54 million was achieved. Transfers between business segments reduced prioryear operating profit before exceptional items by £3 million. Organic brand performance: Reported Organic Reported net Organic volume volume sales* net sales* movement movement movement movement % % % %Global priority brands 11 11 14 13Local priority brands 4 4 12 5Category brands 24 22 20 18Total 14 14 15 13 Smirnoff vodka 9 14 13Smirnoff ready to drink 41 47 44Johnnie Walker 16 13 16Baileys 11 8 6Guinness (2) 7 3Buchanan's 20 15 21Windsor 12 23 9 * Net sales, after deducting excise duties. Good economic conditions in many markets, further investment in the brands andthe organisation and a focus on market place execution have resulted in theInternational business growing strongly in all regions. Growth has been drivenby the global priority brands, with Johnnie Walker in particular experiencingstrong growth on the back of upweighted investment. This investment has beenfocused around the sponsorship of Team McLaren Mercedes Formula One, which hasbeen particularly successful in driving growth of Johnnie Walker Black Label andSuper Deluxe variants, where net sales, after deducting excise duties, grew 17%.The sponsorship has also provided a strong platform for Diageo's responsibledrinking programmes. Smirnoff vodka grew net sales, after deducting excise duties, by 13% withparticularly strong growth in India and Brazil. Smirnoff ready to drink volumegrew over 40%. This performance has been delivered through strengtheneddistribution and sales execution and advertising campaigns on Smirnoff Ice inBrazil and Australia, as well as the launch of Smirnoff Ice in Venezuela andSmirnoff Storm in South Africa. Baileys grew volume by 11% driven by growth in Global Duty Free and Japan.Promotional activity in Global Duty Free and the decline of Baileys Glide inAustralia have, however, resulted in adverse mix with net sales, after deductingexcise duties, growing by 6%. Guinness volume declined 2% whilst net sales, after deducting excise duties,were up 3%. Performance was held back as a result of a decline in Cameroon,although this was partly offset by strong performances in Nigeria and Ghanawhere price increases accelerated the growth of net sales, after deductingexcise duties, ahead of volume. South East Asia and Japan also experienced goodgrowth. Local priority brand performance was led by the growth of Buchanan's inVenezuela, and the return to growth of Windsor in Korea, driven in particular bynew packaging on the 12 and 17 year-old variants. Growth of Bundaberg inAustralia and Bell's in South Africa were offset by declines in Dimple in Korea,and Tusker and Pilsner in Kenya. The growth of the scotch category across the region has been the main driver ofthe growth in category brands. Investment behind Diageo's scotch brands hasenabled the International region to capitalise on market opportunities. Amongstthe successes was Old Parr, which grew significantly across Latin America withvolume and net sales, after deducting excise duties, up nearly 60%. The newlylaunched whisky brands, continued to perform strongly in Thailand and thesuccessful relaunch of Harp in Nigeria also contributed to the overall growth incategory brands. Ready to drink grew volume by 22% and net sales, after deducting excise duties,by 21%. This was led by the growth of Smirnoff throughout International andBundaberg and Johnnie Walker in Australia. Asia Pacific Increased marketing investment, growing markets in India and China, share gainsin Korea and Thailand and continued growth in ready to drink in Australia led tovolume up 15%, and net sales, after deducting excise duties, up 11% in AsiaPacific. In Australia, ready to drink has driven growth of 6% in net sales, afterdeducting excise duties, with Smirnoff, Johnnie Walker and Bundaberg all showinggood growth. Smirnoff ready to drink delivered share gains of 3.4 percentagepoints, boosted by the successful launch of Smirnoff Twist ready to drink. Inspirits, whilst Baileys has declined in volume and lost share, Johnnie WalkerRed Label, Johnnie Walker Black Label, Bundaberg and Smirnoff have all gainedshare in a spirits market that was up 6% in the year. In Korea, the trading environment for spirits has stabilised as a result ofimproved economic conditions, however Diageo's strong performance was the resultof gaining share, most notably on Windsor. The brand has been revitalised withnew packaging and the introduction of a 21-year-old variant and net sales, afterdeducting excise duties, grew 9%. Johnnie Walker volume grew 36% and net sales,after deducting excise duties, grew 52%. Johnnie Walker Super Deluxe grewvolume 58% and net sales, after deducting excise duties, by 82%, albeit off asmall base, as it gained from the new focus on modern on trade outlets andmarketing activities to build brand equity. Dimple volume declined by 22% in theyear, as renovations on the brand failed to turn around performance. In Japan, volume grew 3% and net sales, after deducting excise duties, grew by1%. Strong performances from Baileys, which grew volume by 65% and Guinness, up14%, offset a 45% volume decline in Smirnoff ready to drink as a result of atemporary withdrawal in the first half. The brand performed well following therelaunch in the second half. In Thailand, Diageo clearly outperformed the market and the competition, withgrowth in each of its brands despite the decline in the imported whisky segment.Benmore and Golden Knight together account for over 450,000 cases and have madesignificant share gains in the standard and economy whisky segmentsrespectively, although this strong growth has resulted in an adverse mix.Johnnie Walker recorded volume growth of 32% and growth in net sales, afterdeducting excise duties, of 20% driven by Johnnie Walker Red Label. Performance in Taiwan improved as volume and net sales, after deducting exciseduties, both grew 11%. Johnnie Walker Green Label in particular has performedwell, benefiting from a new campaign and a market where malt whisky is growingstrongly. Performance in China has continued strongly with volume up 57% and net sales,after deducting excise duties, up 81%, albeit from a small base. Johnnie WalkerBlack Label represents a significant proportion of Diageo's business in China,and has driven this growth with volume up 89% and net sales, after deductingexcise duties, up 124%, supported by a significant upweight in investment. Thisinvestment included activities surrounding the sponsorship of Team McLarenMercedes Formula One at the Shanghai Grand Prix, as well as three new localadvertising executions. The Indian business benefited from activities surrounding Johnnie Walker'ssponsorship of the cricket Super Series in Australia, and the Smirnoff "Life isCalling" campaign. Volume grew 29% and net sales, after deducting excise duties,grew 37%. While there is increasing evidence of consumers upgrading to premiumand branded products, competitive activity is becoming more intense, withevidence of increased consolidation in the sector, and an increasing number ofnew brand launches. Africa Africa delivered volume growth of 10% and growth in net sales, after deductingexcise duties, of 9%. This was the result of strong performances in Nigeria andSouth Africa, offset by a decline in Cameroon. In Nigeria volume grew 20% and net sales, after deducting excise duties, grew13%. Harp was relaunched in 2005 and as a result share has increased by 3.7percentage points. This growth has, however, led to adverse mix. Guinnessdelivered volume growth of 4% and net sales, after deducting excise duties, grew9% as a result of a price increase in October 2004. In East Africa, difficult economic conditions due to drought and rising fuelprices together with a duty increase, saw consumers trade down to lower valuebrands. Volume grew 20% and net sales, after deducting excise duties, grew 11%with Senator, a low priced beer introduced in 2005, having performed well. South Africa saw significant mix improvement as volume grew 6% and net sales,after deducting excise duties, grew 19%. This mix improvement was the result ofa strong performance by Diageo's scotch brands as Johnnie Walker volumeincreased by 36% and Bell's grew volume by 15%. The switch in consumerpreference towards dark spirits resulted in Smirnoff vodka volume declining by7%, although Smirnoff ready to drink grew by 48%, driven by the launch ofSmirnoff Storm. In Ghana, volume grew 6% whilst price increases and a change in invoicingarrangements agreed with the authorities following the acquisition of GhanaBreweries Ltd, led net sales, after deducting excise duties, to grow by 17%.Guinness volume for the year was flat with net sales, after deducting exciseduties, up 13%. Volume of Malta increased by 13% as it continued to enjoy anadvantaged price position over its competitive set. Trading in Cameroon was heavily impacted by aggressive promotional activity by acompetitor. As a result, Guinness volumes were down 37% and net sales, afterdeducting excise duties, were down by 35%. Latin America and Caribbean Diageo has continued to invest behind brand building programmes, improvements incustomer relationships and sales execution to capitalise on the growth inconsumer demand from buoyant economies across Latin America. Volume grew by 17%and net sales, after deducting excise duties, by 21%. In the Brazilian hub, which includes Paraguay and Uruguay, growth was driven byscotch and ready to drink. Johnnie Walker grew net sales, after deducting exciseduties, by 40%. In Brazil, Johnnie Walker benefited from investment both aboveand below the line as Johnnie Walker Red Label share grew 3.4 percentage pointsand Johnnie Walker Black Label delivered share gains of 1.8 percentage points.Smirnoff ready to drink grew net sales, after deducting excise duties, over 100%as the continued success of Smirnoff Ice has extended Smirnoff's leadership inthe buoyant ready to drink segment. Volume grew 23% and net sales, after deducting excise duties, grew 36% inVenezuela, as strong economic fundamentals have translated into increasedconsumer demand across all sectors. Diageo leads the super deluxe, deluxe andstandard scotch segments. Johnnie Walker Red Label performed strongly withvolume and net sales, after deducting excise duties, up 25% and Buchanan'sdelivered growth in net sales, after deducting excise duties, of 40%. A newcampaign for Smirnoff Ice has driven significant growth in volume and net sales,after deducting excise duties, albeit off a small base. In Mexico, volume grew 55% and net sales, after deducting excise duties, grew41%. As a result Diageo gained 4.9 percentage points of share in the scotchcategory. Johnnie Walker Red Label grew volume 32% and Buchanan's volumeincreased 51% as a result of strengthened customer relationships, sustainedbrand building investment and a particular focus on the on trade. Global Duty Free The focus on sales execution and innovation within Global Duty Free has drivenstrong volume growth of 16% and growth in net sales, after deducting exciseduties, of 18%. Packaging innovation such as the Johnnie Walker Blue LabelMagnum and marketing activity around the sponsorship of Team McLaren MercedesFormula One has led to a 21% growth in net sales, after deducting excise duties,for Johnnie Walker. Baileys delivered growth of 29% in net sales, afterdeducting excise duties, as major sampling activities were carried out in Europeand Asia associated with the launch of the new flavour innovations. Corporate revenue and costs Reported Performance: Net sales, after deducting excise duties, were £76 million in the year ended 30June 2006, up by £14 million from £62 million in the prior year. Net operatingcosts before exceptional items increased by £2 million to £166 million in theyear ended 30 June 2006. Organic Performance: Transfers between business segments increased prior year net sales, afterdeducting excise duties, by £15 million, and there was an organic decrease innet sales, after deducting excise duties, of £1 million. Net corporateoperating costs before exceptional items decreased by £6 million as a result oftransfers between business segments and there was a decrease of £1 million as aresult of foreign exchange impacts. An organic increase of £9 million incorporate net operating costs, before exceptional items, was driven mainly by anincrease in investment behind innovation. FINANCIAL REVIEW Condensed consolidated income statement Year ended 30 June 2006 Year ended 30 June 2005 Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total £ million £ million £ million £ million £ million £ million Sales 9,704 - 9,704 8,968 - 8,968Excise duties (2,444) - (2,444) (2,291) - (2,291)Net sales 7,260 - 7,260 6,677 - 6,677Operating costs (5,216) - (5,216) (4,745) (201) (4,946)Operating profit 2,044 - 2,044 1,932 (201) 1,731Disposal of investments/ businesses 157 157 214 214Net finance charges (186) - (186) (141) - (141)Associates' profits 131 - 131 121 - 121Profit before taxation 1,989 157 2,146 1,912 13 1,925Taxation (496) 315 (181) (677) 78 (599)Profit from continuing operations 1,493 472 1,965 1,235 91 1,326Profit after tax from disposal of businesses - - 73 73Profit for the year 1,493 472 1,965 1,235 164 1,399 Attributable to: Equity shareholders 1,436 472 1,908 1,180 164 1,344 Minority interests 57 - 57 55 - 55 1,493 472 1,965 1,235 164 1,399 Adoption of IFRS The financial statements for the year ended 30 June 2006 have been prepared inaccordance with International Financial Reporting Standards as endorsed andadopted for use in the European Union (IFRS). The results for the comparativeyear ended 30 June 2005 are also presented in accordance with IFRS. For furtherinformation related to the conversion to IFRS please see note 1 'Basis ofpreparation' and note 12 'Explanation of transition to IFRS'. Sales and net sales after deducting excise duties On a reported basis, sales increased by £736 million (8%) from £8,968 million inthe year ended 30 June 2005 to £9,704 million in the year ended 30 June 2006. Ona reported basis, net sales, after deducting excise duties, increased by £583million (9%) from £6,677 million in the year ended 30 June 2005 to £7,260million in the year ended 30 June 2006. Acquisitions and disposals contributed anet increase to reported sales and net sales, after deducting excise duties, of£46 million and £27 million respectively in the year and foreign exchange ratemovements also beneficially impacted reported sales by £186 million and reportednet sales, after deducting excise duties, by £140 million, principally arisingfrom strengthening of the US dollar. Operating costs On a reported basis operating costs before exceptional items increased by £471million principally due to an increase in cost of goods sold of £318 million andan increase in marketing costs of 11% from £1,013 million to £1,127 million.Overall, the impact of exchange rate movements increased total operating costsbefore exceptional items by £165 million. There were no exceptional operatingcosts in the year (2005 - £201 million). In the prior year exceptional operatingcosts comprised £149 million in respect of contributions to be made to theThalidomide Trust, £29 million of accelerated depreciation and £30 million ofSeagram integration costs less £7 million in respect of the disposal ofproperty, plant and equipment. On a reported basis, operating costs increased by£270 million (5%) from £4,946 million in the year ended 30 June 2005 to £5,216million in the year ended 30 June 2006. Post employment plans Post employment costs for the year ended 30 June 2006 of £87 million (2005 - £80million) comprised amounts charged to operating profit of £106 million (2005 -£89 million) and finance income of £19 million (2005 - £9 million). At 30 June2006, Diageo's deficit before taxation for all post employment plans was £801million (2005 - £1,294 million). Operating profit Operating profit before exceptional items for the year increased by £112 millionto £2,044 million from £1,932 million in the prior year. Exchange rate movementsreduced operating profit before exceptional items for the year ended 30 June2006 by £25 million. There were no exceptional operating charges in the yearended 30 June 2006, compared to costs in respect of the year ended 30 June 2005of £201 million. Non-operating exceptional items Non-operating exceptional items before taxation were a gain of £157 million inthe year ended 30 June 2006 compared with a gain of £214 million in the yearended 30 June 2005. The gain in the year to 30 June 2006 represents a gain of£151 million on sale of the group's remaining 25 million shares of common stockof General Mills and a gain on sale of other businesses of £6 million. In theyear ended 30 June 2005 non-operating exceptional items included a gain of £221million on the disposal of 54 million shares of common stock of General Millsand a net charge of £7 million in respect of the disposal of other businesses. Net finance charges Net finance charges increased by £45 million from £141 million in the year ended30 June 2005 to £186 million in the year ended 30 June 2006. The net interest charge increased by £43 million from £150 million in the prioryear to £193 million in the year ended 30 June 2006; £23 million of thisincrease resulted from higher debt and higher interest rates year on year, £13million resulted from the loss of interest income on the Burger Kingsubordinated debt repaid in July 2005 and £10 million from the termination ofcertain financing arrangements. In addition, the interest charge increased by£6 million as a result of exchange rate movements. Partly offsetting theseincreases, net interest also includes an interest credit of £9 million relatedto derivative instruments arising on the application of IAS 39 - Financialinstruments: recognition and measurement. Other net finance income of £7 million (2005 - income of £9 million) includedincome in respect of the group's post employment plans of £19 million (2005 -income of £9 million) which year on year improvement principally results fromlower interest costs in the pension plans from the unwinding of discountedliabilities. In addition, other net finance charges include a charge of £15million (2005 - £7 million) in respect of the unwinding of discountedliabilities, a £2 million charge (2005 - charge of £8 million) in respect offoreign exchange translation differences on inter-company funding arrangementsthat do not meet the accounting criteria for recognition in equity andinvestment income of £5 million (2005 - £17 million) in respect of dividends onGeneral Mills shares. Associates The group's share of profits of associates after interest and tax was £131million for the year compared to £121 million last year. Diageo's 34% equityinterest in Moet Hennessy contributed £122 million to share of profits ofassociates after interest and tax (2005 - £113 million). Profit before taxation After exceptional items, profit before taxation increased by £221 million from£1,925 million to £2,146 million in the year ended 30 June 2006. Taxation The effective tax rate before exceptional items for the year ended 30 June 2006is 24.9% compared with 35.4% for the year ended 30 June 2005. The highereffective tax rate in the year ended 30 June 2005 mainly resulted from thereduction in the carrying value of deferred tax assets following a change in taxrate in the relevant territory. The effective tax rate for continuing operations for the year ended 30 June 2006after exceptional items is 8.4% compared with 31.1% for the year ended 30 June2005. The effective tax rate in the current year has been reduced following theagreement of certain brand values with fiscal authorities that resulted inrecognising an increase in the group's deferred tax assets of £313 million.This amount has been accounted for as exceptional income. The profit arising onthe sale of General Mills shares in the year and the comparative year is notsubject to tax. Profits after tax from disposal of businesses Profits after tax from the disposal of businesses in the prior year of £73million are in respect of the release of provisions established on the disposalof Burger King and Pillsbury. Exchange rates Diageo does not hedge the translation of its foreign currency results intosterling. Transactional foreign exchange rate risk is hedged for thosecurrencies in which there is an active market. The group seeks to hedge between80% and 100% of forecast transactional exchange rate risk, for up to a maximumof 21 months forward, using forward currency exchange contracts. The gain orloss on the hedge is recognised in equity to the extent the hedge is effectiveand subsequently recognised in the income statement at the same time as theunderlying hedged transaction effects the income statement. Effect of exchange rate movements on the results for the year ended 30 June 2006as compared with the results for the year ended 30 June 2005: Year ended 30 June 2006 Gains/(losses) £ millionOperating profit before exceptional items Translation impact 46 Transaction impact (71) (25)Interest and other finance charges Translation impact (6) Net exchange movements on short term inter-company loans 6Total FX effect on profit before exceptional items and taxation (25) Year ended Year ended 30 30 June 2006 June 2005Exchange rates Translation US$/£ rate 1.78 1.86 Translation •/£ rate 1.46 1.46 Transaction US$/£ rate 1.81 1.72 Transaction •/£ rate 1.45 1.48 The strengthening of the US dollar had a positive translation effect onoperating profit and an adverse impact on US dollar denominated interestpayments. The negative transaction impact was mainly driven by the move in thetransaction US$ exchange rate from £1 = $1.72 to £1 = $1.81. Outlook for the impact of exchange rate movements For the year ending 30 June 2007 the impact of exchange rate movements based oncurrent exchange rates is estimated to have an adverse impact of £75 million onoperating profit and a positive impact of between £5 million to £10 million oninterest. For the full year, each one cent movement from current rates foreither the US dollar or the Euro impacts profit before exceptionals and taxationby approximately £3 million respectively. Dividend The directors recommend a final dividend of 19.15 pence per share, an increaseof 5% on last year's final dividend. The full dividend would therefore be 31.1pence per share, an increase of 5% from the year ended 30 June 2005. Subject toapproval by shareholders, the final dividend will be paid on 23 October 2006 toshareholders on the register on 15 September 2006. Payment to ADR holders willbe made on 27 October 2006. A dividend reinvestment plan is available in respectof the final dividend and the plan notice date is 2 October 2006. Cash flow Extract from the consolidated cash flow statement Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionCash generated from operations 2,199 2,273Interest paid (net) (171) (179)Dividends paid to equity minority interests (40) (49)Tax paid (393) (320)Net sale/(purchase) of investments 7 (6)Net capital expenditure (241) (276)Free cash flow 1,361 1,443 Cash generated from operations decreased by £74 million to £2,199 million in theyear ended 30 June 2006. There was an increase in profit after tax in the yearof £566 million to £1,965 million at 30 June 2006 which was offset by theyear-on-year impact of working capital movements on the cash flow of £281million (an outflow of £192 million in the year ended 30 June 2006 and an inflowof £89 million in the prior year). Of this movement in year-on-year workingcapital, £179 million reflects the presentation of exceptional non-cash chargeswithin working capital movements in the prior year following the implementationof IFRS, thus operating working capital impact on cash flow was £102 million.The decrease in cash generated from operations was partially offset by reducedinterest payments (down £8 million to £171 million) and reduced capitalexpenditure (down £35 million to £241 million). However increased tax payments(up £73 million to £393 million) contributed to an overall decrease in free cashflow of £82 million to £1,361 million from £1,443 million in the prior year. In the year ended 30 June 2006, the group generated proceeds from the disposalof shares of General Mills of £651 million (2005 - £1,210 million) and issuednew share capital under employee share schemes generating proceeds of £3 million(2005 - £6 million). These inflows were mainly offset by payments of £1,428million to repurchase shares to be held as treasury shares, the payment of £209million to acquire Bushmills Irish Whiskey in August 2005 and £864 millionequity dividends paid. Diageo's stance on capital structure is unchanged: itcontinues to target a range of ratios that are currently broadly consistent withan A band credit rating. Diageo expects to continue the share repurchaseprogramme at broadly the current level in the next financial year. Balance sheet At 30 June 2006, total equity was £4,681 million compared with £4,626 million at30 June 2005. This increase was mainly due to the profit for the year of £1,965million and an actuarial gain on the group's post employment plans (net of tax)of £374 million offset by the dividends paid out of shareholders' equity of £864million and shares repurchased of £1,428 million. Net borrowings were £4,082 million at 30 June 2006, an increase of £379 millionfrom 1 July 2005 net borrowings of £3,703 million. The principal components ofthis increase are summarised above. Economic profit Economic profit increased by £101 million from £463 million in the year ended 30June 2005 to £564 million in the year ended 30 June 2006. See page 38 forcalculation and definition of economic profit. DIAGEO CONSOLIDATED INCOME STATEMENT Year ended 30 June 2006 Year ended 30 June 2005 Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total Notes £ million £ million £ million £ million £ million £ million Sales 2 9,704 - 9,704 8,968 - 8,968Excise duties (2,444) - (2,444) (2,291) - (2,291)Net sales 7,260 - 7,260 6,677 - 6,677Cost of sales 4 (2,921) - (2,921) (2,603) (29) (2,632)Gross profit 4,339 - 4,339 4,074 (29) 4,045Marketing (1,127) - (1,127) (1,013) - (1,013)Other operating expenses 4 (1,168) - (1,168) (1,129) (172) (1,301)Operating profit 2 2,044 - 2,044 1,932 (201) 1,731Sale of General Mills 4 shares 151 151 221 221Sale of other businesses 4 6 6 (7) (7)Net interest 3 (193) - (193) (150) - (150)Other net finance income 3 7 - 7 9 - 9Share of associates' profits after tax 131 - 131 121 - 121Profit before taxation 1,989 157 2,146 1,912 13 1,925Taxation 5 (496) 315 (181) (677) 78 (599)Profit from continuing operations 1,493 472 1,965 1,235 91 1,326Discontinued operationsProfit after tax from disposal of businesses - - 73 73Profit for the year 1,493 472 1,965 1,235 164 1,399 Attributable to:Equity shareholders 1,436 472 1,908 1,180 164 1,344Minority interests 57 - 57 55 - 55 1,493 472 1,965 1,235 164 1,399 Basic earnings per shareContinuing operations 67.2p 42.8pDiscontinued operations - 2.4p 67.2p 45.2pDiluted earnings per shareContinuing operations 66.9p 42.8pDiscontinued operations - 2.4p 66.9p 45.2p Average shares 2,841m 2,972m DIAGEO CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year ended Year ended 30 June 2006 30 June 2005 £ million £ million £ million £ millionExchange differences on translation of foreign operations - group 24 95 - associates 22 21Exchange differences on hedge of net investment in foreign operations (21)Effective portion of changes in fair value of net investment (49) hedgesEffective portion of changes in fair value of foreign exchange cash flow hedges - gains taken to equity 38 - transferred to other operating expenses for the year 11Effective portion of changes in fair value of interest rate cash flow hedges - gains taken to equity 1 - transferred to interest receivable/payable for the year (7)Fair value movement on available for sale securities - unrealised gains arising during the year (including exchange) 33 - realised gains reclassified to profit for the year (181)Actuarial gains/(losses) on post employment plans 459 (238)Tax on items taken directly to equity (97) 33Net income/(expense) recognised directly in equity 233 (89)Profit for the year - group 1,834 1,278 - associates 131 121Profit for the year 1,965 1,399Total recognised income and expense for the year 2,198 1,310Impact of IAS 39 adoption on 1 July 2005 (net of tax) - group 170 - associates (6)Impact of adoption of IAS39 164 2,362Attributable to:Equity shareholders of the parent company 2,146 1,250Minority interests 52 60Total recognised income and expense for the year 2,198 1,310 DIAGEO CONSOLIDATED BALANCE SHEET 30 June 2006 30 June 2005 £ million £ million £ million £ millionNon-current assetsIntangible assets 4,534 4,409Property, plant and equipment 1,952 1,919Biological assets 13 14Investments in associates 1,341 1,261Other investments 69 719Other receivables 12 44Other financial assets 42 32Deferred tax assets 1,113 778Post employment benefit assets 14 12 9,090 9,188Current assetsInventories (note 8) 2,386 2,347Trade and other receivables 1,681 1,569Cash and cash equivalents 699 787Other financial assets 71 30 4,837 4,733Total assets 13,927 13,921Current liabilitiesBorrowings and bank overdrafts (759) (869)Trade and other payables (1,803) (1,872)Other financial liabilities (36) -Corporate tax payable (681) (777)Provisions (56) (88) (3,335) (3,606)Non-current liabilitiesBorrowings (4,001) (3,677)Other payables (37) (95)Other financial liabilities (78) (9)Provisions (306) (304)Deferred tax liabilities (674) (298)Post employment benefit liabilities (815) (1,306) (5,911) (5,689) Total liabilities (9,246) (9,295)Net assets 4,681 4,626 EquityCalled up share capital 883 883Share premium 1,340 1,337Other reserves 3,168 3,181Retained deficit (889) (942)Equity attributable to equity shareholders of 4,502 4,459 the parent companyMinority interests 179 167Total equity (note 7) 4,681 4,626 DIAGEO CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 30 June 2006 30 June 2005 £ million £ million £ million £ millionCash flows from operating activities Profit for the year 1,965 1,399 Profit after tax from discontinued businesses - (73) Taxation 181 599 Share of associates' profits after tax (131) (121) Net interest and finance charges 186 141 Net non-operating exceptional gains (157) (214) Depreciation and amortisation 214 241 Movements in working capital (192) 89 Dividend income 115 134 Other items 18 78 Cash generated from operations 2,199 2,273 Interest paid (235) (325) Interest received 64 146 Dividends paid to equity minority interests (40) (49) Taxation paid (393) (320) Net cash from operating activities 1,595 1,725 Cash flows from investing activities Net disposal/(purchase) of investments 7 (6) Disposal of property, plant and equipment 16 18 Purchase of property, plant and equipment (257) (294) Disposal of shares in General Mills 651 1,210 Disposal of businesses 121 (16) Purchase of subsidiaries (209) (258) Net cash from investing activities 329 654 Cash flows from financing activities Proceeds from issue of share capital 3 6 Net purchase of own shares for share trusts (11) (29) Own shares repurchased for cancellation or holding as treasury shares (1,428) (710) Increase/(decrease) in loans 309 (379) Redemption of guaranteed preferred securities - (302) Equity dividends paid (864) (849) Net cash used in financing activities (1,991) (2,263)Net (decrease)/increase in cash and cash equivalents (67) 116Exchange differences (11) (55)Net cash and cash equivalents at beginning of the year 729 668Net cash and cash equivalents at end of the year 651 729 Net cash and cash equivalents consist of: Cash and cash equivalents 699 787 Bank overdrafts (48) (58) 651 729 NOTES 1. Basis of preparation The consolidated financial statements are prepared in accordance with applicableInternational Financial Reporting Standards, as endorsed and adopted for use inthe European Union (IFRS). The group is complying with IFRS for the first timefor the year ended 30 June 2006 and the accounting policies applicable to thegroup from 1 July 2005 are those available on Diageo's website, www.diageo.com.Comparative information is presented for the year ended 30 June 2005 preparedunder IFRS. This involved preparation of an opening IFRS balance sheet as at 1July 2004, which is the group's date of transition to IFRS reporting. IFRS 1 - First-time adoption of International Financial Reporting Standardspermits certain optional exemptions from full retrospective application of IFRSaccounting policies and the following options have been adopted: • Business combinations: Business combinations prior to the date of transition have not been restated onto an IFRS basis. • Cumulative translation differences: The cumulative translation difference arising on consolidation has been deemed to be zero at the date of transition. • Share-based payments: Full retrospective application has been adopted. • Financial instruments: The group has adopted the provisions of IAS 39 • Financial instruments: recognition and measurement from 1 July 2005. Financial instruments in the year ended 30 June 2005 remain recorded in accordance with previous UK GAAP accounting policies, and the adjustment to IAS 39 is reflected in the balance sheet at 1 July 2005. Further details of the impact of the transition to IFRS are presented in note12. The information in this preliminary announcement does not constitute thestatutory accounts of the group within the meaning of Section 240 of theCompanies Act 1985. The statutory accounts of Diageo plc for the year ended 30June 2005, which were prepared under UK GAAP, have been filed with the registrarof companies. KPMG Audit Plc has reported on those accounts and on thestatutory accounts for the year ended 30 June 2006. Both the audit reports wereunqualified and did not contain any statement under section 237 of the CompaniesAct 1985. 2. Business and geographical analyses Business analysis is presented under the categories of Diageo North America,Diageo Europe, Diageo International and Corporate, reflecting the group'smanagement and internal reporting structure. Business analysis: Year ended Year ended 30 June 2006 30 June 2005 Operating profit/ Operating Sales (loss) Sales profit/(loss)* £ million £ million £ million £ millionNorth America 2,968 829 2,622 779Europe 3,834 737 3,860 702International 2,826 644 2,424 615 9,628 2,210 8,906 2,096Corporate 76 (166) 62 (164) 9,704 2,044 8,968 1,932 * Operating profit for the year ended 30 June 2005 is before exceptionaloperating charges of £201 million. Corporate revenues and costs are in respect of central costs including finance,human resources and legal as well as certain information system, businessservice centre, facilities and employee costs that are not directly allocated tothe geographical operating units. They also include the revenues and costsrelated to rents receivable in respect of properties not used by Diageo in themanufacture, sale or distribution of premium drinks and the results ofGleneagles Hotel. Net corporate operating costs increased £2 million to £166million. 30 June 2006 30 June 2005 £ million £ millionTotal assets:North America 872 872Europe 1,190 1,074International 1,139 1,125Moet Hennessy 1,303 1,214Corporate and other 9,423 9,636 13,927 13,921 Total assets for 'Corporate and other' includes the group's brands and maturinginventories owned for the future production of whisky. Geographical analysis of sales and operating profit by destination: Year ended Year ended 30 June 2006 30 June 2005 Operating profit Operating Sales Sales profit* £ million £ million £ million £ millionNorth America 2,999 842 2,658 795Europe 3,977 597 3,974 561Asia Pacific 1,085 218 918 213Latin America 671 163 564 159Rest of World 972 224 854 204 9,704 2,044 8,968 1,932 * Operating profit for the year ended 30 June 2005 is before exceptionaloperating charges of £201 million. Sales and operating profit by geographical destination have been statedaccording to the location of the third party customers. Certain businesses included within Diageo International for internal managementpurposes have been reported within the appropriate geographic operating regionin the geographical analysis above. Corporate sales and operating loss(principally central costs) are incurred in Europe. Weighted average exchange rates used in the translation of profit and lossaccounts were US dollar - £1 = $1.78 (2005 - £1 = $1.86) and euro - £1 = €1.46(2005 - £1 = €1.46). Exchange rates used to translate assets and liabilities atthe balance sheet date were US dollar - £1 = $1.85 (2005 - £1 = $1.79) and euro- £1 = €1.45 (2005 - £1 = €1.48). The holiday season provides the peak period for sales. Approximately 30% ofannual sales volume occurs in the last three months of each calendar year. 3. Net interest and other finance charges Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionInterest payable (229) (271)Interest receivable 27 121Market value movements on interest rate instruments 9Net interest (193) (150) Investment income - dividends receivable from General Mills 5 17Net finance income in respect of post employment plans 19 9Unwinding of discounts on provisions and debtors (15) (7)Other finance charges - (2) 9 17Net exchange movements on short term intercompany loans (2) (8)Other net finance income 7 9 4. Exceptional items The group separately presents certain items as "exceptional". These are itemswhich, in management's judgement, need to be disclosed by virtue of their sizeor incidence in order for the user to obtain a proper understanding of thefinancial information. Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionOperating costs Park Royal brewery accelerated depreciation - (29) Provision for contributions to the Thalidomide Trust - (149) Seagram integration costs - (30) Disposal of fixed assets - 7 - (201)Disposals Shares in General Mills 151 221 Other 6 (7) 157 214Discontinued operations Disposal of Burger King - 53 Exceptional items before taxation 157 66 In addition, exceptional income of £313 million has been recognised withintaxation related to the agreement of certain brand values within fiscalauthorities that resulted in the recognition of an increase in the group'sdeferred tax assets. 5. Income taxes The £181 million total taxation charge for the year ended 30 June 2006 comprisesa UK tax charge of £134 million and a foreign tax charge of £47 million.Exceptional tax credits amounted to £315 million in the year (2005 - £78million) including a £313 million increase in the group's deferred tax assetsfollowing agreement of certain brand carrying values with fiscal authorities.In addition, in the year ended 30 June 2005 there was a tax credit ondiscontinued operations of £20 million. 6. Dividends Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionAmounts recognised as distributions to equity holders in the YearFinal dividend paid for the year ended 30 June 2005 of 18.2p (2004 - 17.0p) per share 529 512Interim dividend paid for the six month period ended 31 December 2005 of 11.95p (2004 - 11.35p) per share 335 337 864 849 A final dividend of 19.15 pence per share for the year ended 30 June 2006 (2005- 18.2 pence per share) was recommended by the board on 30 August 2006. Thisdividend is recommended for approval by shareholders at the annual generalmeeting to be held on 17 October 2006 and as the approval will be after thebalance sheet date it has not been included as a liability. 7. Movements in total equity Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionTotal equity at beginning of the year 4,626Adoption of IAS 39 on 1 July 2005 164Restated total equity at beginning of the year 4,790 5,229 Total recognised income and expense for the year 2,198 1,310Dividends paid to equity shareholders (864) (849)Dividends paid to minority interests (40) (60)New share capital issued 3 6Share trust arrangements 16 (2)Tax on share trust arrangements 6 -Purchase of own shares for cancellation - (61)Purchase of own shares held as treasury shares (1,428) (649)Redemption of preferred securities (net) - (298)Net movement in total equity (109) (603) Total equity at end of the year 4,681 4,626 Total equity at the end of the year includes gains of £107 million in respect ofcumulative translation differences (2005 - gains of £121 million) and charges of£2,070 million (2005 - £649 million) in respect of own shares held as treasuryshares. The increase in shares held as treasury shares of £1,428 millionrepresents treasury shares acquired under the share repurchase programme of£1,407 million and other treasury shares acquired to hedge share option schemesof £21 million. 8. Inventories 30 June 2006 30 June 2005 £ million £ millionRaw materials and consumables 236 237Work in progress 17 19Maturing stocks 1,644 1,561Finished goods and goods for resale 489 530 2,386 2,347 9. Reconciliation of movement in net borrowings Year ended Year ended 30 June 2006 30 June 2005 £ million £ millionNet borrowings at beginning of the year (3,706) (4,156)Adoption of IAS 39 on 1 July 2005 3Restated net borrowings at beginning of the year (3,703) (Decrease)/increase in net cash and cash equivalents (67) 116Cash flow from change in loans (309) 379Change in net borrowings from cash flows (376) 495Exchange differences 15 (136)Other non-cash items (18) 91Net borrowings at end of the year (4,082) (3,706) The group issued the following bonds or medium term notes in the year: a US $750million global bond issued on 28 October 2005 which matures on 28 October 2015,a US $250 million medium term note issued on 10 November 2005 which matures on10 November 2008, a US $600 million bond issued on 30 March 2006 which matureson 1 April 2013 and a US $400 million floating rate note issued on 30 March 2006which matures on 30 March 2009. A US $500 million global bond matured and wasrepaid in the year. 10. Net Borrowings 30 June 2006 30 June 2005 £ million £ millionDebt due within one year and overdrafts (759) (869)Debt due after one year (4,001) (3,677)Fair value of interest rate hedges (44) -Obligations under finance leases (9) (9) (4,813) (4,555)Less: Cash and cash equivalents 699 787Other liquid resources 49 30Fair value of foreign exchange net investment hedges (17) 32Net borrowings (4,082) (3,706) The balance sheet classifications 'Other financial assets' include £9 million ofassets in respect of the fair value of interest rate hedges and other liquidresources of £49 million. The balance sheet classifications 'Other financialliabilities' include £53 million of liabilities in respect of the fair value ofinterest rate hedges, £9 million of obligations under finance leases and £17million in respect of the fair value of foreign currency net investment hedges. 11. Contingent liabilities and legal proceedings (i) Guarantees In connection with the disposal of Pillsbury, Diageo hasguaranteed the debt of a third party to the amount of $200 million (£108million) until November 2009. Including this guarantee, but net of the amountprovided in the consolidated financial statements, the group has givenperformance guarantees and indemnities to third parties at 30 June 2006 of £168million. There has been no material change since 30 June 2006 in the group'sperformance guarantees and indemnities. (ii) Colombian litigation An action was filed on 8 October 2004 in the UnitedStates District Court for the Eastern District of New York by the Republic ofColombia and a number of its local government entities against Diageo and otherspirits companies. The complaint alleges several causes of action. Includedamong the causes of action is a claim that the defendants allegedly violated theFederal RICO Act by facilitating money laundering in Colombia through theirsupposed involvement in the contraband trade to the detriment of governmentowned spirits production and distribution businesses. Diageo intends to defenditself vigorously against this lawsuit. (iii) Alcohol advertising litigation A number of similar putative class actionsare pending in state and federal courts in the United States against Diageo plc,Diageo North America Inc. and other Diageo entities, along with a large group ofother beverage alcohol manufacturers, brewers and importers. All have beenbrought by the same national counsel. In each action, the plaintiffs seek topursue their claims on behalf of parents and guardians of people under the legaldrinking age who illegally bought alcoholic beverages during the period from1982 to the present. Plaintiffs allege several causes of action, principally fornegligence, unjust enrichment and violation of state consumer fraud statutes.Some complaints include additional claims based on conspiracy, nuisance and onother legal theories. The litigation is ongoing and Diageo intends to defenditself vigorously against these claims. (iv) Other The group has extensive international operations and is defendant ina number of legal proceedings incidental to these operations. There are a numberof legal claims against the group, the outcome of which cannot at present beforeseen. Save as disclosed above, neither Diageo, nor any member of the Diageo group, isor has been engaged in, nor (so far as Diageo is aware) is there pending orthreatened by or against it, any legal or arbitration proceedings which may havea significant effect on the financial position of the Diageo group. 12. Explanation of transition to IFRS These are the group's first consolidated annual financial statements prepared inaccordance with IFRS. As permitted by IFRS 1, the group has adopted certainoptional exemptions from full retrospective application of IFRS accountingpolicies, including the adoption of IAS 39 - Financial instruments recognitionand measurement with effect from 1 July 2005 (see note 1). Subject to thoseexemptions, the accounting policies applied in preparing the consolidatedfinancial statements for the year ended 30 June 2006, the comparativeinformation presented in these financial statements for the year ended 30 June2005, and an opening IFRS balance sheet at 1 July 2004 (the group's date oftransition) are available on Diageo's website, www.diageo.com, along with anexplanation of how the transition from UK GAAP to IFRS has affected the group'sfinancial performance and financial position. In addition, the impact of theadoption of IAS 39 on the group's consolidated balance sheet at 1 July 2005 isgiven. In preparing the comparative information and the opening IFRS balance sheet, thegroup has adjusted amounts reported previously in financial statements preparedin accordance with its former basis of accounting under UK GAAP. Set out in thefollowing tables is the UK GAAP to IFRS reconciliation of profit for the yearended 30 June 2005 and a reconciliation of total equity at 1 July 2004 and 30June 2005. Reconciliation of profit for the year Year ended 30 June 2005 £ millionProfit after taxation under UK GAAP 1,439Reversal of goodwill recycled to income statement on disposal (IAS 38) 247Amortisation of deferred tax assets (IAS 12) (267)Foreign exchange differences on inter-company funding loans (IAS 21) (8)Share based payments (IFRS 2) (9)Other (3)Profit for the year under IFRS 1,399 Reconciliation of total equity 30 June 2005 1 July £ million 2004 £ million Total shareholders' funds and minority interests under UK GAAP 3,834 4,183Valuation of net post employment benefit liability (IAS 19) (52) (54)Net deferred tax asset on brands and group re-organisations (IAS 12) 423 706De-recognition of final dividend creditor (IAS 10) 530 513Elimination of revaluation reserve (IAS 16) (111) (113)Other 2 (6)Total equity under IFRS 4,626 5,229Net impact of implementation of IAS 39 164Total equity under IFRS at 1 July 2005 4,790 ADDITIONAL INFORMATION FOR SHAREHOLDERS EXPLANATORY NOTES Definitions Unless otherwise stated, percentage movements given throughout this announcementfor volume, sales, net sales, after deducting excise duties, marketing andoperating profit are organic movements (at level exchange rates and afteradjusting for acquisitions and disposals) for continuing operations. They arebefore exceptional items. Comparisons are with the equivalent period in thelast financial year. For an explanation of organic movements please refer toDiageo's annual report for the year ended 30 June 2005 and 'Reconciliation toGAAP measures' in this announcement. Volume has been measured on an equivalent units basis to nine litre cases ofspirits. An equivalent unit represents one nine litre case of spirits, which isapproximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine,or 330ml of ready to drink or beer. Therefore, to convert volume of products,other than spirits, to equivalent units, the following guide has been used: beerin hectolitres divide by 0.9, wine in nine litre cases divide by five and readyto drink in nine litre cases divide by 10, with certain pre-mixed products thatare classified as ready to drink divided by 5. Net sales are sales less excise duties. Exceptional items are those that in management's judgement need to be disclosedby virtue of their size or incidence in order for the user to obtain a properunderstanding of the financial information. Such items are included within theincome statement caption to which they relate. References to ready to drink include flavoured malt beverages in the UnitedStates. References to Smirnoff ready to drink include Smirnoff Ice, SmirnoffBlack Ice, Smirnoff Twisted V, Smirnoff Mule, Smirnoff Spin, Smirnoff Storm,Smirnoff Caesar, Smirnoff Fire, Smirnoff Raw Tea, Smirnoff Caipiroska andSmirnoff Signatures. References to Smirnoff Black Ice include Smirnoff IceTriple Black in the United States. Volume share is a brand's volume when compared to the volume of all brands inits segment. Value share is a brand's retail sales when compared to the retailsales of all brands in its segment. The share data contained in thisannouncement is taken from independent industry sources in the markets in whichDiageo operates. Unless otherwise stated, share refers to volume share. Share of voice is the media spend on a particular brand when compared to allbrands in its segment. The share of voice data in this announcement is takenfrom independent industry sources in the markets in which Diageo operates. This announcement contains forward-looking statements that involve risk anduncertainty. There are a number of factors that could cause actual results anddevelopments to differ materially from those expressed or implied by theseforward-looking statements, including factors beyond Diageo's control. Pleaserefer to page 39 - 'Cautionary statement concerning forward-looking statements'for more details. This announcement includes names of Diageo's products which constitutetrademarks or trade names which Diageo owns or which others own and license toDiageo for its use. Reconciliation to GAAP measures (i) Organic movement Organic movement in volume, sales, net sales after deducting excise duties,operating profit before exceptional items and basic earnings per share aremeasures not specifically used in the consolidated financial statementsthemselves (non-GAAP measures). The performance of the group is discussed usingthese measures. In the discussion of the performance of the business, certain information ispresented using sterling amounts on a constant currency basis. This strips outthe effect of foreign exchange rate movements and enables an understanding ofthe underlying performance of the market that is most closely influenced by theactions of that market's management. The risk from foreign exchange is managedcentrally and is not a factor over which local managers have any control. Acquisitions and disposals also impact the reported performance and thereforethe reported movement in any period in which they arise. Management adjusts forthe impact of such transactions in assessing the performance of the underlyingbusiness. The underlying performance on a constant currency basis and excluding the impactof acquisitions and disposals is referred to as 'organic' performance. Organicmovement calculations enable the reader to focus on the performance of thebusiness which is common to both periods. Organic movement in volume, sales, net sales after deducting excise duties, andoperating profit before exceptional items Diageo's strategic planning and budgeting process is based on organic movementin volume, sales, net sales after deducting excise duties and operating profitbefore exceptional items, and these measures closely reflect the way in whichoperating targets are defined and performance is monitored by the group'smanagement. Therefore organic movement measures most closely reflect the way inwhich the business is managed. These measures are chosen for planning, budgeting, reporting and incentivepurposes since they represent those measures which local managers are mostdirectly able to influence and they enable consideration of the underlyingbusiness performance without the distortion caused by fluctuating exchangerates, acquisitions and disposals. The group's management believes these measures provide valuable additionalinformation for users of the financial statements in understanding the group'sperformance since they provide information on those elements of performancewhich local managers are most directly able to influence and focus on thatelement of the core brand portfolio which is common to both periods. Theyshould be viewed as complementary to, and not a replacement for, the comparableGAAP measures: sales, net sales after deducting excise duties, operating profitand reported movements in individual income statement captions. These GAAPmeasures reflect all of the factors which impact on the business. The organic movement calculations for volume, sales, net sales after deductingexcise duties and operating profit before exceptional items for the year ended30 June 2006 were as follows: 1. Volume (1) (a) (b) Organic Organic 2005 Acquisitions movement 2006 movement units units units units million million Million million % North America 46.5 0.2 2.1 48.8 5 Europe 40.8 0.3 0.3 41.4 1 International 38.1 0.3 5.2 43.6 14Total 125.4 0.8 7.6 133.8 6 2. Sales (a) (b) Acquisitions and disposals 2005(2) (5) Organic 2006 Organic Reported Transfers(3) Exchange(4) movement Reported movement £ million £ million £ million £ million £ million £ million % North America 2,622 3 129 41 173 2,968 6 Europe 3,860 (23) 1 (7) 3 3,834 - International 2,424 5 56 12 329 2,826 13 Corporate 62 15 - - (1) 76 (2)Total 8,968 - 186 46 504 9,704 6 3. Net sales after deducting excise duties (a) (b) Acquisitions and disposals 2005(2) (5) Organic 2006 Organic Reported Transfers(3) Exchange(4) movement Reported movement £ million £ million £ million £ million £ million £ million % North America 2,194 3 110 34 169 2,510 7 Europe 2,499 (23) (1) (16) (4) 2,455 - International 1,922 5 31 9 252 2,219 13 Corporate 62 15 - - (1) 76 (2)Total 6,677 - 140 27 416 7,260 6Excise duties 2,291 2,444Sales 8,968 9,704 4. Operating profit before exceptional items (a) (b) Acquisitions and disposals 2005(2) (5) Organic 2006 Organic Reported Transfers(3) Exchange(4) movement Reported movement £ million £ million £ million £ million £ million £ million % North America 779 - 2 1 47 829 6 Europe 702 (3) (5) 4 39 737 6 International 615 (3) (23) 1 54 644 9 Corporate (164) 6 1 - (9) (166) (6)Total 1,932 - (25) 6 131 2,044 7 Notes - Information relating to the current period (1) Differences between the reported volume movements and organic volumemovements are due to acquisitions. (2) Results for 2005 have been restated for the impacts of implementing IFRS. (3) Transfers represent the movement between operating units of certainactivities, the most significant of which were the reallocation of the GuinnessStorehouse visitor centre in Dublin from Europe into the Corporate businesssegment and the transfer of the costs in respect of a global informationtechnology project from Corporate into Europe and International. (4) The exchange adjustments for sales, net sales after deducting exciseduties, and operating profit before exceptional items are principally in respectof the US dollar. (5) The only acquisition in the year ended 30 June 2006 was the acquisition ofThe 'Old Bushmills' Distillery Company Limited. Other acquisitions impacting thecalculation of organic growth in the year were in respect of the acquisition ofThe Chalone Wine Group (North America), Ursus Vodka Holdings B.V. (Europe) andGhana Breweries Limited (International). Disposals affecting the year wereprincipally the disposal of United Beverages Limited (Europe) and contributedsales, net sales after deducting excise duties, and operating profit beforeexceptional items of £35 million, £35 million and £nil million, respectively, inthe year ended 30 June 2005 and had no impact on volume. Notes - Information relating to the organic movement calculations a) The organic movement percentage is the amount in the columnheaded 'Organic movement' in the tables above expressed as a percentage of theaggregate of the columns headed 2005 Reported, Transfers, Exchange and theamounts in respect of disposals (see note 5 above) included in the column headedAcquisitions and disposals. The inclusion of the column headed Exchange in theorganic movement calculation reflects the adjustment to exclude the effect ofexchange rate movements by recalculating the prior period results as if they hadbeen generated at the current period's exchange rates. Organic movementpercentages are calculated as the organic movement amount in £ million,expressed as the percentage of the prior period results at current year exchangerates and after adjusting for disposals. The basis of calculation means that theresults used to measure organic movement for a given period will be adjustedwhen used to measure organic movement in the subsequent period. b) Where a business, brand, brand distribution right or agency agreementwas disposed of, or terminated, in the current period, the group, in organicmovement calculations, adjusts the results for the comparable prior period toexclude the amount the group earned in that period that it could not have earnedin the current period (i.e. the period between the date in the prior period,equivalent to the date of the disposal in the current period, and the end of theprior period). As a result, the organic movement numbers reflect only comparableperformance. Similarly, if a business was disposed of part way through theequivalent prior period then its contribution would be completely excluded fromthat prior period's performance in the organic movement calculation, since thegroup recognised no contribution from that business in the current period. Inthe calculation of operating profit before exceptional items the overheadsincluded in disposals were only those directly attributable to the businessesdisposed, and do not result from subjective judgements of management. Foracquisitions, a similar adjustment is made in the organic movement calculations.For acquisitions subsequent to the end of the equivalent prior period, the postacquisition results in the current period are excluded from the organic movementcalculations. For acquisitions in the prior period, post acquisition results areincluded in full in the prior period but are only included from the anniversaryof the acquisition date in the current period. Organic movement in earnings per share The group's management believes basic earnings per share on an organic movementbasis, provides valuable additional information for users of the financialstatements in understanding the group's overall performance. The group'smanagement believe that the comparison of movements on both a reported andorganic basis provides information as to the individual components of themovement in basic earnings per share being: the impact of exceptional items,fluctuating exchange rates, acquisitions and disposals arising in the period andchanges in the effective rate of tax. These measures should be viewed ascomplementary to, and not a replacement for, the comparable GAAP measures suchas basic and diluted earnings per share and reported movements thereon. TheseGAAP measures reflect all of the factors which impact on the business. The organic movement calculation in earnings per share for the year ended 30June 2006 was as follows: pence per share (5)Reported basic eps for year ended 30 June 2005 45.2Exceptional items (1) (5.5)Basic eps before exceptional items for year ended 30 June 2005 39.7Disposals (2) (a) 0.3Exchange (3) (d) (0.7)Tax equalisation to 25% (4) 6.7Adjusted basic eps for year ended 30 June 2005 46.0 Reported basic eps for year ended 30 June 2006 67.2Exceptional items (1) (16.7)Basic eps before exceptional items for the year ended 30 June 2006 50.5Acquisitions (2) (b) 0.2Exchange (3) (d) 0.1Adjusted basic eps for year ended 30 June 2006 50.8 Reported basic eps movement amount 22.0Basic eps before exceptional items movement amount 10.8Organic movement amount (after impact of acquisitions and exchange) (c) 4.8Reported basic eps growth 49%Basic eps before exceptional items growth 27%Organic growth (c) 10% Notes - Information relating to the current period 1) The exceptional items (after tax and attributable to equityshareholders) reported by the group for the year ended 30 June 2006 were a gainof £472 million (2005 - a gain of £164 million) equating to 16.7 pence per sharefor the year ended 30 June 2006 and 5.5 pence per share for the year ended 30June 2005. 2) Acquisitions in the year ended 30 June 2006 are in respect of theacquisition of The 'Old Bushmills' Distillery Company Limited. Acquisitionsimpacting the calculation of organic growth in the period were in respect of theacquisition of The Chalone Wine Group (North America), Ursus Vodka Holdings B.V.(Europe) and Ghana Breweries Limited (International). Disposals affecting theperiod are the disposal of United Beverages Limited (Europe) and the impact ofthe disposal of 25 million shares of the common stock of General Mills. 3) Exchange - the exchange adjustments for operating profit beforeexceptional items, net finance charges and taxation before exceptional items areprincipally in respect of the US dollar. Transaction exchange adjustments aretaxed at the effective tax rate for the period. 4) Tax equalisation - the impact of equalising the effective rate oftax on profit before exceptional items and tax from the reported rate to 25%.The group's underlying effective rate of tax before exceptional items isexpected to be 25%. 5) All amounts are derived from amounts in £ million divided by theweighted average number of shares in issue for the period to 30 June 2006 of2,841 million (2005 - 2,972 million). Notes - Information relating to the organic movement calculations a) Where a business, brand, brand distribution right or agencyagreement or investment was disposed of, or terminated, in the current period,the group, in organic movement calculations, adjusts the profit for the periodattributable to equity shareholders for the comparable prior period to excludethe following: i) the amount the group earned in that period that it could nothave earned in the current period (i.e. the period between the date in the priorperiod, equivalent to the date of the disposal in the current period, and theend of the prior period), ii) a capital return in respect of the reduction ininterest charge had the disposal proceeds been used entirely to reduceborrowings, and iii) taxation at the rate applying in the jurisdiction in whichthe asset or business disposed was domiciled. As a result, the organic movementnumbers reflect only comparable performance. Similarly, if a business orinvestment asset was disposed of part-way through the equivalent prior periodthen its impact on the profit for the year attributable to equity shareholders(i.e. after adjustment for a capital return from use of the proceeds of thedisposal to reduce borrowings and tax at the rate applying in the jurisdictionin which the asset or business disposed was taxed) would be completely excludedfrom that prior period's performance in the organic movement calculation, sincethe group recognised no contribution from that business in the current period. b) Where a business, brand, brand distribution right or agency agreement orinvestment is acquired subsequent to the end of the equivalent prior period, inorganic movement calculations the group adjusts the profit for the currentperiod attributable to equity shareholders to exclude the following: i) theamount the group earned in the current period that it could not have earned inthe prior period, ii) a capital charge in respect of the increase in interestcharge had the acquisition been funded entirely by an increase in borrowings,and iii) taxation at the rate applying in the jurisdiction in which the businessacquired is domiciled. As a result, the organic movement numbers reflect onlycomparable performance. Similarly, if a business or investment asset wasacquired part way through the equivalent prior period then its impact on theprofit for the year attributable to equity shareholders (i.e. after adjustmentfor a capital charge for the funding of the acquisition and tax at the rateapplying in the jurisdiction in which the acquired business is taxed) would beadjusted only to include the results from the anniversary of the acquisition inthe current period's performance in the organic movement calculation, since thegroup recognised a full period's contribution from that business in the currentperiod. c) Organic movement percentages for basic earnings per share are calculatedas the organic movement amount in pence (p), expressed as the percentage of theprior period results at current year exchange rates, and after adjusting forexceptional items, tax equalisation and acquisitions and disposals. The basis ofcalculation means that the results used to measure organic movement for a givenperiod will be adjusted when used to measure organic movement in the subsequentperiod. d) The exchange effects of IAS 21 in respect of short term intercompanyfunding balances as recognised in other finance charges / income are removedfrom both the current and prior period as part of the organic movementcalculation. (ii) Free cash flow Free cash flow is a non-GAAP measure that comprises net cash from operatingactivities as well as the net purchase and disposal of investments and property,plant and equipment that form part of net cash from investing activities. Thegroup's management believes the measure assists users of the financialstatements in understanding the group's cash generating performance as itcomprises items that arise from the running of the ongoing business. The remaining components of net cash from investing activities that do not formpart of free cash flow, as defined by the group's management, relate to thepurchase and disposal of subsidiaries, associates and businesses. The group'smanagement regards the purchase and disposal of property, plant and equipment asultimately non-discretionary since ongoing investment in plant and machinery isrequired to support the day-to-day operations, whereas purchases and disposalsof businesses are discretionary. However, free cash flow does not necessarilyreflect all amounts that the group either has a constructive or legal obligationto incur. Where appropriate, separate discussion is given for the impacts ofacquisitions and disposals of businesses, equity dividends and purchase of ownshares - each of which arises from decisions that are independent from therunning of the ongoing underlying business. The free cash flow measure is also used by management for their own planning,budgeting, reporting and incentive purposes since it provides information onthose elements of performance which local managers are most directly able toinfluence. The calculation of free cash flow is set out in the 'Cash flow' section of theFinancial Review in this document. (iii) Return on average total invested capital Return on average total invested capital is a non-GAAP measure that is used bymanagement to assess the return obtained from the group's asset base. Thismeasure is not specifically used in the consolidated financial statements, butis calculated to aid comparison of the performance of the business. The profit used in assessing the return on total invested capital reflects theoperating performance of the business after the effective tax rate for theperiod stated before exceptional items and interest. Average total investedcapital is calculated using the average derived from the consolidated balancesheets at the beginning, middle and the end of the period. Capital employedcomprises net assets for the period, excluding post employment benefitliabilities (net of deferred tax) and net borrowings. This average capitalemployed is then aggregated with the average restructuring and integration costsnet of tax, which have been charged to exceptional items, and goodwill writtenoff to reserves as at 1 July 2004, the date of transition to IFRS, to obtain theaverage total invested capital. Calculations for the return on average total invested capital for the yearsended 30 June 2006 and 30 June 2005 were as follows: 2006 2005 £ million £ millionOperating profit before exceptional items 2,044 1,932Associates after interest and taxation 131 121Dividends receivable from investments 5 17Effective tax rate 24.9% (2005 - 25%)* (543) (518) 1,637 1,552 Average net assets 5,527 5,835Average net borrowings 3,899 3,781Average integration costs (net of tax) 931 921Average goodwill 1,562 1,562Average total invested capital 11,919 12,099 Return on average total invested capital 13.7% 12.8% * The effective tax rate for 2005 has been adjusted to 25% to achieve acomparable measure in the year of IFRS adoption (2005 effective rate of tax onprofit before tax and exceptional items under IFRS was 35%) (iv) Economic profit Economic profit is a non-GAAP measure that is used by management to assess thegroup's return from its asset base compared to a 9% cost of capital charge. Themeasure is not specifically used in the consolidated financial statements, butis calculated to aid comparison of the performance of the business. Economic profit is calculated as the difference between a 9% capital charge onthe average invested assets and the actual return achieved by the group on thoseassets. The profit used in assessing the return from the group's asset base andthe asset base itself is the same as that used in the calculation for the returnon average total invested capital (see (iii) above). Calculations for economic profit for the year ended 30 June 2006 and 30 June2005 were as follows: 2006 2005 £ million £ millionAverage total invested capital (see (iii) above) 11,919 12,099 Operating profit before exceptional items 2,044 1,932Associates after interest and taxation 131 121Dividends receivable from investments 5 17Effective tax rate 24.9% (2005 - 25%)* (543) (518) 1,637 1,552Capital charge at 9% of average total invested capital (1,073) (1,089)Economic profit 564 463 * The effective tax rate for 2005 has been adjusted to 25% to achieve acomparable measure in the year of IFRS adoption (2005 effective rate of tax onprofit before tax and exceptional items under IFRS was 35%) Cautionary statement concerning forward-looking statements This document contains statements with respect to the financial condition,results of operations and business of Diageo and certain of the plans andobjectives of Diageo with respect to these items. These forward-lookingstatements are made pursuant to the 'Safe Harbor' provisions of the UnitedStates Private Securities Litigation Reform Act of 1995. In particular, allstatements that express forecasts, expectations and projections with respect tofuture matters, including trends in results of operations, margins, growthrates, overall market trends, the impact of interest or exchange rates, theavailability of financing to Diageo, anticipated cost savings or synergies andthe completion of Diageo's strategic transactions, are forward-lookingstatements. By their nature, forward-looking statements involve risk anduncertainty because they relate to events and depend on circumstances that willoccur in the future. There are a number of factors that could cause actualresults and developments to differ materially from those expressed or implied bythese forward-looking statements, including factors that are outside Diageo'scontrol. These factors include, but are not limited to: • increased competitive product and pricing pressures and unanticipatedactions by competitors that could impact Diageo's market share, increaseexpenses and hinder growth potential; • the effects of future business combinations, partnerships,acquisitions or disposals, existing or future, and the ability to realiseexpected synergies and/or costs savings; • Diageo's ability to complete existing or future acquisitions anddisposals; • legal and regulatory developments, including changes in regulationsregarding consumption of, or advertising for, beverage alcohol, changes inaccounting standards, taxation requirements, such as the impact of excise taxincreases with respect to the business, environmental laws and the lawsgoverning pensions; • developments in the alcohol advertising class actions and any similarproceedings or other litigation directed at the drinks and spirits industry; • developments in the Colombian litigation and any similar proceedings; • changes in consumer preferences and tastes, demographic trends orperception about health related issues; • changes in the cost of raw materials and labour costs; • changes in economic conditions in countries in which Diageo operates,including changes in levels of consumer spending; • levels of marketing, promotional and innovation expenditure by Diageoand its competitors; • renewal of distribution rights on favourable terms when they expire; • termination of existing distribution rights on agency brands; • technological developments that may affect the distribution ofproducts or impede Diageo's ability to protect its intellectual property rights;and • changes in financial and equity markets, including significantinterest rate and foreign currency exchange rate fluctuations, which may affectDiageo's access to or increase the cost of financing or which may affectDiageo's financial results. All oral and written forward-looking statements made on or after the date ofthis announcement and attributable to Diageo are expressly qualified in theirentirety by the above factors and the 'risk factors' contained in the annualreport on Form 20-F for the year ended 30 June 2005 filed with the US Securitiesand Exchange Commission. Any forward-looking statements made by or on behalf ofDiageo speak only as of the date they are made. Diageo does not undertake toupdate forward-looking statements to reflect any changes in Diageo'sexpectations with regard thereto or any changes in events, conditions orcircumstances on which any such statement is based. The reader should, however,consult any additional disclosures that Diageo may make in documents it fileswith the US Securities and Exchange Commission. The information in this announcement does not constitute an offer to sell or aninvitation to buy shares in Diageo plc or any other invitation or inducement toengage in investment activities. This document includes disclosure about Diageo's debt rating. A security ratingis not a recommendation to buy, sell or hold securities and may be subject torevision or withdrawal at any time by the assigning rating organisation. Eachrating should be evaluated independently of any other rating. Past performance cannot be relied upon as a guide to future performance. For further information Diageo's preliminary results presentation to analysts and investors will bebroadcast at 09.30 (UK time) on Thursday 31 August 2006. The presentation willbe available on the Diageo website www.diageo.com and also at www.cantos.com.Prior to the event the presentation slides will also be available to downloadfrom Diageo's home page. You will be able to listen to a live broadcast of the presentation and to thequestion and answer session. The number to call is: France + 33 1 70 75 00 02 Germany + 49 69 2222 52100 Ireland + 353 1 246 0034 Netherlands + 31 20 710 0075 Spain + 34 91 414 1545 UK + 44 20 7019 0810 USA (toll free) + 877 951 7311 Passcode: Diageo results After the presentation the slides and accompanying text will be available todownload from Diageo's homepage. You will be able to view a recording of the presentation and question and answersession on the Diageo website from 14.00 (UK time) on the day. This facilitywill be available until 29 September 2006. A press conference will take place beginning at 12.30 (UK time) on Thursday 31August and will be broadcast live from a link on www.diageo.com. Diageo management will host a conference call for analysts and investors at15.00 (UK time) on Thursday 31 August 2006. Call this number to participate: France + 33 1 70 75 00 02 Germany + 49 69 2222 52100 Ireland + 353 1 246 0034 Netherlands + 31 20 710 0075 Spain + 34 91 414 1545 UK + 44 20 7019 0810 USA (toll free) + 877 951 7311 Passcode: Diageo results The teleconference will be available on instant replay from 17.00 (UK time) andwill be available until 29 September 2006. The number to call is: UK/Europe +44 20 7108 6299 USA/Canada +1 203 369 4739 Investor enquiries to: Darren Jones +44 (0) 20 7927 4223 Sandra Moura +44 (0) 20 7927 4326 [email protected] Media enquiries to: Isabelle Thomas +44 (0) 20 7927 5967 Jennifer Crowl +44 (0) 20 7927 5749 [email protected] This information is provided by RNS The company news service from the London Stock Exchange

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