Preliminary Results

30th Aug 2007 07:01

Diageo PLC30 August 2007 Preliminary results for the year ended 30 June 2007 Diageo reports continued strong growth in the year with organic top line growthof 7.3%, operating profit growth of 8.7% and underlying eps growth of 13%.Guidance is for increased organic operating profit growth in 2008 of 9%. Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2007said: "Diageo's focus on proven brand and market building strategies has againdelivered strong growth in top and bottom line and strong cash flow. "In North America we outperformed the US spirits market for the thirdconsecutive year. In Europe we improved performance in the second half andincreased our investment in the growth drivers by brand and market. InInternational strong performance by our beer brands and the investment we madebehind our Scotch brands delivered another year of excellent growth. In AsiaPacific we grew in all markets, gained share in our key markets and improvedperformance in the second half. "Our world leading brands, Johnnie Walker, Smirnoff, Baileys and Guinness alongwith Captain Morgan and Buchanan's were the strongest performing brands thisyear. Johnnie Walker enhanced its position as the world's leading Scotch whiskyand now sells over 15 million cases. Smirnoff reinforced its position as theworld's number one premium spirits brand and Baileys grew strongly, supported bythe successful launch of the new Baileys flavours. Guinness grew despite theimpact of weak beer markets in Great Britain and Ireland as a result of doubledigit growth in International on the back of the Guinness Greatness campaign inAfrica. Captain Morgan is primarily a North American brand but strongperformance in Europe delivered 10% of the brand's growth this year. FinallyBuchanan's delivered excellent growth as the brand continued to gain share inthe fast growing Scotch markets of Latin America. "Together these regional and brand performances have driven top line growth of7.3%. Operating margin expansion of 40 basis points resulted in operating profitgrowth of 8.7%. Another year of strong cash flow enabled us to return a further£2.3 billion to shareholders through dividends and our share buyback programme. "Whilst we watch for any impact the current volatility in financial markets mayhave on broader trading conditions, the investments we have made in brands andmarkets this year have created an even stronger platform for the future.Therefore we currently expect increased organic operating profit growth in 2008of 9%". Results at a glance Reported Organic 2007 2006 movement movement Volume in millions of equivalent units 141.3 133.8 6% 5%Net sales £ million 7,481 7,260 3% 7%Operating profit £ million 2,159 2,044 6% 9%Profit attributable to parent company's equity shareholders * £ million 1,489 1,908 (22)%Basic eps * pence 55.4 67.2 (18)% 13% * For year ended 30 June 2007 tax rate 32%. For year ended 30 June 2006 tax rate8%. • Marketing spend increased by a further 8% • Operating profit includes a gain of £40 million in respect of exceptional items • Using an underlying effective tax rate of 25% eps before exceptional items increased from 50.5 pence in 2006 to 54.8 pence in 2007, which adjusted for exchange is a 13% increase • Return on invested capital increased 70 basis points to 14.4% • Strong free cash flow of £1,365 million • Recommended full year dividend per share increase of 5% to 32.7 pence • £2.3 billion returned to shareholders: £858 million in dividends and £1,400 million of share buybacks Unless otherwise stated in this announcement: net sales are sales afterdeducting excise duties; percentage movements are organic movements; commentaryrefers to organic movements and share refers to volume share. See page 31 foradditional information for shareholders and an explanation of non-GAAP measuresincluding the reconciliation of basic eps as reported to underlying basic eps. Regional summary North America - Focus on priority brands delivered strong top line growth andoperating margin improvement • Volume up 3%• Net sales up 7%• Marketing spend up 5%• Operating profit up 12% North America delivered strong top and bottom line growth driven by the prioritybrands. Volume growth of spirits was 3%, wine 6% and beer 7%. Price increaseson approximately 50% of the volume together with mix improvements resulted innet sales for spirits, wine and beer all up 8% while ready to drink net sales,from a 6% decline in volume, were down only 1%. Smirnoff vodka and Baileys eachdelivered double digit net sales growth. Diageo's value share of the distilledspirits market in the United States grew 0.6 percentage points during fiscal2007. Europe - Continued growth in Continental Europe supported by strong second halfperformance in Russia, Great Britain and Ireland • Volume down 2%• Net sales flat• Marketing spend up 1%• Operating profit flat In Europe strong growth in Continental Europe and Russia from Baileys, JohnnieWalker and Smirnoff vodka partially offset the first half net sales decline inGreat Britain, Ireland and Spain. In the second half all three of these marketsdelivered net sales growth: in Great Britain Smirnoff vodka and Baileys bothgrew net sales over 10%; in Ireland the improved performance of the lager brandsdrove growth and in Spain Johnnie Walker grew net sales 19%. International - Continued strong performance of Diageo's Scotch and beer brandsdelivered top line growth • Volume up 16%• Net sales up 18%• Marketing spend up 17%• Operating profit up 19% International delivered strong growth throughout the region. Diageo's Scotchbrands continued to be the main driver of growth, especially Johnnie Walker withnet sales up 18% and Buchanan's with net sales up 40%. The growth of Diageo'sbeer brands in Africa accelerated in the second half fuelled by a new Guinnesscampaign. The launch of Baileys flavours contributed to an increase of 21% innet sales for the Baileys brand. In ready to drink net sales were up 19% led bySmirnoff Storm in South Africa and Smirnoff Ice in Nigeria and Brazil. Asia Pacific - Top line growth accelerated in the second half driving improvedoperating margin leverage • Volume up 12%• Net sales up 13%• Marketing spend up 22%• Operating profit up 7% In Asia Pacific top line growth accelerated in the second half as marketingspend was increased behind new brand launches in India and in the fast growingmarkets of Southeast Asia. Johnnie Walker, Diageo's largest brand in theregion, was the biggest growth driver with further strong net sales growth of22%. While Korea, China and India continue to be the key growth engines for theregion, performance was broad based as every market delivered net sales growth.In the second half net sales growth was 17%, driven by Johnnie Walker which grewnet sales 32%. Korea, Thailand and India all improved performance in the secondhalf. Financial • The deficit in respect of post employment plans reduced by £382million from £801 million at 30 June 2006 to £419 million at 30 June 2007. Inthe year ending 30 June 2008, finance income under IAS 19 is expected to be £47million, broadly in line with the benefit in the year ended 30 June 2007. • In the year ended 30 June 2007, exchange rate movements reducedoperating profit by £91 million and the net interest charge by £11 million. • In the year ending 30 June 2008, at current exchange rates, foreignexchange movements (excluding the exchange impact of re-translatinginter-company balances under IAS 21) are forecast to reduce operating profit by£65 million and reduce the interest charge by approximately £5 million. Brand performance summary Reported Organic Reported Organic volume volume net sales net sales movement movement movement movement % % % % Global priority brands 6 6 3 7Local priority brands 4 3 3 7Category brands 7 6 4 8Total 6 5 3 7 Key spirits brands*:Smirnoff vodka 6 6 4 9Johnnie Walker 14 14 13 16Captain Morgan 7 7 2 10Baileys 7 7 6 10J&B (2) (2) (3) (1)Jose Cuervo 2 2 (4) 3Tanqueray 6 6 3 10Crown Royal - North America 5 5 1 9Buchanan's - International 41 41 53 40Windsor - Asia Pacific 15 15 12 15 Guinness 2 2 - 3 Ready to drink (1) (1) (5) - * Spirits brands excluding ready to drink. Throughout this announcement certain brands formerly treated as local prioritybrands have now been reclassified as category brands and vice versa, to reflectthe change in contribution of these brands in individual countries. Allcomparative figures have been restated. See page 32 for additional informationregarding these changes. Ready to drink includes all ready to drink brands. The global priority brands represent 60% of volume and were the main driver oftop line growth with volume up 6% and net sales up 7%. The growth was driven bythe performance of Johnnie Walker, Smirnoff, Baileys and Captain Morgan across anumber of regions. These are the world's leading brands and this volume growthrepresents some huge increases in case volume. Smirnoff, for example, grew byover a million cases while Johnnie Walker grew by almost two million cases inthe year. Johnnie Walker volume is now over 15 million cases and the brand extended itsposition further as the world's leading Scotch with growth around the globe. Smirnoff vodka volume was up 6% to 23.2 million cases with growth in each regionbut particularly in North America which accounts for over 40% of total Smirnoffnet sales. Net sales grew 9% as a result of price increases in many markets. Growth of Baileys was driven by the launch of Baileys flavours with particularlystrong performances in North America and International. While Captain Morgan is primarily a North American brand, it also grew stronglyin Europe. Outstanding performance of Guinness in International with net sales up 15% andgrowth in North America offset the decline in the tough beer markets of GreatBritain and Ireland. The local priority brands were the biggest driver of overall price and miximprovement in the year. Crown Royal in North America, Buchanan's inInternational and Windsor in Asia Pacific all grew strongly and contributedsignificantly to this improvement. Category brands performance was driven by Diageo's other Scotch brands, as wellas the high value reserve brands. The overall performance of ready to drink was driven by the continued decline ofthe category in Europe offset by strong growth in International. Interim management statements As a result of the introduction of the EU Transparency Directive Diageo will berequired to publish interim management statements from the financial yearbeginning 1 July 2007. The interim results announcement and the preliminary results announcement willform two of the interim management statements. Two further statements arerequired, one in the period from mid September to mid November and another inthe period from mid March to mid May. In order to satisfy the first of theserequirements Diageo will continue to issue a trading update at the time of theAGM in October. In order to satisfy the second Diageo will issue a tradingupdate in mid May and therefore will discontinue the trading update in lateJune. BUSINESS REVIEW For the year ended 30 June 2007 OPERATING REVIEW Analysis by region North America Summary: • Price increases and mix improvements drove top line growth• Smirnoff vodka and Baileys each delivered double digit net sales growth and further share gains• Value share of the US spirits market was up 0.6 percentage points• Operating margin improved in organic terms by 1.6 percentage points Key measures: Reported Organic 2007 2006 movement Movement £ million £ million % % Volume 3 3Net sales 2,472 2,510 (2) 7Marketing spend 364 384 (5) 5Operating profit 850 829 3 12 Reported performance: Net sales were £2,472 million in the year ended 30 June 2007 down by £38 millionfrom £2,510 million in the prior year. Reported operating profit increased by£21 million to £850 million in the year ended 30 June 2007. Organic performance: The weighted average exchange rate used to translate US dollar sales and profitmoved from £1 = $1.78 in the year ended 30 June 2006 to £1 = $1.93 in the yearended 30 June 2007. Exchange rate impacts decreased net sales by £190 million.Acquisitions increased net sales by £1 million and there was an organic increaseof £151 million. Exchange rate impacts reduced operating profit by £69 millionand transfers of costs between regions reduced operating profit by £3 million.There was an organic increase in operating profit of £93 million. Brand performance: Reported Organic Reported net Organic volume volume sales movement net sales movement movement movement % % % % Global priority brands 4 4 (2) 7Local priority brands 3 3 (2) 8Category brands (2) (2) (1) 5Total 3 3 (1) 7 Key spirits brands: Smirnoff vodka 5 5 2 10 Johnnie Walker 5 5 (2) 7Captain Morgan 6 6 1 9Baileys 20 20 13 22Jose Cuervo 1 1 (5) 3 Tanqueray 6 6 1 9Crown Royal 5 5 1 9 Guinness 4 4 (1) 7 Ready to drink (6) (6) (8) (1) Price increases and mix improvement drove performance in North America as topline growth was achieved across spirits, wine and beer. Smirnoff vodka had another strong year with volume up 5% and net sales up 10% asprice increases have been implemented. Smirnoff continued to benefit from the 'Clearly Smirnoff' campaign and gained 0.2 percentage points of value share. Johnnie Walker volume was up 5% and stronger growth of Johnnie Walker BlackLabel together with price increases on Johnnie Walker Black Label led to netsales growth of 7%. Share was up 2.0 percentage points on a value basis withgains on both Johnnie Walker Red Label and Johnnie Walker Black Label. New television advertising campaigns and successful on trade marketingprogrammes increased brand awareness and recruited new consumers to CaptainMorgan resulting in share gains of 1.5 percentage points on a value basis.Volume was up 6% and price increases on Captain Morgan Original Spiced Rum wereimplemented, driving net sales growth of 9%. Baileys had an outstanding year with volume up 20% and net sales up 22%. Thiswas driven by the national launch of Baileys flavours and by continued growth ofthe core brand. Jose Cuervo delivered 1% volume growth and 3% net sales growth. Investment hasbeen focused around the super premium labels as this is the segment that isdriving category growth. As a result these grew by 20%, albeit off a small base. Tanqueray grew volume 6% and net sales 9%, gaining 0.9 percentage points ofvalue share in a declining category. This was driven by increased mediainvestment behind the 'Are You Ready to Tanqueray' campaign and the introductionof Tanqueray Rangpur which was launched nationally in the second half. Local priority brand volume increased 3% and net sales increased 8%. Growth ofCrown Royal and US wines were partially offset by a small decline in Seagram'sVO. US wines grew net sales 8% driven by strong growth of the Chalone wines. Crown Royal volume increased 5% as the NASCAR team sponsorship was up-weightedfor the 2006 season and the brand returned to being advertised on television inDecember following two years of limited presence. Price increases wereimplemented on approximately 40% of volume and this, combined with the positiveperformance of the luxury Crown Royal Extra Rare, drove net sales growth of 9%. Volume in the category brands declined 2%. Growth of beer and reserve brandsled to mix improvement and net sales grew 5%. Guinness volume grew 4%, with net sales up 7% as a result of a national priceincrease on the brand. Increased marketing activity was focused on GuinnessDraught in Bottle leading to distribution gains and increased levels ofvisibility in retail. Additionally, marketing spend on TV media was up. Ready to drink volume declined 6% whilst net sales were down 1% as a result ofprice increases and mix improvement. While Smirnoff ready to drink volumedeclined, innovation delivered mix improvements with the introduction of newSmirnoff Ice flavours and Smirnoff Raw Tea. The continued growth of Parrot BayTropical Malt Beverages and Jose Cuervo Golden Margaritas also contributed tothis. Europe Summary: • Overall performance improved in the second half, with volume growth of 3% and net sales growth of 4%• Great Britain, Ireland and Spain all delivered net sales growth in the second half• In Russia Johnnie Walker and Baileys were the key drivers of very strong growth• Focus on premiumisation in growing categories in Continental Europe Key measures: Reported Organic 2007 2006 movement movement £ million £ million % % Volume (1) (2)Net sales 2,427 2,455 (1) -Marketing spend 391 389 1 1Operating profit 723 737 (2) - Reported performance: Net sales were £2,427 million in the year ended 30 June 2007 down by £28 millionfrom £2,455 million in the prior year. Reported operating profit decreased by£14 million to £723 million in the year ended 30 June 2007. Organic performance: The weighted average exchange rate used to translate euro sales and profit movedfrom £1 = €1.46 in the year ended 30 June 2006 to £1 = €1.48 in the year ended30 June 2007. Exchange rate impacts reduced net sales by £23 million.Acquisitions increased net sales by £6 million, disposals decreased net sales by£17 million and there was an organic increase of £6 million. Exchange rateimpacts reduced operating profit by £10 million. Acquisitions decreasedoperating profit by £1 million, disposals decreased operating profit by £2million and there was an organic decrease in operating profit of £1 million. Brand performance: Reported Organic Reported net Organic volume volume sales movement net sales movement movement movement % % % % Global priority brands (1) (1) (1) -Local priority brands (6) (6) (3) (2)Category brands 3 1 (1) 2Total (1) (2) (1) - Key spirits brands:Smirnoff vodka 2 2 3 4Johnnie Walker 4 4 11 12Baileys (2) (2) 1 2J&B (4) (4) (3) (2) Guinness (6) (6) (5) (4) Ready to drink (12) (12) (14) (12) Global priority brand volume declined 1% and net sales were flat as the declineof Smirnoff ready to drink and of Guinness was offset by strong growth ofJohnnie Walker. Performance in the global priority brands significantly improvedduring the second half with volume up 3% and net sales up 4%. Smirnoff vodka volume increased 2% while net sales increased 4% following priceincreases in Ireland and benefiting from the premiumisation strategy inContinental Europe which focused on building the brand credentials of SmirnoffRed and Smirnoff Black. With significant improvement in Great Britain, volume inthe second half grew 6% and net sales grew 8%. Johnnie Walker volume was up 4% and net sales increased 12%. Volume growth wasdriven largely from Johnnie Walker Black Label in Greece and Poland and JohnnieWalker Red Label in Russia, Poland, Bulgaria and the Balkans. Net sales growthwas the result of price increases, up-weighted investment and a premiumisationstrategy in Russia, Greece and Iberia. Volume and net sales further improved inthe second half, with growth of 11% and 24% respectively. While Baileys volume declined 2%, net sales increased 2%. This was driven byaction taken in Great Britain in the first half to increase net sales per caseand higher net sales per case in Russia as a result of the move to an in marketcompany. Strong volume performance in Continental Europe and Russia and thelaunch of Baileys flavours partially offset the decline in Great Britain. Bothvolume and net sales growth across Europe improved during the second half asvolume increased 13% and net sales increased 17%. J&B volume declined 4% and net sales declined 2%, primarily driven by thecontinued decline of the Scotch category in Spain. This was partially offset bygrowth in France and Eastern Europe. Guinness volume declined 6% driven by the continued trend from on to off trade.Price increases were taken during the year and net sales declined 4%. Total ready to drink volume and net sales declined 12%, primarily driven bySmirnoff Ice in Great Britain, Germany and France. Local priority brand performance was impacted by the decline of Gordon's andBell's in Great Britain, as a result of the Christmas pricing strategy toincrease net sales value to the trade and by a decline in Cacique in Spain. Thisled to volume down 6% and net sales down 2%. Category brand volume increased 1% and net sales increased 2%, driven by gainsin Pimm's and Blossom Hill. Great Britain In the full year volume and net sales both declined 5%. This reflects decline inthe first half partially offset by growth in the second half. As a result of amore focused strategy on core spirits during the second half, spirits accountedfor a greater proportion of total net sales and the proportion of ready to drinkand beer fell. This resulted in second half volume growth of 6% ahead of netsales growth of 1%. Smirnoff vodka volume declined 1% but net sales increased 1% as a result ofprice increases. In the second half, a combination of focus on sales executionand brand building initiatives resulted in volume up 10% and net sales up 11%. Baileys volume declined 25% and net sales declined 21% as a result of theChristmas pricing strategy to increase net sales per case to the off trade. Inthe second half net sales were up 12% as a result of increased promotions. Guinness volume declined 5% while a price increase in February 2007 moderatedthe net sales decline to 3%. This was broadly in line with the performance ofthe beer market in the United Kingdom. However, positive consumer reaction to anew advertising campaign meant that Guinness gained share in the on trade and isnow the number four beer in Great Britain. Local priority brand volume declined 9% and net sales declined 8%, driven byGordon's and Bell's. Performance significantly improved during the second halfwith a 10% volume and 6% net sales increase. Category brand volume increased 4% while net sales were flat as growth in Pimm'sand Blossom Hill offset declines in Piat d'Or. Smirnoff ready to drink net sales declined 14% in line with the segment. Ireland The key driver in Ireland continues to be the trend from the on to the offtrade. For the full year, volume was down 2% and net sales were down 1%. Whilenet sales of beer declined 2%, spirits and wines outperformed in both the on andoff trade with 4% and 7% net sales growth respectively. Smirnoff vodka grew netsales 7% and Baileys net sales increased 2%. In wine, Blossom Hill increasednet sales by 37%, albeit off a small base. Guinness volume declined 9% and net sales declined 7%. The second halfperformance improved following increased marketing and net sales declined by 5%. Net sales of the lager brands grew 3% driven by Budweiser with the support ofthe successful launch of Bud Light. Iberia Volume declined 7% and net sales declined 2%. This was primarily driven bySpain, where performance was impacted by a declining Scotch category combinedwith changes in consumer behaviour following new legislation that increaseddrink driving penalties. Price increases across both Spain and Portugalpartially offset the impact of the volume decline. J&B volume declined 8% and net sales declined 3%. In the second half,volume and share performance improved as a result of investment in the off tradeand price increases were implemented. This combined with growth in J&BReserve led to price mix improvement. Price increases contributed to Johnnie Walker net sales growth of 4% while stocklevel reduction led to a volume decline of 2%. The brand outperformed the Scotchcategory in Spain with Johnnie Walker Red Label the only whisky brand growingwithin the standard segment. Johnnie Walker Black Label became the number onedeluxe whisky in Spain with share growth of 4.2 percentage points. Local priority brand volume declined 10%, primarily driven by lower volume inCacique down 8%. Growth in premium variants and Cacique 500 and Cacique Origen,which both gained share, combined with price increases, did improve mix and netsales were down 3%. Category brand volume was down 9% primarily because of the decline in low pricedScotch brands. Mix improvement was delivered as Diageo's malt whisky brands grewstrongly, albeit off a small base and net sales declined 3%. Rest of Europe In Continental Europe focus on premiumisation with the relaunch of SmirnoffBlack, reallocation of spending toward key brands and innovation with Baileysflavours drove volume up 4% and net sales up 5%. In France volume increased 6% and net sales increased 2%. In a competitivemarket, promotional activity for priority brands such as Baileys, Smirnoff andJohnnie Walker increased. In Greece total industry spirit sales declined 2%, driven by a decline in theoff trade of 5%. In addition, the port strike during the first half and adecline in Ursus caused volume to decline 4%. Net sales were flat however as aresult of a premiumisation strategy and price increases across all categories.Diageo continues to be the leader in whisky, with Johnnie Walker Red Labelleading both the on and off trade. Net sales performance in Johnnie Walker BlackLabel, Tanqueray and Cardhu were also strong, with increases of 25%, 39% and 14%respectively. In Eastern Europe total volume increased 13% driven by Johnnie Walker Red Label,Johnnie Walker Black Label, J&B and Baileys. Net sales grew 16% as aresult of premiumisation, in particular the strong growth of Johnnie WalkerBlack Label and new routes to market. In Russia volume grew 25% and net sales grew 63%. The move from a distributor toa newly created in-market company in July 2006 drove an increase in net salesper case. Following this move Diageo's regional presence increased to cover 74cities in Russia and marketing spend increased behind Johnnie Walker Red Label,Baileys and Captain Morgan. The newly acquired Smirnov brand has shown apromising start. International Summary: • Strong growth delivered throughout the region• Diageo's Scotch brands, especially Johnnie Walker and Buchanan's, were key drivers of net sales growth• Guinness grew net sales 15% led by strong growth across all major markets in Africa• Baileys grew net sales 21% driven by the launch of Baileys flavours• Global Travel and Middle East grew net sales 8% despite difficult trading conditions Reported Organic Key measures: 2007 2006 movement movement £ million £ million % % Volume 16 16Net sales 1,667 1,456 14 18Marketing spend 208 183 14 17Operating profit 499 445 12 19 Reported performance: Net sales were £1,667 million in the year ended 30 June 2007 up by £211 millionfrom £1,456 million in the prior year. Reported operating profit increased by£54 million to £499 million in the year ended 30 June 2007. Organic performance: Exchange rate impacts reduced net sales by £46 million. There was an organicincrease in net sales of £257 million. Exchange rate impacts reduced operatingprofit by £20 million and transfers of costs between regions reduced operatingprofit by £5 million. There was an organic increase in operating profit of £79million. Brand performance: Reported Organic Reported net Organic volume volume sales movement net sales movement movement movement % % % % Global priority brands 15 15 12 17Local priority brands 19 15 22 24Category brands 18 18 14 16Total 16 16 15 18 Key spirits brands:Smirnoff vodka 11 11 8 17Johnnie Walker 17 16 18 18Baileys 19 19 19 21Buchanan's 41 41 53 40 Guinness 13 13 7 15 Ready to drink 22 22 8 19 Global priority brands achieved strong growth with Guinness net sales up 17% inAfrica and Johnnie Walker and Baileys delivering double-digit net sales growthacross most markets. Smirnoff vodka also performed strongly with Brazil the keydriver. Johnnie Walker continued to demonstrate the success of its global campaign withvolume up 16% and net sales up 18%, benefiting from increased marketinginvestment especially in Latin America and South Africa. Johnnie Walker's GrandPrix team sponsorship continues to be a powerful platform to drive brand equityand deliver Diageo's responsible drinking messages. Guinness delivered strong growth throughout Africa. Growth accelerated in thesecond half as the new Guinness Greatness campaign was rolled out. The brandresponded well to increased investment especially in Nigeria, the biggest marketfor Guinness in International, which accounts for 50% of the volume in Africa. Baileys delivered net sales growth in Latin America and Global Travel and MiddleEast with Baileys flavours helping to drive the increase. Performance of the local priority brands was driven by Buchanan's. MaltaGuinness also performed strongly in Nigeria and Ghana with net sales up 14% and25% respectively, while Tusker grew net sales across East Africa. Old Parr in Latin America and beer brands, especially Senator in East Africa,drove growth of category brands. Ready to drink volume grew 22% and net sales grew 19%. Growth was driven bySmirnoff Storm, which continued to grow share in the segment in South Africa andthe launch of Smirnoff Ice in Nigeria and Ghana. Smirnoff Ice also continued toperform well in Brazil. Africa Volume in Africa grew 17% with net sales up 19% as a result of price increasesin Ghana and Nigeria and mix improvement in South Africa. Guinness, Senator,Johnnie Walker Black Label and Smirnoff ready to drink were the main drivers ofgrowth. Volume in Nigeria was up 10% as a result of strong growth in a relatively stableeconomy. Net sales were up 16% as a price increase was implemented on Guinness.Investment behind the Guinness Greatness campaign drove Guinness net sales up18%. Malta Guinness net sales grew 14%. In East Africa volume was up 27% and net sales up 25%. Senator grew net sales55%, benefiting from the government's zero-rated tax on non-malt beer in Kenyathat allowed it to compete in the huge low value alcohol segment. Guinness netsales were up 32% due to the success of the Guinness Greatness campaign and netsales of Tusker and Pilsner were up 15% and 18% respectively. In South Africa net sales were up 23% on volume growth of 15%. Mix improvementwas delivered as a result of the growth in Smirnoff ready to drink, which grewnet sales 40% and Diageo's Scotch brands, which grew ahead of the category.Johnnie Walker led this growth with net sales up 44%. Price increases wereimplemented across all key brands during the year. Volume in Ghana was up 3% and net sales up 16% as a result of growth in MaltaGuinness and Guinness and price increases taken in the year. In Cameroon trading improved following a substantial decline in volume in theprior year. Volume was up 10% as Guinness performed strongly and gained 1.4percentage points of share. Net sales growth up 2% was held back primarily as aresult of a change to third party distribution. Latin America and Caribbean Strong growth was delivered in Latin America and Caribbean throughout the yearwith volume up 18% and net sales up 22%. Diageo's Scotch brands continued todrive this growth, especially Johnnie Walker and Buchanan's. Smirnoff andBaileys also delivered strongly across the region with net sales up 29% and 32%respectively. In Venezuela Diageo leads the growing Scotch category and made further sharegains, with share up 0.7 percentage points in the super deluxe Scotch segmentand 2.3 percentage points in the standard Scotch segment. In Paraguay, Uruguay and Brazil net sales grew 21%. New advertising campaignsand a broadening of distribution outside of key cities drove growth in JohnnieWalker with net sales up 19%. Price increases were successfully implemented onSmirnoff vodka and net sales grew 31% on volume growth of 18%. Smirnoff vodkais driving growth in the premium vodka segment. Smirnoff ready to drink alsoperformed well as net sales grew 25%. In Mexico volume was up 5% and net sales up 9% as Diageo gained share in theScotch and liqueurs categories. While Diageo gained share across each Scotchsegment, super deluxe Scotch is the fastest growing segment in the category andDiageo gained 2.0 percentage points of share. In liqueurs Baileys volumeincreased 21% following the launch of Baileys flavours in May 2007. Global Travel and Middle East Volume was up 7% and net sales up 8% despite the difficult trading conditionsresulting from conflicts in the Middle East and travel security issuesworldwide. Diageo's Scotch brands were key to this growth. Johnnie Walker BlackLabel performed strongly with net sales up 8% as the premium status of the brandwas enhanced through promotional activities such as the golf gift pack in Asiaaround the Johnnie Walker Classic golf tournament. The Johnnie Walker superdeluxe labels also continued their strong performance. Baileys grew net sales11% mainly driven by the global roll out of Baileys flavours. Asia Pacific Summary: • All markets contributed to top line sales growth• Excellent growth of Johnnie Walker drove overall performance• Sales growth accelerated in the second half• Share gains delivered in key categories across a number of markets Reported Organic Key measures: 2007 2006 movement movement £ million £ million % % Volume 12 12Net sales 840 763 10 13Marketing spend 199 171 16 22Operating profit 196 199 (2) 7 Reported performance: Net sales were £840 million in the year ended 30 June 2007 up by £77 millionfrom £763 million in the prior year. Reported operating profit decreased by £3million to £196 million in the year ended 30 June 2007. Organic performance: Exchange rate impacts reduced net sales by £21 million. There was an organicincrease in net sales of £98 million. Exchange impacts reduced operating profitby £6 million and transfers of costs between regions reduced operating profit by£9 million. There was an organic increase in operating profit of £12 million. Brand performance: Reported Organic Reported net Organic volume volume sales movement net sales movement movement movement % % % % Global priority brands 18 18 14 17Local priority brands 4 4 3 6Category brands 4 4 10 14Total 12 12 10 13 Key spirits brands: Smirnoff vodka 23 23 25 31Johnnie Walker 25 25 19 22Windsor 15 15 12 15 Guinness (5) (5) 5 5 Ready to drink 3 3 1 5 Global priority brands drove overall performance. Johnnie Walker which isDiageo's largest brand in Asia Pacific, representing nearly a third of netsales, drove approximately 50% of the net sales growth in the region. Smirnoff volume grew 23% responding well to increased marketing investment.Price increases were also implemented in a number of markets and as a result netsales grew 31%. Growth was driven by India and Australia as Smirnoff Experienceevents, promotions and in the case of Australia, the 'Clearly Smirnoff' mediacampaign, increased brand awareness. Johnnie Walker growth accelerated over last year as a result of brand buildingmarketing, aligned to Johnnie Walker's Grand Prix team sponsorship, mentoringand PR events. Johnnie Walker Red Label grew net sales over 50% in Thailand andin China net sales of Johnnie Walker Black Label continued to grow strongly. Guinness performance was the result of a strategy to drive value. Net salesincreased 5% as price increases and the repatriation of Guinness from a thirdparty distributor in Korea offset a volume decline of 5%. Local priority brands grew volume 4% and net sales 6% primarily as a result ofgrowth in Windsor in Korea. Significant mix improvement was delivered in category brands with volume up 4%and net sales up 14%. This was primarily driven by the growth of Benmore inThailand offsetting declines in the lower priced Spey Royal and Golden Knight. Ready to drink volume increased 3% and net sales increased 5%, driven bySmirnoff Ice in Japan which was re-launched in fiscal 2006. In Australia, adecline in Bundaberg ready to drink was offset by new brand launches. Marketing spend in Asia Pacific increased 22%. This growth was driven byinvestments made in the high growth potential markets such as India and China,although the rate of growth in marketing spend in China has now moderatedfollowing the significant upweight in fiscal 2005 and 2006. The growth inmarketing was targeted behind priority brands such as Johnnie Walker andSmirnoff vodka and behind the launch of new brands in India. In Australia volume increased 3% and net sales grew 4%. In ready to drink netsales grew 1% as a net sales decline in Bundaberg of 4% was offset by growth inboth Johnnie Walker and Smirnoff ready to drink variants, with net sales up 12%and 5% respectively. Johnnie Walker and Smirnoff net sales growth was driven bynew line extensions and formats. In spirits Diageo outperformed the spiritscategory. Smirnoff vodka grew volume 15% as a result of media investment behindthe 'Clearly Smirnoff' campaign and price increases led to net sales growth of22%. Johnnie Walker's cricket sponsorship and a new advertising campaign led tovolume up 8%. Net sales were up 11% as a price increase was implemented onJohnnie Walker Red Label. In Korea volume increased 8% and net sales were up 13%. Windsor continued toperform strongly, driving overall performance as net sales grew 15%. Diageo hasoutperformed the growing whisky category and therefore extended its leadershipposition with Windsor now the number one Scotch brand in Korea. Positive brandmix was delivered as the growth of Windsor more than offset the decline ofDimple and this, combined with price increases and the repatriation of Guinnessfrom a third party distributor, drove net sales growth ahead of volume growth.During the year Diageo Korea and several employees were subject toinvestigations regarding various regulatory and control matters, some of whichare continuing. Since the year end, Diageo Korea's import licence has beencancelled by the National Tax Service after one of these investigations found anumber of Diageo salesmen were involved in sales to unlicensed wholesalers.Therefore, from the end of July 2007 Diageo has operated through a third partydistributor. In Japan volume declined 1%, while net sales grew 8%. Volume performancecontinued to be impacted by the decline in the Scotch category while the growthof Smirnoff Ice following the re-launch drove mix improvement. Although sharehas been lost in the standard and deluxe segments, Diageo has focused investmenton the super deluxe brands and delivered growth significantly ahead of thesegment. In Thailand while the whisky category declined, Diageo continued to outperform.Volume was up 4% and net sales were significantly ahead, up 21%, driven byDiageo's strategy to drive mix improvement and a reduction in excise duties oncertain brands. Diageo leads across premium, deluxe and super deluxe Scotchsegments and has increased its value share of the overall category by 5.4percentage points. Johnnie Walker Black Label gained further share in the deluxesegment whilst Johnnie Walker Red Label drove the growth in the premium whiskysegment, with net sales up 54%. In the standard segment, mix improvement hasbeen achieved through focus on Benmore in preference to the lower priced SpeyRoyal. Volume of Spey Royal therefore declined as did volume of Golden Knight inthe economy segment. In China volume grew 41% and net sales grew 61% as Johnnie Walker Black Labelcontinued to take share. In January 2007 Diageo made its first investment in theChinese white spirits category through a minority stake in Sichuan ChengduQuanxing Group Co. Ltd. In Taiwan while the overall Scotch category is in decline, the deluxe segmentsare in growth. Diageo's focus on the Johnnie Walker deluxe labels has resultedin volume up 1% and net sales up 4%. In India Johnnie Walker is the leading Scotch and continued to lead the growthof the category with volume up 30%, led by Johnnie Walker Black Label, up 41%.In the year Diageo took steps to widen its participation both within and acrosscategories, launching a number of new brands. Haig was introduced to compete inthe premium whisky segment and the joint venture with Radico Khaitan launchedits first new whisky brand, Masterstroke, into the Indian made foreign liquorsegment. In the vodka category Smirnoff continued to gain share with volume up37%, whilst Shark Tooth vodka was introduced into the prestige vodka segment andperformed well on launch. The introduction of these new brands resulted in adilution of mix, however net sales still grew 36% on volume growth of 44%. Corporate revenue and costs Net sales were £75 million in the year ended 30 June 2007, down by £1 millionfrom £76 million in the prior year. Net operating costs were £109 million, down from £166 million in the prior year.£40 million of this decrease relates to the exceptional gain on the sale of thePark Royal land in the United Kingdom. Excluding this exceptional gain, netoperating costs decreased £17 million as a result of transfer of costs to theregions and there was an underlying reduction in net operating costs of £4million. FINANCIAL REVIEW Condensed consolidated income statement Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Sales 9,917 9,704Excise duties (2,436) (2,444) Net sales 7,481 7,260Operating costs (5,322) (5,216) Operating profit 2,159 2,044Disposal of investments and businesses (1) 157Net finance charges (212) (186)Associates' profits 149 131 Profit before taxation 2,095 2,146Taxation (678) (181) Profit from continuing operations 1,417 1,965Discontinued operations 139 - Profit for the year 1,556 1,965 Attributable to:Equity shareholders 1,489 1,908Minority interests 67 57 1,556 1,965 Sales and net sales On a reported basis, sales increased by £213 million from £9,704 million in theyear ended 30 June 2006 to £9,917 million in the year ended 30 June 2007. On areported basis, net sales increased by £221 million from £7,260 million in theyear ended 30 June 2006 to £7,481 million in the year ended 30 June 2007.Exchange rate movements decreased reported sales by £358 million and reportednet sales by £280 million, principally arising from the weakening of the USdollar. Acquisitions and disposals resulted in a net decrease in reported salesand reported net sales of £24 million and £10 million, respectively for theyear. Operating costs On a reported basis operating costs increased by £106 million in the year ended30 June 2007 due to an increase in marketing costs of £35 million, from £1,127million to £1,162 million, an increase in cost of sales of £82 million, from£2,921 million to £3,003 million, and a decrease in other operating expenses of£11 million, from £1,168 million to £1,157 million. Offset within otheroperating expenses in the year ended 30 June 2007 are profits on disposal ofproperty, plant and equipment, including an exceptional gain of £40 million onthe disposal of land at Park Royal in the United Kingdom. There were noexceptional items in operating costs in the year ended 30 June 2006. Excludingexceptional items, operating costs increased by £146 million from £5,216 millionin the year ended 30 June 2006 to £5,362 million in the year ended 30 June 2007. Post employment plans Post employment costs for the year ended 30 June 2007 of £56 million (2006 - £87million) included amounts charged to operating profit of £104 million (2006 -£106 million) partly offset by finance income of £48 million (2006 - £19million). At 30 June 2007, Diageo's deficit before taxation for all postemployment plans was £419 million (2006 - £801 million). Operating profit Reported operating profit for the year ended 30 June 2007 increased by £115million to £2,159 million from £2,044 million in the prior year. Exceptionaloperating gains of £40 million were generated in the year ended 30 June 2007.There were no comparable exceptional operating gains or costs in the year ended30 June 2006. Excluding the exceptional gain relating to Park Royal, operatingprofit for the year increased by £75 million from £2,044 million in the yearended 30 June 2006 to £2,119 million in the current year. Exchange rate movements reduced operating profit for the year ended 30 June 2007by £91 million. Disposal of investments and businesses In the year ended 30 June 2007 a loss before taxation of £1 million arose fromthe disposal of businesses. In the year ended 30 June 2006 gains before taxationon the disposal of businesses were £157 million, representing a gain of £151million on the sale of the group's remaining 25 million shares of common stockof General Mills and a gain on the sale of other businesses of £6 million. Net finance charges Net finance charges increased by £26 million from £186 million in the year ended30 June 2006 to £212 million in the year ended 30 June 2007. The net interest charge increased by £58 million from £193 million in the prioryear to £251 million in the year ended 30 June 2007. This increase principallyresulted from the increase in net borrowings in the year and the increase in USdollar and euro interest rates. Exchange rate movements reduced net interest by£11 million. Other net finance income of £39 million (2006 - £7 million) included income of£48 million (2006 - £19 million) in respect of the group's post employmentplans. This movement principally reflects the increase in the value of theassets held by the post employment plans between 1 July 2005 and 30 June 2006.Other finance income for the year ended 30 June 2007 of £7 million (2006 -charge of £2 million) includes income of £6 million (2006 - charge of £2million) in respect of exchange rate translation differences on inter-companyfunding arrangements that do not meet the accounting criteria for recognition inequity. Other finance charges of £16 million (2006 - £15 million) in respect ofthe unwinding of the discount on discounted provisions were recognised duringthe year. Other finance income in the year ended 30 June 2006 also included £5million dividend income in respect of the group's interest in General Mills. Associates The group's share of profits of associates after interest and tax was £149million for the year ended 30 June 2007 compared to £131 million in the prioryear. Diageo's 34% equity interest in Moet Hennessy contributed £136 million toshare of profits of associates after interest and tax (2006 - £122 million). Profit before taxation Profit before taxation decreased by £51 million from £2,146 million to £2,095million in the year ended 30 June 2007, primarily as a result of increasedoperating profit in the year which was more than offset by the £151 million gainon disposal of General Mills shares in the year ended 30 June 2006. Taxation The reported effective tax rate for the year ended 30 June 2007 is 32.4%compared with 8.4% for the year ended 30 June 2006. The underlying effectivetax rate for continuing operations for the year ended 30 June 2007 is 25.1%,compared with 24.9% for the year ended 30 June 2006. Factors that increased thereported effective tax rate for the year ended 30 June 2007 were a provision forthe settlement of tax liabilities relating to the Guinness/GrandMet merger,lower carrying value of deferred tax assets primarily following a reduction intax rates and the tax impact of an intragroup reorganisation of certain brandbusinesses. The effective tax rate in the prior year was reduced following theagreement of certain brand values with tax fiscal authorities that resulted inrecognising an increase in the group's deferred tax assets of £313 million. Theunderlying effective tax rate is expected to be 26% for the year ending 30 June2008. Discontinued operations In the year ended 30 June 2007 profit after tax in respect of the disposal ofbusinesses was £139 million. This profit represents a tax credit of £82 millionin respect of the recognition of capital losses that arose on the disposal ofPillsbury and Burger King and a tax credit of £57 million following resolutionwith the tax authorities of various audit issues including prior year disposals.There was no profit or loss from discontinued operations in the year ended 30June 2006. Exchange rates The estimated effect of exchange rate movements on the results for the yearended 30 June 2007 as compared with the results for the year ended 30 June 2006was as follows: Gains/(losses) £ millionOperating profit Translation impact (73) Transaction impact (18)Associates Translation impact (2) Transaction impact - Interest and other finance charges Translation impact 11 Net exchange movements on short term inter-company loans 8 Net exchange movements on net debt not meeting hedge accounting criteria 1Total exchange effect on profit before taxation (73) Year ended 30 June Year ended 30 June 2007 2006Exchange rates Translation US$/£ rate 1.93 1.78 Translation •/£ rate 1.48 1.46 Transaction US$/£ rate 1.87 1.81 Transaction •/£ rate 1.45 1.45 The weakening of the US dollar had adverse translation and transaction effectson operating profit and a favourable impact on US dollar denominated interestcharges. Outlook for the impact of exchange rate movements For the year ending 30 June 2008 the impact of exchange rate movements based oncurrent exchange rates (excluding the exchange impact of retranslating tradingand short term loan inter-company balances under IAS 21) is projected to have anadverse impact of £75 million on operating profit and a positive impact ofapproximately £5 million on interest. Dividend The directors recommend a final dividend of 20.15 pence per share, an increaseof 5.2% on last year's final dividend. The full dividend will therefore be 32.7pence per share, an increase of 5.1% from the year ended 30 June 2006. Subjectto approval by shareholders, the final dividend will be paid on 22 October 2007to shareholders on the register on 14 September 2007. Payment to US ADR holderswill be made on 26 October 2007. A dividend reinvestment plan is available inrespect of the final dividend and the plan notice date is 1 October 2007. Cash flow Extract from the consolidated cash flow statement Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Cash generated from operations 2,272 2,199 Interest paid (net) (237) (171)Dividends paid to equity minority interests (41) (40)Taxation (368) (393)Net (purchase)/sale of other investments (6) 7Payment into escrow in respect of UK pension fund (50) -Net capital expenditure (205) (241)Free cash flow 1,365 1,361 Free cash flow increased by £4 million to £1,365 million in the year ended 30June 2007. Cash generated from operations increased from £2,199 million to£2,272 million in the year ended 30 June 2007. This £73 million increase isprimarily a result of higher operating profit of £115 million. This increase wassupplemented by reduced net capital expenditure of £36 million and reducedtaxation payments of £25 million, but offset by an increase in net interestpayments of £66 million, due to increased net borrowings during the year andhigher interest rates and a payment of £50 million into an escrow account ascontingency funding in the event that the deficit in the UK pension fund is notcovered by future investment returns. In the year ended 30 June 2007, Diageo invested £70 million in businessacquisitions (2006 - £209 million) and purchased 141 million shares as part ofthe share buyback programme (2006 - 164 million shares) at a cost including feesof £1,405 million (2006 - £1,407 million). Net payments to acquire shares foremployee share schemes totalled £25 million (2006 - £32 million). Equitydividends of £858 million were paid during the year (2006 - £864 million). Diageo continues to target a range of ratios which are currently broadlyconsistent with an A band credit rating. In 2008, assuming similar levels offree cash flow and acquisition activity to those that arose in 2007, Diageowould expect, under this capital structure, to have the financial capacity tofund a share buyback programme of approximately £1 billion. Balance sheet At 30 June 2007, total equity was £4,170 million compared with £4,681 million at30 June 2006. This decrease was mainly due to the shares repurchased forcancellation or holding as treasury shares of £1,405 million and the dividendpaid out of shareholders' equity of £858 million partly offset by the profit forthe period of £1,556 million. Net borrowings were £4,845 million at 30 June 2007, an increase of £763 millionfrom net borrowings at 30 June 2006 of £4,082 million. The principal componentsof this increase were payments of £1,405 million to repurchase shares and a £858million equity dividend offset by free cash inflow of £1,365 million andexchange movements of £211 million. Economic profit Economic profit increased by £71 million from £564 million in the year ended 30June 2006 to £635 million in the year ended 30 June 2007. See page 39 for thecalculation and definition of economic profit. DIAGEO CONSOLIDATED INCOME STATEMENT Year ended 30 June 2007 Year ended 30 June 2006 Notes £ million £ million Sales 2 9,917 9,704Excise duties (2,436) (2,444)Net sales 7,481 7,260Cost of sales (3,003) (2,921)Gross profit 4,478 4,339Marketing expenses (1,162) (1,127)Other operating expenses (1,157) (1,168)Operating profit 2 2,159 2,044Sale of General Mills and other businesses 3 (1) 157Net interest payable 4 (251) (193)Net other finance income 4 39 7Share of associates' profits after tax 149 131Profit before taxation 2,095 2,146Taxation 5 (678) (181)Profit from continuing operations 1,417 1,965Discontinued operations 6 139 -Profit for the year 1,556 1,965 Attributable to:Equity shareholders of the parent company 1,489 1,908Minority interests 67 57 1,556 1,965 Pence per shareBasic earnings 55.4p 67.2pDiluted earnings 55.0p 66.9pAverage shares 2,688m 2,841m DIAGEO CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Exchange differences on translation of foreign operations excluding borrowings (269) (76)Exchange differences on borrowings and derivative net investment hedges 199 52Effective portion of changes in fair value of cash flow hedges - Gains taken to equity 28 39 - Transferred to income statement 35 4Fair value movement on available for sale securities - (148)Actuarial gains on post employment plans 328 459Tax on items taken directly to equity (99) (97)Net income recognised directly in equity 222 233 Profit for the year 1,556 1,965Total recognised income and expense for the year 1,778 2,198 Attributable to:- equity shareholders of the parent company 1,719 2,146- minority interests 59 52Total recognised income and expense for the year 1,778 2,198 DIAGEO CONSOLIDATED BALANCE SHEET 30 June 2007 30 June 2006 £ million £ million £ million £ million Non-current assetsIntangible assets 4,383 4,534Property, plant and equipment 1,932 1,952Biological assets 12 13Investments in associates 1,436 1,341Other investments 128 69Other receivables 17 12Other financial assets 52 42Deferred tax assets 771 1,113Post employment benefit assets 38 14 8,769 9,090Current assetsInventories (note 7) 2,465 2,386Trade and other receivables 1,759 1,681Other financial assets 78 71Cash and cash equivalents (note 8) 885 699 5,187 4,837Total assets 13,956 13,927Current liabilitiesBorrowings and bank overdrafts (note 8) (1,535) (759)Other financial liabilities (43) (36)Trade and other payables (1,888) (1,803)Corporate tax payable (673) (681)Provisions (60) (56) (4,199) (3,335)Non-current liabilitiesBorrowings (note 8) (4,132) (4,001)Other financial liabilities (104) (78)Other payables (38) (37)Provisions (274) (306)Deferred tax liabilities (582) (674)Post employment benefit liabilities (457) (815) (5,587) (5,911) Total liabilities (9,786) (9,246)Net assets 4,170 4,681 EquityCalled up share capital 848 883Share premium 1,341 1,340Other reserves 3,186 3,168Retained deficit (1,403) (889)Equity attributable to equity shareholders of the parent company 3,972 4,502Minority interests 198 179Total equity (note 10) 4,170 4,681 DIAGEO CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 30 June 2007 30 June 2006 £ million £ million £ million £ millionCash flows from operating activities Profit for the year 1,556 1,965 Discontinued operations (139) - Taxation 678 181 Share of associates' profits after taxation (149) (131) Net interest and other net finance income 212 186 Losses/(gains) on disposal of businesses 1 (157) Depreciation and amortisation 210 214 Movements in working capital (180) (192) Dividend income and other items 83 133 Cash generated from operations 2,272 2,199 Interest received 42 64 Interest paid (279) (235) Dividends paid to minority interests (41) (40) Taxation paid (368) (393) Net cash from operating activities 1,626 1,595 Cash flows from investing activities Disposal of property, plant and equipment 69 16 Purchase of property, plant and equipment (274) (257) Net (purchase)/disposal of other investments (6) 7 Payment into escrow in respect of UK Pension fund (50) - Disposal of businesses 4 772 Purchase of businesses (70) (209) Net cash (outflow)/inflow from investing activities (327) 329 Cash flows from financing activities Proceeds from issue of share capital 1 3 Net purchase of own shares for share schemes (25) (32) Own shares repurchased (1,405) (1,407) Net increase in loans 1,226 309 Equity dividends paid (858) (864) Net cash used in financing activities (1,061) (1,991) Net increase/(decrease) in net cash and cash equivalents 238 (67) Exchange differences (50) (11) Net cash and cash equivalents at beginning of the year 651 729Net cash and cash equivalents at end of the year 839 651 Net cash and cash equivalents consist of: Cash and cash equivalents 885 699 Bank overdrafts (46) (48) 839 651 NOTES 1. Basis of preparation The consolidated financial statements are prepared in accordance withInternational Financial Reporting Standards as endorsed and adopted for use inthe European Union (IFRS). This consolidated financial information has beenprepared on the basis of accounting policies consistent with those applied inthe consolidated financial statements for the year ended 30 June 2006. IFRS issubject to ongoing review and endorsement by the EU or possible amendment byinterpretative guidance from the International Accounting Standards Board(IASB). The following interpretations, issued by the International Financial ReportingInterpretations Committee (IFRIC), are effective for the first time in thecurrent financial year and have been adopted by the group with no significantimpact on its consolidated results or financial position: IFRIC 4 - Determining whether an arrangement contains a lease (effectivefor annual periods beginning on or after 1 January 2006). IFRIC 5 - Rights to interests arising from decommissioning, restorationand environmental rehabilitation funds (effective for annual periods beginningon or after 1 January 2006). IFRIC 6 - Liabilities arising from participating in a specific market:waste electrical and electronic equipment (effective for annual periodsbeginning on or after 1 December 2005). IFRIC 7 - Applying the restatement approach under IAS 29 - Financialreporting in hyperinflationary economies (effective for annual periods beginningon or after 1 March 2006). IFRIC 8 - Scope of IFRS 2 - Accounting for share based payments(effective for annual periods beginning on or after 1 May 2006). IFRIC 9 - Reassessment of embedded derivatives (effective for annualperiods beginning on or after 1 June 2006). The following standards and interpretations, issued by the IASB or IFRIC, havenot yet been adopted by the group: Amendment to IAS 1 - Presentation of financial statements: capital disclosures(effective for annual periods beginning on or after 1 January 2007) Amendment to IAS 23 - Borrowing costs (effective for annual periods beginning onor after 1 January 2009) IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009) IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007) IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008) IFRIC 13 - Customer loyalty programmes (effective for annual periods beginningon or after 1 July 2008) IFRIC 14 - IAS 19 - The limit on a defined benefit asset, minimum fundingrequirements and their interaction (effective for annual periods beginning onor after 1 January 2008) The amendment to IAS 1 requires additional disclosures in the Annual Report onthe objectives, policies and processes for managing capital. Appropriateadditional disclosures will be included in the 2008 Annual Report. The amendment to IAS 23 generally eliminates the option to expense borrowingcosts attributable to the acquisition, construction or production of aqualifying asset as incurred and instead requires the capitalisation of suchborrowing costs as part of the cost of specific assets. The group is currentlyassessing the impact of the amendment on the results and net assets of thegroup. IFRS 8 contains requirements for the disclosure of information about an entity'soperating segments and also about the entity's products and services, thegeographical areas in which it operates, and its major customers. The standardis concerned only with disclosure and replaces IAS 14 - Segment reporting. Thegroup is currently assessing the impact this standard would have on thepresentation of its consolidated results. The group does not currently believe the adoption of the interpretations wouldhave a material impact on the consolidated results or financial position of thegroup. 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 2006, which were prepared under IFRS, have been filed with the registrar ofcompanies. KPMG Audit Plc has reported on those accounts and on the statutoryaccounts for the year ended 30 June 2007. 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, Diageo Asia Pacific and Corporate,reflecting the group's management and internal reporting structure. The DiageoAsia Pacific business was established in January 2007. The results for the yearended 30 June 2006 have been revised for the new business structure. Business analysis: Year ended Year ended 30 June 2007 30 June 2006 Operating profit/ Operating Sales (loss) Sales profit/(loss) £ million £ million £ million £ million North America 2,915 850 2,968 829Europe 3,765 723 3,834 737International 2,031 499 1,784 445Asia Pacific 1,131 196 1,042 199 9,842 2,268 9,628 2,210Corporate 75 (109) 76 (166) 9,917 2,159 9,704 2,044 Net corporate operating costs and trading losses decreased from £166 million to£109 million in the year ended 30 June 2007. Corporate revenues and costs arein respect of central costs including finance, human resources and legal as wellas certain information system, service centre, facilities and employee coststhat are not directly allocated to the geographical operating units. They alsoinclude the revenues and costs related to rents receivable in respect ofproperties not used by Diageo in the manufacture, sale or distribution ofpremium drinks, exchange movements on short term inter-company trading balancesand the results of Gleneagles Hotel. Geographical analysis of sales and operating profit by destination: Year ended Year ended 30 June 2007 30 June 2006 Sales Operating profit Sales Operating profit £ million £ million £ million £ million North America 2,958 873 2,999 842Europe 3,912 636 3,977 597Asia Pacific 1,179 215 1,085 218Latin America 813 214 671 163Rest of World 1,055 221 972 224 9,917 2,159 9,704 2,044 Sales and operating profit by geographical destination have been statedaccording to the location of the third party customers. Certain businesses reported for internal management purposes within DiageoInternational have been reported within the appropriate market in thegeographical analysis above. Corporate sales and operating loss (principallycentral costs) are incurred in Europe. 30 June 30 June 2007 2006Analysis of total assets: £ million £ million North America 842 872Europe 1,063 1,190International 808 789Asia Pacific 406 350Moet Hennessy 1,348 1,303 Corporate and other 9,489 9,423 13,956 13,927 Corporate and other total assets consist primarily of brands that arecapitalised in the balance sheet, property, plant and equipment, maturing whiskyinventories and other assets that are not readily allocable to the group'soperating segments. Weighted average exchange rates used in the translation of income statementswere US dollar - £1 = $1.93 (2006 - £1 = $1.78) and euro - £1 = €1.48 (2006 -£1 = €1.46). Exchange rates used to translate assets and liabilities at thebalance sheet date were US dollar - £1 = $2.01 (30 June 2006 - £1 = $1.85) andeuro - £1 = €1.48 (30 June 2006 - £1 = €1.45). The group uses exchange ratetransaction hedges to mitigate the effect of exchange rate movements. The festive holiday season provides the peak period for sales. Approximately 30%of annual sales volume arises in the last three months of each calendar year. 3. Exceptional items Exceptional items are those that in management's judgement, need to be disclosedby virtue of their size or incidence in order for the user to obtain a properunderstanding of the financial information. In the year ended 30 June 2007, operating profit included an exceptional gain of£40 million in respect of the sale of the site of the former brewery at ParkRoyal in the United Kingdom. An exceptional loss on business disposals of £1million also arose in the year to 30 June 2007. In the year ended 30 June 2006,the gain on sale of shares in General Mills of £151 million and gains of £6million related to business disposals were identified as pre-tax exceptionalitems. 4. Net interest and other finance charges Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Interest payable (332) (229)Interest receivable 78 27Market value movements on interest rate instruments 3 9Net interest payable (251) (193) Net finance income in respect of post employment plans 48 19Investment income - dividends receivable from General Mills - 5Other unwinding of discounts (16) (15) 32 9Net exchange movements on certain financial instruments 7 (2) Net other finance income 39 7 5. Taxation The £678 million taxation charge for the year ended 30 June 2007 comprises a UKtax charge of £87 million and a foreign tax charge of £591 million. In the yearended 30 June 2006, the taxation charge of £181 million included an exceptionaltax credit of £315 million that arose mainly as a consequence of agreement withfiscal authorities of the carrying value of certain brands, which resulted in anincrease to the group's deferred tax assets of £313 million. 6. Discontinued operations In the year ended 30 June 2007, a tax benefit of £82 million arose from therecognition of capital losses arising on the prior year disposal of thePillsbury and Burger King businesses. In addition, a tax credit of £57 millionarose following resolution with tax authorities of various audit issuesincluding prior year disposals. 7. Inventories 30 June 2007 30 June 2006 £ million £ million Raw materials and consumables 239 236Work in progress 14 17Maturing inventories 1,745 1,644Finished goods and goods for resale 467 489 2,465 2,386 8. Net borrowings 30 June 2007 30 June 2006 £ million £ million Debt due within one year and overdrafts (1,535) (759)Debt due after one year (4,132) (4,001)Fair value of interest rate hedging instruments (20) (44)Fair value of foreign currency swaps and forwards (29) (17)Obligations under finance leases (14) (9) (5,730) (4,830)Less: Cash and cash equivalents 885 699Other liquid resources - 49Net borrowings (4,845) (4,082) In the year ended 30 June 2007, the group issued a US $600 million global bondrepayable in January 2012 with a coupon of 5.125%, a US $600 million global bondrepayable in September 2016 with a coupon of 5.5%, a US $600 million global bondrepayable in September 2036 with a coupon of 5.875% and a €750 million Eurofloating rate bond with a spread of 24 bps to 3 month EURIBOR, repayable in May2012. A US $500 million bond, a €300 million medium term note, a US $200million medium term note and a US $5 million retail note matured and were repaidin the year. 9. Reconciliation of movement in net borrowings Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Net borrowings at beginning of the year (4,082) (3,706)Adoption of IAS 39 on 1 July 2005 3 Restated net borrowings at beginning of the year (3,703) Increase/(decrease) in net cash and cash equivalents before Exchange 238 (67)Cash flow from change in loans (1,226) (309)Change in net borrowings from cash flows (988) (376)Exchange differences 211 15Other non-cash items 14 (18) Net borrowings at end of the year (4,845) (4,082) 10. Movements in total equity Year ended Year ended 30 June 2007 30 June 2006 £ million £ million Total equity at beginning of the year 4,681 4,626Adoption of IAS 39 on 1 July 2005 164 Restated total equity at beginning of the year 4,790 Total recognised income and expense for the year 1,778 2,198Dividends paid to equity shareholders (858) (864)Dividends paid to minority interests (41) (40)New share capital issued 1 3Share trust arrangements 77 16Tax on share trust arrangements 12 6Purchase of own shares for cancellation or holding as treasury Shares (1,405) (1,407)Purchase of own shares for holding as treasury shares for share scheme hedging (76) (21)Acquisition of minority interest 1 -Net movement in total equity (511) (109) Total equity at end of the year 4,170 4,681 Total equity at the end of the year includes gains of £42 million in respect ofcumulative translation differences (2006 - gains of £107 million) and £2,333million (2006 - £2,070 million) in respect of own shares held as treasuryshares. 11. Dividends Year ended Year ended 30 June 2007 30 June 2006 £ million £ millionAmounts recognised as distributions to equity holders in the yearFinal dividend paid for the year ended 30 June 2006 of 19.15p (2005 - 18.2p) per share 524 529Interim dividend paid for the six month period ended 31 December 2006 of 12.55p (2005 - 11.95p) per share 334 335 858 864A final dividend of 20.15 pence per share for the year ended 30 June 2007 (2006- 19.15 pence per share) was recommended by the board on 29 August 2007. Thisdividend is recommended for approval by shareholders at the Annual GeneralMeeting to be held on 16 October 2007 and as the approval will be after thebalance sheet date it has not been included as a liability. 12. Contingent liabilities and legal proceedings (i) Guarantees In connection with the disposal of Pillsbury, Diageo hasguaranteed the debt of a third party to the amount of $200 million (£100million) until November 2009. Including this guarantee, but net of the amountprovided in the consolidated financial information, at 30 June 2007 the grouphas given performance guarantees and indemnities to third parties of £106million. There has been no material change since 30 June 2007 in the group's performanceguarantees 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 is unable toquantify meaningfully the possible loss or range of loss to which the lawsuitmay give rise. Diageo intends to defend itself 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 alcohol beverages during the period from 1982to 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 andother legal theories. Diageo is unable to quantify meaningfully the possibleloss or range of loss to which these actions may give rise. Diageo intends todefend itself vigorously against these claims. (iv) Turkish customs litigation In common with other beverage alcohol importers,litigation is ongoing against Diageo's Turkish subsidiary in the Turkish CivilCourts in connection with the methodology used by the Turkish customsauthorities in assessing the importation value of and duty payable on thebeverage alcohol products sold in the domestic channel in Turkey. The matterinvolves multiple cases against Diageo's Turkish subsidiary at various stages oflitigation including a group of cases under correction appeal following anadverse finding at the Turkish Supreme Court. Diageo is unable to quantifymeaningfully the possible loss or range of loss to which these cases may giverise. Diageo's Turkish subsidiary intends to defend its position vigorously. (v) Other The group has extensive international operations and is defendant in anumber 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. ADDITIONAL INFORMATION FOR SHAREHOLDERS EXPLANATORY NOTES Definitions Unless otherwise stated, percentage movements given throughout this announcementfor volume, sales, net sales, marketing spend and operating profit are organicmovements (at level exchange rates and after adjusting for the effect ofexceptional items, acquisitions and disposals) for continuing operations.Comparisons are with the equivalent period in the last financial year. For anexplanation of organic movements please refer to 'Reconciliation to GAAPmeasures' 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 after deducting 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 progressive adult 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 Caipiroska, Smirnoff Signatures, Smirnoff Source,Smirnoff Fire and Smirnoff Raw Tea. References to Smirnoff Black Ice includeSmirnoff Ice Triple 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. Unless otherwise stated, share refers tovolume share. Share of voice is the media spend on a particular brand whencompared to all brands in its segment. The share and share of voice datacontained in this announcement is taken from independent industry sources in themarkets 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 41 - '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. Certain brands formerly treated as local priority brands have now beenclassified as category brands and vice versa to reflect the change incontribution of these brands in individual countries. All comparative figureshave been restated. Changes to local priority brand classification These changes reflect the classification of brands to a regional basis ratherthan a single market basis. Previous classification New classificationEuropeArchers Great Britain Archers EuropeBell's Great Britain Bell's EuropeCacique Spain Cacique EuropeCardhu Spain Cardhu EuropeGordon's gin Great Britain Gordon's gin EuropeBudweiser Ireland Budweiser EuropeCarlsberg Ireland Carlsberg EuropeHarp Ireland Harp EuropeSmithwicks Ireland Smithwicks EuropeInternationalBell's South Africa Bell's InternationalBuchanan's Venezuela Buchanan's InternationalMalta Africa Malta InternationalPilsner Kenya Pilsner InternationalTusker Kenya Tusker InternationalRed Stripe Jamaica Red Stripe InternationalAsia PacificOld Parr Japan Old Parr Asia PacificDimple/Pinch Korea Dimple/Pinch Asia PacificBundaberg rum Australia Bundaberg rum Asia PacificWindsor Premier Korea Windsor Premier Asia Pacific In North America the following changes were made to reflect the priority brandfocus of the region. Moved from local priority brands to category brands: GoldschlagerGordon's ginMyersRomana SambucaRumple Minze Moved from category brands to local priority brands:Chalone and other US wines The following brands remain local priority brands in the North America region: Buchanan'sCrown RoyalSeagrams 7 CrownSeagrams VOBeaulieu VineyardSterling Vineyard Reconciliation to GAAP measures (i) Organic movement Organic movement in volume, sales, net sales, operating profit, operating marginand basic earnings per share are measures not specifically used in theconsolidated financial statements themselves (non-GAAP measures). Theperformance of the group is discussed using these 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 exchange rate movements and enables an understanding of theunderlying performance of the market that is most closely influenced by theactions of that market's management. The risk from exchange rate movement ismanaged centrally and is not a factor over which local managers have anycontrol. Acquisitions and disposals and exceptional items also impact the reportedperformance and therefore the reported movement in any period in which theyarise. Management adjusts for the impact of such transactions in assessing theperformance of the underlying business. The underlying performance on a constant currency basis and excluding the impactof acquisitions and disposals and exceptional items is referred to as 'organic'performance. Organic movement calculations enable the reader to focus on theperformance of the business which is common to both periods. Organic movement in volume, sales, net sales, operating profit and operatingmargin Diageo's strategic planning and budgeting process is based on organic movementin volume, sales, net sales, operating profit and operating margin, and thesemeasures closely reflect the way in which operating targets are defined andperformance is monitored by the group's management. Therefore organic movementmeasures most closely reflect the way in which 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, disposals and exceptional items. 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 replacements for, the comparableGAAP measures. The organic movement calculations for volume, sales, net sales and operatingprofit for the year ended 30 June 2007 were as follows: 1. Volume (1)(a)(b) Acquisitions and disposals Organic movement 2006 units million units million 2007 Organic units million units million movement % North America 48.8 - 1.4 50.2 3 Europe 41.4 0.1 (0.6) 40.9 (2) International 32.1 0.2 5.0 37.3 16 Asia Pacific 11.5 - 1.4 12.9 12Total 133.8 0.3 7.2 141.3 5 2. Sales (a)(b) Acquisitions 2006 and Organic 2007 Organic Reported Exchange(3) disposals(4) movement Reported movement £ million £ million £ million £ million £ million % North America 2,968 (225) 2 170 2,915 6 Europe 3,834 (32) (26) (11) 3,765 - International 1,784 (73) - 320 2,031 19 Asia Pacific 1,042 (28) - 117 1,131 12 Corporate 76 - - (1) 75 (1)Total sales 9,704 (358) (24) 595 9,917 6 3. Net sales (a)(b) Acquisitions 2006 and disposals Organic 2007 Organic Reported Exchange(3) (4) movement Reported movement £ million £ million £ million £ million £ million % North America 2,510 (190) 1 151 2,472 7 Europe 2,455 (23) (11) 6 2,427 - International 1,456 (46) - 257 1,667 18 Asia Pacific 763 (21) - 98 840 13 Corporate 76 - - (1) 75 (1)Total net sales 7,260 (280) (10) 511 7,481 7Excise duties 2,444 2,436 Total sales 9,704 9,917 4. Operating profit (a)(b) Transfers,(2) 2006 Exceptional acquisitions and Organic 2007 Organic Reported items(5) Exchange(3) disposals(4) movement Reported movement £ million £ million £ million £ million £ million £ million % North America 829 - (69) (3) 93 850 12 Europe 737 - (10) (3) (1) 723 - International 445 - (20) (5) 79 499 19 Asia Pacific 199 - (6) (9) 12 196 7 Corporate (166) 40 14 17 (14) (109) (9)Total 2,044 40 (91) (3) 169 2,159 9 Notes - Information relating to the current period (1) Differences between the reported volume movements and organic volumemovements are due to acquisitions and disposals. (2) Transfers represent the movement between operating units of certainactivities, the most significant of which were the reallocation of certainsupply and other overheads from corporate to the regions and the reallocation ofcertain prior year transaction exchange differences into corporate. Transfersreduced restated prior year operating profit for North America, Internationaland Asia Pacific profits by £3 million, £5 million and £9 million, respectivelyand reduced costs in Corporate by £17 million. (3) The exchange adjustments for sales, net sales and operating profit areprincipally in respect of the US dollar. (4) The only acquisition in the year ended 30 June 2007 that affected sales,net sales and operating profit was the acquisition of the Smirnov brand inRussia which was reported in Europe. The other acquisition impacting thecalculation of organic growth in the period was the acquisition of The 'OldBushmills' Distillery Company Limited in August 2005. Disposals affecting theperiod were the disposal of United Beverages Limited and Three Barrels (bothEurope) and contributed volume, sales, net sales and operating profit of 213kequivalent units, £35 million, £17 million and £2 million, respectively, in theyear ended 30 June 2006. (5) Exceptional items in the year to 30 June 2007 represents a gain on thedisposal of land at the Park Royal site. There were no operating exceptionalitems in the year ended 30 June 2006. Notes - Information relating to the organic movement calculations a) The organic movement percentage is the amount in the columnheaded 'Organic movement' in the tables above expressed as a percentage of theaggregate of the columns headed 2006 Reported, the column headed Exchange andthe amounts in respect of transfers (see note (2) above) and disposals (see note(4) above) included in the column headed Transfers, acquisitions and disposals.The inclusion of the column headed Exchange in the organic movement calculationreflects the adjustment to exclude the effect of exchange rate movements byrecalculating the prior period results as if they had been generated at thecurrent period's exchange rates. Organic movement percentages are calculated asthe organic movement amount in £ million, expressed as the percentage of theprior period results at current year exchange rates and after adjusting fortransfers, disposals and exceptional items. The basis of calculation means thatthe results 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 the overheads included in disposals wereonly those directly attributable to the businesses disposed, and do not resultfrom subjective judgements of management. For acquisitions, a similar adjustmentis made in the organic movement calculations. For acquisitions subsequent to theend of the equivalent prior period, the post acquisition results in the currentperiod are excluded from the organic movement calculations. For acquisitions inthe prior period, post acquisition results are included in full in the priorperiod but are only included from the anniversary of the acquisition date in thecurrent period. c) Organic movement in operating margin is the difference between the2007 reported operating margin (operating profit excluding exceptional itemsexpressed as a percentage of sales) and an operating margin where the amountsfor each of sales and operating profit are the aggregate of those captions inthe columns headed 2006 Reported, the column headed Exchange and the amounts inrespect of transfers (see note (2) above) and disposals (see note (4) above)included in the column headed Transfers, acquisitions and disposals. Organicmovement in operating margin is calculated as the movement amount in marginpercentage, expressed in basis points between the operating margin for the priorperiod results at current year exchange rates and after adjusting for transfers,disposals and exceptional items and the operating margin for the current periodresults adjusted for current period exceptional items. The basis of calculationmeans that the results used to measure organic movement for a given period willbe adjusted when used to measure organic movement in the subsequent period. Underlying movement in earnings per share The group's management believes basic earnings per share on an underlyingorganic movement basis provides valuable additional information for users of thefinancial statements in understanding the group's overall performance. Thegroup's management believes that the comparison of movements on both a reportedand underlying 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 andthe application of an underlying effective tax rate. These measures should beviewed as complementary to, and not a replacement for, the comparable GAAPmeasures such as basic and diluted earnings per share and reported movementstherein. These GAAP measures reflect all of the factors which impact on thebusiness. The underlying movement calculation in earnings per share for the year ended 30June 2007 was as follows: Pence per share (5) Reported basic eps for year ended 30 June 2006 67.2Exceptional items (1) (16.7)Tax equalisation (4) -Basic eps before exceptional items and after tax equalisation for year ended 30 June 2006 50.5Disposals (2) (a) 0.1Exchange (3) (d) (2.0)Adjusted basic eps for year ended 30 June 2006 48.6 Reported basic eps for year ended 30 June 2007 55.4Exceptional items and discontinued operations (1) (6.6)Tax equalisation (4) 6.0Basic eps before exceptional items and after tax equalisation for year ended 30 June 2007 54.8Exchange (3) (d) (0.1)Acquisitions (2) (b) 0.1Adjusted basic eps for year ended 30 June 2007 54.8 Reported basic eps movement amount (11.8)Basic eps before exceptional items and after tax equalisation movement amount 4.3Underlying movement amount (after impact of acquisitions and exchange) (c) 6.2Reported basic eps growth (18)%Basic eps growth before exceptional items and after tax equalisation 9%Underlying growth (c) 13% Notes - Information relating to the current period 1) The exceptional items (after tax and attributable to equityshareholders) in the year ended 30 June 2007 were £39 million representing again of £40 million in respect of the sale of land at the Park Royal site and aloss of £1 million relating to disposal of businesses. Discontinued operationsin the year ended 30 June 2007 represent tax credits of £139 million on priorbusiness disposals. The exceptional items reported by the group for the yearended 30 June 2006 were £472 million representing a gain of £151 millionrelating to the gain on disposal of General Mills shares, a gain of £6 millionrelating to the disposal of other businesses and taxation on exceptional itemstotalling £315 million, primarily related to the increase in the group'sdeferred tax balances. 2) Acquisitions in the year ended 30 June 2007 are in respect of theacquisition of the Smirnov brand in Russia. Acquisitions impacting thecalculation of organic growth made in the year ended 30 June 2006 were inrespect of the acquisition of The 'Old Bushmills' Distillery Company Limited inAugust 2005. Disposals affecting the year are the disposal of United BeveragesLimited and Three Barrels and the impact of the disposal of General Millsshares. 3) Exchange - the exchange adjustments for operating profit, netfinance charges and taxation are principally in respect of the US dollar.Transaction exchange adjustments are taxed at the underlying effective tax ratefor the period. 4) Tax equalisation - the impact of adjusting the group's reportedtax rate on operating profit from continuing businesses to the underlyingeffective tax rate on profit from continuing businesses before exceptional items(see (v) below). 5) All amounts are derived from amounts in £ million divided by theweighted average number of shares in issue for the year ended 30 June 2007 of2,688 million (2006 - 2,841 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 underlying movement calculations, adjusts the profit for theperiod attributable to equity shareholders for the comparable prior period toexclude the following: i) the amount the group earned in that period that itcould not have earned in the current period (i.e. the period between the date inthe prior period, equivalent to the date of the disposal in the current period,and the end of the prior period), ii) a capital return in respect of thereduction in interest charge had the disposal proceeds been used entirely toreduce borrowings, and iii) taxation at the rate applying in the jurisdiction inwhich the asset or business disposed was domiciled. As a result, the underlyingmovement numbers reflect only comparable performance. Similarly, if a businessor investment 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 excluded from thatprior period's performance in the underlying movement calculation, since thegroup 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, inunderlying 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 underlying movement numbers reflectonly comparable 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 underlying movement calculation, sincethe group recognised a full period's contribution from that business in thecurrent period. c) Organic movement percentages for basic earnings per share are calculatedas the underlying movement amount in pence (p), expressed as the percentage ofthe prior 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 underlying movement for agiven period will be adjusted when used to measure underlying movement in thesubsequent period. d) The exchange effects of IAS 21 in respect of short term inter-companyfunding balances as recognised in other finance charges / income are removedfrom both the current and prior period as part of the underlying 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 believe the measure assists users of the financial statementsin understanding the group's cash generating performance as it comprises itemsthat 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, are in respect ofthe purchase and disposal of subsidiaries, associates and businesses. Thegroup's management regards the purchase and disposal of property, plant andequipment as ultimately non-discretionary since ongoing investment in plant andmachinery is required to support the day-to-day operations, whereas purchasesand disposals of businesses are discretionary. However, free cash flow does notnecessarily reflect all amounts that the group either has a constructive orlegal obligation to incur. Where appropriate, separate discussion is given forthe impacts of acquisitions and disposals of businesses, equity dividends andpurchase of own shares - each of which arises from decisions that areindependent from the running of the ongoing underlying business. The free cash flow measure is also used by management for their own planning,budgeting, reporting and incentive purposes since it provides information onthose elements of performance which local managers are most directly able toinfluence. (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 applying the underlying effectivetax rate for the period stated before exceptional items and interest. Averagetotal invested capital is calculated using the average derived from theconsolidated balance sheets at the beginning, middle and the end of the period.Capital employed comprises net assets for the period, excluding post employmentbenefit liabilities (net of deferred tax) and net borrowings. This averagecapital employed is then aggregated with the average restructuring andintegration costs net of tax, which have been charged to exceptional items, andgoodwill written off to reserves at 1 July 2004, the date of transition to IFRS,to obtain the average total invested capital. Calculations for the return on average total invested capital for the year ended30 June 2007 and 30 June 2006 were as follows: 2007 2006 £ million £ million Operating profit before exceptional items 2,119 2,044Associates after interest and taxation 149 131Dividends receivable from investments - 5Underlying effective tax rate at 25.1% (2006 - 24.9%) (569) (543) 1,699 1,637 Average net assets (excluding net post employment liabilities) 4,839 5,527Average net borrowings 4,494 3,899Average integration costs (net of tax) 931 931Goodwill at 1 July 2004 1,562 1,562Average total invested capital 11,826 11,919 Return on average total invested capital 14.4% 13.7% (iv) Economic profit Economic profit is a non-GAAP measure that is used by management to assess thegroup's return from its asset base compared to a standard cost of capitalcharge. The measure is not specifically used in the consolidated financialstatements, but is calculated to aid comparison of the performance of thebusiness. The profit used in assessing the return from the group's asset base and theasset base itself are the same as those used in the calculation for the returnon average total invested capital (see (iii) above). The standard capital chargeapplied to the average total invested capital is currently 9%, beingmanagement's assessment of a constant minimum level of return that the groupexpects to generate from its asset base. Economic profit is calculated as thedifference between the standard capital charge on the average invested assetsand the actual return achieved by the group on those assets. Calculations for economic profit for the year ended 30 June 2007 and 30 June2006 were as follows: 2007 2006 £ million £ million Average total invested capital (see (iii) above) 11,826 11,919 Operating profit before exceptional items 2,119 2,044Associates after interest and taxation 149 131Dividends receivable from investments - 5Underlying effective tax rate at 25.1% (2006 - 24.9%) (569) (543) 1,699 1,637Capital charge at 9% of average total invested capital (1,064) (1,073)Economic profit 635 564 (v) Underlying effective tax rate The underlying effective tax rate is a non-GAAP measure that reflects the taxcharge on profit from continuing businesses before exceptional items as apercentage of profit from continuing businesses before exceptional items. Thegroup's management believe the measure assists users of the financial statementsin understanding the group's effective tax rate as it reflects the tax arisingon the profits from the ongoing business. The components of the reported tax charge which do not form part of theunderlying effective tax rate, as defined by the group's management, relate totax on items reported as exceptional, movement on deferred tax assets arisingfrom intragroup reorganisations which are due to changes in estimates inexpected future utilisation, any other tax charge or credit that arises fromintra group reorganisations and items which are offset by credits or debits indiscontinued operations. The underlying effective tax rate is also used by management for their ownplanning, budgeting, reporting and incentive purposes since it providesinformation on those elements of performance which management is most directlyable to influence. The group's reported tax rate for the year ended 30 June 2007 is 32.4% (2006 -8.4%). Adjusting the reported tax rate for the provision for the settlement oftax liabilities relating to the Guinness/GrandMet merger and a lower carryingvalue of deferred tax assets primarily following a reduction in tax rates andthe tax impact of an intragroup reorganisation of certain brand businesses, thegroup has an underlying effective tax rate of 25.1% on profit before exceptionalitems in the year ended 30 June 2007. Adjusting the reported tax rate for taxexceptional items outlined in note 1 (Underlying movement in earnings per share)above, the underlying effective tax rate for the year ended 30 June 2006 was24.9% on profit before exceptional items. Cautionary statement concerning forward-looking statements This announcement contains "forward looking statements" within the meaning of 'Safe Harbor' provisions of the United States Private Securities LitigationReform Act of 1995 with respect to the financial condition, results ofoperations and business of Diageo and certain of the plans and objectives ofDiageo with respect to these items. In particular, all statements that expressforecasts, expectations and projections with respect to future matters,including trends in results of operations, margins, growth rates, overall markettrends, the impact of interest or exchange rates, the availability of financingto Diageo, anticipated cost savings or synergies and the completion of Diageo'sstrategic transactions, are forward-looking statements. By their nature,forward-looking statements involve risk and uncertainty because they relate toevents and depend on circumstances that will occur in the future. There are anumber of factors that could cause actual results and developments to differmaterially from those expressed or implied by these forward-looking statements,including factors that are outside Diageo's control. These factors include, but are not limited to: • increased competitive product and pricing pressures and 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 in taxlaw (including tax rates) or accounting standards, changes in taxationrequirements, such as the impact of excise tax increases with respect to thebusiness, and changes in environmental laws, health regulations 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 spend, promotional and innovation expenditure byDiageo and its competitors; • renewal of distribution or licence manufacturing rights on favourableterms when they expire; • termination of existing distribution or licence manufacturing rightson 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 2006 filed with the US Securitiesand Exchange Commission (SEC). Any forward-looking statements made by or onbehalf of Diageo speak only as of the date they are made. Diageo does notundertake to update forward-looking statements to reflect any changes inDiageo's expectations with regard thereto or any changes in events, conditionsor circumstances on which any such statement is based. The reader should,however, consult any additional disclosures that Diageo may make in anydocuments which it publishes and/or files with the SEC. All readers, whereversituated, should take note of these disclosures. 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 announcement includes disclosure about Diageo's debt rating. A securityrating is not a recommendation to buy, sell or hold securities and may besubject to revision or withdrawal at any time by the assigning ratingorganisation. Each rating should be evaluated independently of any otherrating. Past performance cannot be relied upon as a guide to future performance. For further information Diageo's preliminary results presentation to investors and analysts will bebroadcast at 09.30 (UK time) on Thursday 30 August 2007. The presentation canbe viewed live on the Diageo website www.diageo.com. Prior to the event thepresentation slides will be available to download from Diageo's home page. You will be able to listen to a live broadcast of the presentation and Q&Asession by calling one of the following numbers. This is a listen only optionand you will not be able to participate: France + 33 1 70 75 00 04 Germany + 49 69 2222 52104 Ireland + 353 1 246 0036 Netherlands + 31 20 710 9321 Spain + 34 91 414 1544 UK + 44 20 7019 0812 USA (toll free) + 877 818 6787 Passcode: Diageo results After the presentation the slides and accompanying text will be available todownload from Diageo's homepage. A transcript of the Q&A session will beavailable to download from our website later that afternoon. 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 28 September 2007. A press conference will take place beginning at 12.30 (UK time) on 30 August2007 and will be broadcast live from a link on www.diageo.com. Diageo management will host a conference call for investors and analysts at15.00 (UK time) on Thursday 30 August 2007. Call this number to participate: France + 33 1 70 75 00 04 Germany + 49 69 2222 52104 Ireland + 353 1 246 0036 Netherlands + 31 20 710 9321 Spain + 34 91 414 1544 UK + 44 20 7019 0812 USA (toll free) + 877 818 6787 Passcode: Diageo results The teleconference will be available on instant replay from 17.00 (UK time) andwill be available until 28 September 2007. A transcript of the teleconferencewill be available to be downloaded from our website by mid-day on Friday 31August. The number to call is: UK/Europe +44 20 7970 8414 USA/Canada +1 203 369 4862 Investor enquiries to: Darren Jones +44 (0) 20 7927 4223 Catherine James +44 (0) 20 7927 5272 [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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