7th Jul 2005 07:00
Diageo PLC07 July 2005 7 July 2005 Diageo issues statement in respect of year ended 30 June 2005 Diageo will announce preliminary results for the year ended 30 June 2005 on 1September 2005 and has today issued the following statement. Summary The sales trends outlined in the interim results in February continued to impacttrading in the second half of the financial year. Volume growth and miximprovement slowed as the result of tougher trading in Europe and a slow down inthe ready to drink segment in the US. However, organic operating profit growthfor the year ended 30 June 2005 is expected to be in line with the guidance of6% given at the time of the interim results. Looking forward to the newfinancial year Diageo believes that organic growth in volume will be similar tothat achieved in the year just ended while a renewed focus on achieving priceincreases together with the benefits of the planned cost efficiency programmewill deliver continued improvement in operating margin. Diageo makes annual payments to the Thalidomide Trust (£7.2 million in the yearended 30 June 2005) and has made an offer in respect of future payments. For theyear ended 30 June 2005 Diageo will make an exceptional operating charge ofabout £150 million in respect of future payments to the Trust. An exceptionalcredit may arise from the release of the provisions held in respect ofcommitments to the Burger King Corporation. Full year outlook for net sales Spirits growth was led by the performance of the global priority brands whichhave continued to grow volume by around 4%. The more difficult tradingenvironment in beer has however led to a slow down in the performance ofDiageo's beer brands. Diageo's wine brands continue to grow strongly in theirkey markets of the US and GB. In North America Diageo's spirits brands, particularly the global prioritybrands and Crown Royal, continued to outperform the market. Overall miximprovement however is lower partly as a result of the decline in ready to drinksales in the second half. The growth of Smirnoff RTDs has been affected by thecomparison against the prior period when Smirnoff Twisted V was launched. The consumer environment throughout Europe has worsened. Net sales, which weredown 1% in the first half, are therefore likely to be down further in thesecond half. The business in Europe is beginning to benefit from operationalefficiencies and this is expected to improve operating profit performance. Top line performance of the International business continues to be strongfollowing a further substantial increase in marketing investment this year.Growth has been led by the strength of Diageo's business in Latin America andstrong volume growth in the developing BRIC markets partly offset by difficulttrading conditions during the year in Nigeria and Korea. Cost reduction initiatives Diageo has announced a number of initiatives which will drive greater costefficiency across the business. As expected these initiatives have given rise tocosts in the year ended 30 June 2005 of approximately £80 million. These havebeen charged to operating expenses. It is anticipated that restructuring costsamounting to some £70 million will be incurred in the year ending 30 June 2006. The programme is being implemented as planned and is on track to deliver theforecast benefits. These benefits amounted to a £22 million reduction in cost inthe year ended 30 June 2005. It is expected that the cost base will be reducedby approximately £50 million in the year ending 30 June 2006. Seagram synergy The integration of the acquired Seagram businesses was completed during the yearand incremental synergy of £24 million was achieved. There will be noincremental synergy in the next financial year. Interest It is estimated that in the year ended 30 June 2005 Diageo's average debt wasapproximately £3.7 billion and the closing debt was approximately £3.8 billion.The effective interest rate for the year ended 30 June 2005 is estimated to beapproximately 4.1%. With around 50% of Diageo's debt at floating rates the risein short term US interest rates is expected to increase the interest charge inthe new financial year by about £25 million. Certain financing structures whichreduced interest in the year ended 30 June 2005 by approximately £10 millionwere terminated and will not be replaced. In addition if Burger King Corporation(BKC) is successfully refinanced during the new financial year the BKCsubordinated debt held by Diageo will be repaid. In the year ended 30 June 2005interest earned on this debt amounted to £13 million. Exchange rate movements As previously advised adverse exchange rates are expected to impact reportedprofit before exceptionals and tax for the year ended 30 June 2005 by some £80million. Based on current exchange rates, the adverse impact of exchange ratemovements on profit before exceptionals and tax in the year ending 30 June 2006is estimated to be £50 million. Return of capital to shareholders Diageo has returned a further £710 million to shareholders in the financial yearthrough the repurchase of 94 million shares. The number of shares in issue atthe end of the year, excluding 86 million treasury shares, was 2,964 million.The weighted average number of shares used to calculate eps in the year ended 30June 2005 is expected to be 2,972 million shares. As announced on 23 June 2005,Diageo has put in place an irrevocable, non-discretionary programme to buy backshares during the close period which ends on 1 September 2005. Outlook for the new financial year Looking forward to the new financial year Diageo expects that organic growth involume will be similar to that achieved in the year ended 30 June 2005. Diageowill be looking to achieve a higher level of price increase in the coming yearand over the next few weeks price increases will be announced on a number ofbrands in North America. Diageo believes that this renewed focus on pricingtogether with the positive impact of the cost efficiency programme will lead tofurther year on year improvement in operating margin. Conversion to International Financial Reporting Standards ("IFRS") The preliminary results for the year ended 30 June 2005 will be presented underUK GAAP. The income statement, balance sheet and cash flow will also beavailable under the relevant IFRS. The IFRS restatement will includeexplanations of differences to the corresponding UK GAAP reporting. It is notexpected that the impact of the application of IFRS will differ from thatoutlined at the time of the interim results. Diageo will update the market onthe implications of IFRS for the company on the morning of 2 September 2005. Other Diageo holds $212.5 million of subordinated debt in the Burger King Corporation(BKC) and provides a guarantee in respect of $750 million of senior debt and$100 million of revolving credit facilities. Any refinancing of BKC would leadto the termination of Diageo's guarantee and the repayment of the subordinateddebt together with accrued interest. Diageo has balance sheet provisionstotalling $100 million in respect of residual financing obligations to BKC. Areview of the ongoing need for these provisions is being carried out in thelight of the trading performance improvement of BKC and greater clarity as toits future financing expectations. If the provisions are not required, either inwhole or in part, they will be released to exceptional sale of business. Diageo is in discussions with the Thalidomide Trust with respect to the paymentit makes each year to the Trust. Diageo currently makes an annual payment of£2.8 million to the Trust although in the year ended 30 June 2005 an additionalcontribution of £4.4 million was made. Based on the current negotiations it isexpected that the future annual payment will increase to around £6.5 million perannum. This amount will be index-linked. The new agreement is anticipated to befinalized by the end of the calendar year and is expected to be a finalsettlement payable over the period to 2037. Consequently Diageo will make anexceptional operating charge of about £150 million in the year ended 30 June2005 to cover the discounted value of future payments. Paul Walsh, CEO of Diageo, said: 'Diageo's business model has two particular strengths: our outstandingcollection of brands with broad geographic reach and our strong financialposition. These strengths allow us to deliver top and bottom line growthconsistently, while returning the strong cash flow of this business toshareholders in the form of growing dividends and share buybacks. 'In the year just ended we have strengthened our business in a number of ways.In North America having completed the implementation of our new distributorstrategy we are now seeing the benefits as with each consecutive month we reportshare gains. Increasingly our brands there are supported with innovativemarketing executions and line extensions. In Europe we are reorganising to facethe challenges there and create a platform from which our brands can outperformand from which we can deliver operating profit growth. In International wecontinue to invest behind our brands and this is driving strong top line growth.Going forward we believe that our focus on achieving cost efficiencies will notonly improve our operating margin but will make our business able to respondfaster to changing environments. 'During the year we have enhanced our brand positions with targeted acquisitionswhich we believe will create value for shareholders, completing the acquisitionof Ursus and the Chalone Wine Group and reaching agreement on the potentialacquisitions of Bushmills and Montana. 'There is now the potential that Burger King's existing financing facilities maybe refinanced and that we could dispose of the remaining 25 million shares wehold in General Mills during the first half of the year. Therefore as we enterthe new financial year we have increasing confidence that we will take the finalsteps of the strategic realignment we undertook to become the world leadingfocused premium drinks business we are today. ' Cautionary statement concerning forward-looking statements This document contains statements with respect to the financial condition,results of operations and business of Diageo and certain of the plans andobjectives of Diageo with respect to these items. These forward-lookingstatements are made pursuant to the 'Safe Harbor' provisions of the US PrivateSecurities Litigation Reform Act of 1995. In particular, all statements thatexpress forecasts, 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 and parties or consortia who have purchased Diageo's assets, actionsof parties or consortia who have purchased Diageo's assets, anticipated costsavings or synergy and the completion of Diageo's strategic transactions, areforward-looking statements. By their nature, forward-looking statements involverisk and uncertainty because they relate to events and depend on circumstancesthat will occur in the future. There are a number of factors that could causeactual results and developments to differ materially from those expressed orimplied by these forward-looking statements, including factors that are outsideDiageo'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 completed or future business combinations, acquisitionsor disposals and the ability to realise expected synergy and/or costs savings; • Diageo's ability to complete future acquisitions and disposals; • The ability of Diageo to monetise its remaining stake in GeneralMills; • Legal and regulatory developments, including changes in regulationsregarding consumption of, or advertising for, beverage alcohol, changes inaccounting standards, taxation requirements, such as the impact of excise taxincreases with respect to the premium drinks business, and environmental laws; • Developments in the alcohol advertising class actions and any similarproceedings; • Changes in the food industry in the United States, including increasedcompetition and changes in levels of consumer preferences; • Developments in the Colombian litigation or 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 and promotional expenditure by Diageo and itscompetitors; • Renewal of distribution rights on favourable terms when they expire; • Termination of existing distribution rights on agency brands; • Technological developments that may affect the distribution ofproducts or impede Diageo's ability to protect its intellectual property rights;and • Changes in financial and equity markets, including significantinterest rate and foreign currency rate fluctuations which may affect Diageo'saccess to or increase the cost of financing or which may affect Diageo'sfinancial results. All oral and written forward-looking statements made on or after the date ofthis document and attributable to Diageo are expressly qualified in theirentirety by the above factors and the "Risk Factors" contained in Diageo'sAnnual Report on Form 20-F, as amended, for the year ended 30 June 2004 filedwith the U.S. Securities and Exchange Commission. The information in this announcement does not constitute an offer to sell or aninvitation to buy shares in Diageo plc or any other invitation or inducement toengage in investment activities. Past performance cannot be relied upon as a guide to future performance. ENDS Contacts: Investors enquiries Catherine James +44 (0) 20 7927 [email protected] Media enquiries Isabelle Thomas +44 (0) 20 7927 [email protected] Notes to Editor: Diageo is the world's leading premium drinks business. With its global vision,and local marketing focus, Diageo brings to consumers an outstanding collectionof beverage alcohol brands across the spirits, wine and beer categoriesincluding Smirnoff, Guinness, Johnnie Walker, Baileys, J&B, Cuervo, CaptainMorgan and Tanqueray, and Beaulieu Vineyard and Sterling Vineyards wines. Diageotrades in some 180 countries around the world and is listed on both the New YorkStock Exchange (DEO) and the London Stock Exchange (DGE). For more informationabout Diageo, its people, brands and performance, visit us at www.diageo.com This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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