Final Results

Diageo PLC 6 September 2001 6 September 2001 (0700) Diageo reports operating profit of £2,127 million, PBET of £1,980 million and EPS up 15% to 42.8 pence, driven by 14% organic growth in operating profit from premium drinks. Diageo has today announced its preliminary results for the year ended 30 June 2001. Organic growth 2001 2000 £ million £ million Turnover 5% 12,821 11,870 Operating profit 9% 2,127 1,980 Premium drinks operating profit 14% 1,432 1,286 EPS (reported) 15% 42.8 pence 37.3 pence The above numbers are before exceptional items and goodwill amortisation. SUMMARY OF KEY POINTS * Premium drinks continues to perform strongly with: - Volume up 4% - Net sales growth 9% - Marketing up 10% to £995 million - Operating margin improved by 1.1 percentage points to 18.9% * Driven by growth in the global priority brands: - Volume up 6% - Net sales growth 15% - Marketing up 15% to £708 million * Burger King operating profit down 12% to £177 million * Pillsbury operating profit up 5% to £518 million * Profit before goodwill amortisation, exceptional items and tax £1,980 million * £193 million underlying improvement in economic profit * Final dividend 13.4 pence per share, up 6% * Free cash flow up £356 million to £1,220 million Paul Walsh, Group Chief Executive of Diageo, commenting on the year ended 30 June 2001 said: 'The benefits of Diageo's position as the world's leading premium drinks company are reflected in these results. They demonstrate the strength of our premium drinks business and how, by driving top line growth in our global priority brands and in our most important markets, we continue to deliver growth in shareholder value.' Annual report and AGM Diageo's annual report will be sent to shareholders at the beginning of October 2001. The Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 2.30 pm on 30 October 2001. Copies of the group's results presentation to be made to analysts and investors are available upon request. The announcement and the presentation will be on the Diageo website www.diageo.com from 9.30 am on 6 September 2001. Explanatory notes Unless otherwise stated, percentage movements given throughout this statement for volume, turnover, net sales, marketing expenditure and operating profit are organic movements (at level exchange rates and after adjusting for acquisitions and disposals). They are before goodwill amortisation and exceptional items. Comparisons are with the equivalent period last year. Volume has been measured on an equivalent servings basis to nine litre cases of spirits. Equivalent cases are calculated as follows: beer in hectolitres divide by 0.9, wine in nine litre cases divide by 5, ready to drink in nine litre cases divide by 10. Net sales are turnover less excise duty. This document contains forward-looking statements that involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors beyond Diageo's control. Please refer to Note 10 - Cautionary statement concerning forward-looking statements for more details. Investor enquiries to: Catherine James 020 7927 5272 Investor.rel@diageo.com Media enquiries to: Kathryn Partridge 020 7927 5225 Media@diageo.com DIAGEO PLC OVERVIEW Premium drinks Premium drinks has again delivered strong top and bottom line growth as a result of focus on the eight global priority brands, which represent 55% of our volume, and strong performances in the four major markets of North America, Great Britain, Ireland and Spain. This focus, together with commitment to innovation and the implementation of programmes to continually reduce our cost base, have delivered operating margin improvement and have increased the return on total invested capital to nearly 16%. The improvement in operating profit was delivered despite increased investment in new product launches and an increase of over £20 million in expenditure on new business ventures. In addition, marketing investment was again increased as a percentage of net sales. The ready to drink portfolio was expanded in the year and is delivering strong net sales growth as it leverages the brands into new consumer occasions and new price points. Burger King Burger King's operating profit declined year on year. This was due to the continuation in North America of the trends experienced in the business in the first half, together with the slowdown which the business suffered in Europe in the second half. In North America, comparable restaurant sales declined 4% in the full year, with a second half decline of 2% compared with a decline of 7% in the first half. In the second half there was a net reduction in the number of restaurants in North America due to a weaker financial position in some parts of the franchisee system and a tightened lending environment. Operating profit in the International business grew, though in the second half the rate of growth slowed as comparable restaurant sales declined, particularly in Europe where they were down 9%. Pillsbury In Pillsbury, where there has been uncertainty around the delay in the completion of the transaction with General Mills, a good performance from Pillsbury North America was offset by volume weakness in Pillsbury Bakeries and Foodservice. While overall volume in Pillsbury North America was flat, turnover was up 4% as a result of improvement in both pricing and mix. Turnover was down 6% in Pillsbury Bakeries and Foodservice and up 3% in International. The mix improvement in Pillsbury North America was driven by continued strong volume growth in Progresso and Totino's and recovery in Old El Paso. Refrigerated Baked Goods achieved strong profit growth as improved pricing offset volume decline, while the Frozen Breakfast and Vegetable businesses declined year on year both in volume and profit terms. In Pillsbury Bakeries and Foodservice, the volume decline together with margin pressure from a more intense competitive environment reduced operating profit by nearly 40%. The International business performed well despite facing some difficult market conditions and volume gains were achieved in Asia Pacific, Europe and the Middle East, though operating profit was down due to investment in higher marketing and local infrastructure. Outlook Commenting on current trading, Paul Walsh said: 'Since the start of the new financial year the key drivers of performance have remained unchanged. In premium drinks top line growth, in terms of both volume and net sales, has been maintained despite some weakening of economic conditions. The expansion of our ready to drink portfolio continues to provide growth from new consumer occasions at new price points. We are on track to deliver the cost efficiencies we announced from the merger of Guinness and UDV. Burger King's performance is still adversely impacted by the slowdown in Europe and as in 2001 the results for the current year will be affected by the reduction in the number of new restaurants openings. We do not expect to see an improvement in performance before the second half of the new year. Pillsbury's performance in the year was adversely impacted by the decline in the food service business, though trading there has improved in the last two months. Trading in Pillsbury North America has continued to be good and overall the Pillsbury business has started the year well. We look forward to the completion of the strategic transactions which will further Diageo's focus on premium drinks.' DIAGEO PLC OPERATING AND FINANCIAL REVIEW for the year ended 30 June 2001 OPERATING REVIEW DIAGEO On a reported basis, turnover increased by £951 million (8%) from £11,870 million in the year ended 30 June 2000 to £12,821 million in the year ended 30 June 2001. Excluding the favourable effects of currency, turnover increased 3% and on an organic basis grew 5%. Reported operating profit before goodwill amortisation and exceptional items increased £147 million (7%) from £1,980 million to £2,127 million. Excluding the favourable effects of currency, operating profit before goodwill amortisation and exceptional items increased 7% and on an organic basis increased 9%. On a reported basis, advertising, marketing and promotion expenditure increased 12% from £1,706 million to £1,917 million. Organically advertising, marketing and promotion expenditure increased by 8%. Profit before goodwill amortisation, exceptional items, taxation and minority interests increased by £165 million (9%) from £1,815 million in the year ended 30 June 2000 to £1,980 million in the year ended 30 June 2001. In local currency terms this was an increase of 8%. The net interest charge decreased by £13 million (4%) from £363 million to £350 million in the year ended 30 June 2001. Exceptional items before taxation were a charge of £232 million in the year ended 30 June 2001. After exceptional items, profit before taxation and minority interests increased by £271 million from £1,451 million to £1,722 million in the year ended 30 June 2001, and profit for the year increased by £ 250 million from £976 million to £1,226 million in the year ended 30 June 2001. PREMIUM DRINKS Strong organic top line growth continued to be achieved with turnover up 7%. Reported turnover increased by £463 million (7%) from £7,117 million in the year ended 30 June 2000 to £7,580 million in the year ended 30 June 2001. Reported operating profit before exceptional items increased by £146 million (11%) from £1,286 million to £1,432 million. On an organic basis, turnover increased 7% and operating profit increased 14%. Volume increased by 4% as a result of volume growth of 6% in global priority brands and 4% in local priority brands. Volume in other categories, which account for 30% of total volume and 28% of total net sales, declined 1% mainly due to continued weakness in other spirits, which were down 1%, and other wines, where volume was down 5% compared to last year. Net sales increased by 9% to £5,722 million, driven by a combination of price increases, mix improvement and the continued growth of the ready to drink portfolio. Volume and net sales growth by brand classification Equivalent cases Volume Net sales millions growth growth % % Johnnie Walker 10.6 3 7 Guinness 11.0 3 6 Smirnoff 18.4 12 52 J&B 6.2 2 4 Baileys 5.1 10 11 Cuervo 4.3 (6) 9 Tanqueray 1.9 4 7 Malibu 2.3 20 21 Total global priority 59.8 6 15 brands Local priority brands 14.2 4 8 Other 32.5 (1) (2) 106.5 4 9 Acquisitions 2.1 Total 108.6 Marketing investment increased 10% to £995 million. Marketing spend on the global priority brands grew by 15% to £708 million particularly behind the launch of Smirnoff Ice in North America, the Keep Walking campaign for Johnnie Walker and on Baileys. Marketing investment as a percentage of net sales increased by 0.2 percentage points. MARKET REVIEW Global priority Local priority Other brands brands brands Total % % % % Volume growth by market Major markets 6 4 - 4 North America 8 3 - 6 Great Britain 1 (1) (2) - Ireland 7 23 (10) 4 Spain 6 2 (1) 4 Key markets 4 4 1 3 Venture markets 10 8 (5) 4 Total 6 4 (1) 4 Net sales growth by market Major markets 21 13 1 14 North America 16 3 (3) 9 Great Britain 7 5 4 5 Ireland 12 29 (10) 9 Spain 17 7 - 11 Key markets 10 12 (4) 5 Venture markets 15 8 (6) 7 Total 15 8 (2) 9 Operating profit 2001 2000 Organic growth £ million £ million % Major markets 363 317 20 North America 162 150 9 Great Britain 156 135 11 Ireland 85 96 20 Spain 766 698 16 Key markets 447 392 7 Venture markets 219 196 20 Total 1,432 1,286 14 Global Duty Free operations are now reported in key markets and therefore the North American operating profit reported for the year ended 30 June 2000 has been adjusted by £10 million from £327 million to £317 million. Brand review by major market North America In North America, volume increased by 4%, net sales grew by 14%, marketing investment was up 10% and operating profit grew by 20% as a result of continued strong growth. Johnnie Walker volume grew 3% and net sales rose 9%. This was the result of strong growth from Johnnie Walker Black, which increased market share by 3 percentage points. The Keep Walking campaign launched in February 2001 was a key driver of this growth. The standard Scotch category remains soft. J&B volume declined by 3%, against a decline of 15% last year, and this decline was offset by price increases resulting in net sales growth of 2%. Smirnoff volume grew by 11% with the successful launch of Smirnoff Ice, which achieved a volume of 1.1 million equivalent cases, representing 14% of total Smirnoff volume. Excluding Smirnoff Ice, volume declined by 4%, as the price increases implemented last year to reposition the brand continued to impact volume, though net sales increased by 4%. Baileys volume continued to grow and was up 5% in the year. Malibu volume grew by 29%. Cuervo volume continues to be affected by the agave shortage, and while volume was down 6%, net sales grew 8%. Volume of local priority brands grew by 4% to 2.6 million equivalent cases. Buchanan's volume grew by 22% and net sales grew by 24%, following a 3% price increase. Beaulieu Vineyard continued to perform strongly with volume up 15% and net sales up 23%. Marketing increased by 10% to £302 million mainly due to increases in spend behind flavoured Smirnoff line extensions and the introduction of Smirnoff Ice. Marketing investment behind Baileys was up 19% with the launch of the Celebrate campaign. Great Britain Volume increased by 6%, net sales grew by 9%, marketing investment was up 6% and operating profit grew by 9% in Great Britain, led by the continued growth of Smirnoff Ice. Smirnoff volume grew 18% driven by strong performances by both Smirnoff Ice and Smirnoff Red. Smirnoff, excluding Smirnoff Ice, grew 4% driven by increased promotional activity and the brand's association with dance music events. Smirnoff Ice volume doubled to 0.8 million equivalent cases in its second full year following launch, reflecting trade distribution increases in both the off and on trade. In the on trade, distribution doubled to nearly 50%. Baileys volume grew 14%, with continued growth in its share of both liqueurs and total spirits categories. Net sales grew 11%. Marketing investment increased by 30% over the prior year. Malibu volume declined by 2% as ready to drink products took some share from the specialities category, however the second half performance showed signs of improvement driven by a successful advertising campaign. Guinness volume increased 1% compared to a strong performance in the previous year, despite a decline of around 4% in the beer category. Growth has been driven by Guinness Draught Extra Cold and the rollout of the new Guinness fount. Marketing overall fell by 10%, reflecting the high level of investment in the Rugby World Cup in 1999. Local priority brands volume grew by 3%. Bell's volume grew by 3%, helped by marketing investment up 10% behind promotional activity at Christmas and a new advertising campaign. Archers Aqua, a new ready to drink product designed to leverage the female franchise of Archers, was launched in May 2001. The launch has been very successful and, with initial sales of 40,000 equivalent cases, performance is ahead of expectations. Ireland Volume was flat, net sales grew by 5%, marketing investment was up 9% and operating profit grew by 11%. The decline in Guinness volume in Ireland slowed from 4% last year to 3%. In the Republic of Ireland, the long term decline in Guinness' share of the long alcoholic drinks market has halted, and market share has remained constant at about 34% over the past year. Net sales grew by 1%. Marketing investment, which was 4% lower, was refocused around the Witnness programme. Smirnoff volume grew by 9% and net sales grew by 36%. Smirnoff Ice volume doubled to 118,000 equivalent cases. Smirnoff Ice is the market leader in premium packaged spirits in the Republic of Ireland with 50% market share. Smirnoff volume, excluding Smirnoff Ice, grew by 1% and net sales grew by 3%. Marketing investment grew by over 50% behind a new advertising campaign launched in December 2000. Baileys volume and net sales both grew by 21%. Baileys has increased its market share by 3 percentage points to 42%. Marketing spend increased with a year round media presence and sponsorship of television programmes. Spain In Spain, volume increased by 4%, net sales grew by 9%, marketing investment was up 14% and operating profit grew by 20% as a result of continued strong growth in all key brands. Reported movements were affected by the disposal last year of Grupo Cruzcampo SA. J&B volume grew by 7% while maintaining share. Price increases of 2% were implemented in October 2000. Marketing was up 1%. Johnnie Walker volume grew 1%, with a 24% growth in Johnnie Walker Black in response to the introduction of the Keep Walking campaign. Cardhu volume also grew strongly, up 23% to 169,000 cases, and net sales grew 29%. The premium malts category has been growing at about 20% per annum and Diageo's market share increased from 50% to 53%. Smirnoff volume grew by 2%. This volume growth together with a significant price increase led to net sales growth of 27%. Marketing investment grew by 26%. Baileys volume grew by 6%, supported by the introduction of a year round advertising campaign, and marketing investment grew by 10%. Baileys net sales grew by 12% driven by price increases. Malibu volume grew by 37% to 195,000 equivalent cases. Marketing investment grew by 38% behind the introduction of a new advertising campaign. Pampero dark rum volume grew 60% to 100,000 cases and it is the fastest growing brand in the fastest growing premium drinks category of the Spanish market. Key markets Key markets operating profit grew by 7% reflecting varied performance across a number of markets. Reported operating profit for key markets grew by 14% to £447 million, as East Africa Breweries and Bundaberg are now accounted for as subsidiaries following the acquisition of further shares. Reported turnover increased £192 million (12%) despite the disposal in Brazil of certain non core brands including Dreher. Operating profit growth was 7%. In the African key markets, Guinness volume was up 8%, with strong growth in Nigeria and Cameroon driven by the Michael Power advertising campaign. Spirits volume was up by 8% driven by the performance of Smirnoff Ice in South Africa and Johnnie Walker in West Africa. In Venezuela, where the economy has benefited from an increase in oil prices, the business has performed well and volume was up 77%. Johnnie Walker Black and Deluxe grew 30% and VAT69 volume tripled to 0.9 million cases. Overall the other Latin American markets designated as key (Brazil, Paraguay, Columbia and Mexico) reported results down compared with last year, as volume declined due to duty increases and distributor de-stocking. In Thailand, economic conditions and an excise duty increase in April 2001 impacted the business' performance. Volume declined by 2% and net sales declined by 1%. Marketing expenditure was up 66%, due to the impact of staging the Johnnie Walker Classic golf tournament. In Taiwan, the successful introduction of the Keep Walking campaign for Johnnie Walker and a distribution drive for Johnnie Walker Black and Red into independent off trade retail led to a strong year. Johnnie Walker volume growth in total was 26% with Black up 69%. Volume in Korea was up by 30%, with a 25% increase in Dimple volume to over 700,000 cases. Approximately 50% of the volume growth could be attributed to an increase in distributor stocks before the introduction of a new liquor purchase card in the market. In Greece, there was strong volume growth across global priority brands. Gordon's Space volume was up 30% and it is the number one ready to drink brand in the market. Venture markets Venture markets operating profit increased by 20% to £219 million with strong performances in most markets. Volume grew by 4%, with global and local priority brands growing 10% and 8%, respectively. Net sales increased by 7% and marketing investment grew by 16%, reflecting increased investment behind Johnnie Walker Black and Baileys, as well as the launch of Smirnoff Ice in a number of markets. The European venture businesses performed well and although the Asian venture businesses had a challenging year, being impacted by economic down turn in Asia, overall they delivered both volume and profit growth compared with the previous year. BURGER KING * System sales were down 1% * Total restaurants up 2% compared with 30 June 2000 to 11,372 * Worldwide comparable restaurant sales down 4% * Operating profit declined 12% to £177 million * Operating margin down 2.9 percentage points to 17.0% Fewer restaurant openings and more closures in the year; reported operating profit fell by £25 million to £177 million. In the year ended 30 June 2001, 550 new restaurants were opened against 796 new openings in the prior year. In addition, restaurant closures were 339 in the year compared with 161 last year. These adverse movements were due to a weaker financial position of some parts of the franchisee system and a tightened lending environment. Worldwide comparable restaurant sales declined by 4%, with 4% decline in the United States. The decline in operating profit reflects the decline in worldwide comparable restaurant sales and the lower level of increases in restaurant numbers. In North America, system sales were down 2%, which led to an 18% decline in operating profit. The North American business declined 24% in the second half of the year compared to 12% decline in the first half. The reduction in the number of new restaurant openings and the closure of an increased number of poor performing restaurants has reduced profit. The International business experienced a decline in comparable restaurant sales of 4%. The International business suffered significant decline in comparable restaurant sales in the second half, driven primarily by the slowdown in Europe, where comparable restaurant sales were down 9%. In addition, new restaurant openings were lower than in the prior year and 23 restaurants were closed in Poland and 45 in Japan as a result of the decision to exit this market. PILLSBURY * Volume flat * Turnover up 2% to £4,199 million (2000 - £3,812 million) * Marketing expenditure up 6% to £886 million (2000 - £774 million) * Operating profit up 5% to £518 million (2000 - £492 million) * Operating margin up 0.3 percentage points to 12.3% Improved performance in Pillsbury North America was offset by the impact of softness in the Foodservice category. Pillsbury's turnover increased 2% as a result of higher pricing and improved mix of value added products in Pillsbury North America and volume growth in International. Overall top line growth was limited by Pillsbury Bakeries and Foodservice where turnover declined due to category softness and aggressive competitor activity. Investment in marketing activities, mainly in Pillsbury North America, increased 6% during the year to £886 million in support of new products and other growth initiatives. Growth in turnover, coupled with lower overheads, due in part to the restructuring actions taken last year, improved operating profit by 5% and operating margin by 0.3 percentage points during the year. Pillsbury North America Pillsbury's largest business, Pillsbury North America, achieved turnover growth of 4%. Operating margin growth was achieved as a result of pricing actions across the portfolio and volume increases in value added products. An increase of 7% in marketing investment provided the foundation for continuing growth. Turnover increases were led by Progresso up 21%, Totino's up 9% and Old El Paso up 7%. Progresso continued to gain market share behind a 30% increase in marketing investment and the successful introduction of new products. Strong category performance and successful merchandising programmes drove Totino's growth during the year. Old El Paso returned to growth on the strength of Meal Dinner Kit products. Refrigerated Baked Goods achieved double digit operating profit growth driven by improved pricing, operational efficiencies and more efficient marketing investment. Frozen Breakfast turnover and profit declined during the year as competitive activities increased in the waffles segment and as expenditure increased in support of new product introductions. Pillsbury Bakeries and Foodservice Turnover for Pillsbury Bakeries and Foodservice declined 6% as the foodservice and in-store retail channels experienced softness due to weaker demand and increased competitor activity. These trends have impacted Pillsbury Bakeries and Foodservice sales to a number of quick serve and midsize restaurants and also volume sold through distributors. The reduction in turnover, combined with margin pressures from a more intense competitive environment, resulted in a 39% decline in operating profit during the year. In recent months Pillsbury Bakeries and Foodservice have made improvements which have lowered costs and streamlined manufacturing operations. International Turnover growth of 3% was achieved in International driven by volume increases in key markets such as the United Kingdom, Venezuela, Middle East and Australia. The Haagen-Dazs and Old El Paso brands achieved strong volume growth. Turnover growth was limited by soft volume performance in Brazil and Argentina due to unfavourable economic conditions. Overall, increased investment in marketing and local infrastructure outweighed turnover gains during the year. STRATEGIC INITIATIVES Progress is continuing on the group's strategic initiatives. The new management team at Burger King has been strengthened by a number of key appointments of executives with wide experience in the relevant areas of hospitality, fast food and marketing. They are working on the strategy to restore market share and improve operating performance, as well as to facilitate the separation of Burger King from Diageo. The regulatory review of the Pillsbury transaction has extended beyond the period originally expected by the parties and, although the contract remains in place, either Diageo or General Mills may terminate the contract without penalty. The parties are continuing to work hard to address outstanding issues with the FTC and currently expect that the FTC review process will conclude in October. The proposed acquisition of the Seagram spirits and wines business with Pernod Ricard is also awaiting regulatory approval and the parties are endeavouring to resolve the issues raised by regulators in the United States and Canada. Meanwhile, excellent progress has been made on plans for the integration of the businesses using the experience gained from the UD/IDV integration. It is expected that net proceeds from disposals will be slightly higher than originally anticipated. FINANCIAL REVIEW Exchange rates Exchange rate movements during the year, including the effect of the currency option cylinders, favourably impacted profit before goodwill, exceptional items and tax by £11 million. The adverse impact of exchange rate movements on the translation of overseas operating profit was £22 million which was more than offset by the favourable impact on transactions in the year of £28 million, giving a net favourable impact on operating profit of £6 million. Exchange rate movements also favourably affected the share of profits of associates by £1 million and the interest charge by £4 million. Based on current exchange rates, it is estimated that the impact from exchange rate movements on profit before exceptional items and tax for the year ending 30 June 2002 will be a favourable impact of approximately £30 million. Associates The group's share of profits of associates before interest and exceptional items was £203 million for the year compared with £198 million for last year, an organic growth of 7%. Goodwill Goodwill amortisation in the year was £26 million compared with £17 million in the previous year. The increase is in respect of Burger King and Pillsbury acquisitions. Exceptional items Exceptional operating cost items amounted to a charge of £228 million before taxation. This comprised integration and restructuring costs of £163 million and net charges in respect of Burger King of £65 million. The principal restructuring cost was £74 million in respect of the integration of the UDV (spirits and wine) and the Guinness (beer) businesses. It is expected that the total costs of this merger will be approximately £170 million and that most of the balance will be incurred next year. The other costs were £54 million for the reorganisation of Beer production facilities in Great Britain and Ireland, £25 million relating to restructuring of ownership and management within premium drinks, and £10 million in respect of production facilities in Pillsbury Bakeries and Foodservice. Exceptional items also included three items relating to Burger King. Following a review by management, provisions of £49 million have been made against certain fixed assets. In addition, there were costs associated with litigation amounting to £21 million. These costs have been partly offset by exceptional income of £5 million in respect of successor franchise fees. The disposals of premium drinks brands in Latin America resulted in a profit of £28 million. Professional fees, retention bonuses and other costs totalling £51 million were incurred in the year relating to the proposed combination of Pillsbury, the Packaged Food business, with General Mills. Interest The interest charge in the year decreased to £350 million from £363 million in the comparable period. The benefits in respect of the disposal of businesses and cash flow were partly offset by the funding of acquisitions and share repurchases. Taxation The effective rate of taxation on profit before goodwill amortisation and exceptional items for the year was 23.0%, compared with 26.2% for the year ended 30 June 2000 and a 25% effective rate estimated for the interim results. The two percentage points reduction in the effective rate from 25% reflects a low effective rate of taxation in respect of associated companies which is not expected to recur. Dividend The directors recommend a final dividend of 13.4 pence per share to be paid on 5 November 2001 to shareholders on the register on 21 September 2001. Dividends for the year will total 22.3 pence per share, an increase of 6% on last year's dividends. A dividend reinvestment plan is available in respect of the final dividend and the plan notice date is 15 October 2001. Cash flow Free cash inflow was £1,220 million, compared with £864 million in the prior year. Cash inflow from operating activities was £2,276 million compared with £ 2,043 million. This inflow was after £144 million of integration costs and a £ 54 million increase in working capital, compared with £198 million and £62 million, respectively. Net interest payments were £446 million against £405 million in the comparable year. Purchases of tangible fixed assets in the year amounted to £439 million, a decrease of £108 million. Tax payments were £230 million compared with £285 million, the reduction being due to a repayment of UK advance corporation tax. Acquisitions of businesses cost £136 million and the purchase of 17.8 million ordinary shares for cancellation in the year cost £108 million. Sales of businesses generated £31 million. Balance sheet Total shareholders' funds were £5,187 million at 30 June 2001 compared with £ 4,711 million at 30 June 2000. The principal reason for the increase was the £ 475 million retained income for the year, with the repurchase of shares of £ 108 million being broadly offset by exchange gains of £95 million. Net borrowings were £5,479 million, a decrease of £66 million from 30 June 2000. This decrease reflects the free cash inflow of £1,220 million noted above, partly offset by dividends paid of £725 million, increases due to exchange movements of £229 million and net payments from sales/purchases of businesses of £105 million. The group has authority to repurchase up to 10% of its shares and will continue to review its capital structure in the light of market conditions. DIAGEO CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended 30 June 2001 Year ended 30 June 2000 Before Goodwill Before Goodwill goodwill and and goodwill and and exceptional exceptional exceptional exceptional items items items items Total Total £ million £ million £ million £ million £ million £ million Turnover 12,821 - 12,821 11,870 - 11,870 Operating (10,694) (254) (10,948) (9,890) (198) (10,088) costs Operating 2,127 (254) 1,873 1,980 (198) 1,782 profit Share of 203 - 203 198 (3) 195 profits of associates Trading 2,330 (254) 2,076 2,178 (201) 1,977 profit Disposal of - 19 19 - 5 5 fixed assets Sale of - (23) (23) - (168) (168) businesses Interest (350) - (350) (363) - (363) payable (net) Profit 1,980 (258) 1,722 1,815 (364) 1,451 before taxation Taxation (455) 39 (416) (476) 75 (401) Profit 1,525 (219) 1,306 1,339 (289) 1,050 after taxation Minority interests Equity (43) - (43) (37) - (37) Non-equity (37) - (37) (37) - (37) Profit for 1,445 (219) 1,226 1,265 (289) 976 the year Dividends (751) - (751) (713) - (713) Transferred 694 (219) 475 552 (289) 263 to reserves Pence per share Basic 42.8p (6.5)p 36.3p 37.3p (8.5)p 28.8p earnings Diluted 42.8p (6.5)p 36.3p 37.2p (8.5)p 28.7p earnings Dividends 22.3p - 22.3p 21.0p - 21.0p Average 3,377m 3,393m shares DIAGEO CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year ended 30 June 2001 Year ended 30 June 2000 £ million £ million Profit for the year - group 1,056 858 - associates 170 118 1,226 976 Exchange adjustments 95 25 Tax charge on exchange in reserves (17) (7) Total recognised gains and losses 1,304 994 DIAGEO CONSOLIDATED BALANCE SHEET 30 June 2001 30 June 2000 £ £ £ £ million million million million Fixed assets Intangible assets 5,672 5,289 Tangible assets 3,176 3,078 Investments 1,473 1,496 10,321 9,863 Current assets Stocks 2,232 2,139 Debtors - due within one year 1,914 1,845 Debtors - due after one year 1,280 1,187 Debtors subject to financing 43 39 arrangements Cash at bank and in hand 1,842 1,063 7,311 6,273 Creditors - due within one year Borrowings (3,602) (3,066) Other creditors (3,495) (3,275) (7,097) (6,341) Net current assets/ 214 (68) (liabilities) Total assets less current 10,535 9,795 liabilities Creditors - due after one year Borrowings (3,993) (3,716) Other creditors (96) (100) (4,089) (3,816) Provisions for liabilities and (653) (694) charges 5,793 5,285 Capital and reserves Called up share capital 987 990 Reserves 4,200 3,721 Shareholders' funds 5,187 4,711 Minority interests 207 169 Equity 399 405 Non-equity 606 574 5,793 5,285 DIAGEO CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 30 June 2001 30 June 2000 £ £ £ £ million million million million Net cash inflow from operating 2,276 2,043 activities Dividends received from 101 64 associates Returns on investments and servicing of finance Interest paid (net) (446) (405) Dividends paid to equity (31) (477) (27) (432) minority interests Taxation (230) (285) Capital expenditure and financial investment Purchase of tangible fixed (439) (547) assets Purchase of own shares (net) (54) (38) Sale of fixed assets 43 (450) 59 (526) Free cash flow 1,220 864 Acquisitions and disposals Purchase of subsidiaries (136) (151) Sale of subsidiaries, associates 31 (105) 638 487 and businesses Equity dividends paid (725) (683) Cash flow before liquid 390 668 resources and financing Management of liquid resources (572) (219) Financing Issue of share capital 31 12 Own shares purchased for (108) (54) cancellation Redemption of guaranteed (39) - preferred securities Increase/(decrease) in loans 398 (544) 282 (586) Increase/(decrease) in cash in 100 (137) the year MOVEMENTS IN NET BORROWINGS Year ended Year ended 30 June 2001 30 June 2000 £ million £ million Increase/(decrease) in cash in the year 100 (137) Cash flow from change in loans (398) 544 Change in liquid resources 572 219 Change in net borrowings from cash flows 274 626 Exchange adjustments (229) (119) Non-cash items 21 4 Decrease in net borrowings 66 511 Net borrowings at beginning of the year (5,545) (6,056) Net borrowings at end of the year (5,479) (5,545) NOTES 1. Segmental analysis 2001 2000 Turnover Operating Net Turnover Operating Net profit assets profit assets £ £ million £ £ £ million £ million million million million Class of business Premium Drinks 7,580 1,432 5,123 7,117 1,286 4,972 Quick Service 1,042 177 1,432 941 202 1,356 Restaurants Packaged Food 4,199 518 4,077 3,812 492 3,734 12,821 2,127 10,632 11,870 1,980 10,062 Investments in 1,193 1,230 associates Tax, dividends and (553) (462) other Net borrowings (5,479) (5,545) 5,793 5,285 Geographical area Europe 4,073 614 3,763 4,181 585 3,804 North America 6,401 1,001 6,193 5,639 956 5,696 Asia Pacific 990 206 246 886 170 183 Latin America 776 188 216 697 165 252 Rest of World 581 118 214 467 104 127 12,821 2,127 10,632 11,870 1,980 10,062 The above analysis of operating profit is before goodwill amortisation and exceptional items. The geographical analysis of turnover and operating profit is based on the location of the third party customers. Weighted average exchange rates used in the translation of profit and loss accounts were US dollar - £1 = $1.45 (2000 - £1 = $1.60) and euro - £1 = Euro 1.63 (2000 - £1 = Euro1.59). Exchange rates used to translate assets and liabilities at the balance sheet date were US dollar - £1 = $1.41 (2000 - £1 = $1.52) and euro - £1 = Euro1.66 (2000 - £1 = Euro1.58). The group uses option cylinders and foreign exchange transaction hedges to mitigate the effect of exchange rate movements. The effective exchange rates taking into account the impact of these instruments were US dollar - £1 = $1. 58 (2000 - £1 = $1.63) and euro - £1 = Euro1.60 (2000 - £1 = Euro1.50). 2. Goodwill and exceptional items 2001 2000 £ £ £ £ million million million million Charged to: Operating costs Goodwill amortisation (26) (17) Integration costs (74) (83) Beer production (54) - reorganisation Business ownership (25) - restructuring Quick Service (65) (55) Restaurant items Packaged Food (10) (43) reorganisation (228) (181) (254) (198) Associates Share of reorganisation - (3) costs Disposal of fixed Gain on sales 19 5 assets Sale of businesses Premium Drinks brands 28 (165) Costs re sale of (51) - Packaged Food Packaged Food brands - (3) (23) (168) (258) (364) 3. Taxation The £416 million total taxation charge for the year ended 30 June 2001 comprises UK tax of £16 million, foreign tax of £371 million and tax on associates of £29 million. 4. Note of consolidated historical cost profits and losses There is no material difference between the reported profit shown in the consolidated profit and loss account and the profit restated on an historical cost basis. 5. Movements in consolidated shareholders' funds 2001 2000 £ million £ million Profit for the year 1,226 976 Dividends (751) (713) 475 263 Exchange adjustments 95 25 Tax charge on exchange in reserves (17) (7) New share capital issued 31 12 Purchase of own shares for cancellation (108) (54) Goodwill on disposals of businesses - 446 Net movement in shareholders' funds 476 685 Shareholders' funds at beginning of the year 4,711 4,026 Shareholders' funds at end of the year 5,187 4,711 6. Net borrowings 2001 2000 £ million £ million Debt due within one year and overdrafts (3,602) (3,066) Debt due after one year (3,993) (3,716) Net obligations under finance leases (41) (39) (7,636) (6,821) Less: Cash at bank and in hand 1,842 1,063 Interest rate and foreign currency swaps 315 213 Net borrowings (5,479) (5,545) 7. Net cash inflow from operating activities 2001 2000 £ million £ million Operating profit 1,873 1,782 Exceptional operating costs 228 181 Restructuring and integration payments (144) (198) Depreciation and amortisation charge 403 365 Increase in working capital (54) (62) Other items (30) (25) Net cash inflow from operating activities 2,276 2,043 8. Statutory accounts The financial statements of Diageo plc for the year ended 30 June 2001 and this preliminary statement were approved by a duly appointed and authorised committee of the board of directors on 5 September 2001. This statement does not comprise the statutory accounts of the group but is derived from those accounts. The statutory accounts of Diageo plc for the year ended 30 June 2000 have been filed with the registrar of companies. KPMG Audit Plc has reported on those accounts and on the statutory accounts for the year ended 30 June 2001. Both the audit reports were unqualified and did not contain any statement under section 237 of the Companies Act 1985. 9. New accounting standards The financial statements comply, to the extent detailed below, with the following Financial Reporting Standards issued by the UK Accounting Standards Board. FRS 17 - Retirement benefits. This standard replaces the use of actuarial values for assets in a pension scheme in favour of a market-based approach. In order to cope with the volatility inherent in this measurement basis, the standard requires that the profit and loss account shows the relatively stable ongoing service cost, interest cost and expected return on assets. Fluctuations in market values are reflected in the statement of total recognised gains and losses. The group has complied with the transitional disclosure requirements of the standard. FRS 18 - Accounting policies. The group complies with this standard, which deals with the selection, application and disclosure of accounting policies in financial statements. Compliance with the above new standards has not given rise to any restatement of figures reported for prior periods, though a restatement in respect of FRS 17 is expected when full compliance is required. 10. 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 and objectives of Diageo with respect to these items. These forward-looking statements are made pursuant to the 'Safe Harbor' provisions of the United States Private Securities Litigation Reform Act of 1995. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, anticipated cost savings or synergies and the completion of our strategic transactions, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially 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: Changes in economic conditions in countries in which we operate, including changes in levels of consumer spending; Renewal of distribution rights on favourable terms when they expire; Changes in financial and equity markets, including significant interest rate and foreign currency rate fluctuations, which may affect our access to or increase the cost of financing for our operations and investments; Levels of marketing and promotional expenditure by Diageo and its competitors; Increased competitive product and pricing pressures and unanticipated actions by competitors that could impact our market share, increase expenses and hinder our growth potential; Changes in the cost of raw materials and labour costs; Changes in consumer preferences and tastes, demographic trends or perception about health-related issues, which may affect all our business segments; Legal and regulatory developments, including changes in regulations regarding consumption of or advertising for beverage alcohol, changes in accounting standards, taxation requirements, such as the impact of excise tax increases with respect to the premium drinks business, and environmental laws; The receipt of regulatory approvals for pending acquisitions and disposals and any conditions imposed by regulatory authorities; The effects of future business combinations, acquisitions or disposals and the ability to realise expected synergies and/or cost savings; and Technological developments that may affect the distribution of products or create new risks to Diageo's ability to protect intellectual property rights. All oral and forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors.

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