Interim Results
Diageo PLC
21 February 2002
21 February 2002 (7.00 am)
Diageo reports 17% organic growth in operating profit from Premium Drinks.
Diageo today announced its interim results for the six months ended 31 December
2001.
Organic growth 2001 2000
£ million £ million
Turnover 9% 6,478 6,842
Operating profit 11% 1,236 1,235
Premium Drinks operating profit 17% 967 834
Profit before tax 1,228 1,189
EPS (reported) 5% 26.2 pence 25.0 pence
The above numbers are before goodwill amortisation and exceptional
items.
SUMMARY OF KEY POINTS
• Strong performance in Premium Drinks:
- Volume up 5%
- Net sales growth of 11%
- Marketing up 7% to £554 million
- Reported operating margin improved by 1.2 percentage points to 21.7%
• Premium Drinks performance driven by growth in the global priority brands:
- Volume up 9%
- Net sales growth of 15%
- Marketing up 10% to £394 million
• Burger King comparable restaurant sales in North America up 1%
• Burger King operating profit down 29% to £79 million
• Pillsbury operating profit for the four months ended 31 October 2001 £190
million
• Profit before goodwill amortisation, exceptional items and taxation £1,228
million
• Exceptional items before taxation, net gain of £57 million
• £98 million underlying improvement in Premium Drinks economic profit
• Interim dividend 9.3 pence per share, up 4.5%
• Free cash flow down £205 million to £288 million
• Return on invested capital from Premium Drinks, up 2.8 percentage points
Paul Walsh, Group Chief Executive of Diageo, commenting on the six months ended
31 December 2001 said:
'This financial year has begun well, and in the first half Diageo has delivered
on both its strategic and operational objectives. We have exited the Pillsbury
business and completed our acquisition of the spirits and wine businesses of
Seagram while continuing to achieve high levels of profitable top line growth in
premium drinks. Diageo is committed to creating value for shareholders as
evidenced by our continued growth in economic profit and a further return of
capital to shareholders in the period through share buybacks.'
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) for continuing operations. 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 page 23 - Cautionary statement concerning forward-looking statements
for more details.
For further information:
Diageo's interim results presentation to analysts and investors will be
broadcast at 9.30am (GMT) on Thursday 21 February on Diageo's internet home page
at the address: www.diageo.com. Prior to the live link, the presentation slides
will also be available to download from Diageo's home page. Following this, the
press conference is being webcast on www.diageo.com at 12.00pm (GMT).
Presentation slides will also be available to download from the home page.
You will be able to listen to a live broadcast of the presentation and questions
and answers session. The number to call is:
From: UK/Europe: +44 (0) 208 240 8241
Diageo Management will host a teleconference to US and European analysts and
investors at 3.00pm (GMT) on Thursday 21 February. Call this number to listen:
From: UK/Europe: +44 (0) 208 240 8243
The teleconference will be available on instant replay from 5.00pm (GMT) and
will be available until 28 February. The number to call is:
From: UK/Europe : +44 (0) 208 288 4459 Access code: 360
USA/Canada : +1 703 736 7336 Access code: 360
An interview with Paul Walsh is available in video, audio and text from 7.00am
(GMT) on www.diageo.com and www.cantos.com.
Investor enquiries to: Catherine James + 44 (0) 20 7927 5272
Investor.rel@diageo.com
Media enquiries to: Kathryn Partridge + 44 (0) 20 7927 5225
Media@diageo.com
DIAGEO PLC
OVERVIEW
Diageo has continued to deliver on its objectives with top line growth of 9%,
operating profit growth of 11%, improvement in operating margin of 0.4
percentage points and improved return on invested capital, up 1.9 percentage
points. The performance of the core premium drinks business was even stronger as
a result of innovation led growth.
Diageo's integrated premium drinks strategy leverages innovation using Diageo's
skills across distribution channels to bring new products to market faster. Top
line growth has therefore been driven by volume growth and mix improvement.
While price increases have been achieved on specific brands in some markets,
most notably the global priority brands in North America, price has not been a
significant overall driver of turnover growth in the period.
Diageo is now building global campaigns on its leading brands. Scale benefits
and operational efficiency are increasing the effectiveness of Diageo's total
marketing spend.
The operating profit decline in Burger King reflects the steps taken to prepare
the business for separation. The business fundamentals are improving. Comparable
restaurant sales growth has been restored in North America and there is now a
pipeline of new products and a more effective marketing strategy. The new
management is taking action to increase the overall quality of restaurants in
the system and, as a consequence, the number of restaurant closures has
increased in the period and there has been a lower number of restaurant
openings. Despite this, system sales grew 1%.
Overall, these results build on the growth achieved in the last three financial
years and provide further evidence of Diageo's ability to generate sustainable
growth even when the world economic and political environment is not favourable.
Diageo has continued to manage its capital structure to create value for
shareholders. A further 40 million shares were purchased for cancellation in the
period.
Since the beginning of the financial year Diageo has delivered on its strategic
objectives with the disposal of Pillsbury, the acquisition of the spirits and
wine businesses of Seagram and in recent weeks the agreement in respect of
distribution rights for the Cuervo brands. As a result we have increased our
strategic focus on premium drinks and built upon our position as the world's
leading premium drinks company.
Outlook
Commenting, Paul Walsh said:
'As we begin the second half of this financial year we have seen no significant
change in trading performance in our premium drinks business. The trends in
respect of volume and net sales growth achieved in the first half are expected
to be delivered for the full year despite some deterioration in economic
conditions in some markets, especially in Latin America. We will continue to
invest behind our brands to drive growth. Marketing expenditure for the full
year is expected to increase in line with growth in net sales. The second half
reported results will benefit from the addition of the spirits and wine business
of Seagram that we have acquired. We are confident of achieving both our short
and long term financial targets in respect of this acquisition.
'With our interest cover at 7.8 times and our net debt down to £5.0 billion,
there is significant opportunity to return capital to shareholders. This is high
on our agenda for the second half of this financial year.
In Burger King, operational performance is improving and we expect the operating
profit performance in the second half to improve. This performance improvement
will enable us to deliver our objective to separate Burger King from Diageo. We
have a number of options as to how separation can be achieved and we will
explore all of them.'
OPERATING AND FINANCIAL REVIEW
for the six months ended 31 December 2001
OPERATING REVIEW
DIAGEO
On a reported basis, turnover decreased by £364 million (5%) from £6,842 million
in the six months ended 31 December 2000 to £6,478 million in the six months
ended 31 December 2001. For continuing operations, turnover increased £440
million (10%) from £4,583 million to £5,023 million. On an organic basis,
turnover for continuing operations increased 9%.
Reported operating profit before goodwill amortisation and exceptional items
increased £1 million from £1,235 million to £1,236 million. Reported operating
profit before goodwill amortisation and exceptional items for continuing
operations increased by £113 million (12%) from £933 million to £1,046 million.
Excluding the favourable effects of currency, operating profit before goodwill
amortisation and exceptional items for continuing operations increased 8% and on
an organic basis increased 11%. The results of Pillsbury, the packaged food
business, are included for the four months to its disposal on 31 October 2001.
After goodwill amortisation and exceptional operating costs, operating profit
decreased 19% from £1,168 million to £945 million.
On a reported basis, marketing for continuing operations increased 6% from £543
million to £574 million. On an organic basis, marketing increased by 7%.
Profit before goodwill amortisation, exceptional items, taxation and minority
interests increased by £39 million (3%) from £1,189 million in the six months
ended 31 December 2000 to £1,228 million in the six months ended 31 December
2001. In local currency terms, this was a decrease of 1%. The net interest
charge decreased by £15 million (8%) from £185 million to £170 million in the
six months ended 31 December 2001.
Exceptional items before taxation were a net gain of £57 million in the six
months ended 31 December 2001 against a net loss of £50 million in the six
months ended 31 December 2000. After goodwill amortisation and exceptional
items, profit before taxation and minority interests increased by £147 million
from £1,128 million to £1,275 million in the six months ended 31 December 2001,
and profit for the period increased by £19 million from £791 million to £810
million in the six months ended 31 December 2001.
PREMIUM DRINKS
Reported turnover increased by £394 million (10%) from £4,064 million in the six
months ended 31 December 2000 to £4,458 million in the six months ended 31
December 2001. Reported operating profit before goodwill amortisation and
exceptional items increased by £133 million (16%) from £834 million to £967
million. On an organic basis turnover grew 10% and operating profit increased by
17%. Turnover and operating profit in respect of the acquisition of the spirits
and wine business of Seagram on 21 December 2001 were not material in the period
and will be accounted for in the six months ending 30 June 2002.
Volume was up 5%, with global priority brands growing by 9% and local priority
brands by 2%. Volume of category management brands, which generated 26% of total
volume for the six months ended 31 December 2001, declined 4%.
Net sales grew 11% to £3,341 million with global priority brands up 15%.
Marketing grew 7% to £554 million.
Premium drinks has continued to deliver strong top and bottom line growth as a
result of its focus on global priority brands, which represent over 60% of total
premium drinks volume, and growth in ready to drink. The major markets of North
America, Great Britain and Spain delivered strong growth. In Ireland, operating
profit growth was constrained by the performance of Guinness which was affected
by the continued move from beer to spirits and wine. Top line growth in Premium
Drinks, combined with the incremental synergy savings of £26 million delivered
by the merger of Guinness and UDV, has led to a further improvement in return on
invested capital.
Volume and net sales growth by brand classification
Equivalent cases Volume growth Net sales
growth
million %
%
Johnnie Walker 6.0 (2) 1
Guinness 5.6 (1) 3
Smirnoff 11.8 26 59
J&B 3.8 5 5
Baileys 3.6 11 10
Cuervo 2.1 (4) 5
Tanqueray 1.0 2 1
Malibu 1.3 10 13
Total global priority brands 35.2 9 15
Local priority brands 7.8 2 12
Category management brands 13.7 (4) 1
56.7 5 11
Acquisitions 1.8
Total 58.5
MARKET REVIEW Global priority Local priority Category
brands brands
management brands Total
% % % %
Volume growth by market
Major markets
North America 19 (1) (8) 9
Great Britain 9 14 11 11
Ireland (2) 1 (6) (1)
Spain 13 15 (5) 11
14 6 (5) 8
Key markets 2 (2) 1 1
Venture markets 4 (16) (8) (2)
Total 9 2 (4) 5
Global priority Local priority Category
brands brands
management brands Total
% % % %
Net sales growth by market
Major markets
North America 32 - (5) 19
Great Britain 9 30 11 14
Ireland (1) 6 (3) 1
Spain 15 20 3 14
20 12 (1) 14
Key markets 6 7 6 7
Venture markets 8 19 - 6
Total 15 12 1 11
Operating profit 2001 2000 Organic growth
£ million £ million %
Major markets
North America 253 211 20
Great Britain 136 108 33
Ireland 86 88 5
Spain 60 52 18
535 459 20
Key markets 287 243 13
Venture markets 145 132 11
Total 967 834 17
Review by major market
North America
Volume up 9%
Marketing up 17%
Net sales up 19%
Operating profit up 20%
Key drivers:
• Growth of Smirnoff Ice
• Growth of Smirnoff Red and Twist
• Continued growth in global priority brands
• Weak volume performance in category management brands
Volume was up 9% and net sales grew 19% as a result of the increased proportion
of ready to drink and price increases on Cuervo and Johnnie Walker. Marketing
rose 17% driven by increased investment on Smirnoff Ice. Operating profit grew
by 20% driven by the continued rollout of Smirnoff Ice and growth of the global
priority brands.
The launch of Smirnoff Ice has been a key driver of net sales growth in these
results. However, the strength of the Smirnoff brand equity is further
demonstrated by the volume growth of the core brand which is up 11%, with Red up
4% and Twist flavours up over 150%.
The Smirnoff Ice introduction in North America continues to be a great success
with volume of 1.4 million equivalent cases in the period, supported by
marketing spend of £22 million and additional contributions by distributors of
£15 million. Smirnoff Ice has now reached 70% distribution in the grocery sector
and 40% in on trade outlets.
Volume of Johnnie Walker Black grew 6% and net sales grew 9% following a 3%
price increase. Marketing behind the 'Keep Walking' campaign grew over 60%
against the same period last year. Johnnie Walker Black, the market leader in
the deluxe scotch category, made further market share gains. Volume of Johnnie
Walker Red declined 4% with net sales broadly flat. J&B volume declined 9%,
though overall profitability grew against the comparable period as marketing was
cut on campaigns which were not performing.
Cuervo volume declined 3%. Price increases implemented in the past year to cover
the increased cost of agave led to net sales growth of 5%. Tanqueray volume and
net sales were broadly flat. Baileys volume grew by 8% driven by increased
marketing, up 9%, behind the 'Thief' campaign. Malibu volume increased by 12% as
a result of campaigns such as 'Seriously Easy Going', and marketing grew by 14%.
Guinness volume was flat despite the successful launch of Guinness Draught in a
Bottle which has sold nearly 45,000 equivalent cases since launch.
Local priority brand volume declined by 1%, primarily as a result of a decline
in Gordon's gin volume. Gordon's gin has faced increased competition from lower
end brands partly offset by price increases. Beaulieu Vineyard wines continued
to show strong growth with volume up 10%. Overall profitability across North
American local priority brands was broadly flat. Volume of category management
brands declined by 8%. These brands account for 25% of the volume in North
America but only 14% of the contribution after marketing. Therefore the volume
decline, which was offset by a reduction in marketing, did not impact overall
profitability.
Great Britain
Volume up 11%
Marketing up 6%
Net sales up 14%
Operating profit up 33%
Key drivers:
• Growth of Smirnoff Ice and Red
• Growth of Baileys
• Turnaround in Bell's
The business in Great Britain has delivered a very strong performance with
operating profit up 33%. Net sales grew by 14% primarily due to the growth of
the ready to drink and spirits brands.
Smirnoff volume grew 13% largely because of the strong performance of both
Smirnoff Ice and Smirnoff Red. Smirnoff Red grew 13% driven by a new advertising
campaign 'If Smirnoff Made' and investment behind the 'Smirnoff Experience'
dance music events. Smirnoff Ice volume grew 18% and its share of the ready to
drink category grew to nearly 25%, supported by the 'Clear As Your Conscience'
campaign.
Baileys performed extremely well, with volume growth of over 30%. Baileys is
benefiting from investment behind the 'Let Your Senses Guide You' campaign and
the continued rollout of the 'Large Measure Over Ice' programme. Guinness volume
declined by 1%, in line with the overall beer category.
Local priority brands' volume grew 14%. Archers volume grew nearly 80% with 4%
growth in the parent brand but mainly driven by Archers Aqua ready to drink
which was launched in May 2001 and reached 130,000 equivalent cases in the
period. Bell's volume grew 5% underpinned by the success of the 'Jools Holland'
advertising campaign and increased promotional activity in the grocery channel.
Gordon's gin volume was up 7%.
Ireland
Volume down 1%
Marketing flat
Net sales up 1%
Operating profit up 5%
Key drivers:
• 4% decline in Guinness volume
• Growth in Smirnoff Red and Baileys
Guinness accounts for 35% of premium drinks' total volume in Ireland. Guinness
volume fell 4%, therefore despite 3% volume growth in our global priority
spirits brands, total volume fell 1% in the period. The premium drinks market in
Ireland continues to move away from beer to spirits and wines and declined
slightly. Guinness market share in both the on and off trade has increased over
the last six months.
Baileys volume grew 8% with marketing spend up 20% driven by sponsorship of the
'Friends' television series and the on trade perfect serve programme.
Smirnoff Red volume grew 5% and net sales grew 7%. Smirnoff Ice volume declined
by nearly 20%. Smirnoff Ice achieved virtually full distribution at launch and
after the high initial level of consumer trial has settled to more normal
levels.
Spain
Volume up 11%
Marketing up 8%
Net sales up 14%
Operating profit up 18%
Key drivers:
• J&B volume up 14%
• J&B marketing up 28%
• Strong performance in Deluxe scotch and rum brands
J&B volume grew by 14%. There was some buying ahead of the January 2002 excise
duty increase. However, this accounted for only about 5 percentage points of the
growth. J&B is the clear market leader with a 26% share, over 4 percentage
points ahead of the number two brand. Marketing investment on J&B was up 28%,
following the introduction of the new 'Ampersand' campaign. Cardhu volume growth
continues, up 15% driven by advertising and an on premise tasting programme.
Smirnoff volume grew 12% and, in conjunction with price increases, this led to
net sales growth of 26%. Baileys volume grew 17% supported by the global 'Let
Your Senses Guide You' advertising campaign. Baileys net sales grew by 20%
following a price increase. Its market share of the cream liqueur category was
62%.
Malibu volume grew 22% benefiting from television advertising. Pampero volume
grew 38% and a price increase led to net sales growth of 53%. Pampero gained
market share and is again the fastest growing brand in Spain's fastest growing
category.
Key markets
Volume up 1%
Marketing down 1%
Net sales up 7%
Operating profit up 13%
Key drivers:
• Growth in Australia
• Growth in Latin America
• Growth in Africa
• Mix improvement
The performance in key markets must be viewed against the background of current
political and economic difficulties in many regions of the world. Overall growth
in key markets, with operating profit up 13% to £287 million, resulted from a
strong performance across a number of markets, particularly Australia,
Venezuela, Greece and the African markets. During the period, acquisitions made
last year contributed £118 million to turnover and £17 million to operating
profit.
Volume grew 1% and net sales grew 7% as a result of price and mix improvements.
Marketing is broadly in line with the comparable period last year, reflecting
increases behind proven campaigns in Australia and Africa, offset by reductions
in Japan and Brazil.
The global priority brands account for over 50% of total key market volume and
they grew by 2% with 6% growth in net sales.
Volume of the non global priority brands was flat, while net sales grew by 7%.
This is the result of a mix improvement due to strong growth in local priority
brands such as Bundaberg Rum in Australia and Buchanans in Venezuela, which was
up over 70%. These increases offset the decline in Spey Royal in Thailand and
VAT 69 in Venezuela.
The business in Australia continued to perform strongly. It has an established
ready to drink market and Diageo's ready to drink portfolio again delivered
growth with volume up 30%. Bundaberg volume grew 6%. Global priority brands grew
volume by 11% driven by strong performances from Smirnoff, Baileys and the
Johnnie Walker brand. In Greece, a similar mix of growth of global priority
brands and ready to drink led to a 10% increase in contribution after marketing.
Contribution after marketing in the key markets in Africa grew by 19% benefiting
from a strong performance across the global priority brands. Guinness volume was
up 3% with growth restricted by bottling capacity issues which are now largely
resolved. Net sales rose 24% driven by price increases and supported by
increased marketing, up 25%, mainly behind the successful 'Michael Power'
campaign. Spirits volume in Africa grew by 22%, with Johnnie Walker volume up 9%
and Smirnoff volume up 16%.
Thailand continues to be impacted by difficult economic conditions and the
excise duty increase implemented in April 2001. Volume was down 9% in the period
but contribution after marketing rose by 13%, as a result of mix benefits on
global priority brands and a reduction in marketing following the staging of the
Johnnie Walker Classic golf tournament there last year.
Volume in Taiwan grew by 9% with a strong performance from Johnnie Walker, up
10%, which benefited from the 'Keep Walking' campaign and increased focus on the
mainstream restaurant and off trade channels.
In Korea, contribution after marketing was up 6%. A strong performance in J&B
offset volume decline in Dimple which has been impacted by the increase in
distributor stocks at the end of June 2001 prior to the introduction of a new
liquor purchase card.
The weakness of the Japanese economy was reflected in a decline of 3% in volume.
The added impact of an adverse mix shift from deluxe to lower margin brands led
to a 16% decline in net sales. In this environment, marketing was reduced by 30%
and is now 19% of net sales in Japan. At this level, it is expected to support
brand equity in anticipation of a future upturn.
In Venezuela, focus on priority brands and the development of new routes to
market have delivered over 35% growth in contribution after marketing, despite a
16% reduction in volume. Johnnie Walker Black and Buchanans grew 21% and 72%
respectively, with the Johnnie Walker Black performance reflecting the benefit
of the 'Keep Walking' campaign. The growth of global priority brands was offset
by volume decline of 37% on VAT 69 as competitors took price reductions in what
is a low margin business. Brazil volume was down as the devaluation of the
Brazilian currency resulted in significant price increases. However, Smirnoff
Ice continues to perform well following its launch in April 2001 with volume of
48,000 equivalent cases in the period.
Performance in the Global Duty Free business has been impacted by the reduction
in world travel since 11 September and volume was down 7% against the comparable
period last year.
Venture markets
Volume down 2%
Marketing up 4%
Net sales up 6%
Operating profit up 11%
Key drivers:
• Growth across Europe, Asia and the Caribbean
• Global priority brands volume up 4%, net sales up 8% driven by price and
mix improvements
• Market in Latin America and Middle East impacted by economic conditions
While world events have proved even more challenging for many of these markets
than for the key markets, most markets have achieved growth and overall the
venture markets have performed well. Security concerns in the Middle East have
impacted the travel retail business there, and in Argentina action has been
taken to ensure there is minimum financial exposure in this volatile
environment. The Far East has also proved to be a difficult market, and in
Malaysia, the Philippines and India, performance has declined. However, the
Caribbean markets have performed well, as have European markets with the main
exception of Germany.
The focus on global priority brands, with increased investment behind them, is
delivering mix improvement which has resulted in net sales growth. Johnnie
Walker Black net sales were up 7%, Baileys up 10% and Smirnoff Red up 11%.
Caribbean markets showed strong growth, with Johnnie Walker Black volume up 16%.
Red Stripe volume was up 11% in Jamaica.
In Italy, there were volume and profit increases, with 15% volume growth in
Baileys driven by the global advertising campaign 'Let Your Senses Guide You'.
In Germany, double digit price increases on Johnnie Walker Red and Baileys as
part of the European pricing strategy impacted performance in the short term,
with global priority brand volume down 11% and net sales down 4%.
In Asia, contribution after marketing growth was achieved mainly as a result of
price increases.
BURGER KING
• System sales up 1%
• Total restaurants up 65 compared with 30 June 2001 to 11,437
• Worldwide comparable restaurant sales up 0.4%
• North America comparable restaurant sales up 1%
• Operating profit down 29% to £79 million
• Reported operating margin down 5.1 percentage points to 14.0%
The underlying operational performance in Burger King has improved in the six
months ended 31 December 2001. This improvement is evidenced by the slight
improvement in worldwide comparable restaurant sales against a 6% decline in the
six months ended 31 December 2000. This was driven by the significantly improved
performance in North America. Net restaurant numbers have increased by only 65
against an increase of 184 in the comparable period.
In North America, system sales grew 1% as a result of 1% growth in comparable
restaurant sales. A pipeline of new products has been created in the period.
Marketing effectiveness has also been improved as local and national programmes
have been aligned. Whilst the number of restaurants decreased in the period by
51, the overall system quality has improved as a result of the introduction of a
new criteria for restaurant standards. This focus on operational excellence has
led to an increase in overheads which has had an adverse effect on
profitability. These actions are essential to the future of Burger King as a
separate entity.
Comparable restaurant sales were down in the international business, although
the performance has improved against the prior full year. Comparable restaurant
sales were down 2% in Europe, 1% in Latin America and 3% in Asia Pacific. An
additional 116 restaurants were added in the period.
FINANCIAL REVIEW
Exchange rates
Exchange rate movements during the six month period, including the effect of the
currency option cylinders, favourably impacted profit before exceptional items
and taxation by £50 million. The beneficial impact on group trading profit was
£63 million (operating profit £61 million and share of profits of associates £2
million), offset by an adverse effect on the interest charge of £13 million. In
Premium Drinks, the beneficial impact on operating profit was £21 million.
Based on current exchange rates, it is expected that the full year impact of
exchange rate movements on profit before exceptional items and taxation will be
a positive effect of approximately £60 million.
Associates
The group's share of profits of associates before exceptional items was £162
million for the period compared with £139 million for the same period last year.
The 21.7% equity interest in General Mills contributed £46 million of this
increase in the two months ended 31 December 2001.
Goodwill
Goodwill amortisation in the period was £10 million, mainly in respect of the
Packaged Food businesses.
Exceptional items
Exceptional items in the six month period amounted to a net gain of £57 million
before taxation.
£281 million was charged to operating profit, comprising £21 million in respect
of the integration of UDV and Guinness, £40 million in respect of Seagram and
£220 million for the agreement on the distribution rights for the Cuervo brand.
Under the Cuervo agreement, Diageo and Jose Cuervo agreed to terminate their
litigation, new arrangements were formalised for the distribution rights for the
Cuervo brand in the United States (which now extend to 2013), and Diageo will
return its 45% equity stake in Jose Cuervo SA.
£17 million was charged to associates in respect of restructuring costs incurred
by General Mills following the acquisition of the Pillsbury business, and net
losses incurred on sales of fixed assets were £5 million.
Net gains on the disposal of businesses were £360 million, principally Pillsbury
(£326 million) and Guinness World Records (£35 million).
Interest
The interest charge in the period was £170 million, compared with £185 million
for the comparable period. A £34 million benefit arising from the disposal of
businesses and a £20 million benefit from the reduction in interest rates was
partly offset by other factors, principally increases in respect of exchange
rate movements and the share of General Mills' interest charge. Interest cover
was 7.8 times.
Taxation
The effective rate of taxation on profit before goodwill amortisation and
exceptional items for the period was 25%, compared with 25.5 % for the six
months ended 31 December 2000, restated from the originally reported 25%
following compliance with the new accounting standard for deferred tax. The
charge is based on an estimate of the effective tax rate for the financial year
as a whole.
Dividend
Diageo will pay an interim dividend of 9.3 pence per share on 22 April 2002, an
increase of 4.5% on last year's interim dividend. Payment to US ADR holders will
be made on 26 April 2002. The record date for this dividend will be 8 March
2002. A dividend reinvestment plan is available in respect of this dividend and
the plan notice date will be 28 March 2002.
Cash flow
Free cash inflow was £288 million, compared with £493 million in the prior
period. Cash inflow from operating activities was £821 million compared with
£995 million in the comparable period. This inflow was after £70 million of
integration costs and a £457 million increase in working capital mainly due to
seasonal factors. The incremental increase in working capital of £126 million,
against the same period last year, arose from increased sales in premium drinks,
a £31 million increase in respect of Burger King and a £15 million increase in
respect of Pillsbury. In addition there was a £10 million incremental increase
in respect of premium drinks in Spain as a result of purchasing ahead of the
excise duty increase in January 2002, £20 million in respect of the
restructuring of distribution in Portugal and £40 million in Great Britain.
Net interest payments were £184 million against £204 million in the comparable
period. Purchases of tangible fixed assets in the period amounted to £212
million, an increase of £34 million. Tax payments were £115 million compared
with £87 million.
The acquisition of businesses, primarily the spirits and wine businesses of
Seagram, resulted in a cash outflow of £3,502 million. 40 million ordinary
shares were purchased for cancellation in the period at a cost of £279 million,
compared with 18 million at a cost of £108 million in the same period last year.
Net cash inflow, before management of liquid resources and increase in loans,
was £353 million compared with an outflow of £118 million in the comparable
period.
Balance sheet
The consolidated balance sheet includes a provisional assessment of the assets
and liabilities of the acquired spirits and wine businesses of Seagram. The
excess of the purchase consideration over the estimated net tangible assets was
£2.8 billion and has been included in intangible assets.
At 31 December 2001, total shareholders' funds were £6,969 million compared with
£5,123 million at 30 June 2001. The increase was mainly due to the £501 million
retained income for the period, less £279 million following cancellation of own
shares and the release of £1,697 million of goodwill previously written off to
reserves. This release was principally in respect of the sale of the Packaged
Food business.
Gross borrowings were £7,613 million. Net borrowings were £4,994 million, a
decrease of £485 million from 30 June 2001. This decrease includes the net cash
inflow of £792 million on the purchases and sales of subsidiaries and free cash
flow of £288 million, less the £279 million purchase of shares and £452 million
equity dividend payment.
DIAGEO CONSOLIDATED PROFIT AND LOSS ACCOUNT
Six months ended Six months ended
31 December 2001 31 December 2000
Before
Before goodwill and Goodwill and
exceptional ex- ceptional
goodwill and Goodwill and
ex- ceptional items items
exceptional Total
items items (restated) (restated)
Total (restated)
£ million £ million £ million £ million £ million £ million
Turnover
Continuing operations 5,023 - 5,023 4,583 - 4,583
Discontinued operations 1,455 - 1,455 2,259 - 2,259
6,478 - 6,478 6,842 - 6,842
Operating costs (5,242) (291) (5,533) (5,607) (67) (5,674)
Operating profit
Continuing operations 1,046 (285) 761 933 (58) 875
Discontinued operations 190 (6) 184 302 (9) 293
1,236 (291) 945 1,235 (67) 1,168
Share of associates' profits 162 (17) 145 139 - 139
Trading profit 1,398 (308) 1,090 1,374 (67) 1,307
Disposal of fixed assets - (5) (5) - 6 6
Sale of businesses - 360 360 - - -
Interest payable (net) (170) - (170) (185) - (185)
Profit before taxation 1,228 47 1,275 1,189 (61) 1,128
Taxation (307) (116) (423) (303) 8 (295)
Profit after taxation 921 (69) 852 886 (53) 833
Minority interests
Equity (24) - (24) (22) - (22)
Non-equity (18) - (18) (20) - (20)
Profit for the period 879 (69) 810 844 (53) 791
Interim dividend (309) - (309) (298) - (298)
Transferred to reserves 570 (69) 501 546 (53) 493
Pence per share
Basic earnings 26.2p (2.1)p 24.1p 25.0p (1.6)p 23.4p
Diluted earnings 26.1p (2.0)p 24.1p 24.9p (1.5)p 23.4p
Interim dividend 9.3p - 9.3p 8.9p - 8.9p
Average shares 3,358m 3,380m
DIAGEO CONSOLIDATED STATEMENT OF
TOTAL RECOGNISED GAINS AND LOSSES
Six months ended Six months ended
31 December 2001 31 December 2000
£ million £ million
Profit for the period - group 731 700
- associates 79 91
810 791
Exchange adjustments (83) 31
Tax on exchange in reserves 6 -
Total recognised gains and losses 733 822
DIAGEO CONSOLIDATED BALANCE SHEET
31 December 2001 30 June 2001 31 December 2000
(restated) (restated)
£ million £ million £ million £ million £ million £ million
Fixed assets
Intangible assets 5,589 5,672 5,419
Tangible assets 2,360 3,176 3,051
Investments 3,225 1,473 1,578
11,174 10,321 10,048
Current assets
Stocks 2,271 2,232 2,208
Debtors (including franchisee loans
of £233 million, less
non-returnable proceeds of £153
million) 3,817 3,191 3,677
Cash at bank and in hand 2,286 1,842 1,089
8,374 7,265 6,974
Creditors - due within one year
Borrowings (3,446) (3,602) (3,336)
Other creditors (3,877) (3,495) (3,592)
(7,323) (7,097) (6,928)
Net current assets 1,051 168 46
Total assets less current 12,225 10,489 10,094
liabilities
Creditors - due after one year
Borrowings (4,132) (3,993) (3,626)
Other creditors (62) (96) (127)
(4,194) (4,089) (3,753)
Provisions for liabilities and (488) (671) (676)
charges
7,543 5,729 5,665
Capital and reserves
Called up share capital 976 987 986
Reserves 5,993 4,136 4,113
Shareholders' funds 6,969 5,123 5,099
Minority interests
Equity 189 207 153
Non-equity 385 399 413
574 606 566
7,543 5,729 5,665
DIAGEO CONSOLIDATED CASH FLOW STATEMENT
Six months ended Six months ended
31 December 2001 31 December 2000
£ million £ million £ million £ million
Net cash inflow from operating activities 821 995
Dividends received from associates 48 34
Returns on investments and servicing of finance
Interest paid (net) (184) (204)
Dividends paid to equity minority interests (21) (21)
(205) (225)
Taxation (115) (87)
Capital expenditure and financial investment
Purchase of tangible fixed assets (212) (178)
Purchase of own shares (net) (69) (67)
Sale of fixed assets 20 21
(261) (224)
Free cash flow 288 493
Acquisitions and disposals
Purchase of subsidiaries (3,502) (97)
Sale of subsidiaries 4,294 -
792 (97)
Equity dividends paid (452) (425)
Cash flow before liquid resources and financing 628 (29)
Management of liquid resources (226) 56
Financing
Issue of share capital 4 19
Own shares purchased for cancellation (279) (108)
Increase in loans 11 189
(264) 100
Increase in cash in the period 138 127
MOVEMENTS IN NET BORROWINGS
Six months ended Six months ended
31 December 2001 31 December 2000
£ million £ million
Increase in cash in the period 138 127
Cash flow from increase in loans (11) (189)
Change in liquid resources 226 (56)
Change in net borrowings from cash flows 353 (118)
Exchange adjustments 176 (55)
Non-cash items (44) 16
Decrease/(increase) in net borrowings 485 (157)
Net borrowings at beginning of the period (5,479) (5,545)
Net borrowings at end of the period (4,994) (5,702)
NOTES
1. Segmental analysis
2001 2000
Operating profit Turnover Operating profit
Turnover
£ million £ million £ million £ million
Class of business:
Premium Drinks 4,458 967 4,064 834
Quick Service Restaurants 565 79 519 99
Continuing operations 5,023 1,046 4,583 933
Discontinued operations 1,455 190 2,259 302
6,478 1,236 6,842 1,235
Geographical area by destination:
Europe 2,331 427 2,147 373
North America 1,548 322 1,395 299
Asia Pacific 451 115 456 111
Latin America 345 119 345 91
Rest of World 348 63 240 59
Continuing operations 5,023 1,046 4,583 933
The above analysis of operating profit is before goodwill amortisation and
exceptional items. The geographical analysis is based on the location of the
third party customers. The discontinued operations comprise the packaged food
businesses (Pillsbury).
2001 2000
£ million £ million
Net assets:
Premium Drinks 8,772 5,307
Quick Service Restaurants 1,482 1,370
Continuing operations 10,254 6,677
Discontinued operations - 3,883
10,254 10,560
Investments in associates 2,927 1,246
Tax, dividends and other (644) (439)
Net borrowings (4,994) (5,702)
7,543 5,665
Europe 4,090 3,911
North America 5,450 5,921
Asia Pacific 286 305
Latin America 247 295
Rest of World 181 128
10,254 10,560
Weighted average exchange rates used in the translation of profit and loss
accounts were US dollar - £1 = $1.44 (2000 - £1 = $1.46) and euro - £1 = €1.61
(2000 - £1 = €1.65). Exchange rates used to translate assets and liabilities at
the balance sheet date were US dollar - £1 = $1.46 (2000 - £1 = $1.49) and euro
- £1 = €1.63 (2000 - £1 = €1.59). 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 = $1.46 (2000 - £1 = $1.61) and euro - £1 = €1.62 (2000 - £1
= €1.59).
2. Goodwill and exceptional items
2001 2000
£ million £ million £ million £ million
Charged to:
Operating costs Goodwill amortisation (10) (11)
Guinness UDV integration (21) (8)
Jose Cuervo settlement (220) -
Seagram costs (40) -
Beer production reorganisation - (5)
Business ownership restructuring - (25)
Burger King items - (18)
(291) (67)
Associates Share of reorganisation costs of General Mills (17) -
Disposal of fixed assets (Loss)/gain on sales (5) 6
Sale of businesses Packaged Food 326 -
Guinness World Records 35 -
Other (1) -
360 -
47 (61)
3. Taxation
The £423 million total taxation charge for the six months ended 31 December 2001
comprises UK tax of £1 million, foreign tax of £373 million and tax on
associates of £49 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
(restated)
£ million £ million
Profit for the period 810 791
Dividends (309) (298)
501 493
Exchange adjustments (83) 31
Tax on exchange in reserves 6 -
New share capital issued 4 19
Purchase of own shares for cancellation (279) (108)
Goodwill on disposals of businesses 1,697 -
Net movement in shareholders' funds 1,846 435
Shareholders' funds at beginning of the period 5,123 4,664
Shareholders' funds at end of the period 6,969 5,099
6. Net borrowings
31 December 2001 30 June 31 December 2000
2001
£ million £ million £ million
Debt due within one year and overdrafts (3,446) (3,602) (3,336)
Debt due after one year (4,132) (3,993) (3,626)
Net obligations under finance leases (35) (41) (40)
(7,613) (7,636) (7,002)
Less: Cash at bank and in hand 2,286 1,842 1,089
Interest rate and foreign currency swaps 333 315 211
Net borrowings (4,994) (5,479) (5,702)
7. Net cash inflow from operating activities
2001 2000
£ million £ million
Operating profit 945 1,168
Exceptional operating costs 281 56
Restructuring and integration payments (70) (87)
Depreciation and amortisation charge 166 197
Increase in working capital (457) (331)
Other items (44) (8)
Net cash inflow from operating activities 821 995
8. Basis of preparation
The interim financial information has been prepared on the basis of accounting
policies consistent with those applied in the accounts for the year ended 30
June 2001, except for the accounting policy change set out in note 9 below. The
information is unaudited but has been reviewed by the auditors, KPMG Audit Plc,
and their report is reproduced after these notes. The information does not
comprise the statutory accounts of the group. The statutory accounts of Diageo
plc for the year ended 30 June 2001 have been filed with the registrar of
companies. KPMG Audit Plc have reported on these accounts; their report was
unqualified and did not contain any statement under section 237 of the Companies
Act 1985.
9. Accounting policy changes
The interim financial information complies with the following Financial
Reporting Standard issued by the UK Accounting Standards Board.
FRS 19 - Deferred tax. This standard requires full provision to be made for
deferred tax assets and liabilities arising from timing differences between the
recognition of gains and losses in the financial statements and their
recognition in a tax computation. It only requires recognition when the
resulting deferred tax can be justified as an asset or liability in its own
right, thus excluding, for example, deferred tax on periodic revaluations of
fixed assets and on retained profits in overseas subsidiaries and associates
prior to any commitment to remit those profits. The standard allows the optional
discounting of all or none of the deferred tax assets and liabilities, and the
group has elected not to discount.
Compliance with this standard has increased the deferred tax provision at 30
June 2001 by £64 million and at 30 June 2000 by £47 million. The tax charge for
the year ended 30 June 2001 increased by £19 million of which £13 million is in
respect of profit before goodwill amortisation and exceptional items giving a
restated effective tax rate, before goodwill amortisation and exceptional items,
of 23.6% compared with the 23% originally reported.
INDEPENDENT REVIEW REPORT TO DIAGEO plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 31 December 2001 set out on pages 16 to 22. We have read
the other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the
financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing annual accounts except where they are to be
changed in the next annual accounts in which case any changes, and the reasons
for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of Interim Financial Information issued by the Auditing Practices
Board. A review consists principally of making enquiries of group management and
applying analytical procedures to the financial information and underlying
financial data and, based thereon, assessing whether the accounting policies and
presentation have been consistently applied unless otherwise disclosed. A review
is substantially less in scope than an audit performed in accordance with
Auditing Standards and therefore provides a lower level of assurance than an
audit. Accordingly, we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 December 2001.
KPMG Audit Plc
Chartered Accountants
London, 20 February 2002
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, market standing and volume of products, overall market trends, the impact
of interest, exchange rates or the introduction of the euro, 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:
Competitive product and pricing pressures and unanticipated actions by
competitors, including changes in marketing expenditures and strategies,
that could impact Diageo's market share, increase expenses and hinder
growth potential;
The effects of business combinations, acquisitions or disposals and the
ability to realise expected synergies and/or costs savings;
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,
environmental laws, regulatory approval of future acquisitions or
disposals, and development of litigation directed at the drinks and
spirits industry;
Changes in consumer preferences and tastes, demographic trends or
perception about health related issues;
Changes in the cost and availability of raw materials and labour costs;
Changes in economic conditions in countries in which Diageo operates,
including changes in levels of consumer spending;
Renewal of distribution rights on favourable terms when they expire;
Diageo's ability to protect its intellectual property rights; and
Changes in financial and equity markets, including significant interest
rate and foreign currency rate fluctuations.
Past performance cannot be relied upon as a guide to future performance.
All oral and written 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 and the 'Risk Factors' contained in the Form 20-F
filed with the SEC.
This information is provided by RNS
The company news service from the London Stock Exchange
Monday, 20th May 2024
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