Preliminary results for the year ended 30 June 2008

Diageo reports another year of strong organic growth: net sales up 7%, operating profit up 9% and underlying eps up 11%2

Results at a glance

• Marketing spend increased 5%. Excluding Korea, marketing spend on non ready to drink brands increased 8%
• Operating exceptional charge of £78 million in the year ended 30 June 2008 in respect of the restructuring of the Irish brewing operations
• Interest charge increased £90 million to £341 million
• eps before exceptional items 2 increased from 54.8 pence in 2007 to 60.6 pence in 2008, which excluding acquisitions, disposals and exchange is an 11% increase (underlying eps)
• Return on invested capital increased 50 basis points to 14.9%
• Free cash flow of £1,252 million
• Recommended full year dividend per share increase of 5% to 34.35 pence
• £1.9 billion returned to shareholders: £857 million in dividends and £1.0 billion of share buyback

1  For year ended 30 June 2008 tax rate of 24.9%. For year ended 30 June 2007 tax rate of 32.4%. Discontinued operations gain after  

  tax for the year ended 30 June 2008 of £26 million, for the year ended 30 June 2007 of £139 million.

2  Using an underlying effective tax rate of 24.5% in 2008 and 25.1% in 2007.

Unless otherwise stated in this announcement: net sales are sales after deducting excise duties; percentage movements are organic movements; commentary refers to organic movements and share refers to value share. See page 28 for additional information for shareholders and an explanation of non-GAAP measures including the reconciliation of basic eps to underlying eps.  

Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2008 said: 

"The combination of Diageo's leading brands and our global reach has delivered another year of strong organic growth with net sales up 7% and operating profit up 9%. 

The main drivers of top and bottom line growth were International, where scotch in Latin America and beer in Africa drove net sales growth of 16%, and North America, where growth in the priority brands drove a 5% increase in net sales. In Europe, we delivered better performance than last year, with net sales up 3% from growth in Eastern Europe, Russia and Great Britain. In Asia Pacific, even though overall performance was impacted by the loss of our Korean licence for part of the year, we grew the top line 2% as we gained share in China and expanded in India and the markets of South East Asia. 

We have continued to invest behind great campaigns and this year has seen our global priority brands again extend their leadership positions. Smirnoff grew across all markets posting 8% volume and 10% net sales growth. Johnnie Walker grew net sales by 12% and now has annual net sales of over £1 billion. The return to growth of JεB in Europe together with its strong performance in International delivered 9% net sales growth. Guinness grew net sales 6% with over 50% of that growth coming from Africa, where the brand grew 13%. Our other beer brands in Africa grew net sales 25%. 

Price rises and mix improvement covered increased input costs and gross margin has improved. We have benefited from marketing spend efficiencies and scale in our global brands and we have reduced marketing spend in ready to drink to maintain the profitability of that segment. Overall we have delivered a further 70 basis points organic improvement in operating margin. 

During the year we added Ketel One vodka, Zacapa rum and Rosenblum Cellars wine to our brand range. These are already successful brands and we intend to build on that success. 

Our financial results in recent years have mirrored the consistent improvement we have achieved in our business and we finish the year with a stronger business. We enter the new financial year facing slowing global GDP growth and more challenging global economic trends, but given the strength and diversity of Diageo's business we believe we can deliver organic operating profit growth for the coming year within our range of 7% to 9%. Together with the expected positive impact of exchange rate movements on reported results and our share buyback programme this means we expect to deliver double-digit reported eps growth." 

Regional summary 

North America - Strong performance of priority and reserve brands continued to drive growth

• Volume up 2%

• Net sales up 5%

• Marketing spend up 3%

• Operating profit up 10%

North America's performance reflects strong net sales growth with spirits up 7%, beer up 6% and wine up 12%, partially offset by a 10% decrease in net sales of ready to drink. Strong volume growth in priority and reserve brands offset weakness in value brands. Smirnoff, Johnnie Walker, Captain Morgan, Crown Royal, Guinness, Sterling Vineyards and Chalone wines were again the performance leaders. Price increases and strong growth of the reserve brands Cîroc, Don Julio and Johnnie Walker Blue Label drove net sales growth. Marketing excluding ready to drink was up 5% with strong investment behind the reserve brands. Diageo's share of US spirits was broadly maintained at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.

Europe - Improved performance through focused investment in key growth drivers

• Volume up 2%

• Net sales up 3%

• Marketing spend up 6%

• Operating profit up 3%

In Europe performance improved against last year driven by growth in spirits, with net sales up 5% and the continued outperformance of Guinness against the beer categories in Ireland and Great Britain. Increased focus behind the off trade in Great Britain, behind premium scotch brands in Continental Europe and further investment in Eastern Europe and Russia drove the growth in spirits in Europe. Smirnoff and Johnnie Walker performed particularly strongly with net sales up 5% and 11% respectively and JεB returned to growth in the region supported by the 'Start a Party' campaign. Ready to drink however declined by a further 13%. Marketing spend increased more strongly than net sales with increased spend on the priority brands in Great Britain and Ireland and behind Johnnie Walker in Spain.

International - Strong performance of beer and scotch drove double-digit growth in both net sales and operating profit 

• Volume up 5%
• Net sales up 16%
• Marketing spend up 16%
• Operating profit up 19%

International continues to drive overall Diageo performance as scotch in Latin America, South Africa and Global Travel and Middle East grew net sales 11%, 24% and 20% respectively, and Diageo's beer brands in Africa continued their strong growth with net sales up 19%. Growth in International is becoming increasingly broad based and Smirnoff, Baileys, Cacique and JεB all grew as a result of increased consumer demand and marketing spend, which grew strongly again behind successful marketing campaigns. Price increases and mix improvements across most of Diageo's brands in all hubs within International resulted in strong operating profit growth. 

Asia Pacific - Investments in market infrastructure and disruption in Korea impacted performance

• Volume up 2%

• Net sales up 2%

• Marketing spend down 6%

• Operating profit down 12%

The overall performance in Asia Pacific was affected by a number of factors including the loss of the import licence in Korea for part of the year. Investment continued to support the expansion of the regional infrastructure with the increase in locally bottled brands in India and the opening up of new markets such as Vietnam and the focus on priority brands in markets such as Australia. Diageo has maintained market leading positions and continued to grow share and awareness in the key scotch markets of the region such as China and Korea. Smirnoff also continued to grow its leadership of the vodka category in the region with growth in net sales of 29% and share gains in key markets such as India and Australia.  

Financial 

• The deficit in respect of post employment plans reduced by £11 million from £419 million at 30 June 2007 to £408 million at 30 June 2008. The reduction in equity valuations in the year was offset by the increase in value of interest rates and inflation swaps between 30 June 2007 and 30 June 2008. In the year ended 30 June 2008 finance income under IAS 19 was £46 million. In the year ending 30 June 2009, finance income under IAS 19 is expected to be negligible. 

• In the year ended 30 June 2008, exchange rate movements reduced operating profit by £5 million and increased the net interest charge by £1 million.

• For the year ending 30 June 2009, at current exchange rates, foreign exchange movements (excluding the exchange impact under IAS 39) are forecast to increase operating profit by £60 million and increase the interest charge by £15 million.

Brand summary

* Reported and organic volume movements are the same for all brands in all regions

** Spirits brands excluding ready to drink.

Focus on the global priority brands drove almost two thirds of total net sales growth. Smirnoff performed strongly across all regions with new campaigns and the launch of Smirnoff Black in a number of markets driving volume growth. Price increases across most markets resulted in net sales growth.

The International region together with Eastern Europe and Russia led the growth in Johnnie Walker. The strong performance of Johnnie Walker Black Label, Johnnie Walker super deluxe labels and price increases in key markets drove price/mix improvement of 7 percentage points.

Captain Morgan sustained its strong performance from the first half. While the key driver of growth is the brand's performance in North America, the brand is now delivering double-digit net sales growth in each region.

Strong growth in Great Britain, Russia and Latin America drove the growth in Baileys. In Great Britain and Russia Baileys Original Irish Cream performed strongly, while in Latin America Baileys flavours continued to deliver double-digit net sales growth supporting further growth in Baileys Original Irish Cream. Overall results were constrained by lower volume on Baileys flavours in all regions except International as the brand lapped the launch in fiscal 2007.

JεB grew volume across all regions, in many markets supported by the success of the global 'Start a Party' campaign. Price increases in key markets resulted in improved price/mix driving net sales growth.

While Jose Cuervo grew net sales in Latin America and Europe, Jose Cuervo's performance continued to be affected by the growth of the ultra premium tequila segment in North America. Price increases and more premium launches have driven net sales growth in Latin America and Europe.

Tanqueray increased net sales in all regions. North America remained the main contributor to growth, where Tanqueray outperformed the gin category, driven by the continued growth of Tanqueray Rangpur. A price increase on the core brand in North America drove price/mix improvement.

Crown Royal continued to take share in North America and net sales grew benefiting from price increases and successful innovations. 

Price increases on Buchanan's, in line with Diageo's overall scotch pricing strategy, impacted volume but drove net sales growth. 

Windsor's performance reflected the loss of licence in Korea for part of the year which reduced net sales per case while Diageo Korea was operating through a third party distributor from July 2007 to the beginning of March 2008. 

Growth in Guinness was fuelled by double digit net sales growth in International and outperformance against the beer categories in Ireland and Great Britain as a result of successful advertising campaigns. Net sales grew ahead of volume growth driven by price increases in key markets.

Crown Royal, Buchanan's and Windsor were the key local priority brands. In addition Malta Guinness showed strong net sales growth as a result of successful marketing campaigns, a new product launch and the development of the off trade in the key markets of Nigeria and Ghana.

Net sales growth of category brands was driven by the success of our global scotch strategy, namely a focus on net sales growth not volume growth. Price/mix improvement in scotch combined with double-digit growth of beer brands in Africa and growth of reserve and premium brands such as Cîroc, Don Julio and the Classic Malts led to 9 percentage points of price/mix improvement.

Ready to drink remains challenging as expected and net sales were down 5% driven by North America and Europe. Strong performance of Smirnoff ready to drink in International with growth in Nigeria, South Africa, Brazil and Venezuela with the introduction of new flavours and price increases drove 13% net sales growth in the region which partially offset the impact of the segment's decline in North America and Europe. Diageo's ready to drink brands performed strongly in Australia prior to the 70% duty increase which was implemented on the ready to drink segment at the end of April 2008. Since the increased duty was introduced, net sales of ready to drink have declined, partially offset by net sales growth in core spirits.

Management Reports

The Annual Report for the year ended 30 June 2008, which will be published on 15 September 2008, will comprise the Annual Financial Report which Diageo is required to publish under the EU Transparency Directive for the financial year which began on 1 July 2007. The trading update to be issued at the time of the AGM on 15 October 2008 will form the first interim management statement for the year ending 30 June 2009.

BUSINESS REVIEW

For the year ended 30 June 2008

OPERATING REVIEW - analysis by business area

North America

Summary:

• Growth driven by priority and reserve brands

• Net sales growth of spirits up 7%, wine up 12% and beer up 6% 

• The majority of the priority spirits, wine and beer brands gained share

• Share of US spirits broadly maintained at 28.3 percentage points despite share loss in value brands as priority brands gained 0.3 percentage points of share

• Ready to drink segment continued to be challenging with net sales down 10%

Reported performance:

Net sales were £2,523 million in the year ended 30 June 2008 up by £51 million from £2,472 million in the prior year. Reported operating profit increased by £57 million to £907 million in the year ended 30 June 2008.  

Organic performance:

The weighted average exchange rate used to translate US dollar sales and profit moved from £1 = $1.93 in the year ended 30 June 2007 to £1 = $2.01 in the year ended 30 June 2008. Exchange rate impacts decreased net sales by £73 million. Acquisitions increased net sales by £6 million, the loss of distribution rights for certain champagne brands decreased net sales by £6 million and there was an organic increase of £124 million. Exchange rate impacts reduced operating profit by £27 million and transfers of costs between regions increased operating profit by £4 million. Acquisitions and the loss of distribution rights for certain champagne brands decreased operating profit by £2 million and there was an organic increase in operating profit of £82 million. 

* Spirits brands excluding ready to drink

Overall volume growth was driven by the priority brands. Price increases on 40% of spirits volume in the US drove net sales growth despite negative mix within the global priority brands due to the strong growth of Smirnoff and Captain Morgan. The continued challenges in the ready to drink segment reduced overall volume growth by 1 percentage point and net sales growth by 2 percentage points. Marketing spend grew 3% as investment was realigned behind the priority and reserve brands and away from ready to drink. Marketing excluding ready to drink grew 5%. Diageo grew share on the majority of its priority spirits and wine brands. Loss of share in the value brands resulted in overall share of US spirits being broadly maintained during the year at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.

In Canada share gains of 1.0 percentage points were delivered in the spirits category. Volume grew 6% driven by the global priority brands and net sales were up 9% as price increases were implemented.

Smirnoff continued its strong performance from the first half and grew volume 8%. Price increases were taken in key markets driving net sales growth of 12% and share grew 0.2 percentage points. Growth of Smirnoff Red was driven by two successful advertising campaigns, the 'Diamonds' programme and 'Vladimir's Journey', which reinforced the quality image of the brand and its heritage. Smirnoff flavours were driven by the launch of three new flavours: Blueberry, Passion Fruit and White Grape and the 'Simple Drinks' campaign, which taught consumers simple ways of making drinks at home with flavoured vodka.  

Johnnie Walker also grew ahead of the category with volume up 5% and net sales up 10% driven by Johnnie Walker Black Label and the super deluxe labels, leading to share growth of 1.2 percentage points. Price increases were taken across the Johnnie Walker range. Expansion of the Johnnie Walker Blue Label bottle engraving programme and the distribution of Johnnie Walker Blue Label King George V drove growth of the super deluxe labels and improved mix.

Captain Morgan volume was up 7% and net sales were up 12% driven by Captain Morgan Original Spiced rum which gained a further 0.6 percentage points of share despite the launch of two competitor brands in the rum category. Successful marketing campaigns around holidays and the 'Pose-off' contest continued to build this iconic brand.

The release of Jose Cuervo Platino in the first half of 2008 to good consumer response is one of the ways Jose Cuervo is positioning itself in an increasingly premiumising category. Jose Cuervo Especial experienced heavy pricing competition and volume decreased 5% as the Jose Cuervo brand maintained price and in some states increased it, to support the premiumisation of the brand. Marketing spend on Jose Cuervo was weighted toward the summer season and promoted the mixability of the brand.

Tanqueray again outperformed a declining gin category gaining 1.6 percentage points of share driven by the continued growth of Tanqueray Rangpur.  

Crown Royal continued to take share in the North American whiskey category, up 0.4 percentage points. Volume grew 5% and price increases drove net sales up 9%. Crown Royal Cask 16, launched in October 2007, helped to drive mix. The brand was supported by two off trade promotions, the 'Legend of the Purple Bag' and 'I'd Rather Be' as well as its continued sponsorship of NASCAR.

Guinness showed good growth against the import segment which was broadly flat, with volumes up 5% driven by keg sales and Guinness Extra Stout. Net sales grew 7% as price increases were implemented. The brand was supported by a new advertising campaign, 'Guinness Alive Inside'.  

The local priority brands grew volume 3% and net sales were up 8% benefiting from price increases and mix improvement from the higher margin spirits brands. Crown Royal led this performance. Buchanan's volume was up 18% and net sales up 24% and Seagram's 7 Crown and Seagram's VO grew net sales 4% and 1% respectively on flat volumes. Local priority wines grew volume 6% and net sales were up 8% driven by strong performance of Sterling Vineyards and Chalone and price/mix improvement in Beaulieu Vineyards.

Within the category brands, mix improvement was driven by strong growth of Don Julio volume up 19% and net sales up 22%, the Classic Malts volume up 14% and net sales up 19%, Bushmills volume up 13% and net sales up 16% and Cîroc volume up 89% and net sales up 90% on strong marketing and distribution gains. Successful marketing of Smithwick's Irish heritage delivered strong growth albeit off a low base with volume up 19% and net sales up 20% following national price increases. This offset net sales declines among the value brands such as Gordon's vodka, net sales down 10% and Gordon's Gin, down 1%.

The ready to drink segment continued to decline with volume down 13% and net sales down 10%. This was driven by progressive adult beverages, led by the decline of Smirnoff Ice. Smirnoff Ice Light, Smirnoff Ice Strawberry Acai and Captain Morgan Parrot Bay Mojito were introduced in the second half of the year to help refresh the segment. The decline in progressive adult beverages was partially offset by the success of the recently launched Smirnoff cocktail line which has performed very well to date. Consequently marketing spend has been reduced on progressive adult beverages and support provided to the spirit based cocktails.

On 9 June 2008, Diageo completed the acquisition of a 50% equity stake in the newly formed company Ketel One Worldwide BV, which holds the exclusive and perpetual rights to market, sell and distribute Ketel One vodka products.

Europe

Summary:

• Eastern Europe and Russia contributed over two thirds of net sales growth

• Strong performance in GB generated nearly 20% of the region's growth

• Guinness' outperformance against the beer categories in Great Britain and Ireland continued

• Strong performance of JεB with net sales growth driven by price increases in Spain and volume growth in Continental Europe

• Price increases implemented across the region

Reported performance:

Net sales were £2,630 million in the year ended 30 June 2008 up by £203 million from £2,427 million in the prior year. Reported operating profit decreased by £3 million to £720 million in the year ended 30 June 2008. Exceptional costs of £78 million in respect of restructuring costs for the Irish brewing operations are included within operating expenses in the year ended 30 June 2008. Reported operating profit excluding exceptional items increased by £75 million to £798 million in the year ended 30 June 2008.

Organic performance:

The weighted average exchange rate used to translate euro sales and profit moved from £1 = €1.48 in the year ended 30 June 2007 to £1 = €1.36 in the year ended 30 June 2008. Exchange rate impacts increased net sales by £128 million. Acquisitions increased net sales by £1 million, transfers between regions decreased net sales by £1 million and there was an organic increase of £75 million. Exchange rate impacts increased operating profit by £47 million. Transfer of costs between regions increased operating profit by £6 million, exceptional costs decreased operating profit by £78 million and there was an organic increase in operating profit of £22 million. 

* Spirits brands excluding ready to drink

Strong volume growth in Great Britain, driven by Smirnoff and Baileys, and in Eastern Europe and Russia, was partially offset by continued volume weakness in Iberia. Price increases across Europe, combined with focus on the premium spirit brands, offset negative market mix from the rapid growth in Eastern Europe and resulted in net sales up 3%.

Global priority brands were the key growth driver with volume up 3% and net sales up 4%. Johnnie Walker was the main contributor with double-digit net sales growth. JεB, Smirnoff and Baileys also performed strongly and Guinness continued its positive performance from the first half, delivering net sales growth for the full year.

Smirnoff volume was up 6% and net sales were up 5%. This performance was driven by Great Britain where new advertising campaigns and a successful Christmas trading period drove volume up 10%. Net sales were up 8% as a simplified promotional strategy led to higher volume but an increased percentage of that volume being sold on promotion. Within Continental Europe negative market mix generated by the growth of Smirnoff Vladimir in Poland was partially offset by price increases and the growth of Smirnoff Black as it was seeded across a number of markets.

Johnnie Walker volume was up 6% driven by growth in Eastern Europe and Russia both of which were up over 30%, albeit off a small base. Consistent advertising has increased awareness and the status of the brand in these markets. This growth was partially offset by declines in Iberia and Greece. Net sales were up 11% as a result of price increases and mix improvement as investment focused on Johnnie Walker Black Label and Johnnie Walker super deluxe labels.

Baileys returned to growth in Great Britain and delivered strong growth in Russia, resulting in overall volume and net sales up 4%. In Great Britain a return to advertising on television and a revised promotional strategy at Christmas drove the brand back to growth. In Russia Baileys continued to demonstrate great potential with net sales growth of 37%, albeit off a small base. In Continental Europe net sales were flat as the brand lapped the Baileys flavours launch in the prior year. 

JεB returned to growth in Europe supported by the 'Start a Party' advertising campaign and expansion across Continental Europe. In Iberia category volume declines worsened, however JεB delivered net sales growth and share gains as further price increases were implemented. Within Continental Europe, France and Eastern Europe were the main growth drivers. In France a price increase was implemented and JεB gained share. In Romania and Bulgaria, the brand's biggest markets in Eastern Europe, the 'Start a Party' campaign has delivered strong growth.

Guinness volume was flat and net sales were up 3% as the brand continued to outperform the beer categories in both Ireland and Great Britain. This was the result of new advertising campaigns, focus on quality and the cooler summer of 2007. In Ireland net sales were up 2% and share gains were made in both the on and off trade, driving an overall share gain for Diageo Ireland in the beer category. In Great Britain the beer category worsened in the second half. However Guinness net sales were up 2% as it continued to outperform the category, particularly in the on trade where it recorded its highest ever share. Volume was up 3% in the rest of Europe as a result of growth across a number of markets which combined with price increases led to net sales up 6%.

Local priority brand volume was down 3% and net sales were down 2%. This was driven by beer in Ireland and Cacique in Spain. Local beer brands in Ireland declined, impacted by the continued decline of the beer category in the on trade and the decision to reduce the volume sold on promotion in the off trade. Carlsberg however delivered net sales growth as a result of distribution gains and a new advertising campaign and gained share. In Spain lower volumes of Cacique were partially offset by price increases.

Category brands delivered price/mix improvement with volume flat and net sales up 4%, as a result of price increases on category scotch brands and the strategy to drive net sales from wine through a change in promotional strategy and mix improvement.

Ready to drink continued to decline driven by Smirnoff Ice in Great Britain. The segment now accounts for less than 5% of net sales in the region.

International 

Summary:

• Continued double-digit net sales growth in Latin America, Africa and Global Travel and Middle East driven by strong price/mix improvements across categories and markets
• In Africa strong performance of beer brands with net sales growth of 19% combined with continued net sales growth of spirits brands up 21% drove very strong growth
• Volume growth across the region combined with price increases drove strong net sales growth of 14% in scotch 
• Increased focus on categories outside of scotch and beer, such as vodka and rum, drove broader based growth