Diageo Half Year Results, Six Months Ended 31 December 2010
By Diageo Plc, PRNEWednesday, February 9, 2011
LONDON, February 10, 2011 - Organic net sales growth of 4%. Stronger volume growth and
improved price/mix was delivered in North America; continued momentum in
International again led to double digit top line growth in the region and top
line growth improved in Asia Pacific. Europe's performance was weaker given
the challenging economic conditions. At a group level, top line growth
delivered gross margin improvement. Investment to drive growth continued with
organic marketing spend up 10% and increased overhead investment,
particularly in Latin America. Organic operating profit grew 2%. Returns
increased with continued strong free cash flow of GBP775 million.
Summary results
First half First half Organic Reported
F11 F10 movement movement
Volume(1) 79.0m 76.8m 3% 3%
Net sales GBP5,320m GBP5,207m 4% 2%
Marketing spend GBP813m GBP725m 10% 12%
Operating profit before
exceptional items GBP1,727m GBP1,631m 2% 6%
Operating profit GBP1,718m GBP1,536m 12%
Reported tax rate 21.8% 22.3%
Profit attributable to parent
company's equity shareholders GBP1,194m GBP1,016m 18%
Free cash flow GBP775m GBP904m GBP(129)m
Basic eps - pence per share 47.9 40.9 17%
eps pre-exceptionals - pence per
share 48.2 44.2 9%
Interim dividend - pence per share 15.5 14.6 6%
(1) Volume is equivalent units
Organic growth by region
North America Europe International Asia Pacific
Volume % 2 (2) 9 8
Net sales % 3 (3) 13 7
Marketing spend % 12 1 18 10
Operating profit % 5 (9) 15 18
Exchange rate movements
Venezuela Other Total
Net sales GBPm (211) 158 (53)
Operating profit before exceptional
items GBPm (57) 127 70
Paul Walsh, Chief Executive of Diageo, commenting on the six months ended
31 December 2010 said:
"Momentum is building in our business. Our top line
performance was stronger and price/mix improved. We have increased marketing
spend significantly, up 10%, but in a very focused way. 35% of the increase
was behind strategic brands in US spirits to build the brand equity as we
move away from promotional support and over 60% of the increase was on our
brands in the faster growing emerging markets. Despite the economic weakness
in much of Europe, our first half performance gives me increased confidence
that we will improve on the organic operating profit growth we delivered in
fiscal 2010".
Definitions
Unless otherwise stated in this announcement: volume is in
millions of equivalent units; net sales are sales after deducting excise
duties; percentage movements are organic movements; commentary refers to
organic movements and share refers to value share. The classification of
brands as 'global priority brands' and 'other brands' has been discontinued
for reporting purposes. For subsequent reporting periods no performance data
using this classification will be provided in interim or preliminary results
announcements. See Explanatory Notes section for additional information for
shareholders and an explanation of non-GAAP measures including the
reconciliation of basic eps to eps pre-exceptionals and to underlying eps.
North America - Volume growth and mix improvement in US spirits and a
solid recovery in Canada
- North America returned to volume growth and delivered mix improvement
led by the growth of spirits
- Innovation contributed significantly to net sales growth
- Gross margin expansion was driven by improved product mix and tight
control of cost of goods
- Marketing spend increased 12% with further increases in investment
behind the strategic spirits brands
- Promotional spend was reduced on US spirits brands in the off trade
which cost Diageo 1 percentage point of share
- Wine declined as promotional support was reduced in a category where
growth was driven by increased promotions
- A reduction in overheads also contributed to operating margin
improvement
Europe - Continued economic weakness impacted performance in the region
despite strong growth in the emerging markets of Russia and Eastern Europe
- The economic pressures in Greece, Iberia and to a lesser extent Ireland
led to a 13% net sales decline across these markets
- In Great Britain net sales grew 1%, however negative price/mix in
spirits and the strong growth of wine led to margin erosion
- Russia and Eastern Europe grew net sales over 20% as a result of the
improving economic situation and strong growth of imported spirits
- In the rest of Europe a mixed performance resulted in net sales decline
of 1%
- Import restrictions in Turkey resulted in no trading in the domestic
channel in the half
- In line with these trends, marketing spend in Greece and Iberia
decreased 21%, spend in Russia and Eastern Europe increased over 50%
whilst spend in the rest of Europe increased slightly, focused on
strategic brands
- Operating profit decline was principally driven by negative category
mix in Great Britain and economic weakness in Greece and Iberia
International - Continued strong performance with double digit net sales
growth and positive price/mix in all three hubs
- Increased marketing spend across the region and improved distribution
in key markets drove volume growth of 9% and net sales growth of 13%
- In Latin America and the Caribbean, the strong performance of scotch
brands delivered double digit volume growth and price/mix improvement
- In Africa the continued strong performance of beer in East Africa,
Nigeria and Cameroon and the growth of scotch in South Africa drove
net sales growth of 10%
- GTME benefitted from further increases in marketing investment along
with innovation in both product and retail offerings which resulted in
volume growth of 10% and net sales growth of 15%
- Marketing investment grew ahead of net sales, driving strong top line
growth. Nevertheless, operating margins improved again
Asia Pacific - Double digit growth in scotch extended Diageo's position
as the leading scotch company in Asia. The emerging markets in Asia grew net
sales 15%
- Top line improvement was led by the emerging markets of Asia, which
grew net sales 15% driven by India, Thailand, Malaysia and Vietnam,
together with 9% growth in Korea
- Diageo strengthened its leadership position in scotch across the region
gaining share in all markets
- Johnnie Walker was the key driver of performance, supported by double
digit net sales growth on Windsor and The Singleton
- There was a strong performance in Korea with share gains in the scotch
category
- In Australia, Diageo gained share in spirits and ready to drink, but
net sales declined due to a more aggressive off trade pricing
environment
- Marketing spend grew ahead of net sales, focused on Johnnie Walker in
emerging markets
- Operating margin increased as higher marketing spend was more than
offset by lower overheads
Category performance
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
Spirits 4 5 3
Beer 1 3 3
Wine (4) 5 (5)
Ready to drink (2) (1) 2
Total 3 4 2
* Volume movement is both reported and organic, except for
wine where reported movement was (10)% primarily due to disposals
in Europe and North America
Spirits: Spirits was the driver of overall net sales growth
for Diageo, led by scotch, up 6%, and vodka, up 8%. Within scotch, the key
driver was Johnnie Walker in the emerging markets where net sales grew 23%.
This was supported by Windsor and Buchanan's in the deluxe segment and by
Black & White, VAT 69 and White Horse in the standard and value segments.
North America contributed most to the growth of vodka, with continued strong
momentum in Ciroc and the launch of ROKK vodka in the premium segment.
Smirnoff net sales declined in its largest markets of the United States and
Great Britain but grew high double digits in the emerging markets, reflecting
the strategy of positioning standard products to emerging middle class
consumers. Marketing spend behind spirits grew 15%. Key campaigns in the
period were the global "Walk with Giants" campaign on Johnnie Walker, the
Smirnoff "Nightlife Exchange Project", a strong holiday programme entitled
"Ciroc the New Year" in North America and an increase in digital marketing
and sponsorship supporting the global growth of Captain Morgan.
Beer: There was double digit net sales growth and positive
price/mix in Africa led by Harp in Nigeria, Tusker in East Africa and
Windhoek in South Africa. Ireland was the key driver of the 4% net sales
decline of beer in Europe, as Guinness declined due to weakness in the on
trade, particularly in rural areas. In Asia Pacific beer net sales grew 6%
following a successful "Arthur's Day" programme on Guinness and increased on
trade activity in Malaysia. Two percentage points of positive price/mix on
beer was driven by price increases taken across Africa and in Great Britain.
Wine: North America and Great Britain together account for
over 85% of Diageo's wine business. Net sales of wine in North America
declined 7% as promotional support was reduced. In the United States, this
resulted in share loss in an overall wine category growing at 5% and driven
by increased promotions. In Great Britain meanwhile, wine net sales grew
strongly at 18% led by a strong summer Bordeaux campaign and distribution of
the [yellow tail] brand.
Ready to drink: Although net sales declined 1%, there was an
improvement in the half, due to a slowdown in the rate of decline in North
America, stabilisation in Australia and growth in emerging markets such as
Brazil and Nigeria. In Great Britain, the traditional ready to drink segment
remained in decline, although pre-mix cans continued to grow strongly at over
40%. Diageo has a leading position in this segment and grew share. Likewise
in Australia, Diageo is driving the emergence of ready to serve through
innovations such as Smirnoff Signature Serves and Smirnoff Cocktails. These
new products have created retailer and consumer excitement and now appear as
a permanent fixture in off trade outlets.
Strategic brands performance*
Brand performance is now reported using the 14 strategic brands below.
This replaces the previous classification of 8 global priority brands, which
was introduced in 2002 following the Seagram acquisition. The new
classification is a natural evolution and better reflects the way in which
brands are managed.
Organic Reported
Volume net sales net sales
movement** movement movement
% % %
Whisk(e)y
Johnnie Walker 11 10 11
Crown Royal 3 5 10
J&B (8) (10) (11)
Windsor 6 11 20
Buchanan's (3) 14 (33)
Bushmills 5 5 7
Vodka
Smirnoff 2 (1) 2
Ketel One 2 - 5
Ciroc 128 131 139
Liqueurs
Baileys 3 1 -
Rum
Captain Morgan 7 7 12
Tequila
Jose Cuervo 7 7 10
Gin
Tanqueray (3) (2) 1
Beer
Guinness (2) (1) -
* Spirits brands excluding ready to drink; grouped by category
** Volume movement is both reported and organic
Johnnie Walker: Johnnie Walker contributed over a third of
Diageo's net sales growth in the period, driven by International. The fastest
growth came from the super deluxe variants, led by Johnnie Walker Blue Label,
while Black Label growth outstripped Red Label as consumers began to trade
back up. However, higher promotional spend, particularly in Asia, led to one
percentage point of negative price/mix. Volume was down in North America, but
depletions grew in a broadly flat scotch category. In Europe, performance was
impacted by sharp declines in Spain and Greece, its largest markets, but this
was partially offset by strong growth in Russia and Eastern Europe. Marketing
spend increased 19% driven by investment in International and Asia Pacific
behind the proven global "Walk with Giants" campaign.
Crown Royal: Crown Royal grew net sales driven by strong
growth of Crown Royal Black which sells at a price premium to the base
variant and contributed to 2 percentage points of price/mix improvement.
Crown Royal Black remained the number one product in IRI's new spirits
product tracker.
J&B: The majority of the net sales decline stemmed from Spain, the
brand's largest market, where consumer confidence remained low and there was
destocking at the wholesale and retail level. J&B continued to lose share as
consumers traded down to lower priced scotch brands. In France, the brand's
second largest market, increased marketing spend and successful new bottle
formats drove an 8% increase in net sales.
Windsor: Windsor remained the best selling scotch brand in
Korea, growing share by one percentage point in the period, driven by strong
momentum behind the Windsor 12 variant. A price increase contributed to
double digit net sales growth.
Buchanan's: Price increases in Latin America and the success
of the newly launched premium Buchanan's Master variant drove net sales
growth. In the United States, where Buchanan's is the fastest growing brand
in the scotch category, net sales grew 34%, as marketing spend increased
awareness amongst multicultural consumers.
Bushmills: Bushmills grew net sales in all regions. Marketing
spend behind the "Bushmills Brothers" campaign and the launch of new
packaging for Bushmills single malts helped drive global net sales growth.
Smirnoff: Although there was strong growth in International,
the vodka category remained intensely competitive in Europe which led to
negative price/mix and net sales down 1%. In the United States, Smirnoff lost
share as the reduction in the level of off trade price promotion increased
its relative price. In Europe, net sales declined due to the economic
difficulties in Spain and Greece, along with lower volume and negative
channel mix in Great Britain. In Latin America and India, Smirnoff's strategy
of building the brand by positioning it to the emerging middle class consumer
continued to be successful, delivering strong net sales growth. Marketing
spend increased 16% as the Smirnoff "Nightlife Exchange Project" was launched
globally.
Ketel One vodka: In North America net sales were down 1%,
reflecting the competitive pressures in the super premium vodka segment.
However, volume continued to grow behind the successful "Gentlemen, this is
vodka" campaign. The roll out of the brand into other markets led to double
digit net sales growth in all regions outside North America.
Ciroc: Ciroc continued its momentum in the United States
significantly growing volume and net sales, as well as gaining share in the
ultra premium vodka segment. The new Coconut and Red Berry flavours drove
overall brand growth and comprised over 50% of total brand volume.
Baileys: Baileys returned to volume and net sales growth led
by International. In Europe, performance was negatively impacted by the
slowdown in Iberia and Southern Europe, where liqueurs suffered
disproportionately. A challenging off trade promotional environment in Great
Britain and Australia contributed to two percentage points of negative
price/mix.
Captain Morgan: Captain Morgan grew net sales in all four
regions, notably in Europe. However, in the United States, its largest
market, the brand lost share due to the introduction of new spiced rums at
lower prices or higher proofs. Outside of the United States, Captain Morgan
grew net sales and share in the key markets of Great Britain, Canada and
Mexico, supported by increased marketing spend.
Jose Cuervo: Within an intensely competitive retail
environment in the United States, Cuervo continued to sell at a price premium
to competitors but ceded share. Especial Silver and new flavour variants
helped drive brand performance. Outside of the United States, a new
distribution agreement in Australia was the key contributor to global net
sales growth of 7%.
Tanqueray: Depletions grew in North America but volume and net
sales declined primarily as a result of destocking in the period. Tanqueray
performed strongly in International and particularly in Europe. Innovative
marketing executions in Great Britain, including a sponsorship with the
Goodwood Estate, and increased spend in Spain led to strong net sales growth
in these markets.
Guinness: Overall performance was negatively impacted by a
sharp net sales decline in Ireland, where the economic conditions accelerated
the shift to the off trade. In Great Britain, performance also declined,
partly due to consumers' preference for lager during the 2010 Football World
Cup. In Africa, the brand continued to sell at a price premium to local
lagers, and Cameroon and East Africa drove growth in volume and net sales.
Marketing spend was concentrated behind the second global "Arthur's Day".
Marketing spend
Marketing spend increased 10% in the half, principally focused
on strategic brands. Marketing spend as a percentage of net sales increased
80 basis points to 15.3%. Spend increased significantly behind emerging
markets and spirits in North America. Johnnie Walker spend increased 19%
focused on both recruitment and premiumisation across emerging markets. The
primary campaign for Smirnoff was the global "Nightlife Exchange Project" as
investment behind the brand increased 16%. As Captain Morgan continued its
strong growth trajectory, marketing spend increased 30%, with double digit
increases in investment across all regions.
Corporate revenue and costs
Net sales were GBP38 million in the six months ended 31 December
2010, down GBP2 million from GBP40 million in the comparable prior period.
Net operating charges were GBP64 million in the six months ended 31 December
2010. This was a reduction of GBP63 million over the prior period. Diageo
undertakes the majority of its currency transaction hedging centrally and
therefore GBP98 million of positive year on year transaction impact was taken
to corporate in this half. There was an incremental charge of GBP39 million
relating to the difference between budget and achieved rates arising in the
period as the results of the four regions are reported using budget
transaction exchange rates. There was a GBP4 million reduction in underlying
corporate costs.
Exchange rate movements
Foreign exchange movements in the period:
- decreased net sales by GBP53 million
- increased operating profit by GBP70 million
- decreased profit from associates by GBP5 million
- reduced net finance charges by GBP10 million
The impact of foreign exchange movements in the six months
ended 31 December 2010 was adversely impacted by the weaker Venezuelan
bolivar. For the year ending 30 June 2011 foreign exchange movements are
expected to increase operating profit by GBP55 million and are not expected
to materially affect the net finance charge based on applying current
exchange rates (GBP1 = $1.56 : GBP1 = EUR1.18). This guidance excludes the
impact of IAS 21 and 39 but includes the impact of revaluing the Venezuelan
bolivar at the rate used for the reported results for the six months ended
31 December 2010.
Exceptional operating costs
First half F11 First half F10
GBP million GBP million
Restructuring of global supply
operations (4) (69)
Restructuring of Irish brewing
operations (5) (5)
Global restructuring programme - (21)
Total (9) (95)
Cash expenditure (67) (76)
A charge of approximately GBP45 million is expected to be
incurred in the year ending 30 June 2011 in respect of exceptional
restructuring charges, while cash expenditure is expected to be approximately
GBP150 million.
Post employment liabilities
The deficit in respect of post employment plans before
taxation decreased by GBP370 million from GBP1,205 million at 30 June 2010 to
GBP835 million primarily as a result of an increase in the market value of
assets held by the post employment plans.
Management reports
The interim report for the six months ended 31 December 2010
comprises the Half-Yearly Financial Report that Diageo is required to publish
under the Disclosure and Transparency Rules of the UK's Financial Services
Authority. Diageo will issue its next interim management statement on 5 May
2011. The year end preliminary results announcement will be issued on 25
August 2011.
BUSINESS REVIEW
For the six months ended 31 December 2010
OPERATING REVIEW
North America
Reported results:
First First
Half Acquisitions Organic Half
F10 Exchange and movement F11 Reported
GBP GBP disposals GBP GBP movement
million million GBP million million million %
Volume (millions
of equivalent
units) 27.6 - (0.1) 0.5 28.0 1
Net sales 1,695 82 (23) 53 1,807 7
Marketing spend 228 11 - 29 268 18
Operating profit
before exceptional
items 667 23 (1) 34 723 8
Exceptional items (6) -
Operating profit 661 723 9
Organic performance:
Net sales growth of 3% in North America was driven by the
improved performance of the strategic spirits brands. In the United States
there were some signs of a gradual economic recovery but high unemployment
and low income growth held back a significant improvement in consumer
confidence. Despite this, the industry reported value growth across spirits,
beer and wine. In spirits and wine, mirroring the positive mix trend in the
industry, Diageo net sales grew faster in the premium and above segments than
in standard and below. Diageo's strategy to reduce discounting and
promotional activity resulted in share loss but contributed to positive
price/mix. Mix improvement, strict control of cost of goods and a reduction
in overheads delivered operating profit growth of 5%. Canada showed a solid
recovery with growth in both the on and off trade and Diageo increased its
share of spirits.
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
By market:
United States 1 3 6
Canada 4 4 13
By category:
Spirits 2 4 9
Beer (1) 1 7
Wine (10) (7) (16)
Ready to drink (1) (2) 3
Strategic brands:**
Johnnie Walker (6) (4) -
Smirnoff 2 1 6
Baileys 1 1 6
Captain Morgan 1 1 6
Jose Cuervo 7 7 12
Tanqueray (7) (5) (1)
Crown Royal 2 4 9
Ketel One 1 (1) 4
Ciroc 131 134 144
Guinness 1 1 6
* Volume movement is both reported and organic except for wine
where reported movement was (19)% due to disposals in the period
** Spirits brands excluding ready to drink
United States - Volume growth, mix improvement and strong marketing spend
Volume performance was driven by spirits, as beer and wine declined and
ready to drink remained flat. Within spirits, volume growth was led by Ciroc
up 131% and Jose Cuervo up 7%. Net sales growth was primarily driven by Ciroc
up 134%, Crown Royal up 5% and innovation. The strategic decision to reduce
promotional activity contributed to price/mix improvements in spirits, beer
and wine but share losses across many categories and segments.
Johnnie Walker volume declined 9% due predominantly to a planned
reduction in wholesaler inventories of Johnnie Walker Red and Black Labels to
bring shipments and depletions closer in line. Net sales decreased 6% as
price increases were taken across most variants and mix improved due to the
performance of super deluxe variants, Johnnie Walker Gold, Blue and King
George V, as well as the introduction of The John Walker.
Smirnoff returned to volume growth on the performance of Smirnoff Red up
3% partially offset by the decline in Smirnoff Flavours and Smirnoff Blue.
Net sales declined 1% as price/mix was negative across all variants.
Promotional activity in the premium vodka segment remained high. However,
promotions on Smirnoff were reduced, resulting in a share loss of 1
percentage point.
Baileys net sales declined 1%. A good performance by Baileys flavours, up
6%, was not sufficient to offset a 3% decline on the base variant. The brand
continued to sell at a premium price despite challenging economic conditions
and Baileys gained 0.2 percentage points of share.
Captain Morgan remained under pressure from new spiced rum entrants, with
over 40 new brands launched in the past five years. As a result, Captain
Morgan lost 0.3 percentage points of share. Volume was flat and net sales
declined 1%, primarily due to a reduction in volume of Parrot Bay.
Volume and net sales of Jose Cuervo increased 7% in comparison to the
first half of fiscal 2010 when the brand experienced some destocking. The
brand continued to sell at a premium price in line with strategy despite
continued competition and Jose Cuervo lost 3.3 percentage points of share.
Jose Cuervo Silver continued to perform well and maintained its position as
the number one silver tequila by volume in the United States. In the super
and ultra premium segments, Jose Cuervo Tradicional performed well.
Tanqueray volume declined as inventories of London Dry Gin were reduced
at the wholesaler level. Positive price/mix was due to price increases and
the strong performance of Tanqueray Ten, up 14% in net sales.
Crown Royal grew volume 2% and net sales 5% fuelled by the success of
Crown Royal Black and Crown Royal Cask 16. Crown Royal Black remained number
one in IRI's new spirits product tracker, while the brand grew 0.2 percentage
points of share.
Ketel One vodka volume was flat and net sales decreased 1%. Declines in
Ketel One Citroen were partially offset by increases in Ketel One Oranje
which was launched last year. Competition remained strong in the vodka
category and Ketel One vodka lost 0.2 percentage points of share.
Ciroc was the driving force behind growth in the United States. Volume
increased due to the continued success of the new Ciroc flavours Coconut and
Red Berry, which have exceeded expectations. Price increases helped drive
positive price/mix. Ciroc's exceptional performance has driven 0.3 percentage
points of share gain in a highly competitive category.
Guinness grew volume and net sales 1% driven by Guinness Draft in Cans
and the success of Guinness Foreign Extra Stout, which launched nationally in
October. Guinness lost 0.1 percentage points of share driven by declines in
Guinness Draft in Bottle, lapping the 250th Anniversary Stout launch of a
year ago.
Bushmills grew volume 10% and net sales 5% following a planned price
reduction to reposition the brand in line with its competition. Gordon's,
Popov, Seagram's 7 Crown and Seagram's VO all declined reflecting the
slowdown in the value and standard segments.
Reserve brands grew volume 23% and net sales 27% with growth across
nearly all brands. Volume growth and selective price increases across key
brands such as Johnnie Walker Blue Label and Ciroc helped drive much of the
positive price/mix for the half. Also of note were the performances of
Buchanan's Special Reserve up 36% and Classic Malts up 26% in net sales.
Red Stripe held volume flat but grew net sales 7% on price increases and
the continued success of Red Stripe Light. Harp volume and net sales both
fell 5% and Smithwick's volume and net sales declined 9% due to heavy
competition from craft beers.
Wine volume declined 10% and net sales declined 7% as promotional support
was reduced compared to the prior period. Declines in the Sterling Vintners
Collection were partially offset by BV Georges de La Tour and the Sterling
reserve wines. Within the Chalone wine group A by Acacia outperformed the
market due to distribution gains and off trade programmes while Chalone
Vineyards and Edna Valley declined. Rosenblum net sales declined as consumers
shifted away from vineyard designate and appellations to vintner's cuvees.
Ready to drink volume was held flat on the success of Smirnoff Mixed
Drinks. Net sales declined 1% as the Smirnoff, Jose Cuervo and Captain Morgan
cocktail lines declined due to their premium price.
Innovation centred on the vodka category with the launch of ROKK vodka,
Godiva Chocolate Vodka and Moon Mountain Vodka. ROKK, a freeze filtered vodka
from Sweden, was positioned in the premium segment while Godiva Chocolate
Vodka and Moon Mountain Vodka offered alternatives in the super premium
segment.
Marketing increased by 11% as Diageo maintained its commitment to invest
behind strategic brands and proven marketing programmes. Diageo continued its
focus on Smirnoff Red behind the "I Choose" campaign and launched the DJ
reality TV show "Master of the Mix." Crown Royal integrated Crown Royal Black
into NASCAR, football and the "Crown Royal Affair." Captain Morgan increased
its sport sponsorships and the "One Million Pose" social responsibility
campaign. Ciroc continued its collaboration with Sean "Diddy" Combs around
the "Ultimate Summer Cabana" and "Ciroc the New Year" in conjunction with E!
Entertainment. This investment has increased Diageo's share of voice to 9.5%
overall with increases across spirits, beer and ready to drink.
Canada - Recovery of the on trade drove volume and net sales growth
The favourable turnaround in the on trade was reflected in
Diageo's volume and net sales growth of 4%. Volume performance was driven by
Smirnoff up 6%, Captain Morgan up 8%, Johnnie Walker up 44% and Baileys up
8%, while net sales were driven by Smirnoff up 8%, Captain Morgan up 11% and
Johnnie Walker up 44%. Price/mix was flat as price increases on Smirnoff,
Captain Morgan and Tanqueray were offset by the decline in the ready to drink
segment.
Europe
Reported results:
First First
Half Acquisitions Organic Half
F10 Exchange and movement F11 Reported
GBP GBP disposals GBP GBP movement
million million GBP million million million %
Volume (millions
of equivalent
units) 22.0 - - (0.5) 21.5 (2)
Net sales 1,547 (38) (13) (52) 1,444 (7)
Marketing spend 229 (6) (1) 3 225 (2)
Operating profit
before exceptional
items 528 (9) 1 (49) 471 (11)
Exceptional items (6) -
Operating profit 522 471 (10)
Organic performance:
Economic weakness in a number of markets created an overall challenging
environment for the Europe region. There were notable net sales declines in
Greece, Iberia and to a lesser extent Ireland that led to declines in Johnnie
Walker, J&B and Guinness. Russia, Eastern Europe and Germany performed well,
led by the scotch and liqueur categories in Russia and Eastern Europe and by
the scotch and rum categories in Germany. There was moderate net sales growth
in Great Britain with strong price/mix improvement in wine. Negative
price/mix was mainly due to the decline in scotch in Southern Europe and
challenging trading conditions for Smirnoff in Great Britain. Whilst
marketing spend was reduced in line with net sales in Greece and Iberia,
overall spend in Europe increased 1%, reflecting a significant increase in
Russia and Eastern Europe. Captain Morgan benefited from a double digit
increase in marketing spend as the brand continued to perform strongly.
Operating profit declined 9%, driven by economic weakness in Southern Europe
and margin decline in Great Britain.
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
By market:
Great Britain (1) 1 1
Ireland (1) (5) (12)
Iberia (13) (14) (19)
Greece (35) (38) (42)
Russia 9 31 36
By category:
Spirits (2) (5) (7)
Beer (5) (4) (9)
Wine (2) 17 8
Ready to drink (4) (8) (9)
Strategic brands:**
Johnnie Walker (5) (5) (7)
Smirnoff (6) (15) (16)
Baileys 1 (2) (4)
J&B (6) (10) (14)
Captain Morgan 37 45 44
Guinness (6) (5) (7)
* Volume movement is both reported and organic, except for wine where
reported movement was (6)% primarily due to the disposal of Barton & Guestier
and Ireland where reported movement was (3)% primarily due to the disposal of
the Gilbeys wine business in Ireland
** Spirits brands excluding ready to drink
Great Britain - Moderate net sales growth achieved as the economy
continued its fragile recovery
In Great Britain, net sales grew as the market continued to be
characterised by the shift from the on trade to the off trade. The spirits
market was flat and Diageo spirits broadly maintained share, as a gain of 0.9
percentage points in the off trade offset a decline of 0.7 percentage points
in the on trade. Net sales of Smirnoff were down 16% following customer stock
building in fiscal 2010 ahead of the anticipated duty increase in the
emergency budget in June and a loss of share in the on trade. Smirnoff also
experienced negative price/mix as the on trade contracted and price conscious
consumers in the off trade bought more on promotion. Net sales of Baileys
grew 2% and gained 2.9 percentage points of share, the new "Let's do this
again" campaign was launched in the half and marketing spend was flat.
Guinness net sales declined 2%. Although Guinness Surger increased brand
distribution into a further 9,500 outlets, this failed to offset the
continued contraction of the on trade with, on average, 29 outlets closing
each week. The brand achieved 3 percentage points of price/mix driven by a
price increase taken in the prior year and customer mix. Wine net sales grew
18% as price increases on Blossom Hill combined with strong sales of the
higher value en primeur wines drove strong price/mix. Marketing spend
increased 3% and investment behind the total Smirnoff brand increased 4%,
focused on the global "Nightlife Exchange Project", and support behind
Smirnoff innovations including Smirnoff and Cola and Smirnoff Flavours.
Guinness marketing spend was down as the brand switched its sponsorship
programme from the rugby premiership to the Six Nations and international
rugby.
Ireland - Spirits outperformed beer as Guinness was impacted by further
on trade declines
In Ireland volume fell slightly whilst net sales declined 5%
driven by beer which represents over 80% of Diageo Ireland net sales. Net
sales of total beer declined 6% and Guinness net sales declined 8% as the
economic conditions continued to impact the market. Core consumers reduced
their consumption frequency and the shift to the off trade accelerated
resulting in a share loss on Guinness of 0.2 percentage points. However,
spirits performed better as volume grew 2% and 3 percentage points of
price/mix drove net sales growth to 5%. This was driven by share gains in a
declining spirits market and a reduction in cross border trade. Captain
Morgan grew net sales double digit and remained the fastest growing spirit
brand in Ireland, gaining over 10 percentage points of share. Procurement
efficiencies drove a 3% reduction in marketing spend whilst the reinvestment
rate was broadly flat. Guinness marketing spend was up as the business
focused on fewer, bigger events such as "Arthur's Day" and spend decreased
behind Captain Morgan and Smirnoff.
Iberia - Further deterioration in the spirits market and consumer
confidence is reflected in business performance
Volume in Iberia declined 13% and net sales decreased 14%. The business
was impacted by further destocking which accounted for over a third of the
volume decline, as customers experienced reduced financial liquidity and
further declines in consumer confidence impacted demand. Volume of J&B fell
10% as the scotch category continued to decline. There was also price/mix
dilution due to the increased volume sold through lower margin cash and carry
and hypermarket customers. Johnnie Walker was impacted by some destocking
with volume down 11% and net sales down 12%, however both Johnnie Walker Red
Label and Johnnie Walker Black Label grew share in the declining scotch
category in the six months to December 2010 and Diageo grew its share of
total scotch in the off trade in the half. In the slow growth rum category,
private label and value brands grew, as consumers sought greater value for
money. As a result, Cacique volume and net sales were down 24% and 26%
respectively. The gin category continued to decline whilst premium gin grew
at the expense of local and standard gin brands. Tanqueray delivered double
digit volume and net sales growth, whilst sacrificing 1 percentage point of
price/mix following deeper and more frequent off trade promotions to increase
competitiveness. This was supported by a print and digital campaign combined
with the "Mentor at Home" programme. Support continued behind ready to serve
cocktails with the launch of J&B Manhattan and the further roll out of
draught Cacique Mojito. The packaged ready to serve segment has become more
competitive with private label entrants, which has impacted price/mix.
Marketing spend declined in line with net sales. Remaining spend focused on
the new J&B kite surfing sponsorship, "J&B Masters of Kite" to drive
relevance with consumers, a TV campaign to support the launch of J&B
Manhattan and the national launch of Johnnie Walker's "Walk with Giants"
campaign.
Greece - The deteriorating economic conditions impacted the business in
the first half
Lower disposable income due to the economic downturn and
excise duty increases totalling 87% over the course of 2010 led to a 35%
decline in volume in Greece and net sales fell 38%. Negative price/mix was a
result of the higher margin on trade declining at a faster rate than the off
trade and prices of some brands being reduced to maintain affordability. As
part of a large scotch market, Johnnie Walker was significantly impacted as
was Dimple, which declined sharply, as deluxe scotch was impacted more
severely. With its strong brand equity, Haig proved more robust and the brand
gained share although volume again declined. Outside of the scotch category,
net sales of all other spirits declined. Marketing spend was maintained as a
percentage of net sales and therefore reduced by 38%.
Russia and Eastern Europe - Recovery continued in Russia and signs of
trading up returned
Russia and Eastern Europe combined delivered double digit
volume and net sales growth. The strong growth of imported spirits and the
benefit of price increases last year drove mix improvements. Johnnie Walker
performed well across the region with increased net sales of 26%. In
addition, White Horse and Bell's continued to perform well delivering double
digit growth and Baileys achieved double digit net sales growth across the
region. Vodka net sales declined 2% as growth of Smirnov in Russia and growth
of Smirnoff in third party distributor markets in Eastern Europe failed to
offset the decline of Smirnoff Vladimir in Poland. Marketing spend increased
markedly, following lower levels of investment last year. Investment was
focused behind the Johnnie Walker "Walk with Giants" campaign and Captain
Morgan internet advertising.
Rest of Europe - Strong performance of scotch and rum across the rest of
Europe
Import restrictions on Diageo Turkey resulted in no trading in
the domestic channel in the half. Elsewhere in Europe Johnnie Walker Red
Label performed very well in Germany, following a planned price reduction to
maintain its competitive price positioning. A renewed focus behind J&B in
France drove good growth, with the execution of "J&B Colours". In Benelux
Johnnie Walker and J&B grew double digit volume and net sales, however the
benefit was diluted by negative channel mix. Net sales declined in the
Nordics as the result of continued decline in the spirits market and the
cessation of the Smirnoff Ice distribution contract in Denmark. Within other
brand performance, Captain Morgan showed excellent growth across Northern
Europe supported by a significant increase in marketing spend behind proven
growth drivers.
International
Reported results:
First First
Half Acquisitions Organic Half
F10 Exchange and movement F11 Reported
GBP GBP disposals GBP GBP movement
million million GBP million million million %
Volume (millions
of equivalent
units) 20.8 - - 1.9 22.7 9
Net sales 1,402 (149) (1) 163 1,415 1
Marketing spend 150 - - 27 177 18
Operating profit
before exceptional
items 460 (51) (1) 60 468 2
Exceptional items (3) -
Operating profit 457 468 2
Organic performance:
International delivered another strong performance in the
first half with all hubs generating double digit net sales growth.
Performance in Latin America was driven by scotch, with increased marketing
spend driving volume in Brazil and Mexico, and price increases in Mexico
driving net sales. GTME performance was also driven by scotch, in particular
by Johnnie Walker Black Label and the ongoing roll out of Johnnie Walker
Double Black. Increased distribution and supply, and improving brand equities
drove lager growth across Africa. Diageo beer brands gained volume share in
Cameroon, Nigeria and Kenya, and in South Africa brandhouse gained share in
spirits and beer, notably scotch.
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
By market:
Latin America and the Caribbean 10 17 (15)
Africa 9 10 13
GTME 10 15 21
By category:
Spirits 13 17 (4)
Beer 5 10 11
Wine 16 24 10
Ready to drink (8) - (6)
Strategic brands:**
Johnnie Walker 21 25 19
Buchanan's (7) 11 (39)
Smirnoff 15 22 26
Baileys 10 16 7
Guinness 1 2 4
* Volume movement was both reported and organic except for wine where
reported movement was 6% primarily due to the disposal of Barton & Guestier
** Spirits brands excluding ready to drink
Latin America and the Caribbean - Marketing investment
increased 21%, driving growth in scotch
Continuing positive economic trends in Brazil translated into
double digit growth for beverage alcohol. Volume increased 26%, net sales
increased 30%, and Diageo's scotch portfolio grew share 6 percentage points
in the deluxe segment and 2 percentage points in the standard segment.
Johnnie Walker volume and net sales both grew double digits. This was in part
due to price reductions made in the second half of fiscal 2010, but growth
was also driven by geographic expansion and continued investment in brand
building activities. Black & White and Old Parr also delivered strong net
sales growth of 20% and 36% respectively. Smirnoff maintained its leadership
position in the vodka category supported by the "Be There" campaign and the
Smirnoff "Nightlife Exchange Project". Smirnoff ready to drink grew net sales
4% on the back of strong volume performance from Smirnoff Ice and the
re-launch of Smirnoff Caipiroska with a new product formula and packaging.
Despite the relatively slow economic recovery in Mexico and
ongoing security concerns, price increases on key brands and accelerated
marketing spend drove 23% net sales growth. Increased investment behind the
"Strides" and "Join the Pact" campaigns on Johnnie Walker Black Label, and on
trade activities such as "Adventure in a Glass" for Johnnie Walker Red Label
resulted in the highest awareness scores recorded for the brand in Mexico.
All Johnnie Walker variants posted double digit net sales growth. Buchanan's
share declined in the face of heavy competitive price reductions and liquid
promotions, but positive price/mix fuelled 18% net sales growth.
The trading performance in Venezuela was impacted by the
currency exchange restrictions which have constrained supply. Reported net
sales and operating profit were therefore down significantly, although after
adjusting for the year on year exchange impact Diageo generated organic
operating profit growth in Venezuela.
Africa - Improved distribution led to strong net sales growth in lager,
and key spirits segments returned to growth
Net sales in Nigeria grew 10%, propelled by the double digit
growth of Harp. Reduced stock outs and advertising campaigns increased trade
and consumer confidence in the brand as demonstrated by volume growth of 19%
despite two price increases in the first half. Malta Guinness continued to
benefit from the bottle re-launch and improved distribution, which drove net
sales growth of 18%. Guinness volume was up slightly, but net sales were flat
due to the focus on the 45cl pack size. Smirnoff Ice performed well as off
trade momentum behind the can format increased distribution and drove 34% net
sales growth.
The East Africa hub delivered 12% volume growth and 10% net
sales growth as the economy continued to recover. Negative price/mix was
driven by a significant increase in duties which caused consumers to shift
into value spirits and beer. However, Guinness net sales were up 6% despite
price increases on the back of excise duty increases. Improved distribution
increased Senator volume which in turn drove 17% net sales growth. Tusker
also delivered strong results growing net sales 15% as a result of volume
growth in Uganda and price increases.
In South Africa, net sales grew in line with volume with both
up 5% driven primarily by scotch. Johnnie Walker Red Label delivered a
particularly strong performance, with increased distribution and marketing
investment driving 14% net sales growth. Johnnie Walker Black Label volume
and net sales grew 9% and 3% respectively, driven by upweighted promotional
activity. Bell's net sales grew 13% as improved consumer confidence and a
strong festive season advertising campaign positioned the brand as an
affordable luxury. Smirnoff volume was up 4% but price/mix was negative due
to increased promotional activity. In total, the brandhouse venture grew
share of both spirits and beer.
Elsewhere in Africa, Guinness volume in Ghana declined due to
January 2010 excise duty and price increases, but double digit net sales
growth from Star and Gulder lagers and non-alcoholic Alvaro, and significant
growth in spirits compensated for Guinness performance. In Cameroon, a focus
on improving the route to market and sales execution drove strong Guinness
volume growth and net sales grew 18%.
Global Travel and Middle East - Marketing investment increased
as passenger numbers recovered, with Johnnie Walker leading continued net
sales growth
GTME delivered volume growth of 10% and net sales growth of
15% as marketing investment was upweighted on the back of the recovery in
passenger numbers. The increased level of marketing spend reflects the
important role GTME plays as a brand and category building channel. Johnnie
Walker drove performance with 22% net sales growth. The "Step Inside the
Circuit" campaign, a programme to encourage consumers into stores, the
continuation of the "Walk with Giants" marketing campaign, and the ongoing
roll out of Johnnie Walker Double Black all contributed to the brand's
success. The largest non-scotch brands, Baileys, Smirnoff, Tanqueray and
Captain Morgan all grew volume and net sales, and innovation continued to
play a significant role in driving growth.
Asia Pacific
Reported results:
First First
Half Acquisitions Organic Half
F10 Exchange and movement F11 Reported
GBP GBP disposals GBP GBP movement
million million GBP million million million %
Volume (millions
of equivalent
units) 6.4 - (0.1) 0.5 6.8 6
Net sales 523 53 - 40 616 18
Marketing spend 118 11 1 13 143 21
Operating profit
before
exceptional items 103 9 (3) 20 129 25
Exceptional item (5) -
Operating profit 98 129 32
Organic performance:
Emerging markets were the key driver of net sales growth in
Asia Pacific, growing 15% in total. By category, growth was led by scotch and
the three largest brands, Johnnie Walker, Windsor and The Singleton all grew
net sales in double digits. Diageo strengthened its leadership in the scotch
category in Asia Pacific by growing share in the major markets of Korea,
Thailand, Australia, India, Taiwan and China. The Smirnoff trademark grew 17%
in total as the very strong growth of ready to drink added to 6% growth on
Smirnoff spirits. The rum and beer categories also contributed to growth.
Premiumisation was evident in the half with the premium and above price
segments growing twice as fast as standard and below. This positive mix
impact was offset by price reductions taken in Australia and China and
negative market mix from strong volume growth in India and South East Asia.
Marketing spend increased ahead of net sales, focused on driving sales of
Johnnie Walker and Smirnoff by trading up increasingly affluent emerging
market consumers into international spirits. Overheads were reduced resulting
in operating profit growth of 18%.
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
By market:
Australia 3 (1) 12
Korea 4 9 18
China (2) (3) 2
India 67 134 34
By category:
Spirits 9 9 20
Beer 2 6 18
Wine 21 44 (5)
Ready to drink 6 2 16
Strategic brands:**
Johnnie Walker 17 12 22
Smirnoff 11 6 18
Baileys 10 (12) (3)
Windsor 6 11 20
Guinness (3) 3 13
* Volume movement is both reported and organic except for wine where the
reported movement was (28)% primarily due to the disposal of Barton &
Guestier
** Spirits brands excluding ready to drink
Australia - Gained share of spirits and ready to drink in a challenging
market
Although the macro economic prospects look positive for
Australia, the beverage alcohol market continued to be challenging. Price/mix
was negative as a result of selective price reductions in the most
competitive categories and the continued shift of sales to the larger off
trade retailers. Diageo grew share in total due primarily to an increased
focus on customer marketing activities with the largest off trade accounts
and the continuation of a successful innovation programme. A key success in
the half was the introduction into the market of Smirnoff Signature Serves
and Smirnoff Cocktails which have provided net sales growth for Diageo and
have re-invigorated the segment for retailers and consumers alike.
Korea - Share gains and a price increase on Windsor delivered a strong
performance
Diageo Korea outperformed a broadly flat scotch market.
Windsor extended its position as the leading brand by 1 percentage point
driven by the strong performance of Windsor 12. A price increase on the brand
taken in September 2010 drove 5 percentage points of positive price/mix.
Diageo Korea continued its strategy to grow the brand range beyond blended
scotch whisky, primarily investing behind Guinness, which received its first
television campaign, and launching super premium products: Classic Malts,
Ketel One vodka and Zacapa rum.
South East Asia - Double digit net sales growth led by Johnnie Walker
South East Asia again performed strongly. In Thailand, the
economic recovery and increased brand building activities behind Johnnie
Walker led to 19% net sales growth. There was continued strong momentum in
Vietnam, particularly at the premium and above price segments, led by Johnnie
Walker and The Singleton. Beer net sales grew 9%, driven primarily by
Guinness in Malaysia as a result of a successful "Arthur's Day" campaign and
increased on trade activity.
China - Share gains in scotch offset by lower volumes in other categories
Johnnie Walker volume grew 9% and the brand made share gains
in the key deluxe and super deluxe segments. However, there was negative
price/mix as last year's price increases were reversed, reflecting the highly
competitive on trade environment. The total net sales decline of 3% was
driven by higher trade investment behind Johnnie Walker Black Label, lower
volumes of Smirnoff in a weak vodka category and the discontinuation of J&B.
There was an increase in marketing spend behind super deluxe scotch, targeted
to capture the increasing preference of Chinese consumers for super premium
products. This helped drive net sales growth of 22% and share gains in this
segment.
India - Strong growth of key brands enhanced by route to market changes
The first half was the first full period in which the new
route to market structure was in place. All imported brands are now
distributed by Diageo India. In the prior period Diageo did not record any
sales of imported brands as the stocks held by the former third party
distributor were reduced. India therefore delivered strong top and bottom
line growth and there was a return to strong marketing spend behind key
brands. A new Johnnie Walker brand campaign was launched in the period
focusing on building the brand's quality credentials through mentoring
sessions. Increased investment on Smirnoff behind the "Nightlife Exchange
Project" and on the launch of a new bottle for VAT69 delivered significant
double digit net sales growth for these key brands. Diageo gained 2
percentage points of share of scotch in the Duty Free Channel as depletions
grew strongly in key airports.
2. FINANCIAL REVIEW
Summary consolidated income
statement
Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Sales 7,132 6,928
Excise duties (1,812) (1,721)
Net sales 5,320 5,207
Operating costs before exceptional
items (3,593) (3,576)
Operating profit before
exceptional items 1,727 1,631
Exceptional operating items (9) (95)
Operating profit 1,718 1,536
Sale of businesses (1) -
Net finance charges (209) (237)
Share of associates' profits after
tax 104 94
Profit before taxation 1,612 1,393
Taxation (352) (310)
Profit from continuing operations 1,260 1,083
Discontinued operations - (10)
Profit for the period 1,260 1,073
Attributable to
Equity shareholders of the parent
company 1,194 1,016
Non-controlling interests 66 57
1,260 1,073
Sales and net sales
On a reported basis, sales increased by GBP204 million from
GBP6,928 million in the six months ended 31 December 2009 to GBP7,132 million
in the six months ended 31 December 2010. On a reported basis net sales
increased by GBP113 million from GBP5,207 million in the six months ended 31
December 2009 to GBP5,320 million in the six months ended 31 December 2010.
Exchange rate movements decreased reported sales by GBP51 million and
reported net sales by GBP53 million.
Operating costs before exceptional items
On a reported basis, operating costs before exceptional items
increased by GBP17 million in the six months ended 31 December 2010 due to a
decrease in cost of sales of GBP38 million, from GBP2,101 million to GBP2,063
million, an increase in marketing expenses of GBP88 million from GBP725
million to GBP813 million, and a decrease in other operating expenses before
exceptional costs of GBP33 million, from GBP750 million to GBP717 million.
The impact of exchange rate movements decreased total operating costs before
exceptional items by GBP123 million.
Exceptional operating items
Exceptional operating costs of GBP9 million for the six months
ended 31 December 2010 comprise accelerated depreciation in respect of the
restructuring of Global Supply operations in Ireland and Scotland announced
in prior years. In the six months ended 31 December 2009 exceptional
operating items comprised GBP74 million for the restructuring of Global
Supply operations and GBP21 million for the global restructuring programme.
Total restructuring cash expenditure in the six months ended
31 December 2010 was GBP67 million (2009 - GBP76 million) of which GBP23
million (2009 - GBP72 million) was in respect of the global restructuring
programme. A charge of approximately GBP45 million is expected to be
incurred in the year ending 30 June 2011 in respect of exceptional
restructuring, while cash expenditure is expected to be approximately
GBP150 million.
Post employment plans
Post employment net costs for the six months ended 31 December
2010 were a charge of GBP55 million (2009 - GBP58 million) comprising GBP54
million (2009 - GBP39 million) included in operating costs before exceptional
items, pension curtailment gains of GBP1 million (2009 - GBP6 million) in
sale of businesses and a charge of GBP2 million (2009 - GBP25 million) in
net finance charges.
The deficit in respect of post employment plans before
taxation decreased by GBP370 million from GBP1,205 million at 30 June 2010 to
GBP835 million at 31 December 2010 primarily as a result of an increase in
the market value of assets held by the post employment plans. Cash
contributions to the group's UK and Irish pension schemes in the six months
ended 31 December 2010 were GBP70 million and are expected to be
approximately GBP160 million for the year ending 30 June 2011.
In the period Diageo agreed a deficit funding arrangement with
the trustee in respect of the Guinness Ireland Group Pension Scheme (the
Irish Scheme). This deficit funding arrangement is expected to result in
additional annual contributions to the Irish Scheme of approximately EUR21
million (GBP18 million) over a period of 18 years, and provides for
additional cash contributions of up to EUR188 million (GBP161 million) if an
equivalent reduction in the deficit is not achieved over the 18 year period.
Operating profit
Reported operating profit for the six months ended 31 December
2010 increased by GBP182 million to GBP1,718 million from GBP1,536 million in
the comparable prior period. Before exceptional operating items, operating
profit for six months ended 31 December 2010 increased by GBP96 million to
GBP1,727 million from GBP1,631 million in the comparable prior period.
Exchange rate movements increased both operating profit and operating profit
before exceptional items for the six months ended 31 December 2010 by GBP70
million.
Exceptional non-operating items
A net loss of GBP1 million on sale of businesses arose on the
disposal of certain small wine businesses in Europe and North America.
Net finance charges
Net finance charges decreased from GBP237 million in the six
months ended 31 December 2009 to GBP209 million in the six months ended 31
December 2010.
Net interest charge decreased by GBP1 million from GBP197 million
in the comparable period to GBP196 million in the six months ended 31
December 2010. The effective interest rate was 4.9% in the six months ended
31 December 2010 and average net borrowings excluding interest rate related
fair value adjustments decreased by approximately GBP0.5 billion compared to
the comparable period last year. The income statement interest cover was 9.3
times and cash interest cover was 10.6 times (2009 - 8.8 times and 8.2 times,
respectively).
Net other finance charges for the six months ended 31 December
2010 were GBP13 million (2009 - GBP40 million). There was a decrease of GBP23
million in finance charges in respect of post employment plans from GBP25
million in the six months ended 31 December 2009 to GBP2 million in the six
months ended 31 December 2010. Other finance charges also included GBP8
million (2009 - GBP7 million) on unwinding of discounts on liabilities,
GBP1 million (2009 - GBP11 million) in respect of net exchange movements on
certain financial instruments and GBP2 million (2009 - GBP3 million income)
of other finance charges.
Associates
The group's share of associates' profits after interest and
tax was GBP104 million for the six months ended 31 December 2010 compared to
GBP94 million in the comparable prior period. Diageo's 34% equity interest in
Moet Hennessy contributed GBP106 million (2009 - GBP90 million) to share of
associates' profits after interest and tax.
Profit before taxation
Profit before taxation increased by GBP219 million from GBP1,393
million in the comparable prior period to GBP1,612 million in the six months
ended 31 December 2010.
Taxation
The reported tax rate for the six months ended 31 December
2010 was 21.8% compared with 22.3% for the six months ended 31 December 2009.
The underlying tax rate for the six months ended 31 December 2010 was 21.8%
compared with 22.4% for the six months ended 31 December 2009. The underlying
tax rate for the year ending 30 June 2011 is expected to remain at
approximately 22%.
Discontinued operations
No operations are classified as discontinued in the six months
ended 31 December 2010. Discontinued operations in the six months ended 31
December 2009 comprised a charge after taxation of GBP10 million in respect
of anticipated future payments to thalidomide claimants.
Exchange rate and other movements
Exchange rate movements are calculated by retranslating the
prior period results as if they had been generated at the current period
exchange rates. The difference is excluded from organic growth.
The estimated effect of exchange rate and other movements on
profit before exceptional items and taxation for the six months ended 31
December 2010 was as follows:
Gains/(losses)
GBP million
Operating profit before exceptional items
Translation impact (28)
Transaction impact 96
Impact of IAS 21 on operating profit 2
Total exchange effect on operating profit 70
before exceptional items
Interest and other finance charges
Net finance charges - translation impact 2
Mark to market impact of IAS 39 on interest (2)
expense
Impact of IAS 21 and IAS 39 on other finance 10
charges
Associates - translation impact (5)
Total effect on profit before exceptional 75
items and taxation
Six months ended Six months ended
31 December 2010 31 December 2009
Exchange rates
Translation GBP1 = $1.57 $1.64
Transaction GBP1 = $1.52 $1.74
Translation GBP1 = EUR1.18 EUR1.12
Transaction GBP1 = EUR1.13 EUR1.30
The impact of foreign exchange movements in the six months
ended 31 December 2010 was adversely impacted by the weaker Venezuelan
bolivar. For the year ending 30 June 2011 foreign exchange movements are
expected to increase operating profit by GBP55 million and are not expected
to materially affect the net finance charge based on applying current
exchange rates (GBP1 = $1.56 : GBP1 = EUR1.18). This guidance excludes the
impact of IAS 21 and 39 but includes the impact of revaluing the Venezuelan
bolivar at the rate used for the reported results for the six months ended
31 December 2010.
Dividend
An interim dividend of 15.50 pence per share will be paid to
holders of ordinary shares and ADRs on the register on 4 March 2011. This
represents an increase of 6% on last year's interim dividend. The interim
dividend will be paid to shareholders on 6 April 2011. Payment to US ADR
holders will be made on 11 April 2011. A dividend reinvestment plan is
available in respect of the interim dividend and the plan notice date is 16
March 2011.
Cash flow Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Cash generated from operations before 1,391 1,645
exceptional costs
Exceptional restructuring costs paid (67) (76)
Cash generated from operations 1,324 1,569
Interest paid (net) (176) (217)
Dividends paid to equity (75) (55)
non-controlling interests
Taxation paid (150) (198)
Net capital expenditure including sale and (129) (150)
leaseback of land
Net increase in other investments (19) (45)
Free cash flow 775 904
Free cash flow decreased by GBP129 million to GBP775 million in
the six months ended 31 December 2010. Cash generated from operations
decreased from GBP1,569 million to GBP1,324 million principally as a result
of a higher seasonal increase in working capital in the period compared with
the same period last year.
Balance sheet
At 31 December 2010, total equity was GBP5,650 million compared
with GBP4,786 million at 30 June 2010. The increase was mainly due to the
profit for the period of GBP1,260 million, partly offset by the dividend paid
out of shareholders' equity of GBP586 million.
Net borrowings were GBP7,010 million at 31 December 2010, an
increase of GBP56 million from GBP6,954 million at 30 June 2010. The
principal components of this increase were GBP586 million (2009 - GBP551
million) equity dividends paid, adverse exchange rate movements of GBP35
million (2009 - GBP201 million), adverse non-cash movements of GBP134 million
(2009 - GBP67 million) comprising predominantly fair value movements and
GBP51 million (2009 - GBP12 million) paid in respect of purchase of
businesses primarily in respect of Serengeti Breweries Limited partly offset
by free cash flow of GBP775 million (2009 - GBP904 million).
Diageo manages its capital structure to achieve capital
efficiency, maximise flexibility and give the appropriate level of access to
debt markets at attractive cost levels in order to enhance long-term
shareholder value. To achieve this, Diageo targets a range of ratios which
are currently broadly consistent with an A band credit rating. Diageo would
consider modifying these ratios in order to effect strategic initiatives
within its stated goals, which could have an impact on its rating.
Economic profit
Economic profit increased by GBP68 million from GBP653 million in
the six months ended 31 December 2009 to GBP721 million in the six months
ended 31 December 2010. See Reconciliation to GAAP Measures section four,
for the calculation and definition of economic profit.
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
Six months ended Six months ended
31 December 2010 31 December 2009
Notes GBP million GBP million
Sales 2 7,132 6,928
Excise duties (1,812) (1,721)
Net sales 2 5,320 5,207
Cost of sales (2,072) (2,123)
Gross profit 3,248 3,084
Marketing expenses (813) (725)
Other operating expenses (717) (823)
Operating profit 2 1,718 1,536
Sale of businesses 3 (1) -
Net interest payable 4 (196) (197)
Net other finance charges 4 (13) (40)
Share of associates' profits
after tax 104 94
Profit before taxation 1,612 1,393
Taxation 5 (352) (310)
Profit from continuing
operations 1,260 1,083
Discontinued operations 6 - (10)
Profit for the period 1,260 1,073
Attributable to:
Equity shareholders of the
parent company 1,194 1,016
Non-controlling interests 66 57
1,260 1,073
Pence per share
Continuing operations 47.9p 41.3 p
Discontinued operations - (0.4) p
Basic earnings 47.9p 40.9 p
Continuing operations 47.8p 41.2 p
Discontinued operations - (0.4)p
Diluted earnings 47.8p 40.8 p
Average shares 2,492m 2,482m
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six months Six months
ended ended
31 December 31 December
2010 2009
GBP million GBP million
Other comprehensive income
Exchange differences on translation of
foreign operations
excluding borrowings
- group (38) 217
- associates and non-controlling interests 45 85
Exchange differences on borrowings and
derivative net
investment hedges (34) (201)
Effective portion of changes in fair value
of cash flow hedges
- net losses taken to other comprehensive
income (20) (69)
- transferred to income statement 29 36
Net actuarial gain on post employment plans 342 176
Tax on other comprehensive income (83) (56)
Other comprehensive income, net of tax, for
the period 241 188
Profit for the period 1,260 1,073
Total comprehensive income for the period 1,501 1,261
Attributable to:
Equity shareholders of the parent company 1,470 1,187
Non-controlling interests 31 74
1,501 1,261
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
31 December 30 June 31 December
2010 2010 2009
GBP GBP GBP GBP GBP GBP
Notes million million million million million million
Non-current
assets
Intangible
assets 6,661 6,726 6,355
Property, plant
and equipment 2,456 2,404 2,390
Biological
assets 29 30 38
Investments in
associates 2,268 2,060 2,226
Other
investments 139 117 130
Other
receivables 20 115 18
Other financial
assets 341 472 261
Deferred tax
assets 359 529 594
Post employment
benefit assets 57 49 45
12,330 12,502 12,057
Current assets
Inventories 7 3,401 3,281 3,279
Trade and other
receivables 2,670 2,008 2,596
Assets held for
sale 10 63 112 -
Other financial
assets 63 98 105
Cash and cash
equivalents 8 1,472 1,453 1,589
7,669 6,952 7,569
Total assets 19,999 19,454 19,626
Current
liabilities
Borrowings and
bank overdrafts 8 (794) (587) (891)
Other financial
liabilities (139) (186) (154)
Trade and other
payables (2,804) (2,615) (2,738)
Liabilities held
for sale 10 (5) (10) -
Corporate tax
payable (417) (391) (604)
Provisions (174) (155) (196)
(4,333) (3,944) (4,583)
Non-current
liabilities
Borrowings 8 (7,847) (8,177) (8,202)
Other financial
liabilities (140) (155) (97)
Other payables (54) (76) (26)
Provisions (258) (318) (355)
Deferred tax (825) (744) (672)
liabilities
Post employment
benefit
liabilities (892) (1,254) (1,100)
(10,016) (10,724) (10,452)
Total liabilities (14,349) (14,668) (15,035)
Net assets 5,650 4,786 4,591
Equity
Called up share
capital 797 797 797
Share premium 1,342 1,342 1,342
Other reserves 3,258 3,245 3,331
Retained deficit (511) (1,377) (1,603)
Equity
attributable to
equity
shareholders of
the parent 4,886 4,007 3,867
company
Non-controlling
interests 764 779 724
Total equity 5,650 4,786 4,591
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained earnings/(deficit)
Other
Share Share Other Own retained
capital premium reserves shares earnings Total
GBP GBP GBP GBP GBP GBP
million million million million million million
At 30 June 2010 797 1,342 3,245 (2,253) 876 (1,377)
Total
comprehensive
income - - 13 - 1,457 1,457
Employee share
schemes - - - (26) (3) (29)
Share-based
incentive plans - - - - 17 17
Tax on
share-based
incentive plans - - - - 7 7
Acquisitions - - - - - -
Dividends paid - - - - (586) (586)
At 31 December
2010 797 1,342 3,258 (2,279) 1,768 (511)
At 30 June 2009 797 1,342 3,279 (2,342) 93 (2,249)
Total
comprehensive
income - - 52 - 1,135 1,135
Employee share
schemes - - - 44 (1) 43
Share-based
incentive plans - - - - 16 16
Tax on
share-based
incentive plans - - - - 3 3
Dividends paid - - - - (551) (551)
At 31 December
2009 797 1,342 3,331 (2,298) 695 (1,603)
(table continues)
Equity
attributable to
parent
company Non-controlling
share-holders interests Total equity
GBP million GBP million GBP million
At 30 June 2010 4,007 779 4,786
Total
comprehensive
income 1,470 31 1,501
Employee share
schemes (29) - (29)
Share-based
incentive plans 17 - 17
Tax on
share-based
incentive plans 7 - 7
Acquisitions - 29 29
Dividends paid ( 586) (75) (661)
At 31 December
2010 4,886 764 5,650
At 30 June 2009 3,169 705 3,874
Total
comprehensive
income 1,187 74 1,261
Employee share
schemes 43 - 43
Share-based
incentive plans 16 - 16
Tax on
share-based
incentive plans 3 - 3
Dividends paid (551) (55) (606)
At 31 December
2009 3,867 724 4,591
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended Six months ended
31 December 2010 31 December 2009
GBP GBP GBP GBP
million million million million
Cash flows from operating
activities
Cash generated from operations (see 1,324 1,569
note 12)
Interest received 133 156
Interest paid (309) (373)
Dividends paid to equity (75) (55)
non-controlling interests
Taxation paid (150) (198)
Net cash from operating activities 923 1,099
Cash flows from investing
activities
Disposal of property, plant and
equipment and computer software 44 3
Purchase of property, plant and
equipment and computer software (173) (153)
Net increase in other investments (19) (45)
Disposal of businesses 19 1
Purchase of businesses (51) (12)
Net cash outflow from investing (180) (206)
activities
Cash flows from financing
activities
Net (purchase)/sale of own shares (29) 41
for share schemes
Net (decrease)/increase in loans (68) 299
Equity dividends paid (586) (551)
Net cash outflow from financing (683) (211)
activities
Net increase in net cash and cash 60 682
equivalents
Exchange differences (65) (1)
Net cash and cash equivalents at
beginning of the period 1,398 846
Net cash and cash equivalents at 1,393 1,527
end of the period
Net cash and cash equivalents
consist of:
Cash and cash equivalents 1,472 1,589
Bank overdrafts (79) (62)
1,393 1,527
NOTES
1. Basis of preparation
The financial information included within this report has been
prepared using accounting policies in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB) and as endorsed and adopted for use in the European
Union, and in accordance with the Disclosure and Transparency Rules (DTR) of
the Financial Services Authority. The condensed consolidated financial
statements have been prepared in accordance with IAS 34 - Interim Financial
Reporting. This interim condensed consolidated financial information is
unaudited and has been prepared on the basis of accounting policies
consistent with those applied in the consolidated financial statements for
the year ended 30 June 2010 except as noted below. IFRS is subject to ongoing
review and endorsement by the EU or possible amendment by interpretative
guidance from the IASB.
(a) Adopted by the group The following accounting standards
and interpretations, issued by the International Accounting Standards Board
(IASB) or International Financial Reporting Interpretations Committee
(IFRIC), are effective for the first time in the current financial year and
have been adopted by the group with no significant impact on its consolidated
results or financial position:
Amendment to IAS 1 - Classification of the liability component of a
convertible instrument
Amendment to IAS 7 - Classification of expenditures on unrecognised
assets
Amendment to IAS 17 - Classification of leases of land and buildings
Amendment to IAS 27 - Consolidated and separate financial statements
Amendment to IAS 32 - Financial instruments: presentation -
Classification of rights issues
Amendment to IAS 36 - Cash generating units
Amendments to IAS 39 - Financial instruments: recognition and measurement
Amendment to IFRS 2 - Group cash-settled share-based payment transactions
Amendment to IFRS 3 - Business combinations
Amendment to IFRS 5 - Non-current assets held for sale and discontinued
operations
Amendment to IFRS 8 - Segment information with respect to total assets
IFRIC 19 - Extinguishing financial liabilities with equity instruments
(b) Not adopted by the group The following standards,
amendments and interpretations issued by the IASB or IFRIC have not yet been
adopted by the group. The group currently believes that the adoption of these
standards or interpretations would not have a material impact on the
consolidated results or financial position of the group. These standards,
amendments and interpretations are effective for annual periods beginning on
or after 1 January 2011 unless otherwise stated.
Amendment to IAS 1 - Presentation of financial statements
Limited scope amendment to IAS 12 - Income taxes (effective for annual
periods beginning on or after 1 January 2012)
IAS 24 (Revised) - Related party disclosures
Amendment to IAS 34 - Interim financial reporting
Amendment to IFRS 7 - Financial instruments: disclosures
IFRS 9 - Financial instruments (effective for annual periods beginning on
or after 1 January 2013)
Amendment to IFRIC 13 - Customer loyalty programmes
Amendment to IFRIC 14 - IAS 19: The limit on defined benefit assets,
minimum funding requirements and their interaction
With the exception of IAS 24 (Revised) and the Amendment to
IFRIC 14, none of the above standards and interpretations not yet adopted by
Diageo has been endorsed or adopted for use in the European Union.
The comparative figures for the financial year ended 30 June
2010 are not the company's statutory accounts for that financial year. Those
accounts have been reported on by the company's auditor and delivered to the
registrar of companies. The report of the auditor was (i) unqualified, (ii)
did not include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report, and (iii) did
not contain a statement under section 498(2) or (3) of the Companies Act
2006.
2. Segmental information
The executive committee considers the business principally
from a geographical perspective and the business analysis is presented under
the operating segments of North America, Europe, International and Asia
Pacific. In addition to these geographical selling segments, a further
segment reviewed by the executive committee is Global Supply which
manufactures and distributes premium drinks within the group. Continuing
operations also include the Corporate function. In view of the focus on the
geographical segments in explaining the group's performance in the Business
review, the results of the Global Supply segment have, in order to provide
additional reconciling information, been allocated to the geographical
segments. This gives an additional basis of presenting the group's
performance and results on the basis of the location of third party
customers. Corporate revenues and costs are in respect of central costs,
including finance, human resources and legal, as well as certain information
systems, facilities and employee costs that do not relate to the geographical
segments or to Global Supply and hence are not allocated. They also include
rents receivable in respect of properties not used by Diageo in the
manufacture, sale or distribution of premium drinks and the results of
Gleneagles Hotel. The group also owns a 34% interest in Moet Hennessy which
is based in France and accounted for as an associate.
The segmental information for net sales and operating profit
is reported at budgeted exchange rates in line with internal reporting. For
management reporting purposes Diageo measures the current period at, and
restates the prior period net sales and operating profit to, the current
year's budgeted exchange rates. These exchange rates are set prior to the
financial year as part of the financial planning process and provide a
consistent exchange rate to measure the performance of the business
throughout the year. The adjustments required to retranslate the segmental
information to actual exchange rates and to reconcile it to Diageo's reported
results are shown in the tables below. The comparative segmental information,
prior to re-translation, has not been restated at the current year's budgeted
exchange rates but is presented at the budgeted rates for the year ended 30
June 2010.
In addition, for management reporting purposes Diageo excludes
the impact on net sales and operating profit of acquisitions and disposals
completed in the current and prior period from the results of the
geographical segments in order to provide comparable results. The impact of
acquisitions and disposals has been allocated to the appropriate geographical
segments in the tables below. These acquisitions and disposals are the same
as those disclosed in the organic growth reconciliations but for management
reporting purposes they are disclosed here at budgeted exchange rates.
North Inter- Asia Global
America Europe national Pacific Supply
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Six months ended
31 December 2010
Sales 2,094 2,312 1,773 915 1,411
Net sales
At budgeted
exchange rates* 1,770 1,428 1,415 562 1,468
Acquisitions and
disposals 13 4 - 1 -
Global Supply
allocation 16 26 8 5 (55)
Retranslation to
actual
exchange rates 8 (14) (8) 48 (2)
Net sales 1,807 1,444 1,415 616 1,411
Operating
profit/(loss)
At budgeted
exchange rates* 683 435 489 121 92
Acquisitions and
disposals 1 - (3) (3) -
Global Supply
allocation 40 40 8 4 (92)
Retranslation to
actual
exchange rates (1) (4) (26) 7 -
Operating
profit/(loss)
before exceptional
items 723 471 468 129 -
Exceptional items - - - - (9)
Operating 723 471 468 129 (9)
profit/(loss)
Sale of businesses
Net finance charges
Share of
associates' profits
- Moet Hennessy
- Other associates
Profit before
taxation
(table continues)
Eliminate
inter- Total Corporate
segment operating and
sales segments other Total
GBP million GBPmillion GBPmillion GBPmillion
Six months
ended
31 December
2010
Sales (1,411) 7,094 38 7,132
Net sales
At budgeted
exchange
rates* (1,413) 5,230 38 5,268
Acquisitions
and disposals - 18 - 18
Global Supply
allocation - - - -
Retranslation
to actual
exchange rates 2 34 - 34
Net sales (1,411) 5,282 38 5,320
Operating
profit/(loss)
At budgeted
exchange
rates* - 1,820 (93) 1,727
Acquisitions
and disposals - (5) - (5)
Global Supply
allocation - - - -
Retranslation
to actual
exchange
rates - (24) 29 5
Operating
profit/(loss)
before
exceptional
items - 1,791 (64) 1,727
Exceptional
items - (9) - (9)
Operating
profit/(loss) - 1,782 (64) 1,718
Sale of businesses (1)
Net finance
charges (209)
Share of
associates'
profits
- Moet 106
Hennessy
- Other (2)
associates
Profit before
taxation 1,612
* These items represent the IFRS 8 performance measures for
the geographical and Global Supply segments.
North Inter- Asia Global
America Europe national Pacific Supply
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Six months
ended
31 December
2009
Sales 1,969 2,456 1,726 737 1,391
Net sales
At budgeted
exchange
rates* 1,596 1,405 1,327 490 1,375
Acquisitions
and disposals 26 4 - - -
Global Supply
allocation 9 31 9 7 (56)
Retranslation
to actual
exchange rates 64 107 66 26 72
Net sales 1,695 1,547 1,402 523 1,391
Operating
profit/(loss)
At budgeted
exchange
rates* 614 470 458 95 65
Acquisitions
and disposals (1) 1 - - -
Global Supply
allocation 30 33 6 1 (70)
Retranslation
to actual
exchange rates 24 24 (4) 7 5
Operating
profit/(loss)
before
exceptional
items 667 528 460 103 -
Exceptional
items (6) (6) (3) (5) (74)
Operating
profit/(loss) 661 522 457 98 (74)
Net finance
charges
Share of
associates'
profits
- Moet Hennessy
- Other
associates
Profit before
taxation
(table continues)
Eliminate
inter- Total Corporate
segment operating and
sales segments other Total
GBP million GBPmillion GBPmillion GBPmillion
Six months ended
31 December 2009
Sales (1,391) 6,888 40 6,928
Net sales
At budgeted
exchange rates* (1,319) 4,874 38 4,912
Acquisitions and
disposals - 30 - 30
Global Supply
allocation - - - -
Retranslation to
actual
exchange rates (72) 263 2 265
Net sales (1,391) 5,167 40 5,207
Operating
profit/(loss)
At budgeted
exchange rates* - 1,702 (95) 1,607
Acquisitions and
disposals - - - -
Global Supply
allocation - - - -
Retranslation to
actual
exchange rates - 56 (32) 24
Operating
profit/(loss)
before
exceptional items - 1,758 (127) 1,631
Exceptional items - (94) (1) (95)
Operating
profit/(loss) - 1,664 (128) 1,536
Net finance
charges (237)
Share of
associates'
profits
- Moet Hennessy 90
- Other associates 4
Profit before taxation 1,393
* These items represent the IFRS 8 performance measures for
the geographical and Global Supply segments.
The group's net finance charges are managed centrally and are
not attributable to individual operating segments.
Apart from sales by the Global Supply segment, inter-segmental
sales are not material.
The festive holiday season provides the peak period for sales.
Approximately 40% of annual net sales occur in the last four months of each
calendar year.
Weighted average exchange rates used in the translation of
income statements were US dollar - GBP1 = $1.57 (2009 - GBP1 = $1.64) and
euro - GBP1 = EUR1.18 (2009 - GBP1 = EUR1.12). Exchange rates used to
translate assets and liabilities at the balance sheet date were US dollar -
GBP1 = $1.56 (30 June 2010 - GBP1 = $1.50; 31 December 2009 - GBP1=1.62) and
euro - GBP1 = EUR1.17 (30 June 2010 - GBP1 = EUR1.22; 31 December 2009 GBP1 =
EUR1.13). The group uses foreign exchange transaction hedges to mitigate the
effect of exchange rate movements.
3. Exceptional items
Exceptional items are those which, in management's judgement,
need to be disclosed by virtue of their size or incidence in order for the
user to obtain a proper understanding of the financial information.
Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Items included in operating profit
Restructuring of Global Supply operations (4) (69)
Restructuring of Irish brewing operations (5) (5)
Global restructuring programme - (21)
(9) (95)
Sale of businesses (1) -
Exceptional items before taxation (10) (95)
Tax on exceptional operating items 2 24
Exceptional items in continuing operations (8) (71)
Discontinued operations net of taxation - (10)
Total exceptional items (8) (81)
Items included in operating profit are
charged to:
Cost of sales (9) (22)
Other operating expenses - (73)
(9) (95)
4. Net interest and other finance charges
Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Interest payable (270) (284)
Interest receivable 86 97
Market value movements on interest rate
instruments (12) (10)
Net interest payable (196) (197)
Net finance charges in respect of post
employment plans (2) (25)
Unwinding of discounts (8) (7)
Other finance (charges)/income (2) 3
(12) (29)
Net exchange movements on certain
financial instruments (1) (11)
Net other finance charges (13) (40)
Comparative data in the table for Interest receivable and
Market value movements on interest rate instruments has been reclassified in
order to show the impact of certain transactions on a net basis in line with
the presentation followed in the annual report for the year ended 30 June
2010.
5. Taxation
For the six months ended 31 December 2010, the GBP352 million
taxation charge (2009 - GBP310 million) comprises a UK tax charge of GBP25
million (2009 - tax credit of GBP47 million) and a foreign tax charge of
GBP327 million (2009 - GBP357 million). Included within the tax charge is a
credit of GBP2 million (2009 - GBP24 million) in respect of the exceptional
items identified in note 3.
6. Discontinued operations
No operations are classified as discontinued in the six months
ended 31 December 2010. Discontinued operations for the six months ended 31
December 2009 represent a charge after taxation of GBP10 million in respect
of anticipated future payments to thalidomide claimants.
7. Inventories
31 December 30 June 31 December
2010 2010 2009
GBP million GBP million GBP million
Raw materials and consumables 296 297 311
Work in progress 23 21 25
Maturing inventories 2,585 2,506 2,413
Finished goods and goods for
resale 497 457 530
3,401 3,281 3,279
8. Net borrowings
31 December 30 June 31 December
2010 2010 2009
GBP million GBP million GBP million
Borrowings due within one year and
bank overdrafts (794) (587) (891)
Borrowings due after one year (7,847) (8,177) (8,202)
Fair value of interest rate hedging
instruments 44 191 64
Fair value of foreign currency swaps
and forwards 171 227 154
Finance lease liabilities (56) (61) (18)
(8,482) (8,407) (8,893)
Cash and cash equivalents 1,472 1,453 1,589
(7,010) (6,954) (7,304)
9. Reconciliation of movement in net borrowings
Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Increase in net cash and cash
equivalents before exchange 60 682
Decrease/(increase) in loans 68 (299)
Decrease in net borrowings from cash
flows 128 383
Exchange differences (35) (201)
Loans acquired on purchase of businesses (15) -
Other non-cash items (134) (67)
Net borrowings at beginning of the
period (6,954) (7,419)
Net borrowings at end of the period (7,010) (7,304)
Other non-cash items primarily comprise the fair value changes
of bonds and interest rate derivatives.
10. Assets and disposal groups held for sale
31 December 2010 30 June 2010
GBP million GBP million
Current assets 26 47
Non-current assets 37 65
63 112
Current liabilities
(1) (6)
Non-current liabilities (4) (4)
(5) (10)
The assets and disposal groups held for sale comprise a number
of non-strategic wine businesses in California and the group's investment in
Tanzania Breweries Limited. No assets and disposal groups were classified as
held for sale at 31 December 2009.
11. Dividends and other reserves
Six months ended Six months ended
31 December 2010 31 December 2009
GBP million GBP million
Amounts recognised as distributions to
equity shareholders in the period
Final dividend paid for the year ended
30 June 2010 of 23.50 pence per share
(2009 - 22.20 pence) 586 551
For the six months ended 31 December 2010, an interim dividend
of 15.50 pence per share (2009 - 14.60 pence) was approved by the Board on 9
February 2011. As this was after the balance sheet date, this dividend has
not been included as a liability in the balance sheet at 31 December 2010.
Other reserves of GBP3,258 million at 31 December 2010 included
capital redemption reserve of GBP3,146 million, fair value and hedging reserve
of GBP12 million and exchange reserve of GBP100 million.
12. Cash generated from operations
Six months ended Six months ended
31 December 2010 31 December 2009
GBP GBP GBP GBP
million million million million
Profit for the period 1,260 1,073
Discontinued operations - 10
Taxation 352 310
Share of associates' profits after
tax (104) (94)
Net interest and net other finance
charges 209 237
Sale of businesses 1 -
Operating profit 1,718 1,536
Increase in inventories (119) (128)
Increase in trade and other
receivables (529) (488)
Increase in trade and other payables
and provisions 139 544
Net movement in working capital (509) (72)
Depreciation and amortisation 144 159
Dividend income 5 6
Other items (34) (60)
Cash generated from operations 1,324 1,569
In the consolidated statement of cash flows, cash generated
from operations is stated after GBP67 million (2009 - GBP76 million) of cash
outflows in respect of exceptional operating items.
In the calculation of cash generated from operations, Other
items include GBP37 million of cash contributions to post employment schemes
in excess of the income statement charge (2009 - GBP54 million).
13. Contingent liabilities and legal proceedings
(a) Guarantees As of 31 December 2010 the group has no
material performance guarantees or indemnities to third parties.
(b) Colombian litigation An action was filed on 8 October 2004
in the United States District Court for the Eastern District of New York by
the Republic of Colombia and a number of its local government entities
against Diageo and other spirits companies. The complaint alleges several
causes of action. Included among the causes of action is a claim that the
defendants allegedly violated the Federal RICO Act by facilitating money
laundering in Colombia through their supposed involvement in the contraband
trade to the detriment of government owned spirits production and
distribution businesses. Diageo is unable to quantify meaningfully the
possible loss or range of loss to which the lawsuit may give rise. Diageo
intends to defend itself vigorously against this lawsuit.
(c) Turkish customs litigation In common with other beverage
alcohol importers, litigation is ongoing against Diageo's Turkish subsidiary
(Diageo Turkey) in the Turkish Civil Courts in connection with the
methodology used by the Turkish customs authorities in assessing the
importation value of and ad valorem import duty payable on the beverage
alcohol products sold in the domestic channel in Turkey between 2001 and
April 2009. The matter involves multiple cases against Diageo Turkey at
various stages of litigation, including a group of cases under correction
appeal following an adverse finding at the Turkish Supreme Court, and a group
of cases decided on correction appeal against Diageo Turkey that are now
under further appeal. Diageo Turkey is unable to quantify meaningfully the
possible loss or range of loss to which these cases may give rise. If all of
these cases were finally to be decided against Diageo Turkey, the aggregate
loss could exceed GBP100 million. Diageo Turkey has been using available
opportunities to indicate to the Turkish authorities that, if suitable
enabling legislation were in place, Diageo Turkey would be amenable to
agreeing a settlement at a level that is proportionate to the scale of Diageo
Turkey's business, which earns annual operating profit of less than GBP10
million. In November 2010, the Turkish government announced the proposed
restructuring of its public receivables law, which would allow the settlement
of outstanding tax claims (including custom duties). Once the law becomes
effective, Diageo will evaluate its position under the new legislation.
Diageo believes that any eventual liability is unlikely to be material to the
Diageo group as a whole. Diageo recognises that, in absence of settlement,
the ongoing situation creates potential uncertainty regarding Diageo Turkey's
continuing operations in Turkey. Diageo Turkey intends to defend its position
vigorously.
(d) SEC investigation Diageo Korea and several of its current
and former employees have been subject to investigations by Korean
authorities regarding various regulatory and control matters. Convictions for
improper payments to a Korean customs official have been handed down against
two former Diageo Korea employees, and a former and two current Diageo Korea
employees have been convicted on various counts of tax evasion. Diageo had
previously voluntarily reported the allegations relating to the convictions
for improper payments to the US Department of Justice and the US Securities
and Exchange Commission (SEC). The SEC has commenced an investigation into
these and other matters, and Diageo is in the process of responding to the
regulators' enquiries regarding activities in Korea, Thailand, India and
elsewhere. Diageo's own internal investigation in Korea, Thailand, India and
elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and
related statutes and regulations provide for potential monetary penalties,
criminal sanctions and may result in some cases in debarment from doing
business with governmental entities in connection with FCPA violations.
Diageo is unable to quantify meaningfully the possible loss or range of loss
to which these matters may give rise.
(e) Korean customs litigation Litigation is ongoing at the
Korean Tax Tribunal in connection with the application of the methodology
used in transfer pricing on spirits imports since 2004. On 24 December 2009,
Diageo Korea received a final customs audit assessment notice from the Korean
customs authorities, covering the period from 1 February 2004 to 30 June
2007, for Korean won 194 billion or approximately GBP107 million (including GBP13
million of value added tax). In order to preserve its right to appeal, Diageo
Korea is required to pay the full amount of the assessment. Diageo Korea paid
GBP4 million to the Korean customs authorities in the year ended 30 June 2009,
GBP57 million in the year ended 30 June 2010 and GBP46 million in the six month
period ended 31 December 2010, in respect of the period prior to 30 June
2007. On 22 January 2010, Diageo Korea appealed this customs audit assessment
to the Korean Tax Tribunal. No assessments have been received for any period
subsequent to 30 June 2007. Diageo Korea is unable to quantify meaningfully
the possible loss or range of loss to which these claims may give rise.
Diageo Korea intends to defend its position vigorously.
(f) Potential Chinese acquisition On 1 March 2010, Diageo
entered into an equity transfer agreement to acquire an additional 4% equity
stake in Sichuan Chengdu Quanxing Group Company Ltd. (Quanxing) from Chengdu
Yingsheng Investment Holding Co., Ltd. The consideration for the additional
4% equity stake is RMB 140 million (GBP14 million). The acquisition of the 4%
equity stake, which is subject to a number of regulatory approvals, would
bring Diageo's shareholding in Quanxing to 53%. Quanxing is a holding company
controlling a 39.7% stake in Sichuan ShuiJingFang Co., Ltd. (ShuiJingFang), a
super premium Chinese white spirits company listed on the Shanghai Stock
Exchange. If the acquisition of the 4% equity stake is approved, Diageo would
become the indirect controlling shareholder of ShuiJingFang and, in
accordance with Chinese takeover regulations, would be required to make a
mandatory tender offer to all the other shareholders of ShuiJingFang. Were
all other ShuiJingFang shareholders to accept the tender offer, the amount
payable would be RMB 6.3 billion (approximately GBP614 million). As required by
Chinese law, 20% of the maximum consideration payable under the tender offer
(GBP123 million) was deposited with China's securities depositary and clearing
agency, Shanghai branch.
(g) Other The group has extensive international operations and
is defendant in a number of legal, tax and customs proceedings incidental to
these operations. There are a number of legal, tax and customs claims against
the group, the outcome of which cannot at present be foreseen.
Save as disclosed above, neither Diageo, nor any member of the
Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is
there pending or threatened by or against it, any legal or arbitration
proceedings which may have a significant effect on the financial position of
the Diageo group.
14. Related party transactions
The group's significant related parties are its associates,
joint ventures, key management personnel and pension plans, as disclosed in
the annual report for the year ended 30 June 2010. There have been no
transactions with these related parties during the six months ended 31
December 2010 that have materially affected the financial position or
performance of the group during this period.
INDEPENDENT REVIEW REPORT TO DIAGEO PLC
Introduction
We have been engaged by the company to review the condensed
set of financial statements in the half-yearly financial report for the six
months ended 31 December 2010 which comprises the condensed consolidated
income statement, the condensed consolidated statement of comprehensive
income, the condensed consolidated balance sheet, the condensed consolidated
statement of changes in equity, the condensed consolidated statement of cash
flows and the related explanatory notes. We have read the other information
contained in the half-yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with
the terms of our engagement to assist the company in meeting the requirements
of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial
Services Authority ("the UK FSA"). Our review has been undertaken so that we
might state to the company those matters we are required to state to it in
this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company
for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the DTR of the
UK FSA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the EU. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with IAS 34 Interim Financial
Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion
on the condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of Interim
Financial Information Performed by the Independent Auditor of the Entity
issued by the Auditing Practices Board for use in the UK. A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on Auditing (UK
and Ireland) and consequently does not enable us to obtain assurance that we
would become aware of all significant matters that might be identified in an
audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 31 December 2010 is not
prepared, in all material respects, in accordance with IAS 34 as adopted by
the EU and the DTR of the UK FSA.
Ian Starkey
for and on behalf of KPMG Audit Plc Chartered Accountants
15 Canada Square
London, E14 5GL, UK
9 February 2011
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Definitions
Comparisons are to the six months ended 31 December 2009
(2009) unless otherwise stated. Unless otherwise stated, percentage movements
given throughout this announcement for volume, sales, net sales, marketing
spend and operating profit are organic movements after retranslating prior
period reported numbers at current period exchange rates and after adjusting
for the effect of exceptional items and acquisitions and disposals. For an
explanation of organic movements please refer to `Reconciliation to GAAP
measures' in this announcement.
Volume has been measured on an equivalent units basis to
nine-litre cases of spirits. An equivalent unit represents one nine-litre
case of spirits, which is approximately 272 servings. A serving comprises
33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer.
Therefore, to convert volume of products, other than spirits, to equivalent
units, the following guide has been used: beer in hectolitres divide by 0.9,
wine in nine-litre cases divide by five, ready to drink in nine-litre cases
divide by 10 and certain pre-mixed products that are classified as ready to
drink in nine-litre cases divide by five.
Net sales are sales after deducting excise duties.
Price/mix is the number of percentage points by which the
organic movement in net sales exceeds the organic movement in volume. The
difference arises because of changes in the composition of sales between
higher and lower priced variants or as price changes are implemented.
Exceptional items are those which, in management's judgement,
need to be disclosed by virtue of their size or incidence in order for the
user to obtain a proper understanding of the financial information. Such
items are included within the income statement caption to which they relate.
References to ready to drink also include ready to serve
products, such as pre mix cans in some markets, and progressive adult
beverages in the United States and certain markets supplied by the United
States. References to beer include Guinness Malta, a non alcoholic malt based
product.
References to reserve brands include Johnnie Walker Green
Label, Johnnie Walker Gold Label 18 year old, Johnnie Walker Blue Label,
Johnnie Walker Blue Label King George V, The John Walker, Classic Malts, The
Singleton of Glen Ord, The Singleton of Glendullan, The Singleton of
Dufftown, Buchanan's Special Reserve, Buchanan's Red Seal, Dimple 18 year
old, Bulleit Bourbon, Tanqueray No. 10, Ciroc, Ketel One vodka, Don Julio,
Zacapa and Godiva.
Volume share is a brand's volume when compared to the volume
of all brands in its segment. Value share is a brand's retail sales when
compared to the retail sales of all brands in its segment. Unless otherwise
stated, share refers to value share. Share of voice is the media spend on a
particular brand when compared to all brands in its segment. The share data,
competitive set classifications and share of voice data contained in this
announcement are taken from independent industry sources in the markets in
which Diageo operates. IRI refers to Information Resources, Inc. with
references to IRI's new spirits product tracker for the 12 months ended 26
December 2010, NABCA refers to the US National Alcohol Beverage Control
Association.
This announcement 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 'Cautionary statement concerning
forward-looking statements' for more details.
This announcement includes names of Diageo's products which
constitute trademarks or trade names which Diageo owns or which others own
and license to Diageo for use.
Reconciliation to GAAP measures
1. Organic movements
Organic movements in volume, sales, net sales, marketing spend
and operating profit are measures not specifically used in the consolidated
financial statements themselves (non-GAAP measures). The performance of the
group is discussed using these measures.
In the discussion of the performance of the business, organic
information is presented using pounds sterling amounts on a constant currency
basis. This retranslates prior period reported numbers at current period
exchange rates and enables an understanding of the underlying performance of
the market that is most closely influenced by the actions of that market's
management. The risk from exchange rate movements is managed centrally and is
not a factor over which local managers have any control. Residual exchange
impacts are reported within corporate.
Acquisitions, disposals and exceptional items also impact on
the reported performance and therefore the reported movement in any period in
which they arise. Management adjusts for the impact of such transactions in
assessing the performance of the underlying business.
The underlying performance on a constant currency basis and
excluding the impact of exceptional items, acquisitions and disposals is
referred to as `organic' performance. Organic movement calculations enable
the reader to focus on the performance of the business which is common to
both periods.
Organic movements in volume, sales, net sales, marketing spend
and operating profit
Diageo's strategic planning and budgeting process is based on
organic movements in volume, sales, net sales, marketing spend and operating
profit, and these measures closely reflect the way in which operating targets
are defined and performance is monitored by the group's management.
These measures are chosen for planning, budgeting, reporting
and incentive purposes since they represent those measures which local
managers are most directly able to influence and they enable consideration of
the underlying business performance without the distortion caused by
fluctuating exchange rates, exceptional items and acquisitions and disposals.
The group's management believes these measures provide
valuable additional information for users of the financial statements in
understanding the group's performance since they provide information on those
elements of performance which local managers are most directly able to
influence and they focus on that element of the core brand portfolio which is
common to both periods. They should be viewed as complementary to, and not
replacements for, the comparable GAAP measures and reported movements
therein.
The organic movement calculations for volume, sales, net
sales, marketing spend and operating profit before exceptional items for the
six months ended 31 December 2010 were as follows:
2009 Acquisitions and Organic 2010
Reported disposals(2) movement Reported Organic
units units units units movement
million milliion million million %
Volume
North America 27.6 (0.1) 0.5 28.0 2
Europe 22.0 - (0.5) 21.5 (2)
International 20.8 - 1.9 22.7 9
Asia Pacific 6.4 (0.1) 0.5 6.8 8
Total volume 76.8 (0.2) 2.4 79.0 3
Acquisitions
2009 and Organic 2010 Organic
Reported Exchange(1) disposals movement Reported movement
GBP GBP GBP GBP GBP %
Sales million million million million million
North America 1,969 94 (23) 54 2,094 3
Europe 2,456 (50) (18) (76) 2,312 (3)
International 1,726 (174) (1) 222 1,773 14
Asia Pacific 737 80 - 98 915 12
Corporate 40 (1) - (1) 38
Total sales 6,928 (51) (42) 297 7,132 4
Acquisitions
2009 and Organic 2010 Organic
Reported Exchange(1) disposals movement Reported movement
GBP GBP GBP GBP GBP %
Net sales million million million million million
North America 1,695 82 (23) 53 1,807 3
Europe 1,547 (38) (13) (52) 1,444 (3)
International 1,402 (149) (1) 163 1,415 13
Asia Pacific 523 53 - 40 616 7
Corporate 40 (1) - (1) 38
Total net 5,207 (53) (37) 203 5,320 4
sales
Excise duties 1,721 1,812
Total sales 6,928 7,132
Acquisitions
2009 and Organic 2010 Organic
Reported Exchange(1) disposals movement Reported movement
Marketing GBP GBP GBP GBP GBP %
Spend million million million million million
North America 228 11 - 29 268 12
Europe 229 (6) (1) 3 225 1
International 150 - - 27 177 18
Asia Pacific 118 11 1 13 143 10
Total
marketing
spend 725 16 - 72 813 10
Acquisitions
2009 and Organic 2010 Organic
Reported Exchange(1) disposals movement Reported movement
Operating GBP GBP GBP GBP GBP %
Profit million million million million million
North America 667 23 (1) 34 723 5
Europe 528 (9) 1 (49) 471 (9)
International 460 (51) (1) 60 468 15
Asia Pacific 103 9 (3) 20 129 18
Corporate (127) 98 - (35) (64)
Total operating
profit
before exceptional
items 1,631 70 (4) 30 1,727 2
Exceptional
items(3) (95) (9)
Total operating
profit 1,536 1,718
Notes: Information relating to the organic movement calculations
(1) The exchange adjustments for sales, net sales, marketing
spend and operating profit are primarily the retranslation of prior period
reported results at current period exchange rates and are principally in
respect of the strengthening of the US dollar offset by the weakening of the
Venezuelan bolivar.
(2) The impacts of acquisitions and disposals are excluded
from the organic movement percentages. In the six months ended 31 December
2010 there were no acquisitions impacting organic growth. Disposals in the
six months ended 31 December 2010 were the disposals completed under the
reorganisation of the group's US wines operations and the disposal of the
Gilbeys wholesale wine business in Ireland. Adjustment is also made to
exclude directly attributable transaction costs incurred in the six months
ended 31 December 2010 of GBP6 million, netted against acquisition costs of GBP3
million incurred in the six months period ended 31 December 2009 primarily in
respect of the acquisition of Serengeti Breweries and the potential
acquisition of an additional equity stake in Quanxing.
(3) Analysis by operating segment of exceptional items is
disclosed in Note 2, 'Segmental Information'.
Notes: Organic movement calculations methodology
a) The organic movement percentage is the amount in the column headed
Organic movement in the tables above expressed as a percentage of the
aggregate of the amount in the column headed 2009 Reported, the amount in the
column headed Exchange and the amount, if any, in respect of acquisitions and
disposals that have benefited the prior period included in the column headed
Acquisitions and disposals. The inclusion of the column headed Exchange in
the organic movement calculation reflects the adjustment to recalculate the
prior period results as if they had been generated at the current period's
exchange rates.
b) Where a business, brand, brand distribution right or agency
agreement was disposed of, or terminated, in the current or comparable
period, the group, in organic movement calculations, excludes the results for
that business from the current period and comparable period. In the
calculation of operating profit, the overheads included in disposals are only
those directly attributable to the businesses disposed of, and do not result
from subjective judgements of management. For acquisitions subsequent to the
end of the prior period, the post acquisition results in the current period
are excluded from the organic movement calculations. For acquisitions in the
prior period, post acquisition results are included in full in the prior
period but are only included from the anniversary of the acquisition date in
the current period. The acquisition adjustment also eliminates the impact of
transaction costs directly attributable to acquisitions that have been
publicly announced and charged to operating profit in either period.
Key brand performance
The classification of brands as `global priority brands' and
`other brands' has been discontinued for reporting purposes. The new
classification better reflects the manner in which the brands are currently
managed. Data relating to the aggregate performance of these brand groupings
in the six months ended 31 December 2010 is given below.
Organic Reported
Volume net sales net sales
movement* movement movement
% % %
Global priority brands 3 3 4
Other brands 3 6 -
Total 3 4 2
Global priority brands**
Johnnie Walker 11 10 11
Smirnoff 2 (1) 2
Baileys 3 1 -
Captain Morgan 7 7 12
Jose Cuervo 7 7 10
J&B (8) (10) (11)
Tanqueray (3) (2) 1
Guinness (2) (1) -
* Volume movement is both reported and organic
** Spirits brands excluding ready to drink
Movement in earnings per share before exceptional items and
underlying movement in earnings per share
The group's management believes movement in earnings per share
before exceptional items and earnings per share on an underlying movement
basis provides valuable additional information for users of the financial
statements in understanding the group's overall performance. The group's
management believes that the comparison of movements on these bases provides
information as to the individual components of the movement in basic earnings
per share, being the impact of retranslating prior period reported results at
current period exchange rates, the impact of exceptional items, acquisitions
and disposals, the impacts of IAS 19, 21 and 39 on net finance charges and
the application of an underlying tax rate for each period. These measures
should be viewed as complementary to, and not a replacement for, the
comparable GAAP measures such as basic earnings per share and reported
movements therein.
The calculation of movements in earnings per share for the six
months ended 31 December 2010 was as follows:
Six months Six months
ended ended
31 December 31 December Growth
2010 2009
Pence per Pence per %
share(7) share(7)
Basic eps 47.9 40.9 17
Exceptional items(1) 0.3 3.3
Eps before
exceptional items 48.2 44.2 9
Exchange(2) - 2.1
IAS 19(3) 0.1 0.8
IAS 21 and IAS 39(4) 0.4 0.6
Acquisitions and
disposals(5) 0.2 (0.2)
Adjusted basic eps -
underlying 48.9 47.5 3
<end_table>
Notes: Information relating to the current period
1) In the six months ended 31 December 2010, there were
exceptional charges after tax of GBP7 million (2009 - GBP71 million) for
restructuring and a GBP1 million loss on sale of businesses (2009 - GBPnil).
Discontinued operations in the six months ended 31 December 2010 amounted to
GBPnil (2009 - charge of GBP10 million).
2) Exchange - the exchange adjustments for operating profit
and net finance charges are principally in respect of the strengthening of
the US dollar partially offset by the weakening of the Venezuelan bolivar.
Exchange adjustments are taxed at the underlying tax rate for the period.
3) Amounts under IAS 19 reported in net finance charges after
tax at the underlying tax rate for each period are excluded from adjusted
basic earnings per share.
4) Amounts under IAS 21 and IAS 39 reported in net finance
charges after tax at the underlying tax rate for each period are excluded
from adjusted basic earnings per share.
5) In the six months ended 31 December 2010 there were no
acquisitions impacting the calculation of underlying eps. Disposals impacting
the results for the six months ended 31 December 2010 were the disposals
completed under the reorganisation of the group's US wines operations and the
disposal of the Gilbeys wholesale wine business in Ireland. Adjustment is
also made to exclude directly attributable transaction costs incurred in the
six months ended 31 December 2010 of GBP6 million, netted against acquisition
costs of GBP3 million incurred in the six months period ended 31 December 2009
primarily in respect of the acquisition of Serengeti Breweries and the
potential acquisition of an additional equity stake in Quanxing.
6) All amounts are derived from amounts in GBP million divided
by the weighted average number of shares in issue for the six months ended 31
December 2010 of 2,492 million (2009 - 2,482 million).
Notes: Underlying movement calculations methodology
a) Where a business, brand, brand distribution right, agency
agreement or investment was disposed of, or terminated, in the current or
comparable period, the group, in the underlying movement calculations,
excludes the results for that business from the current period and comparable
period. As a result, the underlying movement reflects only comparable
performance.
b) Where a business, brand, brand distribution right or agency
agreement or investment was acquired subsequent to the end of the equivalent
prior period, the group, in the underlying movement calculations, adjusts the
profit for the current period attributable to equity shareholders to exclude
the following: (i) the amount the group earned in the current period that it
could not have earned in the prior period; (ii) a capital charge in respect
of the increase in interest charge had the acquisition been funded entirely
by an increase in borrowings; and (iii) taxation at the underlying tax rate.
As a result, the underlying movement numbers reflect only comparable
performance. Similarly, if a business or investment asset was acquired part
way through the equivalent prior period, then its impact on the profit for
the period attributable to equity shareholders (i.e. after adjustment for a
capital charge for the funding of the acquisition and tax at the underlying
tax rate) would be adjusted only to include the results from the anniversary
of the acquisition in the current period's performance in the underlying
movement calculation.
c) The effects of IAS 19 in respect of post employment plans,
IAS 21 in respect of short term inter-company funding balances and IAS 39 in
respect of market value movements as recognised in net finance charges, net
of tax at the underlying tax rate, are removed from both the current and
prior period as part of the underlying movement calculation.
d) Underlying movement percentages for basic earnings per
share are calculated as the underlying movement amount in pence, expressed as
the percentage of the prior period results at current period exchange rates,
and after making an adjustment in each period for exceptional items, the
impacts of IAS 19, IAS 21 and IAS 39 on net finance charges, tax equalisation
and acquisitions and disposals.
2. Free cash flow
Free cash flow is a non-GAAP measure that comprises the net
cash flow from operating activities as well as the net purchase and disposal
of investments, property, plant and equipment and computer software that form
part of net cash flow from investing activities. The group's management
believes the measure assists users of the financial statements in
understanding the group's cash generating performance as it comprises items
which arise from the running of the ongoing business.
The remaining components of net cash flow from investing
activities that do not form part of free cash flow, as defined by the group's
management, are in respect of the purchase and disposal of subsidiaries,
associates and businesses. The group's management regards the purchase and
disposal of property, plant and equipment and computer software as ultimately
non-discretionary since ongoing investment in plant, machinery and technology
is required to support the day-to-day operations, whereas acquisitions and
disposals of businesses are discretionary. However, free cash flow does not
necessarily reflect all amounts which the group has either a constructive or
legal obligation to incur. Where appropriate, separate discussion is given
for the impacts of acquisitions and disposals of businesses, equity dividends
paid and the purchase of own shares, each of which arises from decisions that
are independent from the running of the ongoing underlying business.
The free cash flow measure is also used by management for
their own planning, budgeting, reporting and incentive purposes since it
provides information on those elements of performance which local managers
are most directly able to influence.
3. Return on average total invested capital
Return on average total invested capital is a non-GAAP measure that is
used by management to assess the return obtained from the group's asset base.
This measure is not specifically used in the consolidated financial
statements, but is calculated to aid comparison of the performance of the
business.
The profit used in assessing the return on total invested capital
reflects the operating performance of the business after applying the
underlying tax rate for the period stated before exceptional items and
interest. Average total invested capital is calculated using the average
derived from the consolidated balance sheets at the beginning and end of the
period. Capital employed comprises net assets for the period, excluding post
employment benefit net liabilities (net of deferred tax) and net borrowings.
This average capital employed is then aggregated with the average
restructuring and integration costs net of tax, and goodwill written off to
reserves at 1 July 2004, the date of transition to IFRS, to obtain the
average total invested capital.
Calculations for the return on average total invested capital for the six
months ended 31 December 2010 and 31 December 2009 were as follows:
2010 2009
GBP million GBP million
Operating profit 1,718 1,536
Exceptional items 9 95
Associates' profits after interest and tax 104 94
Tax at the underlying tax rate of 21.8% (2009 -
22.4%) (399) (386)
1,432 1,339
Average net assets (excluding net post
employment liabilities) 6,002 5,150
Average net borrowings 6,982 7,362
Average integration and restructuring costs (net
of tax) 1,249 1,170
Goodwill at 1 July 2004 1,562 1,562
Average total invested capital 15,795 15,244
Annualised return on average total invested 18.1% 17.6%
capital
4. Economic profit
Economic profit is a non-GAAP measure that is used by
management to assess the group's return from its asset base compared to a
standard cost of capital charge. The measure is not specifically used in the
consolidated financial statements, but is calculated to aid comparison of the
performance of the business.
The profit used in assessing the return from the group's asset base and
the asset base itself are the same as those used in the calculation for the
return on average total invested capital (see 3 above). The standard capital
charge applied to the average total invested capital is currently 9%, being
management's assessment of a constant minimum level of return that the group
expects to generate from its asset base. Economic profit is calculated as the
difference between the standard capital charge on the average invested assets
and the actual return achieved by the group on those assets.
Calculations for economic profit for the six months ended 31 December
2010 and 31 December 2009 were as follows:
2010 2009
GBP million GBP million
Average total invested capital (see 3 above) 15,795 15,244
Operating profit 1,718 1,536
Exceptional items 9 95
Associates' profit after interest and tax 104 94
Tax at the underlying tax rate of 21.8% (2009 -
22.4%) (399) (386)
1,432 1,339
Capital charge at 9% of average total invested
capital (711) (686)
Economic profit 721 653
5. Underlying tax rate
The underlying tax rate is a non-GAAP measure that reflects
the adjusted tax charge on profit from continuing businesses before
exceptional items as a percentage of profit from continuing businesses before
exceptional items. The underlying tax rate is also used by management for
their own planning, budgeting, reporting and incentive purposes since it
provides information on those elements of performance which management is
most directly able to influence.
The group's management believes the measure assists users of
the financial statements in understanding the group's effective tax rate as
it reflects the tax arising on the profits from the ongoing business.
The components of the reported tax charge which do not form
part of the adjusted tax charge, as defined by the group's management, relate
to exceptional tax items, movements on deferred tax assets arising from intra
group reorganisations which are due to changes in estimates of expected
future utilisation and any other tax charge or credit that arises from intra
group reorganisations.
In the six months ended 31 December 2010 both the reported tax
rate and the underlying tax rate were 21.8%. In the six months ended 31
December 2009 the reported tax rate was 22.3% and the underlying tax rate was
22.4%.
6. Interest cover
The income statement interest cover is defined as the number
of times that the sum of operating profit before exceptional items and share
of associates' profits after tax exceeds net interest payable.
Cash interest cover is defined as the number of times that the
sum of operating profit before exceptional items, depreciation and
amortisation and dividends from associates exceeds the net interest cash
flow.
The group's management believes that these measures assist
users of the financial statements in understanding the liquidity position of
the ongoing business.
PRINCIPAL RISKS
Diageo's products are sold in over 180 markets worldwide,
which subjects Diageo to risks and uncertainties in multiple jurisdictions
across mature, developing and emerging markets. The group's aim is to manage
risk and control its business and financial activities cost-effectively and
in a manner that enables it to: exploit profitable business opportunities in
a disciplined way; avoid or reduce risks that can cause loss, reputational
damage or business failure; manage and mitigate historic risks and exposures
of the group; support operational effectiveness; and enhance resilience to
external events. To achieve this, an ongoing process has been established for
identifying, evaluating and managing risks faced by the group. The key risks
and uncertainties facing the group in the second half of the current
financial year are described in the "Business Description" section of the
annual report for the year ended 30 June 2010, some or all of which have the
potential to impact the results or financial position during the second half
of the current financial year.
These key risks and uncertainties are (in summary):
competition may reduce Diageo's market share and margins; expected benefits
may not be derived from Diageo's strategy focused on premium drinks or its
cost-saving and restructuring programmes; regulatory decisions and changes in
the legal and regulatory environment could increase Diageo's costs and
liabilities or limit its business activities; litigation (including tax and
customs proceedings and with other regulatory authorities); contamination,
counterfeiting or other circumstances could harm customer support for
Diageo's brands and adversely affect sales; changes in consumer preferences
and tastes and adverse impacts of a declining economy, among many factors,
may adversely affect demand; decline in social acceptability of Diageo's
products; unfavourable economic conditions or political or other developments
and risks in the countries in which Diageo operates; increased costs or
shortages of labour; increased costs of raw materials or energy; disruption
to production facilities or business service centres; failures of systems
could lead to business disruption and systems change programmes may not
deliver the benefits intended; climate change, or legal, regulatory or market
measures to address climate change; water scarcity or poor quality; movements
in the value of Diageo's pension funds, fluctuations in exchange rates and
interest rates; failure to maintain or renegotiate distribution, supply,
manufacturing and licence agreements on favourable terms; inability to
protect Diageo's intellectual property rights; and difficulty in effecting
service of US process and enforcing US legal process against Diageo's
directors.
Cautionary statement concerning forward-looking statements
This announcement contains `forward-looking statements'. These
statements can be identified by the fact that they do not relate only to
historical or current facts. In particular, forward-looking statements
include all statements that express forecasts, expectations, plans, outlook
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, the availability or cost of financing to Diageo,
anticipated cost savings or synergies, the completion of Diageo's strategic
transactions and restructuring programmes, anticipated tax rates, expected
cash payments, outcomes of litigation, anticipated deficit reductions in
relation to pension schemes and general economic conditions. 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:
- global and regional economic downturns;
- increased competitive product and pricing pressures and unanticipated
actions by competitors that could impact Diageo's market share,
increase expenses and hinder growth potential;
- the effects of Diageo's strategic focus on premium drinks, the effects
of business combinations, partnerships, joint ventures, acquisitions
or disposals, existing or future, and the ability to realise
expected synergies and/or cost savings;
- Diageo's ability to complete existing or future business
combinations, restructuring programmes, acquisitions and disposals;
- legal and regulatory developments, including changes in regulations
regarding production, product liability, distribution, importation,
labelling, packaging, consumption or advertising; changes in tax law,
rates or requirements (including with respect to the impact of excise
tax increases) or accounting standards; and changes in environmental
laws, health regulations and laws governing labour and pensions;
- developments in any litigation or other similar proceedings
(including with tax, customs and other regulatory authorities)
directed at the drinks and spirits industry generally or at Diageo in
particular, or the impact of a product recall or product liability
claim on Diageo's profitability or reputation;
- developments in the Colombian litigation, Turkish customs litigation,
SEC investigation, Korean customs litigation or any similar
proceedings;
- changes in consumer preferences and tastes, demographic trends or
perceptions about health related issues; or contamination,
counterfeiting or other circumstances which could harm the integrity
of sales of Diageo's brands;
- changes in the cost or supply of raw materials, labour, energy and/or
water;
- changes in political or economic conditions in countries and markets in
which Diageo operates, including changes in levels of consumer
spending, failure of customer, supplier and financial counterparties or
imposition of import, investment or currency restrictions;
- levels of marketing, promotional and innovation expenditure by Diageo
and its competitors;
- renewal of supply, distribution, manufacturing or licence agreements
(or related rights) and licences on favourable terms when they
expire;
- termination of existing distribution or licence manufacturing rights
on its brands and agency brands;
- disruption to production facilities or business service centres, and
systems change programmes, existing or future, and the ability to
derive expected benefits from such programmes;
- technological developments that may affect the distribution of products
or impede Diageo's ability to protect its intellectual property
rights; and
- changes in financial and equity markets, including significant interest
rate and foreign currency exchange rate fluctuations and changes in
the cost of capital, which may reduce or eliminate Diageo's access
to or increase the cost of financing or which may affect Diageo's
financial results and movements in the value of Diageo's pensions
funds.
All oral and written forward-looking statements made on or
after the date of this announcement and attributable to Diageo are expressly
qualified in their entirety by the above factors and the `Risk factors'
contained in the annual report on Form 20-F for the year ended 30 June 2010
filed with the US Securities and Exchange Commission (SEC). Any
forward-looking statements made by or on behalf of Diageo speak only as of
the date they are made. Diageo does not undertake to update forward-looking
statements to reflect any changes in Diageo's expectations with regard
thereto or any changes in events, conditions or circumstances on which any
such statement is based. The reader should, however, consult any additional
disclosures that Diageo may make in any documents which it publishes and/or
files with the SEC. All readers, wherever located, should take note of these
disclosures.
The information in this announcement does not constitute an
offer to sell or an invitation to buy shares in Diageo plc or an invitation
or inducement to engage in any other investment activities.
This announcement includes information about Diageo's target
debt rating. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organisation. Each rating should be evaluated independently
of any other rating.
Past performance cannot be relied upon as a guide to future
performance.
The content of the company's website (www.diageo.com) should
not be considered to form a part of or be incorporated into this
announcement.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each of the directors of Diageo plc confirms, to the best of his or her
knowledge, that:
- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as issued by the
IASB and endorsed and adopted by the EU;
- the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules of the
UK's Financial Services Authority, being an indication of important events
that have occurred during the first six months of the financial year and
their impact on the condensed set of financial statements; and a description
of the principal risks and uncertainties for the remaining six months of the
year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules of the
UK's Financial Services Authority, being related party transactions that have
taken place in the first six months of the current financial year and that
have materially affected the financial position or performance of the group
during that period; and any changes in the related party transactions
described in the annual report for the year ended 30 June 2010 that could
have a material effect on the financial position or performance of the group
in the first six months of the current financial year.
The directors of Diageo plc are as follows: Dr. Franz Humer
(Chairman), Paul Walsh (Chief executive officer), Deirdre Mahlan (Chief
financial officer), Lord Hollick of Notting Hill (Senior non-executive
director and Chairman of the remuneration committee), Philip Scott
(Non-executive director and Chairman of the audit committee) and
non-executive directors: Peggy Bruzelius, Laurence Danon, Lord Davies of
Abersoch, Betsy Holden, Todd Stitzer and Paul Walker.
For further information
Half Year Results Webcast
At 09.00 (UK time) on Thursday 10 February, Paul Walsh, CEO
and Deirdre Mahlan, CFO will present Diageo's Half Year Results as a webcast.
This will be available to view at www.diageo.com. The presentation slides
will be available from 08.00 (UK time). The transcript will be available
after 11.00 (UK time) and both will be available for download at
www.diageo.com. An archived video and podcast of the presentation and Q&A
session will also be made available later that day.
If you would like to ask a question during the live Q&A
session at the end of the presentation, please use the following dial-in
numbers:
UK Toll free - 0800 279 9640
North America Toll free - 1866 850 2201
France Toll free - 0805 770 152
Germany Toll free - 0800 673 8355
Ireland Toll free - 1800 944 322
Italy Toll free - 800 088 737
Netherlands Toll free - 0800 265 9175
Spain Toll free - 800 099 797
Switzerland Toll free - 0800 000 287
International Toll - +44 (0)20 7138 0828
Please quote confirmation code: 4909539
A transcript of the Q&A session will be available for download at
www.diageo.com on 14 February.
Half Year Results Q&A Session Replay
The Q&A session will also be available on instant replay from 17.00 (UK
time) and will be available until Friday 25 February. Please use the
following dial-in numbers:
UK Toll free - 0800 358 7735
North America Toll free - 1866 932 5017
France Toll free - 0800 989 597
Germany Toll free - 0800 673 8348
Ireland Toll free - 1800 932 637
Italy Toll free - 800 088 741
Netherlands Toll free - 0800 265 9180
Switzerland Toll free - 0800 650 003
International Toll - +44 (0)20 7111 1244
Please quote confirmation code: 4909539#
Investor enquiries to: Nick Temperley +44-(0)-20-8978-4223
Sarah Paul +44-(0)-20-8978-4326
Angela Ryker +44-(0)-20-8978-4911
Gallagher
Kelly Padgett +1-202-715-1110
Investor.relations@diageo.com
Media enquiries to: Stephen Doherty +44-(0)-20-8978-2528
Rowan Pearman +44-(0)-20-8978-4751
media.comms@diageo.com
Tags: Diageo plc, February 10, London, United Kingdom
