UK: Diageo’s preliminary results for the year ended 30 June 2005

Diageo, the world's biggest alcoholic drinks group announced its annual results on September 1.
Diageo has achieved organic growth in net sales (after deducting excise duties) of 4% and operating margin expansion of 0.6 percentage points resulting in organic operating profit growth of 7%. Continued strong generation of free cash flow at £1.4 billion. EPS before exceptional items 49.1 pence per share. Recommended full year dividend 29.55 pence per share.

Net sales (after deducting excise duties) of global priority brands excluding ready to drink grew 6% Marketing increased 5% excluding ready to drink . Restructuring costs of nearly £90 million charged to operating profit to improve efficiency and reduce costs in future years

In North America, strong top line growth together with overhead reduction delivered organic operating profit growth of 11%. Volume grew 4% and Diageo gained share in the United States across all three categories - spirits, wine and beer – in a market which is estimated to have grown by 3.5%. Although volume for the ready to drink sector was flat, Diageo gained share.

In Europe, operating profit grew 3% despite challenging trading conditions and further contraction of the ready to drink segment. Volume and net sales (after deducting excise duties) were down 1% and 2% respectively. Excluding ready to drink, volume and net sales (after deducting excise duties) increased 1% as price increases on global priority brands were offset by weak local priority brands in Ireland. There was an incremental £25 million spent on restructuring initiatives, which was offset by savings of £17 million.

The International business delivered operating profit growth of 4% while increasing marketing investment by 15%. Strong volume growth in Latin America and some Asian markets together with a number of price increases drove net sales (after deducting excise duties) up 9%. Marketing investment was increased in new growth markets such as China and behind the global priority brands where spend was up over 25%.

The global priority brands continue to be the engine for growth with volume and net sales (after deducting excise duties), excluding ready to drink, up 3% and 6% respectively.

Ready to drink now represents 6% of Diageo’s volume and around 10% of net sales (after deducting excise duties). Weakness in the ready to drink segment continued and volume and net sales (after deducting excise duties) declined 3% and 5% respectively. This reduced overall net sales (after deducting excise duties) growth by over 1 percentage point.

Excluding ready to drink, marketing investment grew 5%. Spend on global priority brands, excluding ready to drink, increased 6%. Spend on ready to drink brands was reduced 21% to reflect the decline of the segment across Europe and the consolidating competitive environment in North America.

Diageo’s decision to dispose of nearly 50 million shares in General Mills improved return on invested capital and raised £1,210 million. Excluding the impact of the sale of the General Mills shares, Diageo delivered eps growth of 9%.

The restructuring programme, which began in fiscal 2004, has continued at a cost of nearly £90 million in the year (2004 - £50 million) focused on streamlining operations in Europe. Incremental synergy of £68 million is expected to accrue in fiscal 2006.

Paul Walsh, Chief Executive of Diageo, commenting on the year ended 30 June 2005 said:

'The range of Diageo’s premium drink brands together with our geographic reach gives us the ability to consistently deliver top and bottom line growth and strong cash flow. That is exactly what we have delivered this year. At the same time we have continued to build our brands, with over £1 billion of marketing investment. We have also improved our routes to market, particularly in the world’s biggest premium drinks market, the United States and made value creating acquisitions of brands which widen our brand range even further.

We have successfully resolved our exposure to Burger King, monetised the majority of our shares in General Mills and provided certainty as to the value we will receive from our remaining shares when they are sold as we expect they will be in a couple of months.

With the completion of these transactions Diageo’s balance sheet is now as focused on our position as the world’s leading premium drinks company as our operations have been for a number of years. Therefore, given the continued strong performance of our free cash flow, we will now be able to increase the amount of our share buy back programme. For fiscal ‘06 we are proposing a programme of around £1.4 billion.

As we said at our recent trading update, we expect that in ‘06 volume growth will again be 3% and net sales (after deducting excise duties) will be 4%. Better pricing and a stabilising ready to drink trend may give us the opportunity to improve on the net sales (after deducting excise duties) growth we achieved this year. We believe operating profit growth can be similar to that achieved in ’05 even after allowing for higher growth in marketing spend and higher pension costs.

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