6-K 1 v219319_6k.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934

For the month of:     February 2011
Commission File Number:  001-10691

Diageo plc
(Translation of registrant’s name into English)

Lakeside Drive, Park Royal, London NW10 7HQ
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x                                                      Form 40-F ¨

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ________

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ________

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to  Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes  ¨                                            No  x

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 

 
 
List identifying information required to be furnished
by Diageo plc pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act 1934
1 – 28 February 2011

Information
Required by/when
   
Public Announcements/Press
The Stock Exchange, London

Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(01 February 2011)
 
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(16 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(02 February 2011)
 
Announcement
Company announces interim blocklisting.
(18 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(04 February 2011)
 
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(18 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(07 February 2011)
 
Announcement
Company announces variable rate fix.
(18 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(09 February 2011)
 
Announcement
Company announces agreement to acquire Mey Içki.
(21 February 2011)
Announcement
Company announces its interim results.
(10 February 2011)
 
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(23 February 2011)
Announcement
Company notified of transactions in respect of the Diageo Share Incentive Plan and Mr Walsh and PDMRs inform the Company of their interests therein.
Dr Humer informs the Company of his beneficial interests.
The Company had been notified on 9 February 2010 of transactions in respect of the US Employee Stock Purchase Plan and PDMRs inform the Company of their interests therein.
(10 February 2011)
 
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(25 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(11 February 2011)
 
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(28 February 2011)
Announcement
Company releases shares from treasury to satisfy grants made under employee share plans.
(14 February 2011)
 
Announcement
Company announces total voting rights.
(28 February 2011)

 
 

 
 
Company
Diageo PLC
TIDM
DGE
Headline
Transaction in Own Shares
Released
14:42 01-Feb-2011
Number
11441-AC56

TO:
Regulatory Information Service
   
 
PR Newswire
   
RE:
PARAGRAPH 12.6.4 OF THE LISTING RULES

Diageo plc - Transaction in Own Shares

Diageo plc (the "Company") announces that today, it released from treasury 71,705 ordinary shares of 28 101/108 pence each ("Ordinary Shares"), to satisfy grants made under employee share plans. The average price at which these Ordinary Shares were released from treasury was 995.16 pence per share.

Following this release, the Company holds 250,126,551 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) is 2,503,851,211.

J Nicholls

Deputy Company Secretary

1 February 2011
 
Company
Diageo PLC
TIDM
DGE
Headline
Transaction in Own Shares
Released
14:14 02-Feb-2011
Number
11413-1081

TO:
Regulatory Information Service
   
 
PR Newswire
   
RE:
PARAGRAPH 12.6.4 OF THE LISTING RULES

Diageo plc - Transaction in Own Shares

Diageo plc (the "Company") announces that today, it released from treasury 2,863 ordinary shares of 28 101/108 pence each ("Ordinary Shares"), to satisfy grants made under employee share plans. The average price at which these Ordinary Shares were released from treasury was 995.16 pence per share.

Following this release, the Company holds 250,123,688 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) is 2,503,854,074.

J Nicholls

Deputy Company Secretary

2 February 2011
 
 
 

 
 
Company
Diageo PLC
TIDM
DGE
Headline
Transaction in Own Shares
Released
15:09 04-Feb-2011
Number
11507-098F

TO:
Regulatory Information Service
   
 
PR Newswire
   
RE:
PARAGRAPH 12.6.4 OF THE LISTING RULES

Diageo plc - Transaction in Own Shares

Diageo plc (the "Company") announces that today, it released from treasury 4,565 ordinary shares of 28 101/108 pence each ("Ordinary Shares"), to satisfy grants made under employee share plans. The average price at which these Ordinary Shares were released from treasury was 995.16 pence per share.
 
Following this release, the Company holds 250,119,123 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) is 2,503,858,639.

J Nicholls

Deputy Company Secretary

4 February 2011
 
 
 

 
 
Company
Diageo PLC
TIDM
DGE
Headline
Transaction in Own Shares
Released
15:37 07-Feb-2011
Number
11537-C32F

TO:
Regulatory Information Service
   
 
PR Newswire
   
RE:
PARAGRAPH 12.6.4 OF THE LISTING RULES

Diageo plc - Transaction in Own Shares

Diageo plc (the "Company") announces that today, it released from treasury 15,559 ordinary shares of 28 101/108 pence each ("Ordinary Shares"), to satisfy grants made under employee share plans. The average price at which these
Ordinary Shares were released from treasury was 995.16 pence per share.
 
Following this release, the Company holds 250,103,564 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) is 2,503,874,198.

J Nicholls

Deputy Company Secretary

7 February 2011
 
 
 

 
 
Company
Diageo PLC
TIDM
DGE
Headline
Transaction in Own Shares
Released
13:44 09-Feb-2011
Number
11343-5BF1

TO:
Regulatory Information Service
   
 
PR Newswire
   
RE:
PARAGRAPH 12.6.4 OF THE LISTING RULES

Diageo plc - Transaction in Own Shares

Diageo plc (the "Company") announces that today, it released from treasury 13,776 ordinary shares of 28 101/108 pence each ("Ordinary Shares"), to satisfy grants made under employee share plans. The average price at which these
Ordinary Shares were released from treasury was 995.16 pence per share.
 
Following this release, the Company holds 250,089,788 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) is 2,503,887,974.

J Nicholls

Deputy Company Secretary

9 February 2011
 
 
 

 
 
 
Company
Diageo PLC
TIDM
DGE
Headline
Diageo plc half year results
Released
07:00 10-Feb-2011
Number
9861A07

RNS Number: 9861A
Diageo PLC
10 February 2011
 

 Half year results, six months ended 31 December 2010

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 £775 million.

Summary results
 
   
First half 
F11
   
First half 
F10
   
Organic
movement
   
Reported
movement
 
                                 
Volume1
    79.0 m     76.8 m     3 %     3 %   
Net sales
  £ 5,320   £ 5,207     4 %     2 %   
Marketing spend
  £ 813   £ 725     10 %     12 %   
Operating profit before exceptional items
  £ 1,727   £ 1,631     2 %     6 %   
Operating profit
  £ 1,718   £ 1,536             12 %   
Reported tax rate
    21.8 %     22.3 %                
Profit attributable to parent company’s equity shareholders
  £ 1,194   £ 1,016             18
Free cash flow
  £ 775   £ 904           £ (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 £m
    (211 )     158       (53 )
Operating profit before exceptional items £m
    (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”.

 
1

 

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 page 36 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%
 
 
2

 

·
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
   
Volume
movement*
%
   
Organic
net sales
movement
%
   
Reported
net sales
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 Cîroc and the launch of RÖKK 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 “Cîroc the New Year” in North America and an increase in digital marketing and sponsorship supporting the global growth of Captain Morgan.
 
 
3

 

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.

   
Volume
movement**
%
   
Organic
net sales
movement
%
   
Reported
net sales
movement
%
 
                   
Whisk(e)y
                 
Johnnie Walker
    11       10       11  
Crown Royal
    3       5       10  
JεB
    (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  
Cîroc
    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
 
 
4

 

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.
 
JεB: 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. JεB 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.
 
Cîroc: Cîroc 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.
 
 
5

 
 
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 £38 million in the six months ended 31 December 2010, down £2 million from £40 million in the comparable prior period. Net operating charges were £64 million in the six months ended 31 December 2010. This was a reduction of £63 million over the prior period. Diageo undertakes the majority of its currency transaction hedging centrally and therefore £98 million of positive year on year transaction impact was taken to corporate in this half. There was an incremental charge of £39 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 £4 million reduction in underlying corporate costs.

Exchange rate movements

Foreign exchange movements in the period:

 
·
decreased net sales by £53 million
 
·
increased operating profit by £70 million
 
·
decreased profit from associates by £5 million
 
·
reduced net finance charges by £10 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 £55 million and are not expected to materially affect the net finance charge based on applying current exchange rates (£1 = $1.56 : £1 = €1.18).  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.

 
6

 

Exceptional operating costs

   
First half F11
£ million
   
First half F10
£ 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 £45 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 £150 million.

Post employment liabilities

The deficit in respect of post employment plans before taxation decreased by £370 million from £1,205 million at 30 June 2010 to £835 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.

 
7

 

BUSINESS REVIEW
For the six months ended 31 December 2010

OPERATING REVIEW

North America

Reported results:
   
First Half
F10
£ million
   
Exchange
£ million
   
Acquisitions
and disposals
£ million
   
Organic
movement
£ million
   
First Half
F11
£ million
   
Reported
movement
%
 
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.
 
   
Volume
movement*
   
Organic
net sales 
movement
   
Reported
net sales
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  
Cîroc
    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

 
8

 

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 Cîroc up 131% and Jose Cuervo up 7%.   Net sales growth was primarily driven by Cîroc 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.

Cîroc was the driving force behind growth in the United States. Volume increased due to the continued success of the new Cîroc flavours Coconut and Red Berry, which have exceeded expectations.  Price increases helped drive positive price/mix.  Cîroc’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.
 
 
9

 

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 Cîroc 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 RÖKK vodka, Godiva Chocolate Vodka and Moon Mountain Vodka. RÖKK, 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.  Cîroc continued its collaboration with Sean “Diddy” Combs around the “Ultimate Summer Cabana” and “Cîroc 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 Half
F10
£ million
   
 
Exchange
£ million
   
Acquisitions
and
disposals
£ million
   
Organic
movement
£ million
   
First Half
F11
£ million
   
Reported
movement
%
 
                                     
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 )
 
 
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, JεB 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.
 
   
Volume
movement*
   
Organic
net sales
movement
   
Reported
net sales
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 )
JεB
    (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
 
 
11

 

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 JεB 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 JεB 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 JεB kite surfing sponsorship, “JεB Masters of Kite” to drive relevance with consumers, a TV campaign to support the launch of JεB 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%.

 
12

 

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 JεB in France drove good growth, with the execution of “JεB Colours”. In Benelux Johnnie Walker and JεB 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 Half
F10
£ million
   
 
Exchange
£ million
   
Acquisitions
and
disposals
£ million
   
Organic
movement
£ million
   
First Half
F11
£ million
   
Reported
movement
%
 
                                     
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.
 
 
13

 
 
   
Volume
movement*
   
Organic
net sales
movement
   
Reported 
net sales
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.
 
 
14

 

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 Half
F10
£ million
   
 
Exchange
£ million
   
Acquisitions
and
disposals
£ million
   
Organic
movement
£ million
   
First Half
F11
£ million
   
Reported
movement
%
 
                                     
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  
 
 
15

 

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%.

   
Volume
movement*
   
Organic
net sales
movement
   
Reported
net sales
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.
 
 
16

 

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 JεB. 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.

 
17

 

2.  FINANCIAL REVIEW

Summary consolidated income
statement
 
Six months ended
31 December 2010
   
Six months ended
31 December 2009
 
   
£ million
   
£ 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 £204 million from £6,928 million in the six months ended 31 December 2009 to £7,132 million in the six months ended 31 December 2010. On a reported basis net sales increased by £113 million from £5,207 million in the six months ended 31 December 2009 to £5,320 million in the six months ended 31 December 2010. Exchange rate movements decreased reported sales by £51 million and reported net sales by £53 million.

Operating costs before exceptional items

On a reported basis, operating costs before exceptional items increased by £17 million in the six months ended 31 December 2010 due to a decrease in cost of sales of £38 million, from £2,101 million to £2,063 million, an increase in marketing expenses of £88 million from £725 million to £813 million, and a decrease in other operating expenses before exceptional costs of £33 million, from £750 million to £717 million. The impact of exchange rate movements decreased total operating costs before exceptional items by £123 million.

Exceptional operating items

Exceptional operating costs of £9 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 £74 million for the restructuring of Global Supply operations and £21 million for the global restructuring programme.
 
 
18

 

Total restructuring cash expenditure in the six months ended 31 December 2010 was £67 million (2009 - £76 million) of which £23 million (2009 - £72 million) was in respect of the global restructuring programme.  A charge of approximately £45 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 £150 million.

Post employment plans

Post employment net costs for the six months ended 31 December 2010 were a charge of £55 million (2009 - £58 million) comprising £54 million (2009 - £39 million) included in operating costs before exceptional items, pension curtailment gains of £1 million (2009 - £6 million) in sale of businesses and a charge of £2 million (2009 - £25 million) in net finance charges.

The deficit in respect of post employment plans before taxation decreased by £370 million from £1,205 million at 30 June 2010 to £835 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 £70 million and are expected to be approximately £160 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 €21 million (£18 million) over a period of 18 years, and provides for additional cash contributions of up to €188 million (£161 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 £182 million to £1,718 million from £1,536 million in the comparable prior period. Before exceptional operating items, operating profit for six months ended 31 December 2010 increased by £96 million to £1,727 million from £1,631 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 £70 million.

Exceptional non-operating items

A net loss of £1 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 £237 million in the six months ended 31 December 2009 to £209 million in the six months ended 31 December 2010.

Net interest charge decreased by £1 million from £197 million in the comparable period to £196 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 £0.5 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 £13 million (2009 - £40 million). There was a decrease of £23 million in finance charges in respect of post employment plans from £25 million in the six months ended 31 December 2009 to £2 million in the six months ended 31 December 2010. Other finance charges also included £8 million (2009 - £7 million) on unwinding of discounts on liabilities, £1 million (2009 - £11 million) in respect of net exchange movements on certain financial instruments and £2 million (2009 - £3 million income) of other finance charges.
 
 
19

 

Associates

The group’s share of associates’ profits after interest and tax was £104 million for the six months ended 31 December 2010 compared to £94 million in the comparable prior period. Diageo’s 34% equity interest in Moët Hennessy contributed £106 million (2009 - £90 million) to share of associates’ profits after interest and tax.
 
Profit before taxation

Profit before taxation increased by £219 million from £1,393 million in the comparable prior period to £1,612 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 £10 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)
£ 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 before exceptional items
    70  
Interest and other finance charges
       
Net finance charges – translation impact
    2  
Mark to market impact of IAS 39 on interest expense
    (2 )
Impact of IAS 21 and IAS 39 on other finance charges
    10  
Associates – translation impact
    (5 )
Total effect on profit before exceptional items and taxation
    75  

   
Six months ended
31 December 2010
   
Six months ended
31 December 2009
 
Exchange rates
           
Translation £1 =
  $ 1.57     $ 1.64  
Transaction £1 =
  $ 1.52     $ 1.74  
Translation £1 =
  1.18     1.12  
Transaction £1 =
  1.13     1.30  
 
 
20

 
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 £55 million and are not expected to materially affect the net finance charge based on applying current exchange rates (£1 = $1.56 : £1 = €1.18). 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
31 December 2010
   
Six months ended
31 December
2009
 
   
£ million
   
£ million
 
             
Cash generated from operations before exceptional costs
    1,391       1,645  
Exceptional restructuring costs paid
    (67 )     (76 )
Cash generated from operations
    1,324       1,569  
Interest paid (net)
    (176 )     (217 )
Dividends paid to equity non-controlling interests
    (75 )     (55 )
Taxation paid
    (150 )     (198 )
Net capital expenditure including sale and leaseback of land
    (129 )     (150 )
Net increase in other investments
    (19 )     (45 )
Free cash flow
    775       904  

Free cash flow decreased by £129 million to £775 million in the six months ended 31 December 2010. Cash generated from operations decreased from £1,569 million to £1,324 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 £5,650 million compared with £4,786 million at 30 June 2010. The increase was mainly due to the profit for the period of £1,260 million, partly offset by the dividend paid out of shareholders’ equity of £586 million.

Net borrowings were £7,010 million at 31 December 2010, an increase of £56 million from £6,954 million at 30 June 2010. The principal components of this increase were £586 million (2009 - £551 million) equity dividends paid, adverse exchange rate movements of £35 million (2009 - £201 million), adverse non-cash movements of £134 million (2009 - £67 million) comprising predominantly fair value movements and £51 million (2009 - £12 million) paid in respect of purchase of businesses primarily in respect of Serengeti Breweries Limited partly offset by free cash flow of £775 million (2009 - £904 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.

 
21

 

Economic profit

Economic profit increased by £68 million from £653 million in the six months ended 31 December 2009 to £721 million in the six months ended 31 December 2010. See page 42 for the calculation and definition of economic profit.

 
22

 

DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT

         
Six months ended 
31 December 2010
   
Six months ended
31 December 2009
 
   
Notes
   
£ million
   
£ 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
            47.9 p     41.3 p
Discontinued operations
            -       (0.4 )p
Basic earnings
            47.9 p     40.9 p
                         
Continuing operations
            47.8 p     41.2 p
Discontinued operations
            -       (0.4 )p
Diluted earnings
            47.8 p     40.8 p
                         
Average shares
            2,492 m     2,482 m
 
 
23

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

   
Six months
ended 
31 December 2010
   
Six months ended
31 December
2009
 
   
£ million
   
£ 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  

 
24

 

DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET

         
31 December 2010
   
30 June 2010
   
31 December 2009
 
         
£ million
   
£ million
    £     £     £ million     £  
   
Notes
               
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 liabilities
            (825 )             (744 )             (672 )        
Post employment benefit liabilities
            (892 )             (1,254 )             (1,100 )        
                      (10,016 )             (10,724 )             (10,452 )
Total liabilities
                    (14,349 )