Diageo (NYSE: DEO) today announced its interim results for the six months ended 31 December 2000.
- Turnover up 4% to $10,195 million (1999 – $9,828 million)
- Organic operating profit(a) growth of 11% to $1,840 million (1999 — $1,715 million)
- Organic operating profit(a) growth in Guinness UDV of 14% to $1,243 million (1999 – $1,155 million)
- EPS(a) up 11% to 37.4 cents (1999 – 33.7 cents)
- (a) Pre exceptional items and goodwill amortization
FINANCIAL HIGHLIGHTS:
- Spirits and Wine operating profit up 14% to $1,033 million
- Beer operating profit up 13% to $210 million
- Packaged Food operating profit up 11% to $450 million
- Quick Service Restaurants operating profit down 7% to $147 million
- Profit before goodwill amortization, exceptional items and tax $1,772 million
- Effective tax rate reduced to 25%
- 18 million shares repurchased and cancelled in the period at a cost of $161 million
- $179 million underlying improvement in economic profit
- Interim dividend 13.3 cents per share up 6%
- Free cash flow up $115 million to $730 million
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Paul Walsh, Group Chief Executive of Diageo, commenting on the six months ended December 31, 2000 said:
“Guinness UDV has continued to deliver strong levels of growth even with a tough comparison against last year. On an organic basis turnover grew 6% and operating profit grew 14%. The formula for growth remains the same. We continue to invest in our premium drinks brands and to focus by individual market. We continue to develop our understanding of consumers and consuming occasions and find innovative new ways to ensure that our brands capture the biggest share of high value consumption occasions. We continue to drive down costs and make our cost structure a source of competitive advantage.
“In Pillsbury, where operating profit rose to $450 million, the changes we made in the prior year to reduce costs and to focus marketing on the higher margin categories have led to the achievement of 11% organic operating profit growth in the first half. The business faces its future as part of General Mills in good shape.
“Burger King has faced a more difficult trading environment, particularly in the United States, and operating profit at $147 million is down by $9 million on a reported basis. We are determined to improve the operating performance of Burger King to ensure that the proposed full separation of Burger King from Diageo realizes value for shareholders. The recent appointment of John Dasburg to the role of Burger King’s Chief Executive Officer is an important step in this process.”
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By GlobalDataCommenting on current trading, Paul Walsh said:
“In Guinness UDV, the global priority brands, which were the main driver of growth in the first half, have continued to grow in line with our expectations. We are excited by the opportunity which the national launch of Smirnoff Ice in the Unites States provides, building, as it does, on the success of the brand in other markets around the world and in test markets in the United States.
“Trading performance for Pillsbury also continues to be in line with the trends seen in the first half, though operating profit growth in the second half will be impacted by the comparison against a stronger second half last year.
“Trading at Burger King remains challenging and in January comparable restaurant sales were down approximately 3% however February is slightly better than the full year reported operating profit is likely to be down year on year.
“Above all else our premium drinks business continues to perform strongly and this will drive the achievement of our overall growth targets for the full year.”
Lord Blyth, Chairman, commented:
“This is the third successive results presentation in which Diageo has delivered double digit organic operating profit growth, again driven by strong performance in its premium drinks business.
“The momentum underlying these excellent results has continued into the new calendar year and we therefore continue to look forward to the future with confidence.”
DIAGEO
INTERIM STATEMENT OF RESULTS
for the six months ended 31 December 2000
Unless otherwise stated, percentage movements given throughout this statement for volume, turnover, operating profit and marketing expenditure are organic movements (at level exchange and after adjusting for acquisitions and disposals). They are before goodwill amortization and exceptional items. Comparisons are with the equivalent period last year.
Volume has been measured on an equivalent servings basis to nine liter cases of spirits. Equivalent units are calculated as follows: beer in hectoliters divide by 0.9, wine in nine liter cases divide by 5, ready to drink in nine liter cases divide by 10.
FOCUS ON ORGANIC GROWTH IN PREMIUM DRINKS:
- The global priority brands in Guinness UDV drove growth in that business
- Net sales value of global priority brands grew 13%
- Continued investment behind global priority brands with marketing spend up 13% as total premium drinks marketing spend rose 9%
- Reported operating margin improved by 1.5 percentage points to 20.5%
- Including ready to drink formats, on an equivalent unit basis, growth in the volume of the global priority brands was 5%
- Smirnoff Ice continues to perform very strongly in the United Kingdom and has now been launched in 13 markets around the world
STRATEGIC CHANGE TO SUSTAIN ORGANIC GROWTH:
- Refocused Diageo as a leading global premium drinks business
- Implementing the integration of Guinness and UDV
- Agreed the combination of Pillsbury with General Mills, involving at least $4.5 billion in cash to be received by
Diageo and a 33% shareholding in the enlarged General Mills Agreed the acquisition, together with Pernod Ricard, of the Seagram Spirits and Wine business
OPERATING AND FINANCIAL REVIEW
for the six months ended 31 December 2000
PREMIUM DRINKS
Organic volume growth was 3% comprising growth in spirits of 3%,
in beer of 2% and a decline in wine of 9%.
Volume Net Share of total
growth(a) sales net sales value(a)
value growth(a)
% % %
Global priority brands 5 13 58
Local priority 3 8 15
brand market units – (3) 17
Other spirits (1) (3) 6
Other beer (12) (11) 4
Other wine
Total premium drinks volume 3 7 100
(a) Including ready to drink formats
Volume of the global priority brands grew 5% including ready to
drink formats.
The volume growth of the global priority brands (GPBs), including
ready to drink formats is shown in the table below.
Cases(b) Volume Net sales
million growth value growth
% %
Johnnie Walker 6.1 3 9
Guinness 5.6 3 7
Smirnoff 9.7 5 38
J&B 3.7 4 6
Baileys 3.2 8 10
Cuervo 2.2 (3) 9
Tanqueray 1.0 5 12
Malibu 1.2 21 19
Total GPBs 32.7 5 13
(b) Equivalent units
Excluding ready to drink (RTD) formats, GPB volume grew 3% in the
period. Volume of RTD formats of the GPBs reached nearly 0.9 million
equivalent cases up from 0.3 million in the prior year. This was
mainly due to the continuing strong growth of Smirnoff Ice in Great
Britain and Ireland, to its launch into new markets and to test
marketing in the United States ahead of its launch there in January
2001. Smirnoff Ice volume grew to nearly 0.7 million equivalent cases
or nearly 230 million individual bottles.
Turnover grew 6%, comprising growth in Spirits and Wine of 5%,
with a decline in wine of 3%, and growth in Beer of 6%.
Turnover Turnover Reported Organic
2000 1999 growth growth
$ million $ million % %
Spirits and Wine 4,476 4,287 4 5
Beer 1,579 1,780 (11) 6
Guinness UDV 6,055 6,067 – 6
Reported turnover was flat as growth in the global priority brands of 12% was offset by a reduction of $423 million principally due to the disposal of Cruzcampo in January 2000 and of the European spirits brands in late 1999. Organic growth in turnover was 6% with net sales value up 7%. Growth was driven by price increases and mix improvements particularly in the GPBs, where price and mix accounted for over 60% of the growth in turnover.
All global priority brands performed strongly in the period.
Net sales value of the Johnnie Walker brand grew 6 percentage points more than the 3% growth in volume as a result of price increases and mix improvement. While volume of Johnnie Walker Red Label was constant, focus on Johnnie Walker Black Label, with marketing up nearly 30%, resulted in further strong growth with volume up 11%. Johnnie Walker Black Label is now the world’s number one deluxe scotch following successive periods of growth. Total investment in marketing behind Johnnie Walker grew 21% as focus on the KEEP WALKING campaign, which is now running in most Johnnie Walker markets around the world, has improved qualitative and quantitative measures of brand health.
Guinness volume was up 3%, driven by strong volume growth in the United States. The brand continued to grow in all regions except Europe, where the decline in the beer market in Ireland continued to impact the performance of the brand. Nevertheless, Guinness gained share in the draught beer market in both Ireland and Great Britain. In Rest of World, the brand continues to grow behind proven marketing programs.
The performance of Smirnoff was very strong. Volume was up 5% and net sales value grew nearly 40%. This increase in net sales value was in part due to the price repositioning of the brand in the United States, which helped to generate a 5% increase in net sales value despite a decline in volume. In addition, the successful expansion of Smirnoff Ice contributed to the growth in net sales value with sales nearly 0.6 million equivalent cases above the comparable period last year. Growth of Smirnoff Ice is due equally to the continued success of the brand in Great Britain and Ireland, and its introduction into a further 11 markets. Investment in marketing increased in most markets and behind both the core brand and RTD formats. Despite this 35% increase in marketing investment behind the brand, contribution after marketing was up 30%.
Volume of J&B was up 4% driven principally by continued strong growth in Spain. Volume in Spain grew 11% as a result of strong marketing, particularly in the non-metropolitan areas outside J&B’s traditional urban strongholds, together with targeted on-premise activity. Strong growth in Portugal and Turkey offset volume weakness in France following a 4% price increase. In the United States, the rate of decline has been slowed and although volume fell 7% in the period net sales value was only down 3% due to price increases.
Baileys volume was up 8%. In the United States and Great Britain, its biggest markets, it continued to grow steadily with volume up 3% and 6%, respectively. Continental European markets also grew strongly with volume up over 9%. However, in Spain price increases as a consequence of euro price alignment negatively impacted volume.
Volume of Cuervo in the United States, which accounts for approximately 85% of the brand’s total volume, declined by 5% due to price increases implemented to reflect the rise in agave prices. Worldwide net sales value increased 9%. Contribution after marketing increased by 20%.
Tanqueray performed strongly in the period. Volume was up 5% and net sales value grew 12% as a result of price increases in most markets and the very successful launch of Tanqueray No. TEN in the United States. Contribution after marketing grew 21% as a result of lower marketing spend pending the introduction of new advertising.
Malibu’s excellent performance in many markets, with total volume up 21% and net sales value up 19% was the result of a 30% increase in marketing investment.
Local priority brands continued to perform well with net sales value up 8%.
Local priority brand market units, which contribute 13% of Guinness UDV volume and 16% of contribution after marketing, achieved 3% volume growth in the period. Marketing expenditure was broadly in line with the prior year.
Local priority brands no longer include ready to drink formats of the global priority brands as they are now included in the total volume of the GPBs. Using the previous classification of local priority brands volume growth was 8% and net sales value growth was 18%.
Wine volume declined by 9% but strong growth of Beaulieu Vineyard wines improved the mix and contribution after marketing increased by 6%.
At the lower end, the wine category remained very competitive with volume down 12% however at the premium end Beaulieu Vineyard wines in the United States, which is the focus of our wine business, continued to grow strongly with volume up 20%, net sales value up over 30% and contribution after marketing up nearly 50%.
Marketing spend increased 9% on an organic basis.
Reported marketing investment was up 6% to $782 million (1999 – $735 million). Organic growth of 9% was offset by a reduction of $25 million in respect of disposals made in the prior year. Marketing spend on the global priority brands was up 13% and represents 70% of total Guinness UDV marketing expenditure.
Organic operating profit increased 14%.
Reported operating profit was $1,243 million (1999 – $1,155 million) up 8%. Organic growth of 14% was partly offset by the impact of disposals which reduced operating profit by $70 million.
Operating Organic
profit growth
$ million %
Spirits and Wine
Europe 420 14
North America 323 17
Asia Pacific 133 26
Latin America 107 (1)
Rest of World 49 14
—-
1032 14
====
Beer
Europe 119 11
North America 2 –
Asia Pacific 31 11
Latin America 19 44
Rest of World 39 4
—-
210 13
====
Premium drinks
Europe 539 13
North America 325 18
Asia Pacific 164 23
Latin America 127 4
Rest of World 88 9
—-
1,243 14
=====
In Europe, volume increased 2%, turnover grew 4% and operating profit was up 13%, driven by improvements in the major markets of Great Britain where volume grew 4% and Spain where volume was up 6%.
In Great Britain, volume, sales and operating profit all increased despite the significant impact of the millennium on the results for the six months ended 31 December 1999. The continued success of Smirnoff Ice was the principal engine of this growth. Smirnoff Ice volume and sales were over three and a half times the levels of the comparative period. Smirnoff Red volume grew by 5%, benefiting from the enhanced visibility and profile of Smirnoff Ice. Depletions of Bell’s grew 3% in the first half behind a new marketing campaign for the brand, though volume was level with the comparable period last year because of a reduction in stock levels. Baileys, with volume up 6%, continued to grow as a result of new advertising for the brand aimed at increasing consumption occasions throughout the year. The beer market in Great Britain continued to decline but strategic focus on Guinness maintained volume on the brand, despite comparison against the prior year which benefited from the Rugby World Cup promotions. Other beer volume declined partly as a result of the decision to focus on the Guinness brand and withdraw from secondary brands such as Kilkenny. Marketing investment remained at the same level as in the prior year as increased spend on Smirnoff Ice offset later phasing of expenditure on Guinness.
In Ireland, total volume was flat as strong growth in Baileys and Smirnoff offset a fall in beer volume. Baileys volume was up 19%, and Smirnoff volume was up 15%. Beer volume was down 3% driven by a declining beer market there. Mix improvements and price increases drove turnover growth of 3%. Guinness Draught, which accounts for over 80% of the volume of the Guinness brand in Ireland, has increased share in the draught beer market. A number of programs have been introduced to build recruitment and maintain loyalty and they are demonstrating significant success in increasing consumer perceptions of Guinness.
In Spain, price increases, supported by a 40% increase in marketing investment, led to turnover growth of 11% with a 6% increase in volume. The majority of global priority brands contributed to this growth, particularly J&B with volume up 11% and net sales value up 12%. Cardhu and Malibu again grew strongly with volume up 30% and 50%, respectively.
In North America, operating profit growth of 18% was driven by volume growth, selective price increases and carefully targeted marketing investment.
Turnover growth of 6% in North America was driven by volume growth of 3% and increases in net sales value per case generated by price and mix improvements. Price increases arising from the decision to reposition Smirnoff and the effect of the agave shortage on Cuervo generated an increase in net sales value on these brands of 9% and 8%, respectively despite a decline in volume. Volume growth of Malibu, Tanqueray and Baileys also generated net sales value growth. Marketing investment was slightly up, reflecting increased investment in Guinness, Baileys, Malibu and Smirnoff – particularly in preparation for the Smirnoff Ice launch in January 2001. Marketing spend behind Cuervo and Stolichnaya was reduced, and expenditure on Johnnie Walker has been phased later than in the prior year.
In Asia Pacific, operating profit growth of 23% was driven by growth in premium brands.
Asia Pacific volume grew 6% as a result of strong growth in Johnnie Walker which grew 17%, Smirnoff which grew 10%, Dimple which was up 27% and Guinness up 6%. Turnover was up 9%. Johnnie Walker Black sales grew 22% as a result of increased marketing investment. Smirnoff growth was driven principally by Australia. In Korea, the Scotch market continues to recover, with a shift in consumption towards the premium sector, benefiting Dimple which has grown market share. Guinness volume growth was driven by improved distribution and by increased sales in Malaysia ahead of a possible increase in duty.
In Latin America, turnover and operating profit grew 3% and 4%, respectively, and were supported by an increase in marketing investment.
Latin America turnover growth of 3% was driven by the strong volume performance of Buchanan’s in Mexico and Venezuela, growth in Johnnie Walker Black Label in Venezuela, and the growth of Baileys throughout the region. Operating profit growth was slightly ahead of sales growth, even after a substantial increase in marketing investment, principally behind Johnnie Walker. Beer operating profit growth of over 40% was achieved as a result of cost efficiencies arising from the restructuring in Jamaica.
Continued volume growth of Guinness and the growth of Smirnoff Ice in South Africa and Kenya drove operating profit growth in Rest of World.
Guinness continued to grow strongly in Africa, supported by the extension of the successful “Michael Power” advertising campaign. In Nigeria, Guinness volume grew 5% despite an increase in excise duty and growth in Ghana and Cameroon was also strong. This growth together with the success of Smirnoff Ice in South Africa and Kenya were the principal drivers of sales growth of 18% and operating profit growth of 9% in Rest of World.
QUICK SERVICE RESTAURANTS
- System sales were flat
- Total restaurants up 5% compared with December 31, 1999 to 11,345 units
- Worldwide comparable restaurant sales down 6%
- Operating profit declined 7% to $147 million
- Reported operating margin down 3.3 percentage points to 19.1%
Worldwide system sales were flat as a 5% increase in restaurant numbers since 31 December 1999 offset a 6% decline in comparable restaurant sales.
In the six months ended December 31, 2000, 306 new restaurants were opened, over 60% of them outside the United States. 122 restaurants were closed giving a net increase of 184 restaurants since 30 June 2000, of which 33 were in the United States. Worldwide comparable restaurant sales declined 6%, with comparable sales in the United States down 7%.
Reported operating profit fell by $9 million to $147 million.
The decline in operating profit reflects a decline in North America partially offset by continued strong performance in the International business.
In North America system sales were down 4% which led to a 12% decline in operating profit.
The financial results for the North America business were principally driven by the operations in the United States which suffered from the general slowdown in the US Quick Service Restaurant business, particularly in November and December when cold weather led to lower consumer traffic. In Canada, which represents 3% of North America system sales, restaurant numbers have increased since 31 December 1999 by 10% and comparable restaurant sales were down 6%.
The performance in the United States, where the decline in comparable restaurant sales resulted in lower managed restaurant profit and lower receipt of royalty fees and property income, was also affected both by slowness in the Quick Service Restaurant sector and some issues specific to Burger King. The impact of marketing activity and promotions to drive store traffic was below expectations and did not match the very successful performance in the prior year of promotions such as Pokemon. The US business is now being refocused on the core brand attributes of quality, consistency and high levels of service around the United States’ favorite burger – the WHOPPER. Burger King has implemented an action plan based on improved delivery to the consumer, which is expected to help drive top line growth in the short to medium term.
The international business outside North America continues to grow with system sales up 13% as strong growth in restaurant numbers, up 12% since 31 December 1999, offset a small decline in comparable restaurant sales, down 1%.
In the major international markets of the United Kingdom, Germany and Spain, the system continues to expand. 41 new restaurants were added, since 31 December 1999, in the United Kingdom and Germany which offset negative comparable restaurant sales which were down 2% in the United Kingdom and down 4% in Germany primarily due to the impact of consumer concerns about BSE there. In Spain, system sales were up 25% fuelled by 28 new restaurants since 31 December 1999 and by 10% growth in comparable restaurant sales. In Latin America, there is a similar pattern of growth with restaurant numbers up 10% and comparable restaurant sales growth of 2%. Asia Pacific also added to its restaurant count with 79 new restaurants since 31 December 1999, however comparable restaurant sales declined 4%. Driven primarily by the growth in restaurant numbers, operating profit in the business outside North America increased by nearly 30%.
PACKAGED FOOD
– Volume flat
– Turnover up 2% to $3,366 million
– Marketing expenditure up 4% to $712 million
– Operating profit up 11% to $450 million
– Reported operating margin up 0.2 percentage points to 13.4%
Pillsbury returned to profitable growth with turnover up 2% and operating profit up 11%.
The results in the six months ended 31 December 2000 show that the strategic reorganisation and marketing changes we made in March 2000 have begun to be successful and this business has returned to its long term trend of profitable growth. Turnover and operating profit growth resulted from improved performance in Pillsbury North America and International. Growth in profit was achieved as marketing investment increased as a percentage of sales, laying the ground for future growth.
Pillsbury North America increased turnover 3%.
Price increases and improved mix increased sales and operating margins during the period. Progresso continued to gain market share, growing at a rate four times that of the market, as new products and increased marketing investment drove higher volume. In Refrigerated Baked Goods, price increases helped to offset volume declines and improve operating margins. Frozen Breakfast volume and operating profit declined due to category softness and increased competitive activity in the waffles segment. Marketing investment in Frozen Breakfast was increased 14% during the period in support of new product introductions.
Competitive pressures experienced in Pillsbury Bakeries and Foodservice.
Volume softness in the Quick Service Restaurant sector and increased competitor activity in in-store bakeries and foodservice distributors led to a 5% decline in turnover in Pillsbury Bakeries and Foodservice. The business has however restructured during the period to move away from low margin operations. While this is expected to improve performance going forward it, together with the decline in volume, has resulted in a reduction in operating profit of approximately 20% in the period.
International has recovered achieving strong volume and operating profit growth.
In International, volume growth was 6% and operating profit was up over 70% during the period. All regions achieved volume growth, with Asia Pacific reporting the largest increase as a result of focusing marketing support towards our highest potential brands and markets.
FINANCIAL REVIEW
Exchange rates
Exchange rate movements during the six month period, including the effect of the currency option cylinders, adversely impacted profit before exceptional items and tax by $9 million. The beneficial impact of exchange rate movements on operating profit in the period was $1.5 million. Exchange rate movements also adversely affected the share of profits of associates by $3 million, goodwill amortization by $1.5 million and the interest charge by $6 million.
Based on current exchange rates, it is expected that the full year impact of exchange rate movements on profit before exceptional items and taxation will be a positive impact of approximately $15 million.
Associates
The group’s share of profits of associates before exceptional items was $207 million for the period compared with $180 million for the same period last year, an organic growth of 19%.
Goodwill
Goodwill amortization in the period was $16 million, mainly in respect of Packaged Food.
Exceptional items
Exceptional operating cost items in the six month period amounted to a charge of $83 million before taxation. This comprised restructuring costs of $57 million and Burger King costs associated with litigation of $31 million, partly offset by Burger King’s successor franchise fee income of $4.5 million.
The restructuring costs comprised $12 million in respect of the first stages of the integration of UDV and Guinness, $7 million relating to the commencement of the reorganization of Beer production facilities in Great Britain and Ireland, and $37 million relating to restructuring of ownership and management within Guinness UDV.
Interest
The interest charge in the period was $276 million, the same as reported in the comparable period. A $31 million benefit arising from the disposal of businesses was offset by other factors, principally increases in respect of interest and exchange rate movements.
Taxation
The effective rate of taxation on profit before goodwill amortization and exceptional items for the period was 25%, compared with 26.2% for the six months ended 31 December 1999. The charge is based on an estimate of the effective tax rate for the financial year as a whole.
Dividend
Diageo will pay an interim dividend of 13.3 cents per share on 23 April 2001, an increase of 6% on last year’s interim dividend. Payment to US ADR holders will be made on 27 April 2001. The record date for this dividend will be 9 March 2001. A dividend reinvestment plan is available in respect of this dividend and the plan notice date will be 29 March 2001.
Cash flow
Free cash inflow was $734 million, compared with $620 million in the prior period. Cash inflow from operating activities was $1,482 million compared with $1,384 million in the comparable period. This inflow was after $130 million of integration costs and a $493 million increase in working capital mainly due to seasonal factors. Net interest payments were $304 million against $271 million in the comparable period. Purchases of tangible fixed assets in the period amounted to $265 million, a decrease of $110 million. Tax payments were $130 million compared with $116 million.
The acquisition of businesses, primarily the remaining shares in Bundaberg, resulted in a cash outflow of $144 million. 18 million ordinary shares were purchased for cancellation in the period at a cost of $161 million, compared with 9.5 million at a cost of $80 million in the same period last year.
Balance sheet
At December 31, 2000, total shareholders’ funds were $7,673 million compared with $7,019 million at June 30, 2000. The increase was mainly due to the $746 million retained income for the period, less the $161 million cancellation of shares.
Net borrowings were $8,496 million, an increase of $234 million from 30 June 2000. This increase reflects the $161 million purchase of shares and adverse exchange movements of $82 million.
The following release was converted based on a convenience rate of $1.49/pound taken from the close on December 31, 2000.
The interim statement and the presentation will be on the Diageo web site www.diageo.com from February 22, 2001.
(For tabular information please contact Taylor Rafferty at (212)889-4350) – Volume flat
