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• Financial Statements
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In a difficult market environment Diageo has delivered 3% organic net sales growth, 6% organic operating profit growth, 21% reported eps growth and maintained its financial strength.

Results at a glance

1   For six months ended 31 December 2008 reported tax rate 15% (2007 tax rate 26%).  Includes exceptional items.

Paul Walsh, Chief Executive of Diageo, commenting on the six months ended 31 December 2008 said:

“Diageo’s performance in this first half again demonstrates the resilience we have from our brand range across categories, price points and geography. The global economic slowdown has affected business in the period and in November and December this impact was more pronounced. In this difficult market environment Diageo has delivered 3% organic net sales growth, 6% organic operating profit growth and 9% underlying eps growth and we have maintained our financial strength.  We have delivered value in the half from the brands we have added, Ketel One, Rosenblum Cellars and Zacapa. In addition we have benefited from exchange rate movements given the scale of our business in the United States and Europe and a reduction in our tax rate.  This has resulted in 21% growth in reported eps for the period.

“We have returned £0.9 billion to shareholders in the half. Our share buyback programme slowed as we maintained our conservative approach to balance sheet management. 

“Current economic trends indicate that consumer confidence will reduce further and the outlook for the second half is more difficult to predict. However, across Diageo we have an experienced management team which combined with the consumer appeal of our brands, the effectiveness of our routes to market and our geographic diversity gives us confidence in our business. In the second half we will be yet more agile in our response to changing consumer demand and we will continue to invest behind our business while achieving efficiencies across the regions particularly in marketing spend where we are seeing strong media rate deflation. Given these strengths, albeit with more uncertainty about the wider economic environment, we believe we can deliver organic operating profit growth for the full year in the range of 4% to 6%. We will continue to preserve our advantaged financial position and therefore we would not envisage reopening the share buyback programme in the current calendar year.

“In the second half we will implement a restructuring programme designed to ensure that Diageo emerges from this challenging time with improved routes to market, even stronger brand positions and enhanced financial strength.  Anticipated full year savings, in both cost of goods sold and overheads, of £100 million will accrue largely in fiscal 2010. Restructuring costs, amounting to approximately £200 million will be taken as an exceptional charge in the second half. Continued positive exchange rate impacts and the lower tax rate mean that growth in reported eps after the exceptional item will be double digit ”.

Highlights

• New brand additions, primarily Ketel One, contributed £97 million to net sales and £46 million to operating profit
• Organic marketing spend decreased 1% as cost efficiencies were delivered from media rate deflation and spend on ready to drink was reduced
• Organic operating margin improved a further 0.4 percentage points
• Exchange rate movements, excluding the impacts of IAS 21 and IAS 39, increased operating profit by £103 million and net finance charges by £49 million
• 9% underlying growth in eps before exceptional items using an underlying tax rate of 22% (2007 – 26%) and adjusted for foreign exchange and acquisitions
• Free cash flow of £387 million
• Interim dividend per share increased by 5.3% to 13.9 pence
• £879 million returned to shareholders: £527 million in dividends and £352 million of share buybacks

Unless otherwise stated in this announcement: net sales are sales after deducting excise duties; percentage movements are organic movements; commentary refers to organic movements and share refers to value share.  See page 31 for additional information for shareholders and an explanation of non-GAAP measures including the reconciliation of basic eps to underlying eps.

Regional summary

North America – Benefiting from brand range and superior route to market to deliver growth as industry slows

• Volume up 2%
• Net sales up 4%
• Marketing spend down 6%
• Operating profit up 7%

In North America the worsening economic environment has increasingly impacted consumer demand in the period. While US spirits’ industry volume growth has slowed, Diageo maintained its 30.4% share and continued to outperform major competitors. Spirits net sales grew 8% as a result of 3% volume growth and price increases. This was driven by the performance of Smirnoff, Captain Morgan, Crown Royal and Ciroc in the US and strong growth across spirits brands in Canada. Beer net sales declined 2% and ready to drink declined with net sales down 10%. Wine net sales were down 7% as the consumer slowdown has led to consumers switching to less expensive wine varieties.

The new brand additions Ketel One, Rosenblum Cellars and Zacapa have all performed well and delivered £92 million of net sales in the half.

Marketing spend was down as a result of the decision to reduce spend on ready to drink brands and as a result of the deflation in media rates. This was partially offset by increased activity on spirits brands especially Smirnoff, Jose Cuervo, Captain Morgan and Ciroc.

Europe – Economic conditions in Spain deteriorated and beer markets were weak

• Volume down 5%
• Net sales down 3%
• Marketing spend down 4%
• Operating profit down 4%

The overall performance in Europe was primarily driven by the weaker Spanish market. Net sales there declined 18% as the worsening economy led to a steep decline in consumer demand and reduced distributor and wholesaler ability to fund stock at previous levels.  The weak beer market in Western Europe also impacted performance. This offset continued strong growth in Russia in the half and growth in Continental Europe.  From a category perspective in Europe, spirits net sales were down 2%, beer was down 4%, ready to drink down 12% and wine down 2%. Overall net sales declined at a slower rate than volume as a result of price increases taken across the region, driving two percentage points of price/mix. Marketing spend has benefited from procurement efficiencies resulting from deflation in media rates.

International – Strong performance in Africa and price increases in Latin America drove net sales growth in the region

• Volume down 2%
• Net sales up 11%
• Marketing spend up 2%
• Operating profit up 11%

The International region is again the key contributor to Diageo’s growth.  The performance in Africa remained very strong and in the half net sales grew 20% primarily driven by the continued strong performance of Guinness up 25%. In Latin America Diageo’s three largest markets, Venezuela, Brazil and Mexico each delivered double digit net sales growth.  Elsewhere in Latin America and the Caribbean there has been an increasingly difficult trading environment as a result of slowing economic growth and currency devaluation, however Diageo has successfully managed these market conditions and delivered net sales growth primarily driven by price increases across the scotch brands in the region. However volume was impacted and led to the overall decline in volume in the region. The impact of the slowing global economy on travel has led to a significant slowdown in global travel retail and volume was down but net sales grew slightly. Following a number of years of building marketing spend to optimum levels in Latin America and Caribbean, spend in the half was in line with the prior period.  In Africa marketing spend increased mainly behind the growth of scotch, beer and ready to drink brands.

Asia Pacific – Strong growth in spirits and beer across Asia Pacific offset by ready to drink decline in Australia post the excise duty increase

• Volume down 8%
• Net sales up 2%
• Marketing spend up 12%
• Operating profit down 5%

In Asia Pacific the decline in ready to drink in Australia, following a significant increase in duties for ready to drink at the end of the last financial year, reduced volume growth by 4 percentage points and net sales growth by 6 percentage points. The region delivered spirits net sales growth of 11% (excluding ready to drink) and 16% growth in beer. This led to further share gains across important categories such as scotch in China. The benefit of the return to in-market distribution in Korea was somewhat offset by the decline in the scotch category as a result of the marked economic slowdown there.  Investment in the in-market organisation in China, India and Vietnam increased costs in the period, which contributed to the fall in operating profit.

Financial

• The deficit in respect of post employment plans increased by £69 million from £408 million at 30 June 2008 to £477 million at 31 December 2008. For the full year ending 30 June 2009, finance income under IAS 19 is expected to be minimal compared with the benefit of £46 million in the year ended 30 June 2008.
• In the six months ended 31 December 2008, exchange rate movements (excluding the exchange impact under IAS 21 and IAS 39) increased operating profit by £103 million and increased net finance charges by £49 million.
• For the year ending 30 June 2009, at current exchange rates, foreign exchange movements (excluding the exchange impact under IAS 21 and IAS 39) are forecast to increase operating profit by approximately £210 million and increase the interest charge by approximately £80 million.
• For the year ending 30 June 2010, at current exchange rates, foreign exchange movements (excluding the exchange impact under IAS 21 and IAS 39) are estimated to increase operating profit by £200 million and increase the interest charge by £30 million.

Brand summary

*   Spirits brands excluding ready to drink
**  Brand additions Ketel One vodka and Rosenblum    Cellars wine are included as local priority brands in North America and are reported as category brands in other regions. Zacapa rum is reported as a category brand globally.
*** The transfer of Smirnoff ready to drink brands to the new joint venture company in South Africa has resulted in a difference between reported and organic volumes

Management reports

The interim report for the six months ended 31 December 2008 forms one of the management reports Diageo is required to publish under the EU Transparency Directive. Diageo will issue the next interim management statement on 7 May 2009. The year end preliminary results announcement will be issued on 27 August 2009. 

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