Diageo delivers strong top line and double digit EPS growth.
Paul Walsh, Chief Executive of Diageo, commenting on the year ended 30 June 2006 said:
"Diageo’s strong full year performance is the result of brand building marketing campaigns, better sales execution to build superior relationships with our customers and successful new product launches.
"North America continues to deliver industry beating top line growth; a more cost effective European business is driving operating profit and margin growth; and the rate of sales growth in International has accelerated following new brand introductions and increased investment.
"Strong top line growth has delivered organic operating margin expansion and organic operating profit growth in line with our guidance at the beginning of the year despite pressure on input costs. At the same time we have increased marketing investment creating a stronger platform for future growth. We have delivered another year of strong free cash flow and through our dividends and share buybacks we have returned a further £2.3 billion to our shareholders.
"With well-positioned brands and a more efficient and effective organisation, we enter the new financial year with confidence. We expect that organic net sales growth will be in line with that achieved in the current year and we plan to deliver organic operating profit growth of at least 7% for the year and to return a further £1.4 billion to shareholders through our continuing buyback programme."
Results at a glance
|
|
|
2006 |
2005 |
Reported movement |
Organic movement |
|
Volume in millions of equivalent units |
|
133.8 |
125.4 |
7% |
6% |
|
Net sales after deducting excise duties |
£ million |
7,260 |
6,677 |
9% |
6% |
|
Operating profit before exceptional items |
£ million |
2,044 |
1,932 |
6% |
7% |
|
Operating profit after operating exceptional items |
£ million |
2,044 |
1,731 |
18% |
|
|
Profit attributable to parent company's equity shareholders |
£ million |
1,908 |
1,344 |
42% |
|
|
Basic eps before exceptional items |
Pence |
50.5 |
39.7 |
27% |
10% |
|
Basic eps |
Pence |
67.2 |
45.2 |
49% |
|
Key highlights
- Growth across all businesses with net sales, after deducting excise duties, of spirits up 8%, wine up 8%, beer up 4% and ready to drink up 2%
- At 8% organic growth, marketing increased as a percentage of net sales, after deducting excise duties
- Further operating margin improvement of 30 basis points on an organic basis
- Double digit eps growth
- Return on invested capital up 90 basis points to 13.7%
- Another year of strong free cash flow at £1,361 million
- Share buyback doubled in the year to £1,400 million
- Recommended full year dividend per share increase of 5% to 31.1 pence
Percentage movements in this document are organic movements unless otherwise stated. These movements and operating margins are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to volume share. See page 31 for additional information for shareholders and an explanation of non-GAAP measures including the reconciliation of basic eps as reported to basic eps as adjusted and the organic eps movement calculation. The financial statements for the year ended 30 June 2006 have been prepared in accordance with IFRS as endorsed and adopted for use in the European Union.
Regional Summary
North America – Continued outperformance and share gains
- Volume up 5%
- Net sales, after deducting excise duties, up 7%
- Marketing up 6%
- Operating profit before exceptional items up 6%
Diageo’s North America business continues to outperform the market and gain share. As a result of proven marketing campaigns and stronger execution of on and off trade sales programmes, top line growth has been achieved across the business with net sales, after deducting excise duties, up 8% for spirits, 7% for wine, 11% for beer and 3% for ready to drink. The priority spirits brands continued to perform strongly, especially Smirnoff vodka, Captain Morgan and Jose Cuervo which each delivered double digit growth in net sales, after deducting excise duties. Diageo’s premium beer brands, Guinness, Red Stripe and Smithwicks, continue to broaden their consumer appeal through effective advertising campaigns and targeted product placement. In wine, following its acquisition in February 2005, Chalone has provided another growth engine and the performance of that business is ahead of expectations.
Europe – Building a more cost effective organisation
- Volume up 1%
- Net sales, after deducting excise duties, unchanged year on year
- Marketing reduced by 4%
- Operating profit before exceptional items up 6%
The European business has implemented change in the year to build a more cost effective organisation focused on profitable growth opportunities. The decline in the ready to drink segment in Europe and the challenges inherent in the Irish beer market have adversely impacted top line growth. However, Diageo’s spirits brands in Europe and the beer brands outside of Ireland have performed well. This is the result of focus on those brands and markets which will generate future growth and a fuller innovation pipeline. Cost initiatives implemented in the year have improved operating margins and driven operating profit growth.
International – Growth across all key markets
- Volume up 14%
- Net sales, after deducting excise duties, up 13%
- Marketing up 28%
- Operating profit before exceptional items up 9%
Diageo is well-positioned to take advantage of the opportunities in these markets. Top line growth is accelerating and the International business is delivering share gains for the key brands. The successful implementation of turnaround plans in Nigeria, Korea and Taiwan have also contributed to the improvement. This excellent top line growth has facilitated very high levels of increased marketing investment behind the growth of key brands, particularly Johnnie Walker in expanding markets such as China and Mexico, and behind innovation.
Financial
- The deficit in respect of post employment plans reduced by £493 million from £1,294 million at 30 June 2005 to £801 million at 30 June 2006. As a consequence, in the year ending 30 June 2007, finance income under IAS 19 will increase year on year by approximately £30 million
- In the year ended 30 June 2006, foreign exchange movements reduced operating profit by £25 million and had no impact on the interest charge
- In the year ending 30 June 2007, at current exchange rates foreign exchange movements are estimated to reduce operating profit by £75 million and reduce the interest charge by approximately £10 million (excluding the exchange impact of re-translating short term inter-company loans under IAS 21)
- Brand performance summary
|
Equivalent units million |
Reported volume movement % |
Organic volume movement % |
Reported net sales* movement % |
Organic net sales* movement % |
|
|
|
|
|
|
|
|
Global priority brands |
78.9 |
6 |
6 |
8 |
6 |
|
Local priority brands |
23.1 |
2 |
2 |
8 |
3 |
|
Category brands |
31.8 |
13 |
10 |
11 |
9 |
|
Total |
133.8 |
7 |
6 |
9 |
6 |
|
Key brands |
|
|
|
|
|
|
Smirnoff vodka |
21.9 |
9 |
9 |
12 |
10 |
|
Smirnoff ready to drink |
5.0 |
1 |
1 |
1 |
(2) |
|
Johnnie Walker |
13.7 |
11 |
11 |
11 |
11 |
|
Guinness |
11.1 |
(1) |
(1) |
5 |
3 |
|
Captain Morgan (excl.ready to drink) |
7.1 |
8 |
8 |
17 |
13 |
|
Baileys |
7.0 |
4 |
4 |
4 |
3 |
|
J&B |
5.9 |
- |
- |
(1) |
(1) |
|
Crown Royal |
4.6 |
5 |
5 |
13 |
8 |
|
Jose Cuervo (excl. ready to drink) |
4.5 |
9 |
9 |
15 |
11 |
|
Tanqueray |
2.0 |
6 |
6 |
12 |
8 |
|
Buchanan's |
1.1 |
19 |
19 |
15 |
20 |
|
Windsor |
0.7 |
12 |
12 |
23 |
9 |
*Net sales, after deducting excise duties.
Diageo acquired Bushmill's Irish Whiskey on 25 August 2005 for approximately £200 million.
Download the full press release in PDF here.