Diageo reports continued strong growth in the year with organic top line growth of 7.3%, operating profit growth of 8.7% and underlying eps growth of 13%. Guidance is for increased organic operating profit growth in 2008 of 9%.
Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2007 said:
“Diageo’s focus on proven brand and market building strategies has again delivered strong growth in top and bottom line and strong cash flow.
“In North America we outperformed the US spirits market for the third consecutive year. In Europe we improved performance in the second half and increased our investment in the growth drivers by brand and market. In International strong performance by our beer brands and the investment we made behind our Scotch brands delivered another year of excellent growth. In Asia Pacific we grew in all markets, gained share in our key markets and improved performance in the second half.
“Our world leading brands, Johnnie Walker, Smirnoff, Baileys and Guinness along with Captain Morgan and Buchanan’s were the strongest performing brands this year. Johnnie Walker enhanced its position as the world's leading Scotch whisky and now sells over 15 million cases. Smirnoff reinforced its position as the world's number one premium spirits brand and Baileys grew strongly, supported by the successful launch of the new Baileys flavours. Guinness grew despite the impact of weak beer markets in Great Britain and Ireland as a result of double digit growth in International on the back of the Guinness Greatness campaign in Africa. Captain Morgan is primarily a North American brand but strong performance in Europe delivered 10% of the brand's growth this year. Finally Buchanan’s delivered excellent growth as the brand continued to gain share in the fast growing Scotch markets of Latin America.
“Together these regional and brand performances have driven top line growth of 7.3%. Operating margin expansion of 40 basis points resulted in operating profit growth of 8.7%. Another year of strong cash flow enabled us to return a further £2.3 billion to shareholders through dividends and our share buyback programme.
“Whilst we watch for any impact the current volatility in financial markets may have on broader trading conditions, the investments we have made in brands and markets this year have created an even stronger platform for the future. Therefore we currently expect increased organic operating profit growth in 2008 of 9%”.
Results at a glance
| |
|
2007 |
2006 |
Reported movement |
Organic movement |
| Volume in millions of equivalent units |
|
141.3 |
133.8 |
6% |
5% |
| Net sales |
£ million |
7,481 |
7,260 |
3% |
7% |
| Operating profit |
£ million |
2,159 |
2,044 |
6% |
9% |
| Profit attributable to parent company’s equity shareholders * |
£ million |
1,489 |
1,908 |
(22)% |
|
| Basic eps * |
pence |
55.4 |
67.2 |
(18)% |
13% |
* For year ended 30 June 2007 tax rate 32%. For year ended 30 June 2006 tax rate 8%.
-
Marketing spend increased by a further 8%
-
Operating profit includes a gain of £40 million in respect of exceptional items
-
Using an underlying effective tax rate of 25% eps before exceptional items increased from 50.5 pence in 2006 to 54.8 pence in 2007, which adjusted for exchange is a 13% increase
-
Return on invested capital increased 70 basis points to 14.4%
-
Strong free cash flow of £1,365 million
-
Recommended full year dividend per share increase of 5% to 32.7 pence
-
£2.3 billion returned to shareholders: £858 million in dividends and £1,400 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 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 underlying basic eps.
Regional summary
North America – Focus on priority brands delivered strong top line growth and operating margin improvement
-
Volume up 3%
-
Net sales up 7%
-
Marketing spend up 5%
-
Operating profit up 12%
North America delivered strong top and bottom line growth driven by the priority brands. Volume growth of spirits was 3%, wine 6% and beer 7%. Price increases on approximately 50% of the volume together with mix improvements resulted in net sales for spirits, wine and beer all up 8% while ready to drink net sales, from a 6% decline in volume, were down only 1%. Smirnoff vodka and Baileys each delivered double digit net sales growth. Diageo’s value share of the distilled spirits market in the United States grew 0.6 percentage points during fiscal 2007.
Europe – Continued growth in Continental Europe supported by strong second half performance in Russia, Great Britain and Ireland
-
Volume down 2%
-
Net sales flat
-
Marketing spend up 1%
-
Operating profit flat
In Europe strong growth in Continental Europe and Russia from Baileys, Johnnie Walker and Smirnoff vodka partially offset the first half net sales decline in Great Britain, Ireland and Spain. In the second half all three of these markets delivered net sales growth: in Great Britain Smirnoff vodka and Baileys both grew net sales over 10%; in Ireland the improved performance of the lager brands drove growth and in Spain Johnnie Walker grew net sales 19%.
International – Continued strong performance of Diageo’s Scotch and beer brands delivered top line growth
-
Volume up 16%
-
Net sales up 18%
-
Marketing spend up 17%
-
Operating profit up 19%
International delivered strong growth throughout the region. Diageo’s Scotch brands continued to be the main driver of growth, especially Johnnie Walker with net sales up 18% and Buchanan’s with net sales up 40%. The growth of Diageo’s beer brands in Africa accelerated in the second half fuelled by a new Guinness campaign. The launch of Baileys flavours contributed to an increase of 21% in net sales for the Baileys brand. In ready to drink net sales were up 19% led by Smirnoff Storm in South Africa and Smirnoff Ice in Nigeria and Brazil.
Asia Pacific – Top line growth accelerated in the second half driving improved operating margin leverage
-
Volume up 12%
-
Net sales up 13%
-
Marketing spend up 22%
-
Operating profit up 7%
In Asia Pacific top line growth accelerated in the second half as marketing spend was increased behind new brand launches in India and in the fast growing markets of Southeast Asia. Johnnie Walker, Diageo’s largest brand in the region, was the biggest growth driver with further strong net sales growth of 22%. While Korea, China and India continue to be the key growth engines for the region, performance was broad based as every market delivered net sales growth. In the second half net sales growth was 17%, driven by Johnnie Walker which grew net sales 32%. Korea, Thailand and India all improved performance in the second half.
Financial
-
The deficit in respect of post employment plans reduced by £382 million from £801 million at 30 June 2006 to £419 million at 30 June 2007. In the year ending 30 June 2008, finance income under IAS 19 is expected to be £47 million, broadly in line with the benefit in the year ended 30 June 2007.
-
In the year ended 30 June 2007, exchange rate movements reduced operating profit by £91 million and the net interest charge by £11 million.
-
In the year ending 30 June 2008, at current exchange rates, foreign exchange movements (excluding the exchange impact of re-translating inter-company balances under IAS 21) are forecast to reduce operating profit by £65 million and reduce the interest charge by approximately £5 million.
Brand performance summary
| |
Reported volume movement % |
Organic volume movement % |
Reported net sales movement % |
Organic net sales movement % |
| Global priority brands |
6 |
6 |
3 |
7 |
| Local priority brands |
4 |
3 |
3 |
7 |
| Category brands |
7 |
6 |
4 |
8 |
| Total |
6 |
5 |
3 |
7 |
| Key spirits brands*: |
|
|
|
|
| Smirnoff vodka |
6 |
6 |
4 |
9 |
| Johnnie Walker |
14 |
14 |
13 |
16 |
| Captain Morgan |
7 |
7 |
2 |
10 |
| Baileys |
7 |
7 |
6 |
10 |
| JεB |
(2) |
(2) |
(3) |
-1 |
| Jose Cuervo |
2 |
2 |
(4) |
3 |
| Tanqueray |
6 |
6 |
3 |
10 |
| Crown Royal- North America |
5 |
5 |
1 |
9 |
| Buchanan’s- International |
41 |
41 |
53 |
40 |
| Windsor-Asia Pacific |
15 |
15 |
12 |
15 |
| Guinness |
2 |
2 |
- |
3 |
| Ready to drink |
(1) |
(1) |
(5) |
- |
* Spirits brands excluding ready to drink.
Throughout this announcement certain brands formerly treated as local priority brands have now been reclassified as category brands and vice versa, to reflect the change in contribution of these brands in individual countries. All comparative figures have been restated. See page 32 for additional information regarding these changes. Ready to drink includes all ready to drink brands.
The global priority brands represent 60% of volume and were the main driver of top line growth with volume up 6% and net sales up 7%. The growth was driven by the performance of Johnnie Walker, Smirnoff, Baileys and Captain Morgan across a number of regions. These are the world’s leading brands and this volume growth represents some huge increases in case volume. Smirnoff, for example, grew by over a million cases while Johnnie Walker grew by almost two million cases in the year.
Johnnie Walker volume is now over 15 million cases and the brand extended its position further as the world’s leading Scotch with growth around the globe.
Smirnoff vodka volume was up 6% to 23.2 million cases with growth in each region but particularly in North America which accounts for over 40% of total Smirnoff net sales. Net sales grew 9% as a result of price increases in many markets.
Growth of Baileys was driven by the launch of Baileys flavours with particularly strong performances in North America and International.
While Captain Morgan is primarily a North American brand, it also grew strongly in Europe.
Outstanding performance of Guinness in International with net sales up 15% and growth in North America offset the decline in the tough beer markets of Great Britain and Ireland.
The local priority brands were the biggest driver of overall price and mix improvement in the year. Crown Royal in North America, Buchanan’s in International and Windsor in Asia Pacific all grew strongly and contributed significantly to this improvement.
Category brands performance was driven by Diageo’s other Scotch brands, as well as the high value reserve brands.
The overall performance of ready to drink was driven by the continued decline of the category in Europe offset by strong growth in International.
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