Diageo reports another year of strong organic growth: net sales up 7%, operating profit up 9% and underlying eps up 11%2
Results at a glance
| |
|
2008 |
2007 |
Reported movement |
Organic movement |
| Volume in millions of equivalent units |
|
145.0 |
141.3 |
3% |
3% |
| Net sales |
£ million |
8,090 |
7,481 |
8% |
7% |
| Operating profit before exceptional items |
£ million |
2,304 |
2,119 |
9% |
9% |
| Operating profit |
£ million |
2,226 |
2,159 |
3% |
9% |
| Profit attributable to parent company’s equity shareholders1 |
£ million |
1,521 |
1,489 |
2% |
|
| Basic eps1 |
pence |
59.3 |
55.4 |
7% |
|
-
Marketing spend increased 5%. Excluding Korea, marketing spend on non ready to drink brands increased 8%
-
Operating exceptional charge of £78 million in the year ended 30 June 2008 in respect of the restructuring of the Irish brewing operations
-
Interest charge increased £90 million to £341 million
-
eps before exceptional items2 increased from 54.8 pence in 2007 to 60.6 pence in 2008, which excluding acquisitions, disposals and exchange is an 11% increase (underlying eps)
-
Return on invested capital increased 50 basis points to 14.9%
-
Free cash flow of £1,252 million
-
Recommended full year dividend per share increase of 5% to 34.35 pence
-
£1.9 billion returned to shareholders: £857 million in dividends and £1.0 billion of share buybacks
1 For year ended 30 June 2008 tax rate of 24.9%. For year ended 30 June 2007 tax rate of 32.4%. Discontinued operations gain after tax for the year ended 30 June 2008 of £26 million, for the year ended 30 June 2007 of £139 million.
2 Using an underlying effective tax rate of 24.5% in 2008 and 25.1% in 2007.
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 28 for additional information for shareholders and an explanation of non-GAAP measures including the reconciliation of basic eps to underlying eps.
Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2008 said:
“The combination of Diageo’s leading brands and our global reach has delivered another year of strong organic growth with net sales up 7% and operating profit up 9%.
The main drivers of top and bottom line growth were International, where scotch in Latin America and beer in Africa drove net sales growth of 16%, and North America, where growth in the priority brands drove a 5% increase in net sales. In Europe, we delivered better performance than last year, with net sales up 3% from growth in Eastern Europe, Russia and Great Britain. In Asia Pacific, even though overall performance was impacted by the loss of our Korean licence for part of the year, we grew the top line 2% as we gained share in China and expanded in India and the markets of South East Asia.
We have continued to invest behind great campaigns and this year has seen our global priority brands again extend their leadership positions. Smirnoff grew across all markets posting 8% volume and 10% net sales growth. Johnnie Walker grew net sales by 12% and now has annual net sales of over £1 billion. The return to growth of JεB in Europe together with its strong performance in International delivered 9% net sales growth. Guinness grew net sales 6% with over 50% of that growth coming from Africa, where the brand grew 13%. Our other beer brands in Africa grew net sales 25%.
Price rises and mix improvement covered increased input costs and gross margin has improved. We have benefited from marketing spend efficiencies and scale in our global brands and we have reduced marketing spend in ready to drink to maintain the profitability of that segment. Overall we have delivered a further 70 basis points organic improvement in operating margin.
During the year we added Ketel One vodka, Zacapa rum and Rosenblum Cellars wine to our brand range. These are already successful brands and we intend to build on that success.
Our financial results in recent years have mirrored the consistent improvement we have achieved in our business and we finish the year with a stronger business. We enter the new financial year facing slowing global GDP growth and more challenging global economic trends, but given the strength and diversity of Diageo’s business we believe we can deliver organic operating profit growth for the coming year within our range of 7% to 9%. Together with the expected positive impact of exchange rate movements on reported results and our share buyback programme this means we expect to deliver double-digit reported eps growth.”
Regional summary
North America - Strong performance of priority and reserve brands continued to drive growth
-
Volume up 2%
-
Net sales up 5%
-
Marketing spend up 3%
-
Operating profit up 10%
North America’s performance reflects strong net sales growth with spirits up 7%, beer up 6% and wine up 12%, partially offset by a 10% decrease in net sales of ready to drink. Strong volume growth in priority and reserve brands offset weakness in value brands. Smirnoff, Johnnie Walker, Captain Morgan, Crown Royal, Guinness, Sterling Vineyards and Chalone wines were again the performance leaders. Price increases and strong growth of the reserve brands Cîroc, Don Julio and Johnnie Walker Blue Label drove net sales growth. Marketing excluding ready to drink was up 5% with strong investment behind the reserve brands. Diageo’s share of US spirits was broadly maintained at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.
Europe - Improved performance through focused investment in key growth drivers
-
Volume up 2%
-
Net sales up 3%
-
Marketing spend up 6%
-
Operating profit up 3%
In Europe performance improved against last year driven by growth in spirits, with net sales up 5% and the continued outperformance of Guinness against the beer categories in Ireland and Great Britain. Increased focus behind the off trade in Great Britain, behind premium scotch brands in Continental Europe and further investment in Eastern Europe and Russia drove the growth in spirits in Europe. Smirnoff and Johnnie Walker performed particularly strongly with net sales up 5% and 11% respectively and JεB returned to growth in the region supported by the ‘Start a Party’ campaign. Ready to drink however declined by a further 13%. Marketing spend increased more strongly than net sales with increased spend on the priority brands in Great Britain and Ireland and behind Johnnie Walker in Spain.
International - Strong performance of beer and scotch drove double-digit growth in both net sales and operating profit
-
Volume up 5%
-
Net sales up 16%
-
Marketing spend up 16%
-
Operating profit up 19%
International continues to drive overall Diageo performance as scotch in Latin America, South Africa and Global Travel and Middle East grew net sales 11%, 24% and 20% respectively, and Diageo’s beer brands in Africa continued their strong growth with net sales up 19%. Growth in International is becoming increasingly broad based and Smirnoff, Baileys, Cacique and JεB all grew as a result of increased consumer demand and marketing spend, which grew strongly again behind successful marketing campaigns. Price increases and mix improvements across most of Diageo’s brands in all hubs within International resulted in strong operating profit growth.
Asia Pacific - Investments in market infrastructure and disruption in Korea impacted performance
The overall performance in Asia Pacific was affected by a number of factors including the loss of the import licence in Korea for part of the year. Investment continued to support the expansion of the regional infrastructure with the increase in locally bottled brands in India and the opening up of new markets such as Vietnam and the focus on priority brands in markets such as Australia. Diageo has maintained market leading positions and continued to grow share and awareness in the key scotch markets of the region such as China and Korea. Smirnoff also continued to grow its leadership of the vodka category in the region with growth in net sales of 29% and share gains in key markets such as India and Australia.
Financial
-
The deficit in respect of post employment plans reduced by £11 million from £419 million at 30 June 2007 to £408 million at 30 June 2008. The reduction in equity valuations in the year was offset by the increase in value of interest rates and inflation swaps between 30 June 2007 and 30 June 2008. In the year ended 30 June 2008 finance income under IAS 19 was £46 million. In the year ending 30 June 2009, finance income under IAS 19 is expected to be negligible.
-
In the year ended 30 June 2008, exchange rate movements reduced operating profit by £5 million and increased the net interest charge by £1 million.
-
For the year ending 30 June 2009, at current exchange rates, foreign exchange movements (excluding the exchange impact under IAS 39) are forecast to increase operating profit by £60 million and increase the interest charge by £15 million.
Brand summary
| |
Volume movement*% |
Reported net sales movement% |
Organic net sales movement% |
| Global priority brands |
4 |
8 |
6 |
| Local priority brands |
2 |
10 |
4 |
| Category brands |
1 |
8 |
10 |
| Total |
3 |
8 |
7 |
| Key spirits brands**: |
|
|
|
| Smirnoff |
8 |
12 |
10 |
| Johnnie Walker |
5 |
14 |
12 |
| Captain Morgan |
8 |
10 |
13 |
| Baileys |
1 |
6 |
3 |
| JεB |
5 |
15 |
9 |
| Jose Cuervo |
(4) |
(5) |
(3) |
| Tanqueray |
1 |
2 |
4 |
| Crown Royal – North America |
5 |
5 |
9 |
| Buchanan’s – International |
(2) |
15 |
5 |
| Windsor – Asia Pacific |
7 |
(17) |
(12) |
| |
|
|
|
| Guinness |
1 |
9 |
6 |
| Ready to drink |
(7) |
(4) |
(5) |
* Reported and organic volume movements are the same for all brands in all regions
** Spirits brands excluding ready to drink.
Focus on the global priority brands drove almost two thirds of total net sales growth. Smirnoff performed strongly across all regions with new campaigns and the launch of Smirnoff Black in a number of markets driving volume growth. Price increases across most markets resulted in net sales growth.
The International region together with Eastern Europe and Russia led the growth in Johnnie Walker. The strong performance of Johnnie Walker Black Label, Johnnie Walker super deluxe labels and price increases in key markets drove price/mix improvement of 7 percentage points.
Captain Morgan sustained its strong performance from the first half. While the key driver of growth is the brand’s performance in North America, the brand is now delivering double-digit net sales growth in each region.
Strong growth in Great Britain, Russia and Latin America drove the growth in Baileys. In Great Britain and Russia Baileys Original Irish Cream performed strongly, while in Latin America Baileys flavours continued to deliver double-digit net sales growth supporting further growth in Baileys Original Irish Cream. Overall results were constrained by lower volume on Baileys flavours in all regions except International as the brand lapped the launch in fiscal 2007.
JεB grew volume across all regions, in many markets supported by the success of the global ‘Start a Party’ campaign. Price increases in key markets resulted in improved price/mix driving net sales growth.
While Jose Cuervo grew net sales in Latin America and Europe, Jose Cuervo’s performance continued to be affected by the growth of the ultra premium tequila segment in North America. Price increases and more premium launches have driven net sales growth in Latin America and Europe.
Tanqueray increased net sales in all regions. North America remained the main contributor to growth, where Tanqueray outperformed the gin category, driven by the continued growth of Tanqueray Rangpur. A price increase on the core brand in North America drove price/mix improvement.
Crown Royal continued to take share in North America and net sales grew benefiting from price increases and successful innovations.
Price increases on Buchanan’s, in line with Diageo’s overall scotch pricing strategy, impacted volume but drove net sales growth.
Windsor's performance reflected the loss of licence in Korea for part of the year which reduced net sales per case while Diageo Korea was operating through a third party distributor from July 2007 to the beginning of March 2008.
Growth in Guinness was fuelled by double digit net sales growth in International and outperformance against the beer categories in Ireland and Great Britain as a result of successful advertising campaigns. Net sales grew ahead of volume growth driven by price increases in key markets.
Crown Royal, Buchanan’s and Windsor were the key local priority brands. In addition Malta Guinness showed strong net sales growth as a result of successful marketing campaigns, a new product launch and the development of the off trade in the key markets of Nigeria and Ghana.
Net sales growth of category brands was driven by the success of our global scotch strategy, namely a focus on net sales growth not volume growth. Price/mix improvement in scotch combined with double-digit growth of beer brands in Africa and growth of reserve and premium brands such as Cîroc, Don Julio and the Classic Malts led to 9 percentage points of price/mix improvement.
Ready to drink remains challenging as expected and net sales were down 5% driven by North America and Europe. Strong performance of Smirnoff ready to drink in International with growth in Nigeria, South Africa, Brazil and Venezuela with the introduction of new flavours and price increases drove 13% net sales growth in the region which partially offset the impact of the segment’s decline in North America and Europe. Diageo’s ready to drink brands performed strongly in Australia prior to the 70% duty increase which was implemented on the ready to drink segment at the end of April 2008. Since the increased duty was introduced, net sales of ready to drink have declined, partially offset by net sales growth in core spirits.
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