DEO

Business Context and Reporting Period

Company: Diageo plc
Reporting Period: Fiscal year ended June 30, 2008
Business Overview: Diageo is the world's leading premium drinks business, operating across spirits, beer, and wine in approximately 180 markets. The company manages eight global priority brands (including Smirnoff, Johnnie Walker, Captain Morgan, Baileys, J e B, José Cuervo, Tanqueray, and Guinness) alongside local priority and category brands. Operations are organized into four business areas: North America, Europe, International, and Asia Pacific.

Key Financial Metrics (Year Ended June 30, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by 7% (£726 million) and Net Sales by 8% (£609 million). Organic net sales growth was 7%, driven by volume growth of 3% and price/mix improvements. Exchange rate movements contributed £112 million to reported net sales.
• Profitability: Operating profit increased by 3% (£67 million). Excluding exceptional items, operating profit grew by 9% (£185 million). The increase was driven by strong performance in North America and International regions.
• Exceptional Items: The year included a £78 million charge for the restructuring of Irish brewing operations. This was partially offset by a £9 million gain on the sale of businesses. In the prior year, a £40 million gain on the disposal of Park Royal property was recorded.
• Debt and Liquidity: Net borrowings increased by £1.6 billion to £6.4 billion, primarily due to share buybacks (£1.0 billion), acquisitions (£575 million), and dividends (£857 million), partially offset by cash generated from operations (£2.3 billion).
• Regional Performance:
  • North America: Organic operating profit grew 10%.
  • Europe: Organic operating profit grew 3%, impacted by the £78 million restructuring charge.
  • International: Strongest performer with 19% organic operating profit growth, driven by Latin America and Africa.
  • Asia Pacific: Organic operating profit declined 12% due to the loss of an import license in Korea and increased overheads for infrastructure investment.

Guidance, Outlook, and Risks

• Management Outlook: Management expects organic operating profit growth for the coming year within a range of 7% to 9%. Combined with expected positive exchange rate impacts and the share buyback program, the company anticipates double-digit reported earnings per share (EPS) growth.
• Dividends: A final dividend of 21.15 pence per share was proposed, representing a 5% increase over the prior year. The total dividend for the year is 34.35 pence.
• Key Risks:
  • Regulatory: Changes in excise duties, advertising restrictions, and labeling requirements in key markets (e.g., Australia's 70% duty increase on ready-to-drink products in April 2008).
  • Legal: Ongoing investigations in Korea regarding regulatory matters and customs litigation in Turkey. The SEC has commenced an informal investigation into matters related to the Korean convictions.
  • Market: Slowing global GDP growth, commodity price inflation (raw materials and energy), and currency fluctuations.
  • Operational: Risks associated with systems change programs and the concentration of aged inventory (maturing whisky) in Scotland.

Important Facts for Investor Verification

• Acquisitions: Verify the integration and performance of the Ketel One Worldwide BV acquisition (completed June 2008 for £473 million) and Rosenblum Cellars (£54 million).
• Share Buybacks: Confirm the impact of the £1.0 billion share repurchase program on diluted EPS and capital structure.
• Legal Proceedings: Monitor the status of the SEC informal investigation regarding Korean regulatory matters and the outcome of Turkish customs litigation.
• Pension Deficit: Review the £408 million deficit in post-employment plans and the agreed funding plan with the UK Diageo Pension Scheme trustees.
• Exchange Rate Sensitivity: Assess the impact of the strengthening Euro and US Dollar on future reported results, as approximately 29% of sales are in US dollars and 19% in Euros.