E-Malt.com News article: UK: Diageo issues statement in respect of year ended 30 June 2005

The world's leading premium drinks company, Diageo, posted on July 7 that the sales trends outlined in the interim results in February continued to impact trading in the second half of the financial year. Volume growth and mix improvement slowed as the result of tougher trading in Europe and a slow down in the ready to drink segment in the US. However, organic operating profit growth for the year ended 30 June 2005 is expected to be in line with the guidance of 6% given at the time of the interim results. Looking forward to the new financial year Diageo believes that organic growth in volume will be similar to that achieved in the year just ended while a renewed focus on achieving price increases together with the benefits of the planned cost efficiency programme will deliver continued improvement in operating margin. Diageo will announce preliminary results for the year ended 30 June 2005 on 1 September 2005.

Diageo makes annual payments to the Thalidomide Trust (£7.2 million in the year ended 30 June 2005) and has made an offer in respect of future payments. For the year ended 30 June 2005 Diageo will make an exceptional operating charge of about £150 million in respect of future payments to the Trust. An exceptional credit may arise from the release of the provisions held in respect of commitments to the Burger King Corporation.

Full year outlook for net sales
Spirits growth was led by the performance of the global priority brands which have continued to grow volume by around 4%. The more difficult trading environment in beer has however led to a slow down in the performance of Diageo’s beer brands. Diageo’s wine brands continue to grow strongly in their key markets of the US and GB.

Cost reduction initiatives
Diageo has announced a number of initiatives which will drive greater cost efficiency across the business. As expected these initiatives have given rise to costs in the year ended 30 June 2005 of approximately £80 million. These have been charged to operating expenses. It is anticipated that restructuring costs amounting to some £70 million will be incurred in the year ending 30 June 2006. The programme is being implemented as planned and is on track to deliver the forecast benefits. These benefits amounted to a £22 million reduction in cost in the year ended 30 June 2005. It is expected that the cost base will be reduced by approximately £50 million in the year ending 30 June 2006.

Seagram synergy
The integration of the acquired Seagram businesses was completed during the year and incremental synergy of £24 million was achieved. There will be no incremental synergy in the next financial year.

Interest
It is estimated that in the year ended 30 June 2005 Diageo’s average debt was approximately £3.7 billion and the closing debt was approximately £3.8 billion. The effective interest rate for the year ended 30 June 2005 is estimated to be approximately 4.1%. With around 50% of Diageo’s debt at floating rates the rise in short term US interest rates is expected to increase the interest charge in the new financial year by about £25 million. Certain financing structures which reduced interest in the year ended 30 June 2005 by approximately £10 million were terminated and will not be replaced. In addition if Burger King Corporation (BKC) is successfully refinanced during the new financial year the BKC subordinated debt held by Diageo will be repaid. In the year ended 30 June 2005 interest earned on this debt amounted to £13 million.

Diageo is the world's leading premium drinks business. With its global vision, and local marketing focus, Diageo brings to consumers an outstanding collection of beverage alcohol brands across the spirits, wine and beer categories including Smirnoff, Guinness, Johnnie Walker, Baileys, J&B, Cuervo, Captain Morgan and Tanqueray, and Beaulieu Vineyard and Sterling Vineyards wines. Diageo trades in some 180 countries around the world and is listed on both the New York Stock Exchange (DEO) and the London Stock Exchange (DGE). For more information about Diageo, its people, brands and performance, visit us at www.diageo.com


10 July, 2005