USA: Diageo Trading Statement
Commenting on this trading statement, Group Chief Executive John McGrath said:
"In the year to June 2000 our Spirits and Wine business has performed strongly. We have achieved a high level of sales growth through volume growth, robust pricing action and mix improvement. This strength continues to be centered around the global priority brands and on our major markets. As anticipated Packaged Food will achieve modest organic growth in the year. Foodservice continued to perform strongly and in Pillsbury North America in the second half, we reduced marketing spend on trade promotions which had delivered volume growth in the first half of the year but not operating profit growth. Our beer business is developing a more efficient cost structure and margins have improved again in the year. In Quick Service Restaurants we have continued to implement a significant restaurant opening program and to drive strong International performance. We have also begun to implement the transformation program which has tested so well during the year.
"Trading performance in the second half of the year was in line with our overall expectations at the time of our interim announcement and we are therefore on track to achieve our targets in terms of operating profit in the year just ended."
Spirits and Wine
This was the first full year of UDV's strategy . Increased focus behind the key brands has delivered turnover growth, expected to be up 9% for the full year on an organic basis. This is the result of strong pricing action and mix improvement particularly on the global priority brands (GPBs). Turnover of the GPBs is expected to be up 10 %. Total reported volume was affected by disposals and by the discontinuation of non-core brands. Volume is expected to be up by 2% on an organic basis, with volume of the global priority brands anticipated to be up between 4% and 5% for the full year. The abolition of European duty free sales has led to a reduction in sales of the GPBs of approximately 700,000 cases in the year, equivalent to nearly a percentage point of volume growth. In the second half, volume of the GPBs was, as expected, down by about 2% but net sales value was up 3% as a result of continued focus on price re-positioning supported by increased marketing. Volume of the local priority brands will be up about 10% in the full year as a result of strong performances by Dimple in Korea, Stolichnaya in the United States, and Smirnoff Ice in the United Kingdom. Wine volume is expected to be down 2% for the full year. Volume improved in the second half, driven in part by the successful re-launch of the Glen Ellen brand in the US and the success of Blossom Hill in the UK.
Investment in marketing has continued to increase strongly, mainly behind the GPBs, and on an organic basis the increase in marketing is expected to be 12% for the full year.
In UDV's major markets of the United States, the United Kingdom and Spain the business has continued to perform strongly with volume expected to be up by 7% and net sales value up 15%. Marketing spend increased over 15% on the GPBs in these markets.
In UDV's key Asian markets, the decision to continue to support the brands during the period after the economic collapse there in 1997 has provided a strong platform for volume and profit growth in Thailand and Taiwan. Volume in both countries was up over 20%. In Latin America the economic difficulties in that region have had an impact on trading performance, however, the local priority brands have continued to increase market share.
As anticipated at the time of the interim announcement, volume and sales in Packaged Food are expected to be slightly down compared with last year. However, operating profit will be flat to slightly up over last year as a result of acquisitions and organic growth in the Foodservice business.
In Pillsbury North America, volume and sales are expected to decline on an organic basis by about 2%. In the Dough categories, consumer takeaway has been in line with last year. Strong performance in the Pizza and Hot Snacks category and in Toaster Pastries has continued in the second half. In the non-Dough categories, the Progresso brand continues to perform very strongly with consumer takeaway up over 10%. In the Mexican meals segment, the Old El Paso brand has grown 2% against a market up 1% due mainly to a new dinner kit introduction, which was successfully launched in January. The reduction in promotional spend in other non-dough categories has, as anticipated, led to lower volume in the second half.
In Foodservice, volume and sales will be up strongly as a result of the impact of acquisitions and organic growth. In International, volume will be up slightly year on year.
Marketing spend in Packaged Food was down in the second half against the prior year but will be up for the full year.
Ice Cream Partners, the joint venture formed in October 1999 with Nestle, is beginning to deliver stronger consumer takeaway and market share improvement.
Total Beer volume is expected to be up 1% with Guinness brand volume up 2%. Volume of the Guinness brand in Ireland is expected to be down 4% for the full year. In Great Britain, the Guinness brand has continued to perform strongly against a declining beer market and volumes will be up 3% for the full year. In Africa, the re-imposition of excise duty in Nigeria slowed volume growth of the Guinness brand in that market to 5% in the second half and therefore volume for the full year in Africa is likely to be up about 7%. Volume of the Guinness brand is likely to be up 2% in Asia Pacific for the full year with strong growth in the second half in Indonesia off set by the decline in beer consumption in Malaysia and Singapore. In the United States, Draught Guinness depletions are expected to be up over 10% for the full year. Shipments are expected to be up 6% in the second half and down 1% for the full year as a result of the program to reduce stock levels in the first half of the year.
Marketing investment as a percentage of sales will be up in the full year. Margin has continued to improve during the year as a result of supply chain efficiencies and a reduction in overheads.
Quick Service Restaurants
System sales for the full year are expected to be up about 6% driven by new restaurant openings. World-wide comparable restaurant sales for the year are expected to be flat. Burger King in the United States has now completed the transition from Ameriserve to new regional distributors. The US transformation programme, which has been developed and tested through the last year, is now being rolled out and over 1100 franchised restaurants have committed to implement these changes to restaurant image and drive-thru.
The International business continues to perform strongly. In Europe 220 new restaurant openings and 2% comparable restaurant sales growth in both Germany and the United Kingdom have driven a 10% increase in system sales. In Latin America the system has also performed well with comps up 4%.
In February 2000 DCA was acquired and in March 2000 changes were announced to the Packaged Food operations based in Minneapolis aimed at reducing cost and refocusing the sales organisation there. Operating cost net exceptional charges of $80 million will arise in respect of integration and restructuring costs. The sale of Grupo Cruzcampo SA to Heineken NV during the second half of the year resulted in an exceptional gain of approximately (pound)80 million. Also in the second half of the year costs of $60 million were incurred in respect of the transition to a new distribution system for Burger King in the United States. This will be partially offset by exceptional income of $28 million, which arises as part of Burger King's transformation programme. Burger King has incentivised franchisees with phased royalty changes for a specified time if they agree to new franchise agreements and to upgrade to the new restaurant image within two years. These items are in addition to the exceptional charges in the interim announcement.
As anticipated at the time of the interim announcement the adverse impact of exchange rate movements on profit before exceptional items and taxation is expected to be approximately (pound)35 million.
Diageo is a multinational branded food and drinks company that operates in more than 200 countries through four businesses - UDV, Pillsbury, Guinness and Burger King. Diageo ADRs, equivalent to four Diageo shares, trade on the New York Stock Exchange under the symbol DEO.
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