UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934

30 July 2015

Commission File Number:  001-10691

DIAGEO plc
(Translation of registrant’s name into English)


Lakeside Drive, Park Royal, London NW10 7HQ
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F .......X.....                                                                Form 40-F ..........

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ..................

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ..................

 

 

Preliminary results, year ended 30 June 2015


Dividend increase 9%. Free cash flow £2 billion.


 
· Reported net sales up 5%, with full consolidation of United Spirits
 
· Free cash flow of £2 billion. Up £0.7 billion
 
· 9% final dividend increase to give recommended full year dividend of 56.4 pence
 
· Organic net sales flat; organic operating margin up 24bps
 
· Shipment volume down 1%; depletion volume is estimated to be up 1%
 
· Basic eps 95.0 pence, up 6%
 
· eps before exceptional items 88.8 pence: due to adverse exchange and associates, offset by underlying improvements
 
· Productivity gains will release a further £500 million of cost to invest in growth and improve margin over a three year period from F17. No exceptional charge will be taken
 
 


Ivan Menezes, Chief Executive, commenting on the year ended 30 June 2015 said:

"Our F15 performance reflects the challenges we have seen on top line growth. However, it does not diminish my confidence in what we can achieve in F16 and even more so beyond that. Diageo has an enviable position, by geography, by brand and by category range, in an attractive consumer market place with strong long term growth drivers. This year we made further changes to build strong, sustained performance including embedding our sell out discipline, improving cash  conversion and strengthening our route to consumer. We have  consistently applied a long term perspective in making these changes, despite the short term challenges we have faced from an external environment where currency volatility continues to impact the emerging market consumer.

’We acquired control of United Spirits in the year giving Diageo unparalleled access to one of the world’s most attractive spirits markets. We have enhanced our position in tequila by acquiring the remaining 50% of Don Julio, a brand that is already growing net sales double digit and for which I see significant potential now we have full control. Our participation strategy is clear by market and category. We are focused on our core and have a more proactive approach to our portfolio. We sold Gleneagles in the year, and since the year end, have sold the shares USL owned in United Breweries and we restructured our South African operations to focus on spirits and monetise investments worth £125 million.

’We are delivering the change which will further strengthen this business and deliver our performance ambition. In F16 we believe stronger volume growth will deliver an improved top line performance. As we achieve our productivity gains from F17 we expect to deliver mid single digit organic top line growth on a sustained basis and operating margin expansion of 100 basis points over 3 years. Our brands, our global footprint and our people give me confidence that Diageo can deliver strong and sustained performance.”
 


Ends

 

RESULTS SUMMARY
For the year ended 30 June 2015
 
Key financial information
 
             
Key performance indicators
   
2015
2014
Organic net sales growth
     
%
-
-
Organic operating margin improvement
     
basis points
24
77
Earnings per share before exceptional items
     
pence
88.8
95.5
Free cash flow
     
£ million
1,963
1,235
Return on average invested capital (ROIC) (i)
     
%
12.3
14.1

(i)  
The group has revised the calculation of ROIC by excluding the net assets and net profit attributable to non-controlling interests.  Before this adjustment, in the year ended 30 June 2014 the ROIC was reported as 13.7%.
 
 
Other financial information
   
2015
Reported
2014
Reported
Organic growth
%
Reported growth
%
Volume
EUm
 
246.2
156.1
(1)
58
Net sales
£ million
 
10,813
10,258
-
5
Marketing spend
£ million
 
1,629
1,620
(1)
1
Operating profit before exceptional items
£ million
 
3,066
3,134
1
(2)
Operating profit (i)
£ million
 
2,797
2,707
 
3
Share of associates and joint ventures profit after tax
£ million
 
175
252
 
(31)
Non-operating items
£ million
 
373
140
 
166
Net finance charges
£ million
 
412
388
 
6
Reported tax rate
%
 
15.9
16.5
 
(4)
Reported tax rate before exceptional items
%
 
18.3
18.2
 
1
Profit attributable to parent company’s shareholders
£ million
 
2,381
2,248
 
6
Basic earnings per share
pence
 
95.0
89.7
 
6
Recommended full year dividend
pence
 
56.4
51.7
 
9

(i)  
Operating profit for the year ended 30 June 2015 includes an exceptional operating charge of £269 million (2014 - £427 million), an analysis of which is provided in the ‘Additional Financial Information’ section.
 
 
Volume
Net sales
Marketing spend
Operating profit(i)
 
Organic growth by region
%
EUm
%
£ million
%
£ million
%
 £ million
 
North America
(3)
(1.4)
(1)
(49)
(4)
(21)
(2)
(37)
 
Europe
-
(0.2)
-
2
2
6
3
20
 
Africa
7
1.8
6
85
4
5
10
29
 
Latin America and Caribbean
(7)
(1.7)
(1)
(11)
6
10
(3)
(7)
 
Asia Pacific
(3)
(0.5)
(2)
(32)
(8)
(25)
7
20
 
Corporate
-
-
3
1
175
7
(2)
(3)
 
Diageo
(1)
(2.0)
-
(4)
(1)
(18)
1
22
 
 
(i)  
Before exceptional items.
 

   
Net
sales
Marketing spend
Operating profit
 
£ million
£ million
£ million
Exchange rate movements (i)
 
(337)
(47)
(161)

(i)  
The exchange rate movement includes the translation of prior year reported results at current year exchange rates.
 
Reported net sales and operating profit were significantly impacted by adverse exchange movements driven by the devaluation of many currencies against the pound, in particular the euro, the Venezuelan bolivar, and the Russian rouble. Using current exchange rates (£1 = $1.55; £1 = €1.41), the exchange rate movements for the year ending 30 June 2016 are estimated to adversely impact both net sales and operating profit by approximately £370 million and £100 million, respectively. This estimation excludes the impact of IAS 21 and IAS 39.  It is estimated that the hyperinflation charge for the year ending 30 June 2016 will be approximately £25 million.
 
 
Net sales
Net sales
Operating
profit
Operating
profit
Acquisitions and disposals (i)
2015
2014
2015
2014
 
£ million
£ million
£ million
£ million
         
Acquisitions
       
USL
921
-
48
(19)
Other
28
-
(5)
(5)
Total
949
-
43
(24)
         
Disposals
       
Jose Cuervo
3
44
-
(9)
Bushmills
50
60
22
28
The Gleneagles Hotel
48
45
4
2
Others
1
6
-
1
Total
102
155
26
22
         
(i)  
Net of acquisition and integration costs.

Acquisitions added £949 million of net sales in the year, principally United Spirits Limited (USL) and Don Julio. Operating profit from acquisitions of £43 million in the year ended 30 June 2015 includes £8 million of acquisition and integration costs, with £5 million of integration costs in respect of USL. The £24 million of operating loss from acquisitions in the year ended 30 June 2014 represents acquisition and integration costs incurred in the year, with £19 million of this in respect of USL. For further details on the impact of acquisitions and disposals see ’Additional Information For Shareholders / Explanatory Notes / Acquisitions and disposals’ section.
 
Exceptional items
Results for the year ended 30 June 2015 include £155 million of income in respect of exceptional operating and non-operating items after tax. This includes an exceptional operating charge of £269 million for restructuring charges, a settlement payment in respect of the Korean customs dispute and, an impairment charge in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company in Vietnam. Tax relief on exceptional operating items was £51 million, giving a net exceptional operating charge of £218 million. Exceptional non-operating items comprised net income of £373 million primarily arising on the gain on the sale of Bushmills and Gleneagles Hotel and step up gains in respect of USL and Don Julio. For further details of exceptional items see Notes 3 (exceptional items). 

Notes to the business and financial review


Unless otherwise stated:
·  
commentary refers to organic movements
·  
volume is in millions of equivalent units (EUm)
·  
net sales are sales after deducting excise duties
·  
percentage movements are organic movements
·  
share refers to value share
·  
GTME refers to Global Travel Asia and Middle East

See ‘Additional Information For Shareholders / Explanatory Notes’ explanation of non-GAAP measures.


FINANCIAL REVIEW
For the year ended 30 June 2015
 
Net sales growth (£ million)
The full consolidation of USL, partly offset by adverse exchange delivered reported net sales growth of 5%.  Organic net sales flat

Net sales
£ million
2014 Reported
10,258
Acquisitions and disposals (i)
896
Exchange
(337)
Volume
(127)
Price/mix
123
2015 Reported
10,813
 
(i)  
Impact of acquisitions and disposals on F14 and F15. See ‘Additional Infromation For Shareholders / Explanatory Notes / Acquisitions and disposals’ for further details.
 
Reported net sales were up 5%, largely driven by the full consolidation of USL, which contributed £921 million of net sales. Currency weakness, other than the US dollar, had an adverse impact on net sales. Organic volume decline was largely driven by lower shipments in the United States, reduction in inventory levels in South East Asia and West LAC, and the impact of pricing in Venezuela and Brazil. While these price increases contributed to positive price, the main driver of organic price/mix was positive mix, led by growth of reserve and Crown Royal.


Change in operating margin (%)
Full consolidation of USL rebased operating margin by c200bps. Organic margin improved 24bps.
 
Operating margin
ppt
2014 Reported
30.55
Acquisitions and disposals
(1.83)
Exchange
(0.61)
Gross margin
(0.64)
Marketing spend
0.36
Other operating expenses
0.52
2015 Reported
28.35

(i)  
Exchange impacts in respect of profit on intergroup sales of products and the intergroup recharges have been re-allocated to the respective profit and loss lines for the purposes of calculating margin impacts only.

 
The full consolidation of USL lowered reported operating margin for the group. The organic improvement in margin was largely as a result of cost savings and efficiencies, which more than offset the impact of cost inflation and negative market mix.

 
Earnings per share before exceptional items (pence)
 
eps before exceptionals impacted by adverse exchange and decrease in associate profit
 

eps before exceptionals
pence
2014 Reported
95.5
Operating profit excluding FX
1.6
Exchange on operating profit
(6.4)
Associates and joint ventures
(3.1)
Finance charges
1.4
Tax
1.5
Non-controlling interests
(1.3)
Other including USL (i)
(0.4)
2015 Reported
88.8
 
(i)  
The organic impact of fully consolidating USL results is included in other.  The movements for operating profit, finance charges, tax and non-controlling interests, all exclude USL.

eps fell 6.7 pence largely as a result of adverse exchange movements and lower income from associates and joint ventures. Organic growth in operating profit had a positive impact on eps. Net finance charges excluding acquired debt in USL reduced due to lower interest rates which benefitted eps.
 
Basic eps was 95.0 pence (year ended 30 June 2014 - 89.7 pence), with exceptional items increasing eps by 6.2 pence (year ended 30 June 2014 - 5.8 pence unfavourable).
 
Movement in net finance charges
 
£ million
2014 Reported
 
388
Net interest charge decrease
 
(48)
Consolidation of net borrowings acquired in USL
 
60
Movement in other finance charges
 
12
2015 Reported
 
412
     
 
2015
2014
Average monthly net borrowings (£ million)
10,459
9,174
Effective interest rate (i)
3.5%
3.8%
 
(i)  
For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps.

The increase in average net borrowings was principally the result of the acquisition of the controlling interest in USL, completed on 2 July 2014, and the consolidation of USL’s net borrowings. The effective interest rate decreased in the year ended 30 June 2015 as the negative impact of consolidating USL’s net borrowings was more than offset by lower interest rates on new debt issued and an increase in the proportion of floating rate debt through the use of swaps.
 
 
Free cash flow (£ million)
 
Positive working capital movement drove improvement in free cash flow

 
Free cash flow
£ million
2014 Reported
1,235
USL FCF (i)
(57)
Operating profit excluding exchange (ii)
76
Exchange
(156)
Working capital movement
734
Net capex movement
(7)
Interest and tax
79
Other operating items (iii)
59
2015 Reported
1,963
 
(i)  
USL FCF is shown separately and is excluded from the other line items shown above.
(ii)  
Operating profit adjusted for non-cash items including depreciation and amortisation.
(iii)  
Other operating items includes pension related payments, dividends received from associates and joint ventures, movements in loans receivable and other investments, and payments in respect of the settlement of Thalidomide.

The increase in free cash flow was primarily driven by the positive working capital movement.  This was largely due to lower debtors as a result of phasing of shipments, with days sales outstanding 6 days lower than last year.  This  compares with an increase in debtors in the prior year.

Return on average invested capital (%) (i)
 
 
The investment in USL has rebased ROIC. Adverse exchange and lower income from associates reduced ROIC in the year
 
 
ppt
2014 Reported (ii)
14.1
USL
(1.1)
Operating profit after tax
0.2
Exchange
(0.4)
Associates and joint ventures including FX
(0.3)
Other
(0.2)
2015 Reported (iii)
12.3
 
(i)  
ROIC calculation excludes exceptional items.
(ii)  
The group has revised the calculation of ROIC by excluding the net assets and net profit attributable to non-controlling interests. Before this adjustment, in the year ended 30 June 2014 the ROIC was reported as 13.7%.
(iii)  
For the years ended 30 June 2014 and 30 June 2015 average net assets were adjusted for the inclusion of USL as though it was owned throughout the year as it became an associate on 4 July 2013 and a subsidiary on 2 July 2014.

The additional investment in USL and full consolidation of its results reduced ROIC by 1.1pps. Exchange movements reduced operating profit, but the impact on ROIC was partially offset by exchange reducing invested capital.  Lower income from associates reduced ROIC in the year.

BUSINESS REVIEW
For the year ended 30 June 2015
 
North America
 
In North America, US Spirits has delivered improved depletion performance through the year, with the value of distributor depletions up 3% in the first half, and up 4% for the full year. Shipments were broadly in line with depletions and therefore net sales were down 2% year on year as last year shipments were higher than depletions mainly driven by innovation launches. Beer net sales were in line with last year, ready to drink and wine were down slightly and in Canada net sales grew 2%. Volume growth of the reserve portfolio was the main driver of the 1.5pps of increased price/mix as price premiums against the competition, for brands such as Smirnoff and Captain Morgan, were narrowed. This led to lower achieved price year on year but did drive improved share positions. Our innovation agenda continued to lead the industry in North America and this year was a key driver of our net sales. Advertising spend was down as we drove procurement savings on media and agency fees in marketing while maintaining our share of voice. Adjusting for these savings, marketing as a percentage of net sales was roughly flat. Overheads were flat but operating margin declined 47 basis points driven by soft volume and lower net sales of spirits in the United States.
 
 Key financials £ million:
 
2014
Reported
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 Net sales
3,444
97
(37)
(49)
3,455
-
 Marketing spend
540
16
7
(21)
542
-
 Operating profit before exceptional items
1,460
27
(2)
(37)
1,448
(1)
 Exceptional items
(35)
     
(28)
 
 Operating profit
1,425
     
1,420
-
             
Markets:
                 
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 North America
(3)
(1)
-
           
                   
 US Spirits and Wines
(3)
(2)
1
           
 DGUSA
(3)
(1)
3
           
 Canada
3
2
(4)
           
                   
 Spirits (ii)
(3)
(1)
1
           
 Beer
-
(1)
1
           
 Wine
(2)
(2)
2
           
 Ready to drink
(3)
(1)
(14)
           
Global giants and local stars (ii):
           
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Smirnoff
(2)
(3)
(1)
           
 Captain Morgan
(10)
(12)
(10)
           
 Johnnie Walker
(8)
(15)
(12)
           
 Guinness
2
2
4
           
 Baileys
(5)
(5)
(3)
           
 Tanqueray
(2)
(2)
1
           
 Crown Royal
13
12
15
           
 Cîroc
4
4
8
           
 Ketel One vodka
(2)
(2)
1
           
 Bulleit
32
36
41
           
 Don Julio
5
9
13
           
 Buchanan’s
17
18
23
           
 
(i)  
Organic equals reported movement for volume except for North America (4)%, US Spirits and Wines (5)%, spirits (3)% and ready to drink (25)% reflecting the termination of the transitional arrangements following the disposal of Jose Cuervo and Bushmills and the acquisition of the outstanding stake in Don Julio.
(ii)  
Spirits brands excluding ready to drink.

·  
Net sales in US Spirits and Wines declined 2% while the value of distributor depletions was up 4%. Diageo’s North American whiskey performance was very strong with the portfolio outpacing category growth and net sales up 13%. Crown Royal was the primary driver as Crown Royal Regal Apple, the top selling innovation according to Nielsen, gained share as it recruited new consumers to the brand, driving double digit top line growth for the trademark. Bulleit, the fastest growing unflavoured North American whiskey, drove one third of that category’s growth with net sales up 35%. Both Bulleit Bourbon and Bulleit Rye led their respective segments through increased distribution, consumer experience marketing, and the engagement of key trade influencers. In scotch, Buchanan’s was the fastest growing brand in the United States, with net sales up over 20%. Buchanan’s resonates particularly well with the growing Hispanic population, and this year added sponsorship of the Latin Grammy Awards to its full suite of marketing activities. Johnnie Walker did not perform well, partly as a result of lapping the strong launch of Platinum and Gold Label Reserve last year but also due to a reduction in promotional activities for Red, Black, and Blue Label. Cîroc net sales growth of 4% was driven by the notable success of Cîroc Pineapple, the latest addition to the flavour range. Despite an improved performance trajectory, net sales of Smirnoff declined 4% as the flavour portfolio, confections in particular, continued to be a drag on performance. The launch of Captain Morgan White Flavours partially offset the effect of lapping the prior year’s launch of Captain Morgan White which, together with weakness on Original Spiced, drove double digit net sales decline for the brand. Net sales of tequila were up double digit, driven by 10% growth of Don Julio, which was supported by marketing campaigns focused on the heritage and craftsmanship of the brand, and the launch of new DeLeón variants, which broadened the price range and contributed to increased distribution of the brand.
 
·  
Guinness net sales were up 3% on the strong performance of Blonde American Lager. Guinness Draught was weak given competition in the craft beer segment, particularly in the on trade. Net sales of ready to drink declined slightly, bringing net sales of DGUSA down 1%. Stronger execution and competitive pricing on Smirnoff Ice stabilised the core and flavoured variants but the brand’s growth still lags the category.
 
·  
In Canada the new distribution system helped drive net sales growth of 2%. Spirits growth of 3% was driven by Johnnie Walker and vodka. Ready to drink net sales growth was principally due to Smirnoff variants, with beer down and wine down double digit. Tactical price reductions resulted in share improvement, with a marginally negative impact on price/mix.
 
·  
Marketing investment in North America reduced 4% driven by US Spirits and Wines, which delivered significant savings on media and agency fees and procurement efficiencies. Advertising remained focused on Cîroc, Crown Royal, Smirnoff, Captain Morgan, and Johnnie Walker, and increased on Don Julio and Bulleit to support new programmes. Marketing investment in DGUSA supported the launch of Guinnes Blonde American Lager and in Canada, a 1% increase went behind innovation launches.
Europe
 
Europe’s performance reflected an improved momentum in Western Europe, growth in Turkey, and a challenging environment in Russia. In Western Europe net sales were up 1%, as performance improved in more than half of our markets. Reserve brands delivered another strong performance with net sales up 20% and growing double digit even in the more challenging economies in Southern Europe. Innovation remained a key performance driver with net sales up 30%, driven by successes such as ‘The Brewers Project’ which helped put Guinness back in growth in both Great Britain and Ireland. We continued to invest in our route to consumer, increasing the number of sales people by 30% and the number of outlets we cover by 60%. In Russia, which continued to be impacted by economic volatility, consumers traded down, and customers reduced inventory levels, while Diageo gained share in scotch and rum. Turkey net sales were up 3% driving premiumisation in the raki category and gained share in scotch and vodka. Total operating margin for the region improved 75bps largely driven by gross margin improvement in Turkey, and overhead cost reduction in Western Europe, which was partially reinvested in marketing spend and route to consumer.
 
 
 Key financials £ million:
   
2014
Reported
(restated)
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 
 Net sales
2,814
(186)
(13)
2
2,617
(7)
 
 Marketing spend
413
(30)
(1)
6
388
(6)
 
 Operating profit before exceptional items
853
(67)
(2)
20
804
(6)
 
 Exceptional items
(20)
     
(20)
 
 
 Operating profit
833
     
784
(6)
               
Markets:
                 
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Europe
-
-
(7)
           
                   
 Western Europe
1
1
(5)
           
 Russia and Eastern
                 
 Europe
(8)
(9)
(26)
           
 Turkey
-
3
(5)
           
                   
 Spirits (ii)
(1)
1
(8)
           
 Beer
1
1
(4)
           
 Wine
-
(1)
(4)
           
 Ready to drink
(6)
(2)
(5)
           
                   
Global giants and local stars (ii):
           
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Guinness
1
2
(2)
           
 Smirnoff
(2)
(4)
(7)
           
 Johnnie Walker
(5)
(7)
(15)
           
 Baileys
(3)
(4)
(10)
           
 Captain Morgan
9
10
1
           
 Yenì Raki
(4)
4
(6)
           
 JεB
(1)
(3)
(10)
           
 
(i)     Organic equals reported movement for volume.
(ii)    Spirits brands excluding ready to drink.

·  
In Western Europe net sales were up 1%:
 
·  
In Great Britain net sales were up 3%, with spirits, beer, and ready to drink all in growth. Reserve net sales were up 43% driven by Cîroc and the successful launch of Haig Club. Captain Morgan net sales were up 15%, with investment focused on increased activation in outlets and Smirnoff was back in growth with net sales up 1%, supported by the new ‘We’re Open’ campaign. Beer net sales were up 2% driven by innovation on Guinness. Ready to drink net sales were up 7% supported by strong growth in pre-mix. The only weakness was in Baileys where net sales were down 2%, however Baileys Original was in growth.
 
·  
In Ireland net sales were down 1%, or flat after accounting for the transfer of wine sales to Diageo Wines Europe. Guinness sustained its positive momentum with net sales up 2%, supported by successful innovations launched through ‘The Brewers Project at St James’s Gate’. Net sales in spirits were down 2% as the category continued to be affected by last year’s duty increase.
 
·  
In Southern Europe net sales were down 1%. Net sales in Iberia were flat, after accounting for a transfer of sales of one customer to Africa Regional Markets, but showing positive momentum with growth from Tanqueray and Gordon’s in a vibrant gin category and declines in JεB and Cacique.  Double digit growth of reserve was the main driver behind the 1% net sales growth in Italy, where Zacapa was up 10% and Cîroc more than trebled net sales. In Greece, performance was impacted by the deterioration of economic environment in the last quarter, which resulted in a 4% net sales decline.
 
·  
Net sales in Germany and Austria declined 2%. In Germany net sales were up 5%. Underlying performance was strong with net sales of Baileys, Captain Morgan, and Johnnie Walker Red Label all up double digit. In Austria, net sales were down 53% against the buy in ahead of the excise duty increase in January 2014.
 
·  
Performance in Benelux continued to be impacted by the decision to realign prices in the first half on premium core brands which resulted in a net sales decline of 10%.
 
·  
In a challenging trading environment in France net sales increased 2% largely driven by growth in scotch, with Scotch malts up 6%, and the strong performance of Captain Morgan which, in its third year, more than doubled net sales.
 
·  
Net sales in Diageo Wines Europe were up 3% largely driven by the transfer of wine net sales from Diageo Ireland and the strong performance of [yellow tail].
 
·  
Performance in Russia and Eastern Europe continued to be impacted by the events in the region. In Russia, net sales declined 14%, driven by both destocking amongst distributors and consumers trading down. This impacted Johnnie Walker, however Diageo extended its leadership in whiskey and rum, and gained share with brands such as White Horse, Black & White, and Captain Morgan. In Poland, net sales of Johnnie Walker Red Label declined 15% and the brand lost share, as some competitors did not follow Diageo price increases to cover last year’s excise duty increase.
 
·  
In Turkey net sales grew 3% despite an excise duty increase in January and the earlier start to Ramadan.  Net sales in raki were up 5% with Yenì Raki and the super premium variant Tekirdağ Raki premiumising the category. Good underlying performance of international spirits resulted in share gains for Johnnie Walker, Smirnoff, and Baileys.
 
·  
Marketing investment in Europe increased 2% largely driven by Western Europe where spend was up 3%. The increased investment was focused on the biggest growth opportunities such as reserve and innovation to support the launches of Haig Club and the Guinness Brewers project.

Africa
 
Good performances in both beer and spirits led to net sales up 6% in Africa. Investments in route to consumer together with innovation drove an 8% increase in beer and led to double digit growth in spirits. The mainstream beer market in Nigeria remained challenged as consumers moved towards more value products, impacting the performance of Guinness and Harp. However the national rollout of Orijin and renovation of Satzenbrau drove an increase in beer net sales of 9%. Investment in Guinness marketing has stabilised volume share in the brand. Good progress in route to consumer led to strong net sales growth in Ghana, and in Cameroon, strong marketing campaigns delivered net sales and share gains in Guinness. In South Africa, spirits growth was underpinned by the continued strong performances of Smirnoff 1818, which is now a two million case brand, and Johnnie Walker, while overall growth was impacted by a decline in ready to drink. Reserve brands grew 26% with double digit increases in South Africa, East Africa, and Nigeria. Increased sales of mainstream brands, which have lower costs per case, together with procurement and supply efficiencies were partially offset by an increase in marketing spend and route to consumer investments leading to organic operating margin improvement of 75 basis points.
 
 Key financials £ million:
 
2014
Reported
(restated)
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 Net sales
1,430
(100)
-
85
1,415
(1)
 Marketing spend
152
(10)
-
5
147
(3)
 Operating profit before exceptional items
340
(52)
1
29
318
(6)
 Exceptional items
(23)
     
(7)
 
 Operating profit
317
     
311
(2)
             
Markets:
                 
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Africa
7
6
(1)
           
                   
 Nigeria
13
6
(3)
           
 East Africa
7
9
6
           
 Africa Regional
                 
 Markets
14
15
1
           
 South Africa
(2)
(7)
(12)
           
                   
 Spirits (ii)
17
13
7
           
 Beer
4
8
(1)
           
 Ready to drink
(34)
(28)
(33)
           
                   
Global giants and local stars (ii):
           
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Guinness
(5)
(7)
(15)
           
 Johnnie Walker
3
7
2
           
 Smirnoff
22
22
16
           
 Tusker
(6)
3
1
           
 Malta
(8)
(5)
(17)
           
 Senator
(11)
(16)
(20)
           
 Harp
(40)
(46)
(50)
           
 
(i)  
Organic equals reported movement for volume.
(ii)  
Spirits brands excluding ready to drink.

·  
Nigeria delivered double digit volume growth driven primarily by the national rollout of Orijin, while net sales grew 6%. The weak consumer environment led to a move to value lager which resulted in a strong performance of Satzenbrau and a weak performance of Harp.  Similarly net sales of Guinness declined although the brand’s performance improved in the second half and volume share stabilised. Spirits net sales were up 19% as inventory reductions on Johnnie Walker and Baileys were offset by the strong performance of local mainstream spirits. 
   
·  
In East Africa, where net sales grew 9%, Guinness volume and net sales grew strong double digits supported by the ‘Made of More’ campaign. Innovation in value beer, in particular, Balozi lager in Kenya, a no added sugar offering, and in Tanzania Kibo Gold, positioned to capture consumers trading down, offset a decline in Senator due to excise duty changes in Kenya in the first half last year. In spirits, growth was led by mainstream spirits brands and good performances from Johnnie Walker and Smirnoff. Success in mainstream spirits was driven by Kane Extra and Liberty in Kenya, which benefitted from improvements in route to consumer, including the introduction of motorcycles to increase sales coverage of mainstream outlets. Johnnie Walker net sales grew 60% driven by recruitment activities, while the launch of Smirnoff Ice Double Black and Guarana also contributed to East Africa’s growth.
 
·  
In Africa Regional Markets, net sales grew strongly, up 15%. In Ghana, net sales grew 32%. Investment in route to consumer, together with price increases, led to 28% net sales growth of beer, and spirits grew strongly driven by the growth of Johnnie Walker and the introduction of Orijin Bitters. In Cameroon, net sales grew 10% driven by growth of Guinness, which benefitted from increased awareness through the ‘Made of Black’ campaign, together with outperformance of Harp and growth of Johnnie Walker and Baileys. In Angola, spirits net sales doubled following route to consumer investments and the appointment of a new distributor. This led to strong performances from Johnnie Walker, White Horse, and Gordon’s gin. While the performance of Meta beer in Ethiopia was impacted by increased competitive pricing, this was mostly offset by strong net sales of Malta and the introduction of Zemen, a lower-price beer innovation, along with a good performance of spirits.
 
·  
Net sales in South Africa were down 7% driven by a decline in Smirnoff Ice Double Black and Guarana, which lapped strong replenishment sales and high inventories in the last financial year. Spirits net sales increased 8% driven by Smirnoff 1818, with net sales up 27% based on competitive pricing and following a packaging upgrade. Net sales of Johnnie Walker increased 10% with marketing focused on the brand’s quality credentials. Its contribution to total scotch performance was partially offset by a weaker performance of JεB and Bell’s. Reserve brands continued to benefit from investments in route to consumer.
 
·  
Marketing investment in Africa increased 4%. In Nigeria spend on beer was refocused from Harp to support the growth of Orijin and value beers, while in East Africa, the decline in Senator volume also led to a reduction in spend.  Spend increased behind vodka, notably Smirnoff 1818 in South Africa in support of pack innovations and promotional activity, and investment behind Johnnie Walker grew in South Africa and East Africa. Ready to drink investment increased as Smirnoff Ice Double Black & Guarana launched in East Africa and Nigeria.
 
 
Latin America and Caribbean
 
Good performances in the domestic markets in LAC were offset by a significant net sales decline in export channels due to currency volatility. The levels of stock held by these customers has reduced, which together with lower depletions, impacted growth in the region by 5 percentage points. Net sales in domestic markets increased 5% as we expanded our leading positions in scotch and broadened our business into other categories. In Brazil, performance has been affected by a weaker economy and a tougher competitive environment, but we have invested in route to consumer and recruited new consumers into our portfolio through innovation. In Venezuela, there was good growth in local spirits and scotch. Performance in Colombia benefitted from investments in route to consumer and innovation, while our strength in scotch drove good net sales growth in Mexico. In Peru and Jamaica, we delivered good growth from our investments in route to consumer and, while net sales were down in Argentina, we moved quickly to offset import levies with local production driving share gains. While significant cost efficiencies were achieved, especially in Brazil, negative market mix and increased marketing investment led to a decrease of 41 basis points in organic operating margin.
 
 Key financials £ million:
 
2014
Reported
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 Net sales
1,144
(123)
23
(11)
1,033
(10)
 Marketing spend
203
(22)
3
10
194
(4)
 Operating profit before exceptional items
328
(60)
2
(7)
263
(20)
 Exceptional items
(14)
     
(5)
 
 Operating profit
314
     
258
(18)
             
Markets:
                 
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Latin America and
                 
 Caribbean
(7)
(1)
(10)
           
                   
 PUB
(8)
(2)
(12)
           
 Venezuela
(38)
41
(60)
           
 Colombia
10
10
(2)
           
 Mexico
14
13
19
           
 West LAC
(5)
(9)
(12)
           
                   
 Spirits (ii)
(8)
(3)
(12)
           
 Beer
5
17
11
           
 Wine
1
17
(1)
           
 Ready to drink
(7)
9
(6)
           
             
Global giants and local stars (ii):
           
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Johnnie Walker
(6)
(5)
(11)
           
 Smirnoff
(12)
5
(7)
           
 Baileys
(4)
8
-
           
 Buchanan’s
(17)
(12)
(24)
           
 Old Parr
(9)
(10)
(22)
           
 Ypióca
(5)
(3)
(14)
           
 Black & White
17
27
6
           
 
(i)  
Organic equals reported movement for volume.
(ii)  
Spirits brands excluding ready to drink.
 
·  
Net sales in Paraguay, Uruguay, and Brazil (PUB) declined 2% as currency weakness and a slower Brazilian economy impacted consumer spending. In Brazil, volume declined mainly as a result of changes in the route to consumer and the harmonisation of interstate pricing, which led to a reduction in inventories held by distributors. In PUB, price increases and a reduction in commercial discounts led to 6pps of positive price/mix. Scotch net sales declined 2% driven by Johnnie Walker, which was down 9% as intense competitor promotional activity amplified the price premium of Johnnie Walker Red Label. In premium scotch, Old Parr and Johnnie Walker Double Black had strong net sales growth and share gains, and in standard scotch, White Horse grew net sales supported by a new media campaign. Smirnoff strengthened its leadership position in vodka, growing net sales 6% driven by price increases and the launch of Smirnoff Peach. Net sales of Ypióca were affected by the transfer from net sales to overheads of tax credits from local production incentives. On a like for like basis, net sales of Ypióca increased high single digit driven by price increases and continued strong performance in the North East.
 
·  
In Venezuela, while volume declined, net sales increased 41% to £32 million. Access to currency allowed for the importation of some scotch leading to strong comparative performances of Johnnie Walker, Buchanan’s, and Ye Monks. Increased focus on developing local spirits led to strong performances of Cacique, which doubled net sales, despite glass supply constraints, and Gordon’s vodka net sales increased 185%.
 
·  
In Colombia, investments in the route to consumer increased share across key categories and drove 10% net sales growth. The launch of Old Parr Tribute and the introduction of Buchanan’s Special Reserve, together with double digit growth of Johnnie Walker, led to an 11% increase in the net sales of scotch. Innovations contributed to a 22% increase in Baileys net sales.
 
·  
In Mexico, the breadth of Diageo’s scotch portfolio was the main driver of a 13% increase in net sales. Selective price increases along with strong trade executions delivered growth across all price segments of scotch other than value. Johnnie Walker net sales increased 15% with growth across all variants and a particularly strong contribution from Johnnie Walker Red Label. Diageo gained share in the fast-growing but competitive standard scotch segment with the introduction of Black & White, which increased net sales over 80%. There was a good contribution to net sales growth from Smirnoff, since Diageo took direct control over marketing and distribution of the brand in December 2014.
 
·  
In West LAC, net sales were down 9% driven by inventory reductions in the export channels where net sales declined 51%. This impacted the performance of Johnnie Walker, Old Parr, and Buchanan’s. In domestic markets, strong performances in Peru and Jamaica led to a 3% increase in net sales. In Peru, net sales increased 26% with scotch driving growth together with Baileys, while growth in Red Stripe, pack renovations on Guinness and the strong consumer appeal of Dragon Stout helped deliver 15% growth in net sales in Jamaica. Price realignments in Chile and Caribbean & Central America led to some negative price/mix but delivered share gains in key categories. In Argentina, restrictions on imports affected overall performance but a shift to locally bottled spirits including VAT 69, White Horse, and Smirnoff drove share gains.
 
·  
An increase in marketing investment of 6% supported broader participation within spirits. Spend on scotch was focused on increasing brand equity across price points in Mexico and on supporting the launch of Old Parr Tribute in Colombia. In Jamaica, investment also increased to support the growth of beer and there was growth in spend on Smirnoff to maintain its leadership position in Brazil and in Mexico as Diageo regained distribution of the brand.
 
Asia Pacific
 
Asia Pacific performance reflects inventory reductions in South East Asia, and disruptions in Indonesia due to new restrictions on the sale of beer and ready to drink in some channels. All other markets delivered growth, including China led by Chinese white spirits. Reserve sales were up 30%, led by Scotch malts, with particularly strong performance from The Singleton. Innovation responding to changing trends played an important role, with the launch of Haig Club, W ICE by Windsor in Korea, Guinness Zero in Indonesia, and new ready to drink offerings. We reduced marketing investment, largely in China and South East Asia, where the consumer environment was challenged. Performance, primarily the reduction in stock levels, in South East Asia resulted in a significant operating loss for that market. Our Chinese white spirits business regained profitability after a loss last year. This return to profitability, along with cost savings, resulted in an overall margin improvement for Asia Pacific of two percentage points. The full consolidation of USL added £921m of net sales and £53m of operating profit to reported performance for the region.
 
 Key financials £ million:
 
2014
Reported
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 Net sales
1,347
(22)
920
(32)
2,213
64
 Marketing spend
305
(1)
65
(25)
344
13
 Operating profit before exceptional items
283
(13)
66
20
356
26
 Exceptional items
(276)
     
(193)
 
 Operating profit
7
     
163
2,229
             
Markets:
                 
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Asia Pacific
(3)
(2)
64
           
                   
 South East Asia
(24)
(28)
(28)
           
 Greater China
3
15
17
           
 India
5
3
1,732
           
 Global Travel Asia &
                 
 Middle East
5
4
3
           
 Australia
1
2
(5)
           
 North Asia
1
1
(1)
           
                   
 Spirits (ii)
(3)
(3)
83
           
 Beer
(13)
(12)
(16)
           
 Ready to drink
(2)
1
(5)
           
                   
Global giants and local stars (ii):
           
 
Organic
Organic
Reported
           
 
volume
net sales
net sales
           
 
movement(i)
movement
movement
           
 
%
%
%
           
 Johnnie Walker
(10)
(14)
(14)
           
 Smirnoff
(3)
(7)
(9)
           
 Guinness
(13)
(12)
(16)
           
 Captain Morgan
-
11
8
           
 Baileys
(4)
(13)
(16)
           
 Windsor
(10)
(10)
(8)
           
 Bundaberg
(5)
(7)
(13)
           
 Shui Jing Fang
275
239
245
           
 
(i)  
Organic equals reported movement for volume except for Asia Pacific 622%, India 6347%, and spirits 710%, reflecting the full consolidation of USL.
(ii)  
Spirits brands excluding ready to drink.
 
·  
In South East Asia, net sales declined 28% given an inventory level reduction in specific wholesale channels, with Johnnie Walker Red and Black Label most impacted. Performance in these channels was also impacted by transferring sales from some Indian travel retail customers to Global Travel Asia. New regulations in Indonesia caused major disruptions, and Guinness net sales declined 30%. In Thailand, price repositioning on Johnnie Walker Red Label and Smirnoff led to negative price/mix, however, Johnnie Walker Red Label volume was up double digit in the second half, while Smirnoff gained share.
 
·  
In Greater China, net sales were up 15%. Taiwan net sales increased 6%, driven by continued success of The Singleton, which was up significantly and has become the largest malt brand in Taiwan. Mainland China was up 26% including an 11pps benefit from an additional quarter of Shuijingfang to align financial year end timing. Shuijingfang grew significantly through innovation, strengthened route to consumer, and a soft prior year comparable. Shuijingfang also generated profit and drove margin improvement for Greater China, due to a significant reduction in the underlying business loss and benefitting from provision releases. While scotch in mainland China was down 17%, due to increased competition for on trade contracts and a reduction in wholesaler inventory levels, The Singleton and Haig Club drove growth and share gains.
 
·  
Despite shipment disruptions due to new food safety labelling requirements, Diageo India volume was up 5% and net sales up 3%, and all key priority brands grew depletions. Johnnie Walker and VAT 69 campaigns, and a Black & White packaging relaunch, drove continued premiumisation. The Smirnoff Black launch helped increase Smirnoff share by 5pps over the past 3 months to 56% of vodka. The integration of Diageo and USL completed, and from June, USL started selling Diageo brands.
 
·  
Global Travel Asia and Middle East net sales were up 4% including 6pps of benefit from transferring sales from some Indian travel retail customers from South East Asia. Middle East performance slowed in the second half due to geopolitical tensions and increased pricing pressure on scotch, with second half sales down 16%. Across GTME, Diageo brands gained share particularly in whisky, led by Johnnie Walker in Global Travel Asia, where premium and above variants drove the brand’s net sales growth.
 
·  
Net sales in Australia improved 2%, reversing a first half decline. Spirits were up 2%, driven by super premium scotch, spiced rum, and North American whiskey. Captain Morgan net sales grew nearly 50% and it is now the second largest rum brand behind Bundaberg. While pricing pressure impacted Bundaberg and Smirnoff, depletions improved in the last quarter. Ready to drink growth continued in the second half driven by Captain Morgan variants and pack format innovations from several brands.
 
·  
North Asia net sales were up 1% with Japan up 10% and Korea down 2%, as second half performance slowed following an increase in import duties after a Customs settlement in January. In Korea, whisky contraction decelerated, and the launch of lower ABV offering W ICE by Windsor stabilised Windsor share in the fourth quarter. While Windsor was down, whisky sales in Korea benefitted from strong growth of Johnnie Walker Blue and Black Label. Guinness was up 41%, driven by a campaign and price promotion. In Japan, performance improved due to scotch growth, with depletions up high single digit, and increased distribution and new flavours of Smirnoff Ice.
 
·  
Marketing investment decreased 8%, due to Johnnie Walker reductions, particularly in Black Label, in China and South East Asia. In China, investment declined in the competitive on trade and was reinvested in testing new at home and with meal off trade campaigns. In Thailand and the Philippines, Johnnie Walker investment focused on recruiting consumers and maintaining Gold and Blue Label sponsorships. Many markets also supported Haig Club’s launch.
Corporate

 Key financials £ million:
 
2014
Reported
FX
Acquisitions
and
disposals
Organic movement
2015
Reported
Reported movement
%
 
 
 Net sales
79
(3)
3
1
80
1
 Marketing spend
7
-
-
7
14
100
 Operating profit before exceptional items
(130)
4
6
(3)
(123)
5
 Exceptional items
(12)
     
(10)
 
 Operating profit
(142)
     
(133)
6
 
In the year ended 30 June 2015 reported net sales for corporate were £80 million (2014 – £79 million). Marketing spend up £7 million to £14 million driven by higher spend on global campaigns for Smirnoff and Guinness. Despite increased marketing spend, operating charges reduced to £123 million (2014 - £130 million). This is largely due to cost savings and due to exchange, which reduced net operating charges by £4 million. For the reconciliation of reported to organic results, see ‘Additional Infromation For Shareholders / Explanatory Notes’.

 
 
CATEGORY AND BRAND REVIEW
For the year ended 30 June 2015
 

Key categories:
 
Organic
Organic net
Reported net
 
 
volume
sales
sales
 
 
movement(i)
movement
movement
 
 
%
%
%
 
Spirits (ii)
(2)
(1)
10
 
  Scotch
(4)
(5)
(9)
 
  Vodka
-
1
1
 
  North American whiskey
10
12
15
 
  Rum
(3)
(3)
(6)
 
  Liqueurs
(1)
(4)
(8)
 
  Gin
4
5
3
 
  Tequila
10
14
38
 
Beer
3
4
(2)
 
Ready to drink
(11)
(4)
(13)
 
Wine
(1)
(1)
(1)
 
Total
(1)
-
5
 
 
(i)  
Organic equals reported movement for volume except for total 58%, spirits 72%, ready to drink (18)%, liqueurs (1)%, and tequila 25%, largely reflecting the full consolidation of USL, the acquisition of Don Julio, and the termination of agency brand distribution agreements, including Jose Cuervo.
(ii)  
Spirits brands excluding ready to drink.
 

Global giants, local stars and reserve (ii):
 
Organic
Organic
Reported
 
 
volume
net sales
net sales
 
 
movement(i)
movement
movement
 
 
%
%
%
 
Global giants
       
Johnnie Walker
(6)
(9)
(12)
 
Smirnoff
(1)
(2)
(3)
 
Captain Morgan
(4)
(6)
(7)
 
Baileys
(4)
(4)
(8)
 
Tanqueray
6
5
5
 
Guinness
(2)
-
(5)
 
Local stars
       
Crown Royal
13
12
15
 
Yenì Raki
(4)
4
(6)
 
JεB
(2)
(4)
(9)
 
Buchanan’s
(9)
(3)
(12)
 
Windsor
(10)
(10)
(8)
 
Old Parr
(13)
(14)
(24)
 
Bundaberg
(5)
(7)
(13)
 
Bell's
(3)
(5)
(14)
 
White Horse
(5)
(7)
(26)
 
Ypióca
(5)
(3)
(14)
 
Cacique
(37)
3
(32)
 
Shui Jing Fang
268
235
241
 
Reserve
       
Scotch malts
11
16
12
 
Cîroc
6
6
9
 
Ketel One vodka
(3)
(2)
1
 
Don Julio
8
12
43
 
Bulleit
34
38
42
 
 
(i)  
Organic equals reported movement for volume, except for Don Julio where reported volume growth is 98%.
(ii)  
Spirits brands excluding ready to drink.

·  
Global giants represent 39% of Diageo net sales
 
·  
Johnnie Walker, with nearly 70% of its net sales in the emerging markets, was impacted by currency weakness and inventory reductions in South East Asia and export channels in Latin America. In the United States, the brand lapped the shipment of two big innovations, Gold Label Reserve and Platinum Label in the prior year; Red and Black Label were negatively impacted by reduced promotional activities. In China, the government’s anti extravagance measures drove continued closure of traditional on trade outlets, leading to increased competition in the modern on trade negatively impacting the whole scotch category. Many other markets delivered strong performance, including Cameroon, Angola, Ghana, and East Africa with net sales up more than 50% and Mexico, Venezuela, and Colombia which all delivered double digit sales growth. In the developed markets in Asia Pacific, Johnnie Walker performed strongly and net sales grew high single digit.
 
·  
Smirnoff net sales declined 2%, largely driven by the United States, and the weakness in flavoured vodka there. The relaunch of the brand with the ‘Exclusively for Everybody’ marketing campaign, new packaging and targeted price promotions drove improved depletions momentum and share gains on Smirnoff Red. In Western Europe, a number of countries, notably Great Britain, delivered growth. Net sales were up in Latin America, with Brazil growing 8% following the national ‘Cheers to Real Life’ campaign launch. Smirnoff had a very strong year in South Africa with Smirnoff 1818 sales growing 27%.
 
·  
Captain Morgan net sales were down 6% due to the performance of the brand in the United States, where Captain Morgan held share in a flat rum category that is facing heightened competition from other categories. The decline in shipments was driven by weakness on Original Spiced Rum, and Captain Morgan White Rum which lapped its launch last year. The launch of Captain Morgan White Flavours partially offset the shipments decline on the core variants. Elsewhere, the brand’s performance continued to be strong with double digit growth in Great Britain, Germany, Southern Europe, Australia, India, and East Africa.
 
·  
Baileys net sales declined 4% having started the year with high inventory levels. It experienced softer depletions this year in the United States and Nigeria. In China, after weakness in the first half, specific interventions to drive consumer conversion resulted in stronger second half depletions, up mid single digit. In Western Europe performance was impacted by lapping the launch of Chocolat Luxe in the prior year, but the Baileys brand achieved share gains in the key markets of Great Britain and Germany. The brand continued to expand its footprint in emerging markets, with double digit growth in Colombia, West LAC, and Africa Regional Markets.
 
·  
Tanqueray gin benefitted from a strong focus on increased visibility and distribution in the on trade, supported by the highly effective ‘Tonight We Tanqueray’ campaign. This drove strong double digit growth in Western Europe, particularly in Spain and Great Britain, with accelerating growth in Germany and Benelux. Net sales for the gin brand grew 6%, with Tanqueray No. TEN up double digit in every region.
 
·  
Guinness net sales were flat, reflecting a strong performance in both the United States and Western Europe, where the brand grew 3% and 2% respectively. This was achieved through a combination of acclaimed innovations such as Blonde American Lager and Dublin Porter that built on the Guinness brewing heritage, a drive to increase presence and distribution in bars, and a series of award winning marketing campaigns built under the ‘Made of More’ platform. In Nigeria, sales declined but performance improved over the course of the year and volume share stabilised. Sales declined in Indonesia due to adverse regulatory changes.
 
·  
Local stars represent 16% of Diageo net sales. Overall performance was good with net sales growth of 4%. In developed markets, there was double digit growth on certain premium brands that have resonance with particular consumer groups, such as Buchanan’s in the United States with the Hispanic community, and Crown Royal Regal Apple with millennial consumers in high energy occasions. In China, Shui Jing Fang showed significant growth due to innovation, a strengthened route to consumer, and a soft prior year comparable. In emerging markets more broadly, there was good performance from local and secondary imported brands as certain consumer segments traded down, particularly where local production protected pricing from currency volatility. The net result is that whilst premium imported brands such as Windsor and Old Parr have seen sales decline, there was strong growth on brands such as Yeni Raki in Turkey, Cacique in Venezuela and White Horse in Brazil.
 
·  
Reserve brands represent 13% of Diageo net sales, and continued to perform well with net sales growth of 8%. During the economic volatility of recent years, the wealthy consumer base that underpins reserve has been resilient. The slight deceleration in overall reserve growth was driven by lapping strong innovation shipments on Johnnie Walker Gold Label Reserve and Platinum Label in the United States. Ketel One vodka faced increased competitive pressure from both within and outside the category. Across the wider portfolio, performance was strong. Scotch malts grew double digit, led by The Singleton which was the fastest growing of the top 5 global malt whisky brands last year. The very strong performance of Bulleit continued with sales up 38%, benefitting from high advocacy amongst the bartender community. Zacapa rum and Tequila Don Julio also delivered double digit growth globally, reflecting the quality and heritage of these products, and the strength of the reserve business model. Cîroc continues to expand its footprint outside of North America with strong growth in Western Europe, particularly Great Britain, where it rapidly gained share from the market leader and is now the number two ultra premium vodka.
 
Other Key Highlights
 
·  
Within whiskey, Scotch represents 24% of Diageo net sales and declined by 5%. Approximately 80% of this decline was due to inventory reductions in South East Asia and export channels in Latin America on Johnnie Walker, Buchanan’s, and Old Parr. Other brands including Haig Club, The Singleton, and scotch malts globally, and Buchanan’s in the United States performed well, with many growing double digit.
 
·  
Also within whiskey, North American Whiskey, which represents 7% of Diageo net sales, grew 12% this year with over 2pps of positive price/mix. This strong performance was driven by the successful launch of Crown Royal Regal Apple, the continued strong growth of Bulleit, and the acclaimed range of rare bourbons in the Orphan Barrel series.
 
·  
Vodka represents 12% of Diageo net sales and grew 1%. The growth of Cîroc in Europe and North America, as well as Smirnoff in Africa and Latin America was partially offset by the decline of Smirnoff in developed markets.
 
·  
Beer represents 18% of Diageo net sales, grew 4% and delivered 1.1pps of positive price/mix. Beer in Africa grew 8%, led by double digit growth in Africa Regional Markets. In Nigeria, the success of Orijin and Satzenbrau more than offset declines in Guinness and Harp. East Africa delivered double digit growth on Guinness and a good performance with Tusker. Performance of Guinness in developed markets was good, driven by the successful launch of Brewer’s Project innovations and Blonde American Lager.
 
·  
Ready to drink represents 5% of Diageo net sales and declined 4% this year. The main driver of this decline was in South Africa with Smirnoff Ice Double Black and Guarana where the brand lapped a strong performance in the previous year and an increase in inventories ahead of its transition to DHN Drinks. Elsewhere there was growth in ready to drink, including East Africa, West LAC, and Australia. In Great Britain, ready to drink cans underpinned sales growth of 7% in the category.
 
·  
Wine represents 4% of Diageo sales and declined 1%. In the United States, a decline of 1% was driven by depletion softness as the business lapped one off programming in the prior year on core brands. In Europe, commercial challenges on Blossom Hill were offset by the strong performance of [yellow tail].
 

ADDITIONAL FINANCIAL INFORMATION
For the year ended 30 June 2015

INCOME STATEMENT
 
 
 
2014
Exchange
(a)
Acquisitions and disposals
(b)
Organic movement
2015
 
£ million
£ million
£ million
£ million
£ million
Sales
13,980
(509)
2,321
174
15,966
Excise duties
(3,722)
172
(1,425)
(178)
(5,153)
Net sales
10,258
(337)
896
(4)
10,813
Cost of sales(i)
(4,006)
61
(666)
26
(4,585)
Gross profit
6,252
(276)
230
22
6,228
Marketing
(1,620)
47
(74)
18
(1,629)
Other operating expenses(i)
(1,498)
68
(85)
(18)
(1,533)
Operating profit before exceptional items
3,134
(161)
71
22
3,066
Exceptional operating items (c)
(427)
     
(269)
Operating profit
2,707
     
2,797
Non-operating items (c)
140
     
373
Net finance charges
(388)
     
(412)
Share of after tax results of associates and joint ventures
252
     
175
Profit before taxation
2,711
     
2,933
Taxation
(447)
     
(466)
Profit from continuing operations
2,264
     
2,467
Discontinued operations (c)
(83)
     
-
Profit for the year
2,181
     
2,467
(i) Before exceptional operating items.
         

(a) Exchange
The impact of movements in exchange rates on reported figures is principally in respect of the Venezuelan bolivar, the euro, the Russian rouble and the US dollar.

In February 2015, the Central Bank of Venezuela opened a new mechanism (known as SIMADI) that allows private and public companies to trade foreign currency with fewer restrictions than other mechanisms in Venezuela. As a result, the group has used the SIMADI exchange rate to consolidate its Venezuelan operations for the year ended 30 June 2015. For the year ended 30 June 2014, the group applied the Sicad II exchange rate to consolidate its operations in Venezuela.
Applying the SIMADI consolidation rate of $1 = VEF197.30 (£1 = VEF309.76) compared to the Sicad II rate of $1 = VEF49.98 (£1 = VEF85.47) would have reduced net assets and cash and cash equivalents as at 1 July 2014 by £60 million and £52 million, respectively, and would have reduced the previously reported net sales and operating profit for the year ended 30 June 2014 by £57 million and £36 million, respectively.
 

The effect of movements in exchange rate and other movements on profit before exceptional items and taxation for the year ended 30 June 2015 is set out in the table below.
     
Gains/ (losses)
     
£ million
   Translation impact
   
(72)
   Transaction impact
   
(89)
Operating profit before exceptional items
 
(161)
   Net finance charges – translation impact
   
(7)
   Mark to market impact of IAS 39 on interest expense
 
8
   Impact of IAS 21 and IAS 39 on net other finance charges
 
1
Interest and other finance charges
   
2
Associates – translation impact
   
(20)
Profit before exceptional items and taxation
 
(179)
       
 
Year ended
 
Year ended
 
30 June 2015
 
30 June 2014
Exchange rates
     
    Translation  £1 =
$1.57
 
$1.63
    Transaction £1 =
$1.58
 
$1.59
    Translation  £1 =
€1.31
 
€1.20
    Transaction £1 =
€1.23
 
€1.26

(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the full consolidation of United Spirits Limited (USL) from 2 July 2014 and the acquisition of the Mexican distribution rights of Don Julio, partially offset by the disposal of The Old Bushmills Distillery Company Limited on 27 February 2015 and Gleneagles Hotels Limited on 30 June 2015.

(c) Exceptional items
Exceptional operating charges of £269 million (2014 – £427 million) in the year ended 30 June 2015 comprise:
·  
£47 million (2014 – £98 million) in respect of the Global efficiency programme announced in January 2014;
·  
£35 million (2014 – £35 million) in respect of the Supply excellence restructuring programme;
·  
£41 million in respect of the impairment of the group’s 45.56% equity investment in Hanoi Liquor Joint Company; and
·  
£146 million in respect of settlement of several related disputes with the Korean customs authorities regarding the transfer pricing methodology applicable to imported products. Total payments to settle these disputes in the year were £74 million as £87 million was paid to the customs authorities prior to 30 June 2014, and was previously accounted for as a receivable from Korean customs.

In the year ended 30 June 2014 an exceptional impairment loss of £260 million in respect of the Shui Jing Fang brand and £4 million in respect of tangible fixed assets was charged to other operating expenses.

Non-operating items in the year ended 30 June 2015 include a gain of £103 million (2014 – £140 million) following the acquisition of additional equity shares in USL which increased the group’s investment in USL from 25.02% to 54.78%, excluding the 2.38% interest owned by the USL Benefit Trust (2014 – 10.04% to 25.02%). On 2 July 2014 when USL became a subsidiary of the group a gain was recognised on the difference between the book value of the 25.02% investment and the fair value. The gain is net of a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million transaction costs.

On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million arose, being the difference between the book value of the joint venture on the date of the transaction and the fair value. In addition, the group reacquired the production and distribution for Smirnoff and Popov in Mexico. As part of the transaction, Diageo also agreed to sell 100% of the equity share capital in The Old Bushmills Distillery Company Limited resulting in an exceptional gain of £174 million.

On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group resulting an exceptional gain of £73 million.

In the year ended 30 June 2015 a provision of £30 million was charged to non-operating items in respect of a guarantee provided to a third party financial institution.

Discontinued operations in the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.

Cash payments in the year ended 30 June 2015 for exceptional restructuring items, the legal settlement in Korea, the guarantee and thalidomide were £117 million (2014 – £104 million), £74 million (2014 – £nil), £30 million (2014 – £nil) and £19 million (2014 – £59 million), respectively.

(d) Dividend
The directors recommend a final dividend of 34.9 pence per share, an increase of 9% from the year ended 30 June 2014. The full dividend will therefore be 56.4 pence per share, an increase of 9% from the year ended 30 June 2014. Subject to approval by shareholders, the final dividend will be paid on 8 October 2015 to shareholders on the register on 13 August 2015. Payment to US ADR holders will be made on 14 October 2015. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 17 September 2015.
The recommended final dividend increase is 9%, in line with the increase in the interim dividend. This rate of increase recognises that while eps has declined, the decline was mainly driven by the impact of exchange movements in a year when free cash flow has improved strongly. Eps to dividend cover at 1.6 times is however now outside management’s coverage ratio, and the group will look to rebuild cover over time, maintaining dividend increases at a mid-single digit rate until it is back in range.

MOVEMENT IN NET BORROWINGS AND EQUITY

Movement in net borrowings

 
2015
 
2014
 
£ million
 
£ million
Net borrowings at the beginning of the year
(8,850)
 
(8,403)
Free cash flow (a)
1,963
 
1,235
Acquisition and sale of businesses (b)
(306)
 
(534)
Proceeds from issue of share capital
1
 
1
Net purchase of own shares for share schemes (c)
(8)
 
(113)
Dividends paid to non-controlling interests
(72)
 
(88)
Purchase of shares of non-controlling interests (d)
-
 
(37)
Disposal of non-controlling interests
1
 
-
Net movements in bonds (e)
(701)
 
(93)
Net movements in other borrowings (f)
386
 
(64)
Equity dividends paid
(1,341)
 
(1,228)
Net decrease in cash and cash equivalents
(77)
 
(921)
Net decrease in bonds and other borrowings
315
 
157
Exchange differences (g)
(7)
 
349
Borrowings on acquisition of businesses
(869)
 
-
Other non-cash items
(39)
 
(32)
Net borrowings at the end of the year
(9,527)
 
(8,850)

(a) See ’Financial Review’ table for the analysis of free cash flow.

(b) On 2 July 2014 the group acquired an additional 26% investment in USL for INR 114.5 billion (£1,118 million). On 31 October 2014 the sale of the Whyte and Mackay Group by USL resulted in a net cash receipt of £391 million. On 27 February 2015, Diageo paid $293 million (£192 million) for the 50% equity interest in Don Julio BV that it did not already own and for the Mexican distribution rights for Don Julio. As part of the transaction, Diageo also agreed to sell the equity share capital in The Old Bushmills Distillery Company Limited. The net cash consideration received for Bushmills amounted to $709 million (£456 million).
In the year ended 30 June 2014 cash payments primarily comprised £474 million in respect of the acquisition of a 18.74% investment in USL.

(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £75 million (2014 – £208 million) less receipts from employees on the exercise of share options of £67 million (2014 – £95 million).

(d) In the year ended 30 June 2014 Diageo purchased the remaining 7% equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd.

(e) In the year ended 30 June 2015, the group repaid bonds of €1,000 million (£792 million) and $500 milllion (£330 million) and issued bonds of €1,000 million (£791 million). In addition, a bond of £370 million acquired on the purchase of USL was repaid using the proceeds from the sale of the Whyte and Mackay Group. In the comparable period the group issued bonds of €1,700 million (£1,378 million) and repaid bonds of €1,150 million (£983 million) and $804 million (£488 million).

(f) Net movements in other borrowings are primarily in respect of the net drawdown of short term commercial paper which is used to finance day-to-day operations.

(g) Exchange differences primarily arose on US dollar and euro denominated borrowings partially offset by the favourable change on foreign exchange swaps and forwards.

 
Movement in equity
 
2015
 
2014
 
£ million
 
£ million
Equity at the beginning of the year
7,590
 
8,088
Profit for the year
2,467
 
2,181
Exchange adjustments (a)
(225)
 
(1,133)
Net remeasurement of post employment plans
113
 
(167)
Exchange recycled to the income statement (b)
88
 
-
Fair value movements on available-for-sale investments (b)
20
 
(85)
Non-controlling interests acquired
641
 
8
Purchase of shares of non-controlling interests
-
 
(37)
Dividends to non-controlling interests
(72)
 
(88)
Dividends paid
(1,341)
 
(1,228)
Other reserve movements
(25)
 
51
Equity at the end of the year
9,256
 
7,590

(a) Movement in the year ended 30 June 2015 primarily arose from the exchange loss on Turkish lira, Brazilian real and euro denominated net investments.

(b) Following the acquisition of majority equity stakes in USL, 50% equity interest in Don Julio and one of the group’s joint ventures in South Africa that it did not already own exchange losses of £88 million were recycled to the income statement.
On the acquisition of USL on 2 July 2014 a 43.91% (£641 million) non-controlling interest was recognised. In the year ended 30 June 2014 a gain of £85 million, in respect of USL, was recycled to the income statement reflecting the step up from available-for-sale investment to associate.

Post employment plans
The deficit in respect of post employment plans before taxation decreased by £216 million from £475 million at 30 June 2014 to £259 million at 30 June 2015. The reduction was primarily due to strong asset return and a reduction in long term inflation rates partially offset by a decrease in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (United Kingdom reduced from 4.2% to 3.8% and Ireland from 3.0% to 2.6%). Total cash contributions by the group to all post employment plans in the year ending 30 June 2016 are estimated to be approximately £180 million.
 
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
         
                     
                     
 
Year ended
Year ended
         
 
30 June 2015
30 June 2014
         
 
Notes
£ million
£ million
         
                     
Sales
2
 
15,966
 
13,980
         
Excise duties
   
(5,153)
 
(3,722)
         
Net sales
2
 
10,813
 
10,258
         
Cost of sales
   
(4,610)
 
(4,029)
         
Gross profit
   
6,203
 
6,229
         
Marketing
   
(1,629)
 
(1,620)
         
Other operating expenses
   
(1,777)
 
(1,902)
         
Operating profit
2
 
2,797
 
2,707
         
Non-operating items
3
 
373
 
140
         
Finance income
4
 
244
 
241
         
Finance charges
4
 
(656)
 
(629)
         
Share of after tax results of associates and joint ventures
   
175
 
252
         
Profit before taxation
   
2,933
 
2,711
         
Taxation
5
 
(466)
 
(447)
         
Profit from continuing operations
   
2,467
 
2,264
         
Discontinued operations
3
 
-
 
(83)
         
Profit for the year
   
2,467
 
2,181
         
                     
Attributable to:
                   
Equity shareholders of the parent company - continuing operations
 
2,381
 
2,331
         
                                                                      - discontinued operations
 
-
 
(83)
         
Non-controlling interests - continuing operations
   
86
 
(67)
         
     
2,467
 
2,181
         
                     
                     
Basic earnings per share
   
pence
 
pence
         
Continuing operations
   
95.0
 
93.0
         
Discontinued operations
   
-
 
(3.3)
         
     
95.0
 
89.7
         
                     
Diluted earnings per share
                   
Continuing operations
   
94.6
 
92.6
         
Discontinued operations
   
-
 
(3.3)
         
     
94.6
 
89.3
         
                     
                     
Weighted average number of shares
   
million
 
million
         
Shares in issue excluding own shares
   
2,505
 
2,506
         
Dilutive potential ordinary shares
   
12
 
11
         
     
2,517
 
2,517
         
 
 
 
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
     
                 
                 
   
Year ended
Year ended
     
   
30 June 2015
30 June 2014
     
   
£ million
£ million
     
 
Other comprehensive income
             
 
  Items that will not be recycled subsequently to the income
   statement
             
 
  Net remeasurement of post employment plans
             
 
     -  group
 
125
 
(169)
     
 
     -  associates and joint ventures
 
(10)
 
2
     
 
     -  non-controlling interests
 
(2)
 
-
     
 
  Tax on post employment plans
 
(11)
 
20
     
     
102
 
(147)
     
 
  Items that may be recycled subsequently to the income
   statement
             
 
  Exchange differences on translation of foreign operations
    excluding borrowings
             
 
     -  group
 
(345)
 
(1,117)
     
 
     -  associates and joint ventures
 
(205)
 
(294)
     
 
     -  non-controlling interests
 
56
 
(120)
     
 
  Exchange loss recycled to the income statement in respect of step acquisitions
 
88
 
-
     
 
  Net investment hedges
 
269
 
398
     
 
  Tax on exchange differences
 
30
 
12
     
 
  Effective portion of changes in fair value of cash flow hedges
             
 
     -  (losses)/gains taken to other comprehensive income - group
 
(40)
 
59
     
 
     -  losses taken to other comprehensive income - associates
          and joint ventures
 
(6)
 
(5)
     
 
     -  recycled to income statement
 
(58)
 
34
     
 
  Tax on effective portion of changes in fair value of cash flow hedges
 
18
 
2
     
 
  Fair value movements on available-for-sale investments
             
 
     -  gains taken to other comprehensive income - group
 
11
 
55
     
 
     -  gains taken to other comprehensive income - non-controlling
          interests
 
9
 
-
     
 
     -  recycled to income statement
 
-
 
(140)
     
 
  Tax on available-for-sale fair value movements
 
(4)
 
-
     
 
  Hyperinflation adjustment
 
18
 
11
     
 
  Tax on hyperinflation adjustment
 
-
 
(2)
     
     
(159)
 
(1,107)
     
 
Other comprehensive loss, net of tax, for the year
 
(57)
 
(1,254)
     
 
Profit for the year
 
2,467
 
2,181
     
 
Total comprehensive income for the year
 
2,410
 
927
     
                 
 
Attributable to:
             
 
Equity shareholders of the parent company
 
2,261
 
1,114
     
 
Non-controlling interests
 
149
 
(187)
     
 
Total comprehensive income for the year
 
2,410
 
927
     
                 
 
 
 
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
   
                           
                           
       
30 June 2015
 
30 June 2014
     
   
Notes
 
£ million
 
£ million
 
£ million
 
£ million
     
 
Non-current assets
                       
 
Intangible assets
   
11,231
     
7,891
         
 
Property, plant and equipment
   
3,690
     
3,433
         
 
Biological assets
   
65
     
53
         
 
Investments in associates and joint ventures
   
2,076
     
3,201
         
 
Other investments
   
109
     
63
         
 
Other receivables
   
46
     
107
         
 
Other financial assets
9
 
292
     
250
         
 
Deferred tax assets
   
189
     
246
         
 
Post employment benefit assets
   
436
     
251
         
           
18,134
     
15,495
     
 
Current assets
                       
 
Inventories
6
 
4,574
     
4,222
         
 
Trade and other receivables
   
2,435
     
2,499
         
 
Assets held for sale
   
143
     
8
         
 
Other financial assets
9
 
46
     
118
         
 
Cash and cash equivalents
7
 
472
     
622
         
           
7,670
     
7,469
     
 
Total assets
       
25,804
     
22,964
     
 
Current liabilities
                       
 
Borrowings and bank overdrafts
7
 
(1,921)
     
(1,576)
         
 
Other financial liabilities
9
 
(156)
     
(146)
         
 
Trade and other payables
   
(2,943)
     
(2,800)
         
 
Liabilities held for sale
   
(3)
     
-
         
 
Corporate tax payable
   
(162)
     
(197)
         
 
Provisions
   
(105)
     
(132)
         
           
(5,290)
     
(4,851)
     
 
Non-current liabilities
                       
 
Borrowings
7
 
(7,917)
     
(7,638)
         
 
Other financial liabilities
9
 
(443)
     
(447)
         
 
Other payables
   
(69)
     
(94)
         
 
Provisions
   
(238)
     
(253)
         
 
Deferred tax liabilities
   
(1,896)
     
(1,365)
         
 
Post employment benefit liabilities
   
(695)
     
(726)
         
           
(11,258)
     
(10,523)
     
 
Total liabilities
       
(16,548)
     
(15,374)
     
 
Net assets
       
9,256
     
7,590
     
                           
 
Equity
                       
 
Share capital
   
797
     
797
         
 
Share premium
   
1,346
     
1,345
         
 
Other reserves
   
1,994
     
2,243
         
 
Retained earnings
   
3,634
     
2,438
         
 
Equity attributable to equity
  shareholders of the parent company
       
7,771
     
6,823
     
 
Non-controlling interests
       
1,485
     
767
     
 
Total equity
       
9,256
     
7,590
     
                           
 
 
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY