Annual Report 2010 About Diageo 2010 was characterised Diageo plc is the world’s leading premium drinks business with an outstanding collection by variability. Diageo’s of beverage alcohol brands across spirits, wines and beer categories. These brands include Johnnie Walker, Guinness, Smirnoff , J&B, Baileys, Tanqueray, Captain Morgan, Crown Royal, brand positions, global Gordon’s , Beaulieu Vineyard and Sterling Vineyards wines. The company also has distribution rights for Jose Cuervo. scale and agility in Diageo is a global company, with its products sold in more than 180 markets around the response to changing world. The management team expects to continue the strategy of investing behind Diageo’s global brands, launching innovative new products, and seeking to expand selectively through conditions delivered partnerships or acquisitions that add long term value for shareholders. The company is listed on both the New York Stock Exchange (DEO) and the London Stock Exchange (DGE). a good performance For more information about Diageo, its people and its brands, visit www. diageo.com. in the year. For Diageo’s global resource that promotes responsible drinking through the sharing of best practice tools, information and initiatives, visit www.DRINKiQ.com. 2 1 3 Go online and view 1 Online Review our 2010 reports 2 Annual Report www.diageo.com 3 Corporate Citizenship Report This is the Annual Report of Diageo plc for the year Diageo’s consolidated fi nancial statements have been ended 30 June 2010 and it is dated 25 August 2010. prepared in accordance with International Financial It includes information that is required by the US Reporting Standards (IFRS) as endorsed and adopted Securities and Exchange Commission (SEC) for Diageo’s for use in the European Union (EU) and IFRS as issued US fi ling of its Annual Report on Form 20-F. This by the International Accounting Standards Board (IASB). GO information may be updated or supplemented at the References to IFRS hereafter should be construed as ONLINE! time of the fi ling of that document with the SEC or later references to both IFRS as adopted by the EU and IFRS amended if necessary, although Diageo does not as issued by the IASB. Unless otherwise indicated, all undertake to update any such information. The Annual fi nancial information contained in this document has Report is made available to all shareholders on Diageo’s been prepared in accordance with IFRS. The brand website (www.diageo.com). The content of the ranking information presented in this report, when company’s website should not be considered to comparing volume information with competitors, Register to receive all form a part of or be incorporated into this report. has been sourced from data published during 2010 QUICK future shareholder This report includes names of Diageo’s products, which by Impact Databank. Market data information and EFFICIENT communications online: constitute trademarks or trade names which Diageo competitive set classifi cations are taken from GREEN www. owns or which others own and license to Diageo for use. independent industry sources in the markets diageoregistrars. In this report, the term ‘company’ refers to Diageo plc in which Diageo operates. com and terms ‘group’ and ‘Diageo’ refer to the company and its consolidated subsidiaries, except as the context © Diageo plc 2010 otherwise requires. A glossary of terms used in this report is included at the end of the report. Performance summary 1 Contents 4 Performance overview 6 Outstanding brands 8 Regional overview Performance summary 10 Chairman’s statement 12 Chief executive’s review 14 Historical information Business description p4–5 19 Strategy Performance 20 Premium drinks overview 30 Risk factors 34 Cautionary statement concerning Management focus forward-looking statements on growth drivers and Business description Business review Governance Financial statements Additional information costs has delivered a good Business review performance in variable 37 Introduction market conditions 39 Operating results 2010 compared with 2009 54 Operating results 2009 compared with 2008 p6–7 67 Trend information Outstanding EUR 67 Liquidity and capital resources brands 70 Contractual obligations N.A. A.P. 71 Off -balance sheet arrangements The strength and 71 Risk management breadth of Diageo’s INT 73 Fair value measurements brand range provides 74 Market risk sensitivity analysis both resilience and 74 Critical accounting policies growth opportunities p8–9 75 New accounting standards Regional overview Governance Performance in developing 77 Board of directors and executive committee markets drove overall growth 80 Directors’ remuneration report while developed markets 93 Corporate governance report remained challenging 102 Directors’ report Financial statements 105 Independent auditor’s report to the members of Diageo plc 106 Consolidated income statement 107 Consolidated statement p12–13 of comprehensive income Chief executive’s 108 Consolidated balance sheet review 109 Consolidated statement of changes in equity Agility has been key 110 Consolidated statement of cash fl ows in responding to changing 111 Accounting policies of the group market conditions 115 Notes to the consolidated fi nancial statements 161 Independent auditor’s report to the p77–103 members of Diageo plc Governance 162 Company balance sheet 163 Accounting policies of the company Diageo is committed to 164 Notes to the company fi nancial statements achieving the highest 167 Principal group companies standards of corporate governance Additional information for shareholders 169 Legal proceedings 169 Related party transactions 169 Material contracts 169 Share capital 170 American depositary shares 171 Articles of association 174 Exchange controls 174 Documents on display 174 Taxation 177 Glossary of terms and US equivalents For additional information on Diageo go to: www.diageo.com 2 Delivering value through a great mix Diverse markets Diageo has a combination of great assets... Outstanding Great brands across people categories + In-depth customer and consumer understanding Developing Highly leaders today, eff ective routes for tomorrow to market Driven through active management... Focused World class execution marketing capability Building strong relationships = Diageo Annual Report 2010 Long term opportunities Creating long term value and value for stakeholders See more at: www.diageo.com 3 Performance summary Performance summary contents Diageo continually seeks to 4 Performance overview understand what consumers 6 Outstanding brands 8 Regional overview and shoppers want which 10 Chairman’s statement informs customer relationships 12 Chief executive’s review and helps people celebrate 14 Historical information with its brands everyday, everywhere. Business description Business review Governance Financial statements Additional information Diageo goes to great lengths to understand what its consumers want and how best to engage with them. This continual process informs the way Diageo relates to its consumers through clarity in communication, impactful marketing activations and brilliant innovations, and, increasingly, how it better interacts with customers for mutual benefi t. www.diageoreports.com In-depth customer and consumer understanding 4 Performance overview 140.8 143.4 9,780 9,311 2,751 2009 2010 2,588 Volume (Millions of equivalent units) 2,574 2,418 2009 2010 2 % Reported Net sales (£m) movement 5 % 2 % Reported Organic movement 1,605 1,629 movement 2 % Organic 2009 2010 movement Operating profit (£m) before exceptionals 2009 2010 6 % Operating Reported profit (£m) movement 6 % 2 % 38.10 Reported Organic 36.10 movement 2009 2010 movement 65.5 64.6 Profit attributable to parent company’s equity shareholders (£m) 1% Reported movement Diageo Annual Report 2010 Information presented 2009 2010 Unless otherwise stated in this document, percentage movements Recommended are organic movements. Commentary, 2009 2010 unless otherwise stated, refers to full year dividend organic movements. Share, unless otherwise stated, refers to value Basic earnings per share (p) share. See the ‘Business review’ for per share (p) an explanation of organic movement 5.5% calculations. The market data and competitive set classifi cations 1% Reported contained in this document are taken movement from independent industry sources in Reported the markets in which Diageo operates. movement Performance overview 5 Brand performance overview Performance summary Organic Reported Volume net sales net sales movement* movement movement % % % Global priority brands – (1) 3 Other brands 4 5 8 Total 2 2 5 Global priority brands** Johnnie Walker 11 7 12 Business description Business review Governance Financial statements Additional information Smirnoff (1) (4) – Baileys (1) (4) – Captain Morgan 3 2 6 Jose Cuervo (13) (14) (12) & J B (7) (8) (3) Tanqueray 1 (1) 2 Guinness (3) – – Other brands Crown Royal – North America – (1) 2 Buchanan’s – International 11 15 13 Ketel One – North America 2 4 6 Windsor – Asia Pacifi c – – 9 * Volume movement is both reported and organic. ** Spirits brands excluding ready to drink. Key fi gures ‘In a challenging year characterised by variable market conditions, we have demonstrated agility £2,024m Free cash fl ow – 2010 in responding to the changing environment. We have taken a m number of actions to enhance the £1,204 Free cash fl ow – 2009 positions of our great brands and to further strengthen our fi nancial Improved working capital health, which in turn makes us a management