Annual Report 2009 A great mix Strengths of a great mix Diageo has built a great mix of strengths and resources which it No1 manages to target In-depth customer growth in both good and consumer times and more understanding challenging times. No6 No2 Developing Highly leaders today, eff ective routes Cover picture: for tomorrow to market 2009 is the year in which Diageo celebrates 250 years of Guinness. www.diageoreports.com A great mix No5 No3 Focused World class execution marketing No4 capability Outstanding collection of brands Go online and visit all our 2009 reports and our annual review at www.diageoreports.com This is the Annual Report of Diageo plc and its consolidated subsidiaries, except as for the year ended 30 June 2009 and it the context otherwise requires. A glossary is dated 26 August 2009. It includes of terms used in this report is included at information that is required by the US the end of the document. Securities and Exchange Commission Diageo’s consolidated fi nancial (SEC) for Diageo’s US fi ling of its Annual statements have been prepared in Report on Form 20-F. This information accordance with International Financial GO may be updated or supplemented at the Reporting Standards (IFRS) as endorsed time of the fi ling of that document with and adopted for use in the European Union ONLINE! the SEC or later amended if necessary, (EU) and IFRS as issued by the International although Diageo does not undertake to Accounting Standards Board (IASB). update any such information. The Annual References to IFRS hereafter should be Report is made available to all shareholders construed as references to both IFRS as on its website (www.diageo.com). The adopted by the EU and IFRS as issued by the content of the company’s website should IASB. Unless otherwise indicated, all fi nancial QUICK Register to receive all not be considered to form a part of or be information contained in this document has future shareholder incorporated into this document. been prepared in accordance with IFRS. communications online: EFFICIENT This report includes names of The brand ranking information www. Diageo’s products, which constitute presented in this report, when comparing GREEN diageoregistrars. trademarks or trade names which Diageo volume information with competitors, has com owns or which others own and license to been sourced from data published during Diageo for use. In this report, the term 2009 by Impact Databank. Market data ‘company’ refers to Diageo plc and terms information is taken from industry sources ‘group’ and ‘Diageo’ refer to the company in the markets in which Diageo operates. 1 Performance summary Contents 2 Performance overview 4 Outstanding brands Performance summary 6 Regional overview 8 Chairman’s statement 10 Chief executive’s review 12 Strengths of a great mix 14 Historical information 2 Business description 19 Strategy Performance overview 20 Premium drinks Results that demonstrate the 28 Disposed businesses resilience of the business 28 Risk factors descriptionBusiness review Business Governance statements Financial 31 Cautionary statement concerning forward-looking statements Business review 33 Introduction 35 Operating results 2009 4 compared with 2008 Outstanding brands £2,750m 48 Operating results 2008 290m compared with 2007 The breadth and depth 61 Trend information of its range of brands 61 Liquidity and capital resources has enabled Diageo 64 Contractual obligations to manage through £910 £2,286m 65 Off -balance sheet arrangements the diffi cult trading 65 Risk management environment 6 67 Market risk sensitivity analysis Regional overview 68 Critical accounting policies 69 New accounting standards A varied performance across the regions Governance refl ecting the 71 Board of directors and executive committee macroeconomic 74 Directors’ remuneration report environment and 86 Corporate governance report product mix 94 Directors’ report Financial statements 97 Independent auditor’s report to the 10 members of Diageo plc Chief executive’s 98 Consolidated income statement review 99 Consolidated statement of recognised income and expense Diageo moved quickly to 100 Consolidated balance sheet create a business which 101 Consolidated cash fl ow statement is well positioned to 102 Accounting policies of the group emerge stronger 106 Notes to the consolidated fi nancial statements 70 149 Independent auditor’s report to the Governance members of Diageo plc 150 Company balance sheet Diageo is committed to 151 Accounting policies of the company achieving the highest 152 Notes to the company fi nancial statements standards of corporate 155 Principal group companies governance Additional information for shareholders 157 Legal proceedings Additional information 157 Related party transactions 157 Material contracts For more information please 157 Share capital visit www.diageoreports.com 158 Memorandum and articles of association Symbol legend 161 Exchange controls 161 Documents on display More information online 162 Taxation Video content available 164 Glossary of terms and US equivalents 2 Performance overview Volume (in millions of equivalent units) Net sales (£m) 145.0 141.3 9,311 8,090 Operating profit before exceptionals (£m) 2,613 2,304 Operating profit Profit attributable (£m) to parent company’s 2,443 equity shareholders (£m) 2,226 1,621 1,521 2008 2009 2008 2009 (3%) 15% Reported Reported movement movement (4%) 0% Organic Organic movement movement 2008 2009 Basic earnings Recommended 13% per share (p) full year dividend Reported 65.2 per share (p) movement 36.10 59.3 34.35 4% 2008 2009 Organic 2008 2009 movement 10% Reported movement 7% Reported 4% movement Information presented Organic Unless otherwise stated in movement this document, percentage movements are organic movements. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. See the ‘Business review’ for an explanation of organic movement calculations. Diageo Annual Report 2009 The market data contained in this document is taken from independent industry sources 2008 2009 in the markets in which 2008 2009 Diageo operates. 10% Reported 5 % movement Increase Performance overview 3 Performance summary Key fi gures £1,204m ‘This has been a very challenging year. Strong free cash fl ow We took action quickly to manage these diffi cult times, maximising the benefi t 36.10p of our brand range, reducing our cost Recommended +5% base and refocusing marketing spend full year dividend as consumer trends changed. Overall per share Business descriptionBusiness review Business Governance statements Financial our results this year demonstrate the resilience of our business.’ £1.2bn Paul Walsh Returned to £870m £352m Chief executive shareholders in dividends in share buybacks (9 %) Marketing spend A refocusing of spend as consumer trends organic decrease changed, together with a greater reduction in spend on ready to drink and benefi ts from savings in media rate defl ation, saw a reduction in marketing spend in the year. Brand performance overview Organic Organic Reported Reported volume net sales volume net sales movement movement movement movement % % % % Global priority brands (5) (2) (5) 11 Local priority brands* (1) 1 5 24 Category brands* (2) 4 (1) 17 Total (4) – (3) 15 Spirits** (4) – (3) 16 Beer – 5 – 16 Wine 1 (5) 2 12 Ready to drink (11) (8) (11) 5 Smirnoff Captain Morgan 1 Key spirits brands:** Smirnoff (2) 2 (2) 17 4 Johnnie Walker (11) (6) (11) 4 In-depth customer and Outstanding consumer understanding collection of brands Captain Morgan 3 7 3 29 See how Smirnoff is reacting See how innovation is Baileys (10) (9) (10) 3 to the new media age in its helping drive growth behind new campaign the world’s number 2 rum J&B (13) (12) (13) – José Cuervo 2 3 2 27 Tanqueray (10) (8) (10) 12 2% 7% Crown Royal – North America (1) (1) (1) 23 Net sales increase Net sales increase Buchanan’s – International (15) 2 (15) 18 www.diageoreports.com www.diageoreports.com Additional information Windsor – Asia Pacifi c 3 22 3 17 Guinness (3) 4 (3) 16 * Brand additions in the year ended 30 June 2008 Ketel One vodka and Rosenblum Cellars wine are included in local priority brands in North America and in category brands in other regions while Zacapa rum is reported in category brands globally. ** Spirits brands excluding ready to drink. 4 Outstanding brands No2 Captain Morgan is the No2 rum No1 in the world Johnnie Walker 8.4m is the world’s leading 9-litre cases scotch whisky 14.3m 9-litre cases No1 José Cuervo is the world’s leading tequila No1 Smirnoff is the world’s 4.5m leading premium spirit 9-litre cases 24.5m No1 9-litre cases Tanqueray is the leading imported gin in the US 1.9 m No3 9-litre cases J&B is the No3 scotch whisky in the world 5.2m 9-litre cases No1 No1 Baileys is the world’s leading liqueur Guinness is the world’s leading stout 6.7m 9-litre cases 11.1 m 9-litre case equivalent units Diageo Annual Report 2009 Figures are volumes for the year ended 30 June 2009 excluding ready to drink. Position source: Impact Databank September, December 2008 and February 2009. Outstanding brands 5 About the brands Performance summary Captain Morgan delivered a strong Ketel One vodka performance mainly driven by In June 2009, Diageo and the share gains in North America which Nolet family celebrated the fi rst accounts for almost 90% of net anniversary of their 50/50 sales. The brand’s introduction in company to promote Ketel One ‘The breadth and depth of our range markets in Europe and International super premium vodka around the of great brands have enabled us to continued successfully. Innovation world. Combining generations manage through the diffi cult trading with Captain Morgan 100 in North of spirits distilling expertise from descriptionBusiness review Business Governance statements Financial environment.