Bristol, UK, Oct. 21, 2004 (PRIMEZONE) -- 21 October 2004
ALLIED DOMECQ DELIVERS SUSTAINED BRAND GROWTH
Allied Domecq PLC announces strong brand growth across its spirits, wine and quick service restaurant businesses delivering an 11% increase in trading profit and EPS up 16% at constant currency. This reflects strong value creation from the core spirits brands with volumes up 8%, a 13% increase in profits from our premium wine brands and a growth of 21% in trading profit at the QSR division.
FINANCIAL HIGHLIGHTS Growth at
constant
Restated Growth currency
2004 2003 % %
- Spirits &
Wine net turnover GBP2,385m GBP2,387m 0 5
- Marketing
investment
behind Spirits
& Wine GBP421m GBP413m 2 6
- Group trading
profit GBP657m GBP637m 3 11
- Group profit
before tax GBP521m GBP491m 6 15
- Normalised earnings
per share 35.5p 33.2p 7 16
- Dividend 15.5p 14.0p 11
- Net cash flow
from operating
activities GBP655m GBP702m
- Free cash flow
(after dividends) GBP251m GBP243m
Figures are stated before goodwill and exceptional items. Figures for the year ended 31 August 2003 have been restated for 'FRS 17 - Retirement benefits', 'UITF 38 - Accounting for ESOP trusts' and 'FRS 5 - Reporting the substance of transactions - Application Note G', see page 16. Cash flow from operating activities excludes the pre-tax benefit of the Mexican excise rebate (2004: GBPnil; 2003: GBP46m); free cash flow excludes the post-tax benefit (2004: GBPnil; 2003: GBP38m).
BUSINESS HIGHLIGHTS
Figures here and in the Operating and Financial Review are stated before goodwill and exceptional items and comparative information is based on constant exchange rates unless otherwise specified.
Spirits & Wine Core brands
-Volumes up 2% -Volumes up 8% (ex RTDs +7%)
-Net turnover up 5% -Net turnover up 7% (ex RTDs +7%)
-Marketing spend up 6% -Marketing spend up 9%
-Net brand contribution up 4% -Net brand contribution up 7%
-Trading profit up 9%
Premium wine Quick Service Restaurants
-Volumes flat -Distribution points up 6%
-Net turnover up 7% -Combination stores up 18%
-Marketing spend up 9% -System-wide sales up 12%
-Trading profit up 13% -Trading profit up 21%
Delivering improved efficiencies and cash flow
-Efficiency improvements - overheads flat, benefiting from
restructuring activities
-Strong cash generation - GBP251m free cash flow (GBP407m before
dividends)
-Continued debt reduction - GBP471m reduction
Philip Bowman, Chief Executive, said:
"This has been an excellent year for Allied Domecq with strong brand growth across our core spirits brands and good profit growth from our premium wines and Quick Service Restaurants. These yet again underscore the successful transformation of Allied Domecq into a brand and consumer-driven, value creating business. In particular, our core brands performed well in the US delivering overall market share gains. We have also followed our strategy of value improvement in the premium wine brands to deliver strong profit growth at a time when other wine companies have struggled in a difficult market. The double digit profit growth at our Quick Service Restaurants business has been driven by strong same store sales growth and new store openings. Overall, these good performances have more than offset the trading challenges we faced in markets such as South Korea, France and Germany.
"Looking ahead, we anticipate that the continued momentum of the core brands, supported by our focused marketing investment, will drive volume and turnover growth, as well as higher gross margins, even though certain markets remain challenging. The premium wine brands are on track to meet the five year return on investment targets that we set out two years ago. We anticipate that further innovation and new store openings will continue to drive double digit profit growth in our Quick Service Restaurants business. Together, this momentum will provide us with the platform to deliver continued earnings growth in 2005."
Internet:
Corporate information can be accessed from the website at www.allieddomecq.com.
Presentation material:
The results presentation will be available on the corporate website from 09.00 (UK time) on Thursday 21 October 2004.
Presentation webcast/audio broadcast:
A live webcast of the presentation to analysts will be available on the investor relations section of www.allieddomecq.com at 09.30 (UK time) on Thursday 21 October. A recording of the webcast will be available from around 14.00 (UK time).
A live audio broadcast of the presentation and question and answer session will also be available. The presentation can be accessed by dialling:
UK: 0800 358 5268
US/Canada: 1 888 469 8033
France: 017 09 99 34 40
Germany: 069 58 99 90 07 11
International: +44 (0) 20 7154 2683
Conference call:
A conference call will be held for analysts and investors at 16.00 (UK time) on Thursday 21 October. The call can be accessed by dialling:
UK: 0800 358 5268
US/Canada: 1 888 469 8033
France: 017 09 99 34 40
Germany: 069 58 99 90 07 11
International: +44 (0) 20 7154 2683
A recording of the conference call will be available from around 17.00 (UK time) today until 28 October 2004. Call the following numbers to listen to the recording:
UK/Europe: +44 (0) 20 8515 2499 Access code: 3198793#
US/Canada: 1 800 406 7325 Access code: 3198793#
Photography:
Original high resolution photographs are available to the media free of charge at www.newscast.co.uk +44 (0) 20 7608 1000.
Cautionary statement regarding forward-looking information
Some statements in this press release contain "forward-looking" statements as defined in Section 21E of the United States Securities Exchange Act of 1934. They represent our expectations for our business, and involve risks and uncertainties. You can identify these statements by the use of words such as "believes", "expects", "may", "will", "should", "intends", "plans", "anticipates", "estimates" or other similar words. We have based these forward-looking statements on our current expectations and projections about future events. We believe that our expectations and assumptions with respect to these forward-looking statements are reasonable. However, because these forward-looking statements involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control, our actual results or performance may differ materially from those expressed or implied by such forward-looking statements.
Explanatory notes
Comparative information in the Operating and Financial Review is based on constant exchange rates. Net turnover is turnover after deducting excise duties. Profit and normalised earnings are stated before goodwill and exceptional items. Volumes are quoted in nine litre cases unless otherwise specified.
Brands
All brands mentioned in this press release are trademarks and are registered and /or otherwise protected in accordance with applicable law.
OPERATING AND FINANCIAL REVIEW
Summary
At constant currency, normalised earnings per share have grown by 16% and reported normalised earnings per share have increased by 7% to 35.5p. The three key drivers have been:
-The growth of Spirits & Wine gross profit, particularly from the core brands, which contributed the majority of the incremental gross profit;
-The good mix growth of the premium wine brands; and
-The strong growth in Quick Service Restaurants.
From a geographic perspective, the growth in Spirits & Wine profit has been driven by good trading in North America, a recovery in volumes in Spain and strong value growth in the premium wine portfolio in the US and UK. This has been partly offset by declines in some markets in Western Europe and in Asia Pacific due to local economic and trading challenges. Encouragingly we stabilised the profit declines in Asia Pacific during the second half. The Quick Service Restaurants business has delivered double digit profit growth by implementing its strategy of driving same store sales growth, new store openings and cost efficiencies.
At constant exchange rates, Spirits & Wine net turnover grew GBP105m (5%) to GBP2,385m. However, Quick Service Restaurants turnover declined by GBP7m reflecting the final transition of Baskin-Robbins from producing and selling ice cream to US franchisees (which is now fully contracted out) to a wholly royalty-based model. Group turnover grew by 2% at constant exchange rates. Reported turnover for the Group declined by GBP88m (3%) to GBP3,229m of which GBP161m related to adverse year-on-year foreign exchange movements.
At constant currency, normalised profit before tax increased by 15%. Reported profit before tax increased 6% to GBP521m which reflects an adverse foreign currency translation and transaction movement of GBP38m on restating the profit for the prior period at this year's rates.
The Directors are recommending a final dividend of 9.67p per share giving a total for the year of 15.5p, an increase of 11%.
Outlook
Looking ahead, we anticipate that the continued momentum of the core brands, supported by our focused marketing investment, will drive volume and turnover growth, as well as higher gross margins, even though certain markets remain challenging. The premium wine brands are on track to meet the five year return on investment targets that we set out two years ago. We anticipate that further innovation and new store openings will continue to drive double digit profit growth in our Quick Service Restaurants business. Together, this momentum will provide us with the platform to deliver continued earnings growth in 2005.
Business drivers
Our strategy is delivering good growth in the core spirits and premium wine brands and from Quick Service Restaurants. We focus on three areas to drive competitive advantage and sustainable future growth:
- Portfolio: By building and innovating our brand portfolio through effective marketing, we will retain consumers who enjoy our brands and attract and excite new consumers to win greater market share.
- Presence: Through prioritising, developing and extending our geographic presence, we will establish strong positions in key markets across the world.
- People: By developing our people, harnessing their talents and being an 'employer of choice', we will attract and retain the best people to deliver our business goals.
Our increased investment in these areas, particularly advertising and promotion, over the past four years is driving robust brand growth and strong financial results.
SPIRITS & WINE
2004 2003 Growth
Volume (9L cases) 70.1m 68.6m 2%
Net turnover GBP2,385m GBP2,280m 5%
Advertising and promotion GBP421m GBP396m 6%
Trading profit GBP548m GBP503m 9%
Spirits & Wine net turnover has increased through the growth of our core spirits brands and premium wine brands. Net turnover grew 5% with two percentage points from volume growth and three percentage points from price/mix improvements. Gross profit increased by GBP64m, or 5%, reflecting volume growth (GBP32m), price/ mix improvements (GBP30m) and a lower cost of goods (GBP2m). The core brands and premium wines are the key drivers of the gross profit improvement.
Trading profit grew GBP45m (9%) after advertising and promotion investment increased by GBP25m (6%). Overheads were held flat even after investing significantly in our sales and marketing capabilities in the US and behind the premium wine brands. This has been achieved by driving efficiency benefits from the restructuring of the Spirits & Wine operations. The increase in advertising and promotion spend has been directed behind selected brand market combinations, particularly Sauza in the US and Mexico, Ballantine's in Spain, Malibu in the US and Spain, Kahlua in the US, Whisky DYC in Spain and Imperial in South Korea. This continues to reflect the rigorous way in which we allocate spend behind brands and markets; directing more behind the core brands including new campaigns and innovation, and withdrawing spend from less effective areas. As a result, we are continuing to achieve greater impact from our marketing investment.
Brand review
We manage the Spirits & Wine portfolio as four groups: core brands, local market leaders, premium wine and other Spirits & Wine brands.
Core brand volumes grew 8% and net turnover increased by 7% driven by strong growth across nearly all the brands. There is one percentage point of mix dilution caused by the successful growth of the lower margin ready-to-drink extensions, which grew volumes by 15%. Excluding the ready-to-drinks, core brand volumes and net turnover both grew by 7%. Advertising and promotion behind the core brands was up 9% resulting in net brand contribution increasing by 7%.
Spirits & Wine volume and net turnover growth
Volume Volume Net
million growth turnover
9L cases % growth %
Core brands
Ballantine's 5.9 6 6
Beefeater 2.4 8 10
Canadian Club 2.6 7 0
Courvoisier 1.1 3 3
Kahlua 3.0 (1) 2
Maker's Mark 0.5 10 15
Malibu 3.0 17 15
Sauza 2.9 20 16
Tia Maria 0.8 (11) (13)
Core brands 22.2 8 7
Local market leaders 11.7 (2) (2)
Premium wine 15.6 0 7
Other Spirits & Wine brands
Other spirits 12.7 0 4
Other wine 7.9 5 3
Other Spirits & Wine total 20.6 2 3
Total 70.1 2 5
The core brands are key drivers of gross profit growth with their premium positioning commanding high margins. The average gross profit per case of the core brands is more than twice that of the rest of the portfolio. As a result, they contributed the majority of the incremental Spirits & Wine gross profit. Ballantine's and Beefeater grew well reflecting a recovery in volumes in Spain. Canadian Club volumes grew 7% with flat turnover growth reflecting the price repositioning in the US and mix dilution from the growth of ready-to-drinks in Australia. Excluding the ready-to-drinks, Canadian Club volumes grew 3% on net turnover down 1%. Courvoisier grew both volumes and net turnover by 3% reflecting good growth in the UK. Kahlua volumes fell by 1% but price/mix improved net turnover by 2%. Price increases on Maker's Mark helped to grow net turnover 15% while volumes were up 10%. Malibu grew volumes 17% and net turnover by 15% reflecting a mix dilution from the successful growth of ready- to-drinks in Australia. Excluding the ready-to-drinks, volumes and net turnover both grew 13%. Sauza volumes grew 20% and net turnover was up 16% reflecting price decreases in Mexico following declines in raw material costs. In the US, Sauza grew both volumes and net turnover by 13%. Tia Maria volumes declined by 11% and net turnover fell by 13%. This decline mainly reflects the one-off benefit of the initial distribution effect of the Tia Lusso launch which was not repeated this year and lower Tia Maria sales which were affected in the short-term by the focus on Tia Lusso. Looking ahead, we have developed a new marketing campaign to revitalise the Tia Maria brand.
The recovery in core brand volumes in Spain accounted for one percentage point of volume growth and overall core brand volume growth was 7% excluding the Spanish market.
The local market leader brands are important contributors to overall profit and cash generation. In addition, they provide important local scale to support the development of the core brands in key markets. Among the local market leader brands, the strong growth of Stolichnaya in the US and the recovery of volumes of Whisky DYC and Centenario in Spain were offset by volume declines in the Mexican brandies and Imperial whisky. As a result, overall local market leader volumes and net turnover both declined by 2%. Marketing investment was reduced across the local market leaders by 2% and net brand contribution declined by 2%.
The premium wine brands continued to deliver a significant price/mix improvement with flat volumes and net turnover up by 7%. Marketing spend increased by 9% to deliver a trading profit increase of 13%.
The volumes of the other Spirits & Wine brands grew volumes by 2% with net turnover up by 3%.
Market review - Spirits & Wine
The key geographic drivers are the strong growth in core brand volumes in North America which delivered good turnover and profit growth, a recovery in volumes in Spain and good value growth in the premium wine portfolio. These good results were in part offset by declines in some Western European markets as a result of unfavourable macro-economic conditions and in South Korea where the current consumer credit problems have affected consumption patterns.
The regional performance of our business is reviewed below.
North America
Growth
Volumes (9L cases) 5%
Net turnover 9%
Advertising and promotion 10%
Trading profit 15%
Strong trading in our North American business delivered a net turnover increase of 9% to GBP632m with volumes up 5%. Trading profit grew 15% to GBP183m after advertising and promotion grew by 10%.
In the US, we have continued to grow our share of the spirits market, reflecting the strength of our core brand portfolio and the benefits of our partnership approach with US distributors. As a result, we have grown volumes in the US by 7% and achieved good price/mix improvements to increase net turnover by 10%. Price improvements have been achieved particularly behind Maker's Mark, Malibu and Stolichnaya. To support this momentum, we increased our marketing investment by 11% with the increase being directed mainly behind Malibu, Sauza and Kahlua.
Malibu has continued to increase its market share of the rum category in the US. Volumes grew 31% with net turnover up 35%, reflecting the successful launch of the new flavours, mango and pineapple. The original coconut flavour has also continued to perform well with volumes up 13%. This reflects the success of the "Seriously Easy Going" campaign.
Sauza grew both volumes and net turnover by 13% in the US. It continued to grow its share of the tequila category as we increased our investment in the successful "Get Lost" marketing campaign. Maker's Mark had another strong year with further share growth with volumes up 14% and net turnover up 18%.
Stolichnaya continued to perform well with volumes up 9% and net turnover up 11% helped by the introduction of brand extensions such as Stoli Razberi and Stoli Elit. Beefeater grew volumes by 4% and net turnover by 5% supported by a new advertising campaign called "This Is Gin" which has been trialled in three cities and will be rolled out to further cities during 2005.
Our programme to revitalise Canadian Club has delivered volumes up 4% with flat net turnover reflecting the effect of planned price repositioning across selected States. As a result, Canadian Club has also grown share of the Canadian whisky category. Kahlua continued to deliver positive consumption trends with net turnover up 3% on flat volumes. Courvoisier volumes fell 2% following a strong performance last year.
Our strategy in the US is continuing to drive market share gains. The "first choice supplier" programme with US distributors has brought further benefits as we have extended the contracts to new States. Around 55% of our Open State volume is now covered by these new contracts which are long-term partnerships based on sustainability and mutual benefit. In addition, the new team we put in place to manage the Control States has provided the necessary focus to drive market share gains.
Europe
Growth
Volumes (9L cases) 0%
Net turnover 2%
Advertising and promotion (3)%
Trading profit 14%
Trading profit grew 14% to GBP139m reflecting a recovery in volumes in Spain and a good performance in the UK and Central and Eastern Europe, offset by declines in other Western European markets caused by the challenging trading conditions. Net turnover grew 2% to GBP734m on flat volumes. Advertising and promotion declined by 3% as we reallocated our resources into higher growth markets in the US and Asia. In addition, cost saving initiatives held overheads flat. Outside Spain, our European volumes and net turnover both declined 3% despite the core brands growing share in key markets.
Our business in Spain grew volumes by 8% and net turnover by 12% reflecting the recovery in our volumes following last year's destock by Spanish wholesalers. Ballantine's grew volumes by 16% and net turnover by 20% and, while the Scotch whisky category is now in decline, the brand has continued to grow its market share to an all-time high. We have significantly increased our investment behind the Ballantine's "Go Play" campaign in Spain to maintain the brand's momentum. Volumes for Beefeater grew 9% while net turnover grew 16%. Beefeater became the market leader in the gin category by value with strong market share gains. We have also recently launched WET by Beefeater, a premium brand extension, in high-end on-premise accounts. Malibu has continued to gain share following new television advertising and more than 1,000 on-trade promotion events. The volumes for Whisky DYC increased by 6%, as the new marketing campaign, "DYC Une", helped to improve awareness among target consumers. While the brandy market continues to decline, Centenario has maintained its leadership of the category with a 25% share.
The UK business has continued to deliver profit growth. Courvoisier extended its leadership of the cognac category with both volumes and net turnover up 9%. The brand is benefiting from new listings, a programme of on-trade events, particularly around cocktails, and an advertising programme in style magazines. Malibu has continued to grow share in both the on- and off-trade with volumes and net turnover up 8%. A new national TV and cinema campaign with the "Seriously Easy Going" message increased brand awareness along with a marketing focus on mixing with cranberry. Volumes for the overall Tia Maria trademark declined when compared against high volumes associated with the Tia Lusso launch programme last year. However, Tia Lusso has retained its position as the number two selling cream liqueur by value in the UK.
The rest of Western Europe, such as France and Germany, has experienced sluggish economies and slower consumer spending. However, key brands have made good progress with market share growth in these challenging markets. For example, in France, legislative changes including price decreases have made the trading climate difficult, although we achieved market share gains with Ballantine's. In Germany, while the spirits market has continued to decline, Ballantine's increased its leadership of the Scotch whisky category. Ballantine's has also achieved share gains in other markets so that its overall European market share reached an all-time high.
In addition, we have reviewed our distribution arrangements in a number of our European markets and introduced new partnership arrangements in the Czech Republic, Benelux, Poland and Switzerland. These partnerships provide a more efficient route to market and are delivering overhead savings, improved scale and access. In Central and Eastern Europe, we have seen good profit growth in a number of markets such as Romania, Hungary and Russia and have benefited from the new distribution arrangements in the Czech Republic and Poland.
Latin America
Growth
Volumes (9L cases) 4%
Net turnover 3%
Advertising and promotion 6%
Trading profit 5%
Trading profit grew 5% to GBP44m while net turnover grew 3% to GBP268m despite the challenging market conditions. This performance reflects a significant improvement in the second half, with volumes up 10%, net turnover up 13% and trading profit up GBP6m. The key drivers for the year are the growth of the core brands, particularly Sauza in Mexico, and our Argentine wines, which have been partially offset by a decline in Mexican brandies.
Our Mexican business continued to extend its position as the leading spirits business. Sauza continued to grow its share to become the second largest tequila brand in Mexico. Volumes were up 36% and net turnover grew 27% reflecting price reductions caused by the highly competitive tequila market as well as declines in the raw material costs. We have also increased our focus on the core brands which have delivered good growth in Ballantine's and Kahlua. The domestic brandy category continues to be affected by the growth of the illegal spirits market in Mexico, which has resulted in a 5% decline in our Mexican brandy volumes. However, our brands have maintained their leadership of the category, and we delivered a better performance in the second half with brandy volumes up 7% driven by Presidente, albeit against weaker comparatives. We have continued to work with the Mexican government on initiatives to tackle the growth of the illegal spirits market. The recently implemented regimes apply excise duties on all alcohol imports and production in order to prevent its diversion to the illegal market. It is too early to determine the effectiveness of these initiatives.
In Argentina, we have extended our market leadership through growth of our core spirits brands, such as Tia Maria and Beefeater, and our Argentine wine portfolio. The Argentine wine portfolio helped to grow our domestic wine volumes by 40% and net turnover by 78%. In Brazil, our Latin American wines have also helped to grow our overall Brazilian volumes by 5%. Ballantine's also continued to perform well in the other Latin American markets.
Asia Pacific
Growth
Volumes (9L cases) 2%
Net turnover (3)%
Advertising and promotion 15%
Trading profit (4)%
The challenging trading conditions in South Korea, where a consumer credit squeeze has triggered a significant slowdown in the overall spirits market, has caused the regional trading profit to decline by 4% to GBP68m. Net turnover for the region fell by 3% to GBP226m while volumes grew 2%. Core brand volumes in the region grew 14% offsetting the declines in local market leader brands in South Korea and the Philippines. Outside of South Korea, we experienced strong growth in the rest of the region with volumes up 11% driven by good performances in Greater China, Australasia and the emerging new markets.
The consumer credit squeeze in South Korea has slowed consumer spending which has badly affected the spirits industry. As a result, the whisky category has declined by 26% since August 2003 but our total market share improved by 1.4 percentage points to 34%. We improved our share across the premium, deluxe and super-premium categories. The premium (12 year old) category has been most affected, declining 29%, while Imperial Scotch whisky maintained its market leadership with volumes down 22%. We have, however, continued to grow our share of the premium whisky category to an all-time high. The more premium-priced brands have fared better as the consumer base is relatively less affected by the credit squeeze. This trend is continuing to support a mix benefit for Ballantine's aged whisky. In addition, in December we successfully launched Imperial 17 year old Scotch to broaden our access to this more premium-priced category. This was the main driver for the 15% increase in advertising and promotion in the Asia Pacific region. Our work with Imperial 17 year old and Ballantine's Masters has grown our share of the deluxe premium category in South Korea.
In Australia, our volumes grew 29% driven particularly by the success of our ready-to-drink extensions and good growth from Ballantine's and Malibu. The ready-to-drink formats are based on Canadian Club, with CC Club and CC Cola growing volumes by 40%, and the recent launch of Malibu Chill which has been very well received. The base Malibu brand also grew strongly in Australia with volumes up 25%. In the Philippines, Fundador has maintained its position as the largest international spirits brand but incurred volume declines of 14% as a result of increasing competition from low-priced Spanish imports and the difficult economy. Sales in Japan improved this year, driven particularly by Ballantine's aged whisky.
Our business in China has progressed in building organisational capabilities and a sales network. This delivered good growth from a small base such that volumes grew by 75% driven by Ballantine's, up 90%, and Courvoisier, up 74%.
Premium Wine
Growth
Volumes (9L cases) 0%
Net turnover 7%
Advertising and promotion 9%
Trading profit 13%
The premium wine brands have grown strongly with trading profit up 13% to GBP98m. Net turnover increased by 7% to GBP475m on flat volumes which reflects a strong price/mix improvement of 7%. Advertising and promotion increased 9% primarily behind our champagne brands. Our continued focus on value and mix improvement is delivering improving returns on investment and we are on track to reach our targets. These excellent results have been achieved at a time when many other wine companies have struggled against a challenging wine market. It demonstrates the strength of our wine brands and the benefits of our geographic diversity which have provided a natural hedge against recent variations in wine cycles. We have also improved our capital efficiency both by better working capital management and through disposal of non-strategic assets. These capital savings along with the profit growth are driving higher returns.
Our premium-priced wines (GBP5 or US$7 retail price and above) represent around 55% of the portfolio by volume but around 85% of the portfolio by value. Our strategy is to shift the mix of our wine portfolio towards these more premium categories and away from the value category. As a result, we delivered flat overall volume growth reflecting a strong performance in the premium categories offset by the declines in the value categories. It was helped by a significant growth in premium wine volumes during the second half with overall volumes up 4% and net turnover up 9%.
We had a very strong year in the US, our largest wine market, with overall volumes up 14% and net turnover up 17%. Our largest US brand, Clos du Bois, was the key driver with volumes up 13%. Its core chardonnay varietal grew well and we also benefited from the introduction of a new shiraz varietal. The successful launches of the Jerry Garcia label and Mumm 'M' were also helpful growth drivers. Mumm Cuvee Napa experienced overall strong growth with volumes up 14%. The addition of the Gary Farrell icon wines into the portfolio has also helped to improve the credibility and breadth of the US domestic portfolio. The other key growth driver was the continued introduction of wine imports into the US market, particularly from New Zealand, Champagne and Spain. The New Zealand wines, which we market under the Brancott label in the US, delivered volume growth of 38% and our champagne volumes in the US increased by 36%. Both our domestic and imported brands benefited from broader distribution and improved sales and marketing capabilities within the US market.
The UK wine business delivered good growth with volumes up 7% and net turnover up 10%. There was good growth from a range of brands from different production regions. The New Zealand brands grew volumes and net turnover by 9% in spite of the supply shortage resulting from last year's reduced grape harvest. The Spanish Rioja brands benefited from the strength of our UK distribution, with Campo Viejo volumes up 24% and net turnover up 34%. The champagnes have also delivered net turnover growth of 6% as we have increased prices, particularly on Mumm. Our largest Argentine wine brand, Graffigna, also saw good growth with volumes up 17% and net turnover up 26%.
Our wine sales in Australia and New Zealand had a slow start to the year. The domestic sales in New Zealand declined, primarily reflecting the grape supply shortage caused by last year's frost damage. Consolidation among the retailers also put pressure on sales. However, we restructured our operations in New Zealand and Australia and, coupled with the improving supply situation, we saw good net turnover growth across all brand categories in the second half. The grape harvest in 2004 was at record levels and will support future growth even though overall supply remains tight in the New Zealand market. The premium positioning of our portfolio and the tension in grape supply will support continued value growth from our New Zealand operations.
In Spain, we restructured our operations and continued to focus on driving the mix shift from low value table wine to more premium categories. In the second half, our volumes grew 5% and net turnover grew 10% with good growth across the premium portfolio. In the year as a whole, volumes declined 7% but delivered seven percentage points of price/mix improvement to give flat overall turnover.
Global Operations and Duty Free
During the year, we restructured our Global Operations activities around a simpler functional model based upon regional manufacturing units, supply chain, procurement, finance, human resources and technical operations. This new structure is enabling us to leverage our global scale more effectively, to transfer best practice, to speed up decision-making and deliver better utilisation of our assets. Global Operations has continued to improve productivity by 3% for Spirits & Wine, measured as cases produced per employee. This improvement has been achieved across the key production centres.
Our Duty Free business has grown well with core brand volumes up 8%. The growth came from nearly all the brands with particularly strong performances from aged Ballantine's in Asia, Sauza in the US and Europe, Beefeater and Canadian Club in the US. Traffic numbers have improved during the year, particularly in Asia and the US which were affected by the SARS virus and the Gulf War, respectively, last year. The premium wine brands also performed well with good growth from across the portfolio following improved distribution and listings in airport shops.
QUICK SERVICE RESTAURANTS
-Distribution points up 6% -Number of combination stores up 18% -System-wide sales growth of 12% -Turnover down 3% -Trading profit up 21%
Quick Service Restaurants had an excellent year with profits up 21% to GBP86m driven by continued growth in same store sales, the contribution from new stores and from the cost savings resulting from last year's reorganisation. Distribution points increased by 6% with new store openings in both the US and internationally. Global system-wide sales increased by 12%. However, overall turnover has fallen by 3% (GBP7m) to GBP226m, reflecting the final transition of Baskin-Robbins from producing and selling ice cream to US franchisees (which is now fully contracted out) to a wholly royalty-based model. Excluding the effect of this outsourcing, turnover is up 6%. Gross profit increased by 6% to GBP208m.
Dunkin' Donuts is the key growth driver for QSR with a 13% increase in global system-wide sales. This reflects US same store sales up 6.9% and a 6% increase in global distribution points. The same store sales growth exceeds the rate for the overall industry and is driven by innovation and excellent marketing. In particular, a new range of coffee offerings including latte, cappuccino and espresso products was launched in October 2003. During the summer, the range was extended to include iced coffee options which also proved very popular. The launch exceeded all expectations and helped beverages to grow by 13%. The launch has been supported by the introduction of new high-speed coffee machines that support Dunkin' Donuts reputation for speed, quality and value for money. On the baked goods side, we introduced a new apple pie product and new breakfast sandwich formats.
Baskin-Robbins grew global system-wide sales by 10%. This was driven by same store sales growth and a 7% increase in new store openings. US same store sales grew 2.1%, benefiting from a movie co-promotion with the recent Dreamworks film, Shrek 2, which saw the launch of new flavours such as Fiona's Fairytale, Shrek'd Out Chocolate Mint and Shrek's Hot Sludge sundae. We also re-launched Cappuccino Blast for the summer with good results and successfully trialled a new store format in California. The key innovations for the new store concept are a beverage bar, a new cake display and the introduction of a new soft-serve ice cream to which customers can add their own toppings. The initial results are encouraging. To support the international business, which accounts for almost half of Baskin-Robbins stores, we introduced a global advertising fund in conjunction with the franchisees to deliver a more co-ordinated and cost effective approach to marketing in our international markets.
The difficult economic conditions in California and the increasingly competitive environment has held back the sales of Togo's which recorded an 8% decline in system-wide sales. However, the store innovation and refurbishment programme which has now covered around half of the stores is delivering improved results. The new store formats provide improved menu boards and we have introduced new products such as low carbohydrate bread and new salad dressings.
Multi-branded stores, which combine the Dunkin' Donuts and Baskin-Robbins restaurants in one location, increased by 18% to over 1,300 store locations. This is a key driver of new store openings and is supported by the brands' complementary day-part offering and brings significant benefits to our franchisees through improved scale and operating efficiencies, along with increased choice for consumers.
This year's results also reflect the benefit of the restructuring that we implemented during 2003. The new structure has increased the focus on the three brands and is improving operational systems and standards, menu and product development and the expansion of the international business. We have also generated cost savings in the period of GBP6m.
BRITANNIA SOFT DRINKS
The Group's share of Britannia's profits for the period was GBP23m (2003: GBP20m). Allied Domecq and the other shareholders of Britannia Soft Drinks Limited have also agreed subject, inter alia, to market conditions, to consider an initial public offering of Britannia Soft Drinks, between 1 January 2005 and 31 December 2008. Allied Domecq has a 23.75% share of Britannia Soft Drinks Limited.
TAXATION
The normalised tax charge for the year has remained at 24%, in line with last year.
GOODWILL AND EXCEPTIONAL ITEMS
Goodwill amortisation totalled GBP40m (2003: GBP40m). The exceptional items include profits on property disposals (GBP14m); an additional profit on the disposal of Panrico (GBP20m); offset by costs incurred in restructuring the Spirits & Wine business (GBP31m) and asset write-downs (GBP5m).
Property disposals related primarily to assets within the premium wine business. The consideration for the disposal of our 50% interest in Panrico in March 2000 included an additional payment of GBP20m to be paid by the end of March 2006 or earlier, contingent upon future events. On 19 August 2004, we agreed to receive this payment from Panrico in full and final settlement of the original sale and purchase agreement.
The restructuring programme is aimed at reducing the overlap between central, regional and market-focused functions and has enabled us to be leaner and more efficient, speed up decision-making and reinforce accountability throughout the business. The programme has delivered operational savings this year of GBP15m.
CASH FLOW
Last year, cash flow benefited from the Mexican excise rebate of GBP38m (net of tax) and the timing of duty payments of around GBP40m. Excluding these non-repeatable items, free cash flow improved by GBP88m despite absorbing a number of additional outlays such as increased pension contributions and restructuring costs. We have continued to focus on trade working capital management and reducing the level of capital expenditure and active management of the asset base through disposals of non-strategic assets. Our interest payments were GBP10m lower compared with last year, benefiting from the lower average net debt.
TREASURY OPERATIONS AND FOREIGN EXCHANGE
The Group operates a centralised treasury managing interest rate and foreign exchange risk and financing. The Board agrees and reviews risk management policies.
We operate a prudent hedging policy. Net currency exposures on transactions are hedged forward for between 12 and 18 months using a blend of foreign exchange forwards and options. As hedges fall away, if the currencies remain depreciated, the margins of the imported products are negatively affected.
It is our policy not to hedge the impact of foreign exchange movements on the translation of our overseas earnings into Sterling. For constant rate reporting purposes, our prior year profit before tax was reduced by GBP38m, primarily due to the weakening of the US dollar and Mexican peso.
We anticipate, based on current exchange rates and the hedge contracts in place, that trading profit will be adversely affected during the next financial year by around GBP30m, including GBP20m from currency exposures on transactions.
Our balance sheet is also exposed to currency translation impacts. Our policy is to match our currency of debt in proportion to foreign currency earnings in order to reduce this exposure.
The amount of risk to any counterparty is restricted according to their credit rating. We continually monitor our exposure to counterparties and for any changes in their credit rating.
Exposures to interest rate fluctuations charged against our borrowings are managed using interest rate swaps and interest rate options. It is our policy to keep between 60% and 80% of net debt at fixed rates of interest with a target of 70%.
Net debt has reduced by GBP471m during the year from GBP2,412m to GBP1,941m. This improvement includes a favourable currency translation impact on our borrowings of GBP193m, which is largely due to the US dollar weakness. Net debt reduction from cash flows was GBP278m, benefiting from the Panrico receipt (GBP20m).
At 31 August 2004, EV gearing (net debt as a percentage of market capitalisation plus net debt) was 28% (2003: 36%). Interest cover based on normalised EBITDA was 5.4 times and cover based on normalised EBITA was 4.8 times.
PENSIONS
As anticipated, the profit and loss charge under FRS 17 was GBP51m (2003: GBP49m), with a GBP32m (2003: GBP29m) charge within trading profit and a GBP19m (2003: GBP20m) impact within finance charges. Within the framework of FRS 17 we are able to confirm the charge for 2005 will be similar to 2004.
The post tax deficit included in the balance sheet at 31 August 2004 was GBP387m compared with GBP405m at 31 August 2003.
NEW ACCOUNTING STANDARDS AND OTHER GLOBAL GAAP ISSUES
UK standards
We have adopted 'FRS 17 - Retirement benefits' from 1 September 2003 which has led to a restatement of the figures for the year ended 31 August 2003, with a GBP16m increase in trading profit, a GBP20m increase in finance charges and a GBP1m decrease in the tax charge.
The amendment to 'FRS 5 - Reporting the substance of transactions' has resulted in a number of items which were previously classified as operating costs (GBP69m) and advertising and promotion (GBP24m) to be treated as discounts, reducing turnover by GBP93m for the year ended 31 August 2003. Trading profit was not affected.
The impact of these accounting standards on the profit and loss account for the year ended 31 August 2003 is summarised on page 18.
We have also complied with 'UITF 38 - Accounting for ESOP trusts' which has resulted in a reclassification of shares held in employee trusts from investments to Shareholders' funds, reducing net assets by GBP129m at 31 August 2003. There were no changes to reported profits for the year ended 31 August 2003.
International Financial Reporting Standards
All EU companies listed on an EU stock exchange will be required to report their consolidated accounts in accordance with International Financial Reporting Standards ("IFRS"), as published by the International Accounting Standards Board ("IASB"), for all accounting periods commencing on or after 1 January 2005.
Accordingly, we will present our first set of full financial statements under IFRS for the year ending 31 August 2006. This will require a full profit and loss account, balance sheet and cash flow statement for the year ending 31 August 2005 for comparative purposes. For US GAAP reporting, the US Securities and Exchange Commission has yet to determine whether we are also required to present comparatives for the year ended 31 August 2004.
We have established a project team to ensure that appropriate processes and procedures are in place to achieve the transition to IFRS. The project team is addressing all implementation aspects, including changes to accounting policies, systems implications and wider business issues that may arise. The implementation plan is dependent upon the completion of the standard-setting process by the IASB and the endorsement of such standards by the EU.
The Group has not yet determined the full effects of adopting IFRS. However, at this stage we believe that the major differences between our current accounting practice and IFRS will relate to accounting for financial instruments, accounting for business combinations, and accounting for fixed assets and stock under the agriculture standard.
US GAAP
In the course of our preparatory work to convert our financial statements from UK GAAP to IFRS, we have identified the need to correct our prior reconciliation to US GAAP. The correction relates to the foreign currency translation of certain assets and liabilities in connection with the functional currencies used in past business combinations. The Group has restated the US GAAP reconciliation for prior periods and the impact in 2003 was a GBP1m charge on Net income, a GBP105m credit to Comprehensive income and a GBP26m reduction in Shareholders' equity. Further information can be found on page 52. This reconciliation does not affect any of our UK GAAP financial statements or cash flows under US or UK GAAP.
CONSTANT EXCHANGE RATE REPORTING
The following tables provide a reconciliation between the 2003 reported results and those shown at constant exchange rates in the Operating and Financial Review.
2003
FRS 5/
Reported FRS 17 Foreign At 2004
2003 restatement exchange exchange
GROUP GBPm GBPm GBPm GBPm
Turnover 3,410 (93) (161) 3,156
Trading 621 16 (43) 594
profit
Finance (126) (20) 5 (141)
charges
Profit 495 (4) (38) 453
before tax
Taxation (119) 1 9 (109)
Minority (16) - - (16)
interests
Earnings 360 (3) (29) 328
Weighted 1,075 - - 1,075
average
number of
ordinary
shares
(millions)
Normalised 33.5 (0.3) (2.7) 30.5
earnings
per share
(pence)
2004
Growth
Reported at 2004
2004 exchange
GROUP GBPm %
Turnover 3,229 2
Trading 657 11
profit
Finance (136) (4)
charges
Profit 521 15
before tax
Taxation (125) 15
Minority (14) (13)
interests
Earnings 382 16
Weighted 1,075 1,076
average
number of
ordinary
shares
(millions)
Normalised 35.5 16
earnings
per share
(pence)
2003
FRS 5/
FRS 17
Reported restatement Foreign At 2004
2003 GBPm exchange exchange
SPIRITS & GBPm GBPm GBPm
WINE
Turnover 3,151 (93) (135) 2,923
Duty (671) - 28 (643)
Net 2,480 (93) (107) 2,280
turnover
Advertising (437) 24 17 (396)
& promotion
Trading 522 16 (35) 503
profit
2004
Growth
at 2004
Reported exchange
2004 %
SPIRITS & GBPm
WINE
Turnover 3,003 3
Duty (618) (4)
Net 2,385 5
turnover
Advertising (421) 6
& promotion
Trading 548 9
profit
Geographical Analysis - Group turnover and trading profit
In line with previous statements, the trading profits of the regions shown in this review are on a management reporting basis at constant exchange rates, rather than on a statutory basis at each year's actual exchange rates, as shown in note 2 to the accounts. The table below shows the foreign exchange effect of restating last year's reported trading profit for each region at this year's actual exchange rates. "Others" in the table includes Global Operations (including profit from the sale of bulk whisky), stand-alone Duty Free operations and central costs not allocated to the sales and marketing regions. The profit decline in "Others" principally reflects increased central marketing costs and the additional costs associated with the implementation of the requirements of the Sarbanes-Oxley Act of 2002 and International Financial Reporting Standards.
Geographical Analysis - Group net turnover
2003
FRS5/
Reported FRS17 Foreign At 2004
2003 restatement exchange exchange
GBPm GBPm GBPm GBPm
North 649 (15) (55) 579
America
Europe 762 (49) 10 723
Latin 303 (2) (41) 260
America
Asia 258 (12) (14) 232
Pacific
Premium 463 (12) (5) 446
Wine
Others 45 (3) (2) 40
Spirits & 2,480 (93) (107) 2,280
Wine
QSR 259 - (26) 233
TOTAL 2,739 (93) (133) 2,513
2004
Growth
Reported at 2004
2004 exchange
GBPm %
North 632 9
America
Europe 734 2
Latin 268 3
America
Asia 226 (3)
Pacific
Premium 475 7
Wine
Others 50 25
Spirits & 2,385 5
Wine
QSR 226 (3)
TOTAL 2,611 4
Geographical Analysis - Group trading profit
2003
FRS5/
Reported FRS17 Foreign At 2004
2003 restatement exchange exchange
GBPm GBPm GBPm GBPm
North 182 - (23) 159
America
Europe 114 - 8 122
Latin 54 - (12) 42
America
Asia Pacific 78 - (7) 71
Premium Wine 95 - (8) 87
Others (1) 16 7 22
Spirits & 522 16 (35) 503
Wine
QSR 79 - (8) 71
Britannia 20 - - 20
TOTAL 621 16 (43) 594
2004
Growth
Reported at 2004
2004 exchange
GBPm %
North 183 15
America
Europe 139 14
Latin 44 5
America
Asia Pacific 68 (4)
Premium Wine 98 13
Others 16 (27)
Spirits & 548 9
Wine
QSR 86 21
Britannia 23 15
TOTAL 657 11
Accounting policies
Year to 31 August 2004
Basis of accounting
The accounts are prepared under the historical cost convention and comply with accounting policies generally accepted in the United Kingdom ("UK GAAP").
The significant differences between UK GAAP and US generally accepted accounting principles ("US GAAP") and a reconciliation of net income and Shareholders' equity from UK GAAP to US GAAP as a result of such differences are shown on pages 52 to 55.
Changes in accounting policies
The Group has adopted "FRS 17 - Retirement Benefits" in full from 1 September 2003 (see note 5). In prior years the Group has complied with the transitional disclosure requirements of this standard. The Group has also adopted "Application Note G - revenue recognition" an amendment to "FRS 5 - Reporting the substance of transactions" (see note 1) and has complied with "UITF 38 - Accounting for ESOP Trusts" (see note 14).
The impact of the adoption of these accounting standards has been reflected throughout the accounts. Prior year comparatives have been restated where appropriate (see note 23).
Basis of consolidation
Allied Domecq PLC (the "Group" or "Company") accounts consolidate the accounts of the Company and its interests in subsidiary undertakings. Interests in associated undertakings are included using the equity method of accounting. The results of businesses acquired or disposed of during the year are consolidated for the period from, or up to, the date control passes.
Acquisitions
On the acquisition of a business, or an interest in an associate, fair values, that reflect conditions at the date of the acquisition, are attributed to the net assets acquired. Adjustments are also made to bring accounting policies in line with those of the Group.
Intangible fixed assets
Goodwill arising on acquisitions of a business since 1 September 1998 is capitalised and amortised by equal instalments over its anticipated useful life, but not exceeding 20 years. Goodwill arising on acquisitions prior to 1 September 1998 was charged directly to reserves. On disposal of a business, any attributable goodwill previously eliminated against reserves is included in the calculation of any gain or loss. Purchased intangible assets are also capitalised and amortised over their estimated useful economic lives on a straight line basis, except for purchased brand intangible assets. Purchased brand intangible assets are considered by the Board of Directors to have an indefinite life given the proven longevity of premium spirits brands and the continued level of marketing support. We do not amortise purchased brand intangible assets but they are subject to annual impairment reviews.
Tangible fixed assets
Tangible fixed assets are capitalised at cost. Depreciation is provided to write off the cost less the estimated residual value of assets by equal instalments over their estimated useful economic lives as follows: Land and buildings - the shorter of 50 years or the length of the lease; distilling and maturing equipment - 20 years; storage tanks - 20 to 50 years; other plant and equipment and fixtures and fittings - 5 to 12 years; and computer software - 4 years. Vineyard developments are not depreciated in the first 3 years unless they become productive within that time. No depreciation is provided on freehold land.
Fixed asset investments
Fixed asset investments are stated at cost, less provision for any permanent diminution in value.
Turnover
Turnover represents sales to external customers (including excise duties but excluding sales taxes) and franchise income.
Stocks
Stocks are valued at the lower of cost and net realisable value. Cost comprises purchase price or direct production cost, together with duties and manufacturing overheads. The cost of spirits and wine stocks is determined by the weighted average cost method. Stocks are included in current assets, although a portion of such stocks may be held for periods longer than one year.
Deferred tax
Full provision is made for deferred tax assets and liabilities arising from timing differences. Deferred tax assets are recognised to the extent that they are regarded as recoverable.
Financial instruments
The Group uses financial derivative instruments to manage exposures to movements in interest and exchange rates. Transactions involving financial instruments are accounted for as follows:
(i) Gains or losses arising on forward exchange contracts are taken to the profit and loss account in the same period as the underlying transaction. Premiums paid or received on foreign currency options are taken to the profit and loss account when the option expires or matures.
(ii) Net interest arising on interest rate agreements is taken to the profit and loss account over the life of the agreement.
(iii) Gains and losses on foreign currency debt and foreign exchange contracts held for the purposes of hedging balance sheet translation exposures are taken to reserves.
Accounting policies (continued)
Foreign currencies
Monetary assets and liabilities arising from transactions in foreign currencies are translated at the rate of exchange prevailing at the date of transaction. Subsequent movements in exchange rates are included in the Group profit and loss account. The results of undertakings outside the UK are translated at weighted average exchange rates each month. The closing balance sheets of undertakings outside the UK are translated at year end rates. Exchange rate differences arising from the translation of foreign currency denominated balance sheets to closing rates are dealt with through reserves.
Pension and post-employment benefits
In accordance with FRS 17 - Retirement benefits, the operating and financing costs of pension and post-retirement schemes are recognised separately in the profit and loss account. Service costs are systematically spread over the service lives of the employees and financing costs are recognised in the period in which they arise. The costs of past service benefit enhancements, settlements and curtailments are also recognised in the period in which they arise. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of total recognised gains and losses.
Group profit and loss account
Year to 31 August 2004
Year to 31 August 2004
Before
goodwill Goodwill
and and
exceptional exceptional
items items Total
Note GBPm GBPm GBPm
Turnover 1 3,229 - 3,229
Operating costs
-goodwill amortisation 6 - (40) (40)
-Mexican excise rebate 6 - - -
-other 6 (2,604) (36) (2,640)
Operating profit from 625 (76) 549
continuing operations
Share of profits of 15 32 - 32
associated undertakings
Trading profit on ordinary
activities
before finance charges 1 657 (76) 581
Profit on sale of businesses
in discontinued activities 7 - 20 20
Profit on disposal of fixed
assets in
continuing activities 7 - 14 14
Profit on ordinary activities
before finance charges 657 (42) 615
Interest payable 8 (117) - (117)
Other finance charges 5 (19) - (19)
Profit on ordinary activities 521 (42) 479
before taxation
Taxation 9 (125) 16 (109)
Profit on ordinary activities 396 (26) 370
after taxation
Minority interests - equity and
non-equity 24 (14) - (14)
Profit earned for Ordinary
Shareholders for the year 23 382 (26) 356
Ordinary dividends 11 (167)
Retained profit 189
Earnings per Ordinary Share:
- basic 10 33.1p
- diluted 10 32.9p
- normalised 10 35.5p
Year to 31 August 2003 (restated)
Before
goodwill Goodwill
and and
exceptional exceptional
items items Total
Note GBPm GBPm GBPm
Turnover 1 3,317 - 3,317
Operating costs
-goodwill amortisation 6 - (40) (40)
-Mexican excise rebate 6 - 38 38
-other 6 (2,704) (10) (2,714)
Operating profit from 613 (12) 601
continuing operations
Share of profits of 15 24 - 24
associated undertakings
Trading profit on
ordinary activities
before finance charges 1 637 (12) 625
Profit on sale of businesses
in discontinued
activities 7 - - -
Profit on disposal of
fixed assets in
continuing activities 7 - - -
Profit on ordinary activities before
finance charges 637 (12) 625
Interest payable 8 (126) - (126)
Other finance charges 5 (20) - (20)
Profit on ordinary activities 491 (12) 479
before taxation
Taxation 9 (118) (8) (126)
Profit on ordinary activities 373 (20) 353
after taxation
Minority interests - equity and
non-equity 24 (16) - (16)
Profit earned for Ordinary
Shareholders for the year 23 357 (20) 337
Ordinary dividends 11 (150)
Retained profit 187
Earnings per Ordinary Share:
- basic 10 31.3p
- diluted 10 31.3p
- normalised 10 33.2p
Group balance sheet
At 31 August 2004
31 August 31 August 2003
2004 (restated)
Note GBPm GBPm
Fixed assets
Intangible assets 12 1,234 1,273
Tangible assets 13 921 966
Investments and loans 14 21 31
Investments in associates 15 73 85
Total fixed assets 2,249 2,355
Current assets
Stocks 16 1,343 1,407
Debtors 17 636 701
Cash at bank and in hand 129 175
Total current assets 2,108 2,283
Creditors (due within one year)
Short-term borrowings 20 (378) (772)
Other creditors 18 (1,088) (1,161)
Total current liabilities (1,466) (1,933)
Net current assets 642 350
Total assets less
current liabilities 2,891 2,705
Creditors (due after more
than one year)
Loan capital 20 (1,692) (1,815)
Other creditors 18 (43) (46)
Total creditors due (1,735) (1,861)
after more than one year
Provisions for
liabilities and charges 19 (179) (126)
Net assets excluding pension and 977 718
post-retirement liabilities
Pension and post-retirement
liabilities (387) (405)
(net of deferred taxation)
Net assets including pension and 590 313
post-retirement liabilities
Capital and reserves
Called up share capital 22 277 277
Share premium account 23 165 165
Merger reserve 23 (823) (823)
Shares held in employee trusts 23 (112) (129)
Profit and loss account 23 1,003 747
Shareholders' funds - equity 510 237
Minority interests - equity 24 80 76
and non-equity
590 313
Approved by the Board on 20 October 2004 and signed on its behalf
by:
Sir Gerry Robinson, CHAIRMAN Graham Hetherington, DIRECTOR
Group cash flow information
Year to 31 August 2004
Year to
Year to 31 August
31 August 2003
2004 (restated)
Reconciliation of operating Note GBPm GBPm
profit to net cash inflow
from operating activities
Operating profit 549 601
Goodwill amortisation 40 40
Exceptional operating costs 8 4
Depreciation 78 75
Increase in stocks (5) (72)
(Decrease)/increase in debtors (3) 58
Increase in creditors 9 65
Expenditure against provisions
for reorganisation and
restructuring costs (34) (29)
Other items 13 6
Net cash inflow from 655 748
operating activities
Group cash flow statement
Net cash inflow from 655 748
operating activities
Dividends received from 15 13
associated undertakings
Returns on investments and 25 (122) (148)
servicing of finance
Taxation paid 25 (82) (65)
Capital expenditure and 25 (58) (120)
financial investment
Acquisitions and disposals 25 9 -
Equity dividends paid (156) (144)
Cash inflow before use of 261 284
liquid resources and financing
Management of liquid resources (4) 50
Financing 25 16 (200)
Increase in cash in the year 273 134
Reconciliation of net cash flow to movement in net debt
Increase in cash in the year 273 134
Increase/(decrease) in liquid 4 (50)
resources
Decrease in loan capital 1 164
Movement in net debt resulting 278 248
from cash flows
Exchange adjustments 193 (82)
Movement in net debt during 471 166
the year
Opening net debt (2,412) (2,578)
Closing net debt 27 (1,941) (2,412)
Group statement of total recognised gains and losses
Year to 31 August 2004
Year to Year to 31 August
31 August 2003
2004 (restated)
GBPm GBPm
Profit earned
for Ordinary
Shareholders
for the year 356 337
Currency
translation
differences
on foreign
currency net
investments 108 4
Taxation on
translation
differences (26) 19
Associated
undertaking
reserve
movement (see note 15) (17) -
Actuarial
gains/(losses)
on net pension
liabilities 2 (65)
Total recognised
gains and losses
for the year 423 295
Prior year adjustment (552)
Total gains and
losses recognised
since the last
Annual Report
and Accounts (129) 295
Group note of historical cost profits and losses
Year to 31 August 2004
There is no difference between the profit earned for ordinary shareholders as disclosed in the profit and loss account and the profit stated on an historical cost basis.
Group reconciliation of movements in Shareholders' funds
Year to 31 August 2004
Year to Year to 31 August
31 August 2003
2004 (restated)
GBPm GBPm
Total recognised
gains and losses
for the year 423 295
Movement on shares
in employee trusts 17 (36)
Ordinary dividends (167) (150)
Net movement in
Shareholders' funds 273 109
Shareholders' funds
at the beginning of
the year as originally
reported 918 706
Prior year
adjustment
(see note 23) (681) (578)
Shareholders' funds
at the beginning
of the year
as restated 237 128
Shareholders' funds
at the end
of the year 510 237
Parent company balance sheet
At 31 August 2004
31 August
31 August 2003
2004 (restated)
Note GBPm GBPm
Fixed asset investments 14 4,086 4,086
Current assets
Debtors 17 98 12
Creditors (due within one year)
Other creditors 18 (115) (180)
Net current liabilities (17) (168)
Net assets 4,069 3,918
Capital and reserves
Called up share capital 22 277 277
Share premium account 23 165 165
Merger reserve 23 2,420 2,420
Capital reserve 23 651 651
Shares held in employee trusts 23 (112) (129)
Profit and loss account 23 668 534
Shareholders' funds - equity 4,069 3,918
Approved by the Board on 20 October 2004 and signed on its behalf by:
Sir Gerry Robinson, CHAIRMAN Graham Hetherington, DIRECTOR
Profits of the Parent Company
Under s230 (4) of the Companies Act 1985, a separate profit and loss account for the Parent Company is not presented.
Profits for the year arising in the Parent Company are disclosed in note 23.
Notes to the accounts
1. Activity analysis
Spirits &
Wine QSR Britannia
GBPm GBPm GBPm
Year to 31 August 2004
Turnover 3,003 226 -
Trading profit before exceptional items
and goodwill 548 86 23
Goodwill amortisation (40) - -
Exceptional items (34) (2) -
Trading profit after goodwill and
exceptional items 474 84 23
Profit on sale of businesses in
discontinued activities - - -
Profit/(loss) on disposal of fixed assets
in continuing activities 15 (1) -
Profit before finance charges 489 83 23
Finance charges
Profit on ordinary activities before taxation
Depreciation 68 10 -
Capital expenditure 91 21 -
Assets employed 2,616 134 36
Average numbers of employees 10,762 923 -
Year to 31 August 2003 (restated)
Turnover 3,058 259 -
Trading profit before exceptional items
and goodwill 538 79 20
Goodwill amortisation (40) - -
Exceptional items 37 (9) -
Profit before finance charges 535 70 20
Finance charges
Profit on ordinary activities before taxation
Depreciation 64 11 -
Capital expenditure 114 27 -
Assets employed 2,794 103 32
Average numbers of employees 11,343 1,206 -
Total Discont
continuing inued Total
GBPm GBPm GBPm
Year to 31 August 2004
Turnover 3,229 - 3,229
Trading profit before exceptional items
and goodwill 657 - 657
Goodwill amortisation (40) - (40)
Exceptional items (36) - (36)
Trading profit after goodwill and
exceptional items 581 - 581
Profit on sale of businesses in
discontinued activities - 20 20
Profit/(loss) on disposal of fixed assets
in continuing activities 14 - 14
Profit before finance charges 595 20 615
Finance charges (136)
Profit on ordinary activities before taxation 479
Depreciation 78 - 78
Capital expenditure 112 - 112
Assets employed 2,786 - 2,786
Average numbers of employees 11,685 - 11,685
Year to 31 August 2003 (restated)
Turnover 3,317 - 3,317
Trading profit before exceptional items
and goodwill 637 - 637
Goodwill amortisation (40) - (40)
Exceptional items 28 - 28
Profit before finance charges 625 - 625
Finance charges (146)
Profit on ordinary activities before taxation 479
Depreciation 75 - 75
Capital expenditure 141 - 141
Assets employed 2,929 - 2,929
Average numbers of employees 12,549 - 12,549
Notes:
a) The Group has adopted "Application Note G" an amendment to "FRS 5 - Reporting the substance of transactions". This has resulted in a number of items that were previously classified as operating costs (GBP69m) and advertising and promotion (GBP24m) to be treated as discounts. Trading profit was not affected.
b) Normalised profit before tax is GBP521m (2003: GBP491m) being trading profit GBP657m (2003: GBP637m) less finance charges GBP136m (2003: GBP146m).
c) Spirits & Wine goodwill is amortised over 20 years and relates principally to Mumm, Perrier Jouet and Montana acquired in 2001 and Jinro Ballantines acquired in 2000.
d) Assets employed are before deducting net borrowings of GBP1,941m (2003: GBP2,412m), tax payable of GBP151m (2003: GBP111m) and dividends payable of GBP104m (2003: GBP93m) to give net assets of GBP590m (2003: GBP313m).
e) Trading profit includes the Group's share of profits of associated undertakings whose turnover is not included.
f) Acquired activities in 2004 had no material impact on turnover and trading profit.
Notes to the accounts
2. Geographical analysis
Europe Americas
GBPm GBPm
By country
of operation
Year to 31 August 2004
Turnover - continuing activities 2,106 1,685
- to Group companies
- external
Trading profit - continuing activities 250 348
- goodwill amortisation in
continuing activities (20) (2)
- exceptional items in
continuing activities (23) (10)
Trading profit after goodwill 207 336
and exceptional items
Profit on sale of businesses 20 -
in discontinued activities
Profit on disposal of fixed assets 14 -
in continuing activities
Profit before finance charges 241 336
Assets employed 1,081 1,079
Year to 31 August 2003 (restated)
Turnover - continuing activities 2,029 1,804
- to Group companies
- external
Trading profit - continuing 246 326
activities
- goodwill amortisation in
continuing activities (20) (2)
- exceptional items in
continuing activities 4 24
Profit before finance charges 230 348
Assets employed 1,113 1,196
Rest of
World Total
GBPm GBPm
By country
of operation
Year to 31 August 2004
Turnover - continuing activities 368 4,159
- to Group companies (930)
- external 3,229
Trading profit - continuing activities 59 657
- goodwill amortisation in
continuing activities (18) (40)
- exceptional items in
continuing activities (3) (36)
Trading profit after goodwill 38 581
and exceptional items
Profit on sale of businesses - 20
in discontinued activities
Profit on disposal of fixed assets - 14
in continuing activities
Profit before finance charges 38 615
Assets employed 626 2,786
Year to 31 August 2003 (restated)
Turnover - continuing activities 411 4,244
- to Group companies (927)
- external 3,317
Trading profit - continuing 65 637
activities
- goodwill amortisation in
continuing activities (18) (40)
- exceptional items in
continuing activities - 28
Profit before finance charges 47 625
Assets employed 620 2,929
Notes:
a) Export sales from the United Kingdom were GBP431m (2003: GBP419m) including GBP301m (2003: GBP300m) sales to Group companies.
b) Trading profit includes the Group's share of profits of associated undertakings whose turnover is not included.
Notes to the accounts
2. Geographical analysis (continued)
Europe Americas
GBPm GBPm
By country of destination
Turnover - continuing activities 1,356 1,392
Trading profit - continuing 235 327
activities
- goodwill amortisation in
continuing activities (20) (2)
- exceptional items in
continuing activities (23) (10)
Trading profit after goodwill 192 315
and exceptional items
Profit on sale of businesses 20 -
in discontinued activities
Profit/(loss) on disposal of 14 -
fixed assets in
continuing activities
Profit before finance charges 226 315
Year to 31 August 2003 (restated)
Turnover - continuing activities 1,326 1,478
Trading profit - continuing activities 204 330
- goodwill amortisation in
continuing activities (20) (2)
- exceptional items in
continuing activities 4 24
Profit before finance charges 188 352
Rest of
World Total
GBPm GBPm
By country of destination
Turnover - continuing activities 481 3,229
Trading profit - continuing 95 657
activities
- goodwill amortisation in
continuing activities (18) (40)
- exceptional items in
continuing activities (3) (36)
Trading profit after goodwill 74 581
and exceptional items
Profit on sale of businesses - 20
in discontinued activities
Profit/(loss) on disposal of - 14
fixed assets in
continuing activities
Profit before finance charges 74 615
Year to 31 August 2003 (restated)
Turnover - continuing activities 513 3,317
Trading profit - continuing activities 103 637
- goodwill amortisation in
continuing activities (18) (40)
- exceptional items in
continuing activities - 28
Profit before finance charges 85 625
Notes:
a) Turnover excludes sales to Group companies. b) Trading profit includes the Group's share of profits of associated undertakings whose turnover is not included.
Notes to the accounts
3. Exchange Rates
The significant translation rates to GBP1 :-
Average rate
for the year Closing rate
31 August 31 August
2004 2003 2004 2003
United States 1.78 1.60 1.81 1.58
dollar
Mexican peso 19.92 16.72 20.55 17.48
Euro 1.47 1.49 1.48 1.45
4. Staff costs
Full-Time
UK Overseas
Note GBPm GBPm
Remuneration 71 270
Social security 9 35
Pension schemes - UK 5 11 -
- Overseas 5 - 17
Post retirement medical benefits
(PRMB) 5 1 3
92 325
Average numbers employed
2004 - continuing operations 1,699 8,856
2003 - continuing operations 1,804 9,319
Part-Time
UK Overseas
Note GBPm GBPm
Remuneration 2 7
Social security - -
Pension schemes - UK 5 - -
- Overseas 5 - -
Post retirement medical benefits
(PRMB) 5 - -
2 7
Average numbers employed
2004 - continuing operations 71 1,059
2003 - continuing operations 187 1,239
Year to Year to
31 August 2004 31 August 2003
(restated)
Total Total
Note GBPm GBPm
Remuneration 350 377
Social security 44 44
Pension schemes - UK 5 11 10
- Overseas 5 17 14
Post retirement medical benefits
(PRMB) 5 4 5
426 450
Average numbers employed
2004 - continuing operations 11,685
2003 - continuing operations 12,549
Directors' remuneration
The amounts relating to emoluments, share options, other long term incentive interests and Directors' pension entitlements are disclosed within the Directors' Remuneration Report to be included in the Annual Report and Accounts which will be published in November 2004
Notes to the accounts
5. Pension and post-retirement benefit schemes
The Group operates a number of pension and post-retirement healthcare schemes throughout the world. The major schemes are of the defined benefit type and the assets of the schemes are largely held in separate trustee administered funds. The UK funds represent approximately 80% of the overall pension liabilities of the Group and are closed to new members.
The Group operates defined benefit pension and post-retirement medical benefit plans in several countries overseas, with the most significant being in the US and Canada. In addition there are a number of defined contribution schemes.
The assets and liabilities of the defined benefit schemes are reviewed regularly by independent professionally qualified actuaries. For the UK schemes a full assessment is undertaken every three years for funding purposes and the latest full actuarial valuation of the UK schemes was carried out as at 6 April 2003 using the projected unit credit method. The latest actuarial reviews of the US and Canadian schemes were carried out as at 1 January 2004.
The Group has adopted 'FRS 17 - Retirement benefits' in full from 1 September 2003. In prior years, the Group has complied with the transitional disclosure requirements of this standard.
The Group's investment strategy for its funded pension schemes has been developed within the framework of local statutory requirements. The Group's policy for the allocation of assets within the schemes has the objective of maintaining the right balance between controlling risk and achieving the long-term returns which will minimise the cost to the Group. The Group aims to invest a significant proportion of the assets (50%) into equities which the Group believes offer the best returns over the longer term. In addition the Group invests approximately 40% of the assets into bonds with the remainder in properties and cash.
The total cost of pension and post-retirement benefits for the Group was GBP51m (2003: GBP49m) of which GBP32m (2003: GBP29m) has been charged against operating profit and GBP19m (2003: GBP20m) has been charged within other finance charges.
(a) The major assumptions used were:
31 August 2004
United
Kingdom Overseas
% %
Inflation 2.9 3.0
Rate of general increase in salaries 4.4 4.3
Rate of increase to benefits 3.2 1.8
Discount rate for scheme liabilities 5.8 5.7
The expected long-term rate of return
of the significant schemes is :-
Equities 7.7 8.1
Bonds 5.4 6.0
Property and other 4.7 4.0
31 August 2003
United
Kingdom Overseas
% %
Inflation 2.5 3.0
Rate of general increase in salaries 4.0 4.4
Rate of increase to benefits 3.1 1.8
Discount rate for scheme liabilities 5.6 6.0
The expected long-term rate of return
of the significant schemes is :-
Equities 7.5 8.2
Bonds 5.0 5.8
Property and other 5.5 4.3
31 August 2002
United
Kingdom Overseas
% %
Inflation 2.3 2.1
Rate of general increase in salaries 4.1 4.8
Rate of increase to benefits 3.1 2.1
Discount rate for scheme liabilities 6.0 6.5
The expected long-term rate of return
of the significant schemes is :-
Equities 7.5 8.7
Bonds 5.0 6.1
Property and other 5.2 4.4
Notes to the accounts
5. Pension and post-retirement benefit schemes (continued)
(b) The net pension and post-retirement medical benefits (PRMB) liability of the Group as at 31 August 2004 was:
31 August 2004
United
Kingdom Overseas
market market
value value
GBPm GBPm
Equities 821 134
Bonds 616 136
Property and other 159 33
Total market value of assets 1,596 303
Present value of scheme liabilities (2,002) (458)
Deficit in the schemes (406) (155)
Related deferred tax asset 122 52
Net pension and PRMB liability (284) (103)
31 August 2003
United
Kingdom Overseas
market market
value value
GBPm GBPm
Equities 814 156
Bonds 594 161
Property and other 143 14
Total market value of assets 1,551 331
Present value of scheme liabilities (2,004) (464)
Deficit in the schemes (453) (133)
Related deferred tax asset 136 45
Net pension and PRMB liability (317) (88)
31 August 2002
United
Kingdom Overseas
market market
value value
GBPm GBPm
Equities 896 206
Bonds 458 115
Property and other 197 6
Total market value of assets 1,551 327
Present value of scheme liabilities (1,941) (417)
Deficit in the schemes (390) (90)
Related deferred tax asset 117 27
Net pension and PRMB liability (273) (63)
(c) Profit and loss account charges
The amounts charged to operating profit during the year were:
31 August 2004 31 August 2003
United United
Kingdom Overseas Kingdom Overseas
GBPm GBPm GBPm GBPm
Current service cost 11 21 10 19
Total included within
operating profit 11 21 10 19
The amounts charged to
other finance charges
during the year were:-
Interest cost 110 25 114 26
Expected return on
assets (97) (19) (98) (22)
Total included
within other
finance charges 13 6 16 4
(d) Analysis of amount that has been included within the Group statement of recognised gains and losses :-
31 August 2004 31 August 2003
United United
Kingdom Overseas Kingdom Overseas
GBPm GBPm GBPm GBPm
Actual return less expected
return on pension scheme
assets 10 5 (12) (6)
Experience gains and losses
arising on the scheme
liabilities (17) (3) 20 (4)
Changes in assumptions
underlying
the present value of the
scheme liabilities 34 (26) (71) (22)
Actuarial gain/(loss)
recognised
in Group statement of total
recognised gains and losses 27 (24) (63) (32)
Deferred tax movement (8) 7 19 11
Actuarial gain/(loss)
recognised
in Group statement of total
recognised gains and losses
- net of tax 19 (17) (44) (21)
Notes to the accounts
5. Pension and post-retirement benefit schemes (continued)
(e) The movement in deficit during the year was :-
31 August 2004 31 August 2003
United United
Kingdom Overseas Kingdom Overseas
GBPm GBPm GBPm GBPm
Deficit in scheme at
beginning of year (453) (133) (390) (90)
Movement in year:
Current service cost (11) (21) (10) (19)
Contributions 44 13 26 16
Other finance income (13) (6) (16) (4)
Currency translation adjustment - 16 - (4)
Actuarial gain/(loss) 27 (24) (63) (32)
Deficit in scheme at the
end of the year (406) (155) (453) (133)
Based on current market conditions we anticipate that contributions to the funds will be approximately GBP60m in 2005 and 2006.
(f) The history of experience gains and losses is:-
31 August 2004 31 August 2003 31 August 2002
United United United
Kingdom Overseas Kingdom Overseas Kingdom Overseas
Actual return
less expected
return on
pension
scheme assets
Amount (GBPm) 10 5 (12) (6) (320) (64)
Percentage of
the scheme
assets (%) 1% 2% (1%) (2%) (21%) (20%)
Experience
gains and
losses arising
on the scheme
liabilities
Amount (GBPm) (17) (3) 20 (4) (62) -
Percentage of
the present
value of the
scheme
liabilities (%) 1% 1% (1%) 1% 3% -
Actuarial loss
recognised in
Group statement
of total
recognised
gains and
losses
Amount (GBPm) 27 (24) (63) (32) (401) (83)
Percentage
of the
present
value of
the scheme
liabilities (%) (1%) 5% 3% 7% 21% 20%
6. Operating costs
Year to
Year to 31 August
31 August 2003
2004 (restated)
Note GBPm GBPm
Change in stocks of finished
goods and work in progress (5) (72)
Raw materials and consumables 810 838
Customs and excise
duties paid - ongoing 618 671
- Mexican
excise rebate - (38)
Staff costs 4 426 450
Depreciation 13 78 75
Goodwill amortisation 40 40
Other operating charges
including exceptional items 654 690
Operating leases
- hire of equipment 11 11
- property rents 45 48
Payments to auditor
- fees for audit 3 3
2,680 2,716
The Parent Company audit fee was GBPnil (2003: GBPnil). Other payments to the auditor were GBP1m (2003: GBP1m) which primarily relate to taxation services.
Notes to the accounts
7. Goodwill amortisation and exceptional items
Year to Year to
31 August 2004 31 August 2003
GBPm GBPm
Goodwill amortisation (40) (40)
Exceptional items
Mexican excise rebate - 38
Acquisition
integration costs - (3)
Asset write-downs (5) 2
Restructuring (31) (9)
Total exceptional
items within
operating costs (36) 28
Profit on sale of
businesses 20 -
Profit on disposal
of fixed assets 14 -
Goodwill amortisation
and exceptional
items before taxation (42) (12)
Taxation 16 (8)
Goodwill amortisation
and exceptional
items after taxation (26) (20)
8. Interest payable
Year to Year to
31 August 2004 31 August 2003
GBPm GBPm
Interest on bank
loans and overdrafts 21 31
Interest on other loans 103 107
Less: deposit and
other interest receivable (7) (12)
Interest payable 117 126
Notes to the accounts
9. Taxation
Year to
Year to 31 August 2003
31 August 2004 (restated)
GBPm GBPm
The charge for
taxation on the
profit for the
period comprises:
Current tax
United Kingdom
taxation
Corporation
tax at
30% (2003: 30%) (3) 25
Adjustment in
respect of
prior periods (11) (1)
Double taxation relief (3) (1)
(17) 23
Overseas taxation
Corporation tax 65 60
Adjustment in
respect of
prior periods 1 9
66 69
Taxation on
attributable
profit of
associated
undertakings 10 10
Total current tax 59 102
Deferred tax
Origination
and reversal of
timing differences 57 64
Adjustment in respect
of prior periods (7) (32)
Recognition of
deferred tax assets
arising in prior periods - (8)
Total tax charge 109 126
A reconciliation of the current tax charge at the UK corporation tax rate of 30% (2003: 30%) to the Group's current tax on profit on ordinary activities is shown below :
Year to
Year to 31 August 2003
31 August 2004 (restated)
GBPm GBPm
Profit on ordinary
activities before
taxation 479 479
Notional charge at
United Kingdom
corporation tax rate of 30% 144 144
Differences in effective
overseas tax rates 11 16
Adjustments to prior
period tax charges (10) 8
Taxable intra-group dividend
income - 5
Non deductible
expenditure 7 13
Non taxable income and gains (33) (12)
Losses and other timing
differences (57) (64)
Other current year
items (3) (8)
Current tax
charge 59 102
10. Earnings per share
Basic earnings per share of 33.1p (2003: 31.3p) has been calculated on earnings of GBP356m (2003: GBP337m) divided by the average number of shares of 1,076m (2003: 1,075m).
Diluted earnings per share of 32.9p (2003: 31.3p) has been calculated on earnings of GBP356m (2003: GBP337m) and after including the effect of all dilutive potential Ordinary Shares, the average number of shares is 1,083m (2003: 1,076m).
Notes to the accounts
10. Earnings per share (continued)
To show earnings per share on a comparable basis, normalised earnings per share of 35.5p (2003: 33.2p) has been calculated on normalised earnings of GBP382m (2003: GBP357m) divided by the average number of shares of 1,076m (2003: 1,075m). Normalised earnings has been calculated as follows:
Year to
Year to 31 August 2003
31 August 2004 (restated)
GBPm GBPm
Earnings as reported 356 337
Adjustment for exceptional
items net of tax (10) (18)
Adjustment for goodwill
amortisation net of tax 36 38
Normalised earnings 382 357
Average number of shares Millions Millions
Weighted average Ordinary
Shares in issue during the year 1,107 1,107
Weighted average Ordinary
Shares owned by the
Allied Domecq employee trusts* (31) (32)
Weighted average Ordinary
Shares used in earnings per
share calculation 1,076 1,075
* Includes American Depositary Shares representing underlying Ordinary Shares.
11. Ordinary dividends
Year to Year to Year to Year to
31 August 2004 31 August 2003 31 August 2004 31 August 2003
GBPm GBPm p p
Interim 63 57 5.83 5.30
Final 104 93 9.67 8.70
167 150 15.50 14.00
The 2004 interim dividend was paid on 30 July 2004 and the final dividend will be paid on 2 February 2005.
12. Intangible assets
31 August 31 August
Other 2004 2003
Goodwill Brands Intangibles Total Total
GBPm GBPm GBPm GBPm GBPm
Cost
At the beginning
of the year 785 555 35 1,375 1,375
Currency translation
adjustment - - - - -
Additions 4 - - 4 -
At the end of the year 789 555 35 1,379 1,375
Amortisation
At the beginning of
the year (93) - (9) (102) (59)
Currency translation
adjustment - - - - -
Charge for the year (40) - (3) (43) (43)
At the end of the year (133) - (12) (145) (102)
Net balance at the end
of the year 656 555 23 1,234 1,273
Goodwill is being amortised over 20 years. Brands relates to the acquisition of Malibu in 2002. The acquired brand intangible asset is determined to have an indefinite useful economic life. An impairment review was carried out at the balance sheet date and the Board of Directors are satisfied that the brand has not suffered any loss in value. Other intangibles are being amortised over ten years.
Notes to the accounts
13. Tangible assets
Land and Plant and
buildings equipment Total
GBPm GBPm GBPm
Cost
At the beginning of the year 773 721 1,494
Currency translation adjustment (45) (39) (84)
728 682 1,410
Additions - acquisitions 2 1 3
- capital expenditure 31 81 112
Disposals and transfers (38) (33) (71)
At the end of the year 723 731 1,454
Depreciation
At the beginning of the year (169) (359) (528)
Currency translation adjustment 12 20 32
(157) (339) (496)
Disposals and transfers 15 26 41
Charge for the year (17) (61) (78)
At the end of the year (159) (374) (533)
Net book value at 31 August 2004 564 357 921
Net book value at 31 August 2003 604 362 966
31 August 2004 31 August 2003
At Net book At Net book
cost value cost value
GBPm GBPm GBPm GBPm
Freehold land and
buildings 638 506 689 548
Long lease land
and buildings 16 14 17 15
Short lease land
and buildings 69 44 67 41
Total land and
buildings 723 564 773 604
Notes to the accounts
14. Investments and loans
Franchise
Investments and trade
Listed Unlisted loans Total
GBPm GBPm GBPm GBPm
Group
At the beginning
of the year 139 13 8 160
Prior year adjustment (129) - - (129)
At the beginning of
the year (restated) 10 13 8 31
Currency translation
adjustment - - (1) (1)
Disposals and
transfers (8) - (1) (9)
At the end of the year 2 13 6 21
The Group has complied with "UITF 38 - Accounting for ESOP trusts". This has resulted in the reclassification of shares held in employee trusts from investments to shareholders' funds and has been accounted for as a prior year adjustment. The Parent Company lends funds to the employee trusts to purchase the shares; a similar prior year adjustment has been made in that company.
The unlisted investments include a holding of 1% in Suntory Limited, incorporated in Japan.
Investment Listed
in subsidiary investments
undertaking (restated) Total
GBPm GBPm GBPm
Parent Company
At the beginning of the year 4,086 129 4,215
Prior year adjustment - (129) (129)
At the beginning of
the year (restated) 4,086 - 4,086
Additions - - -
At the end of the year 4,086 - 4,086
Notes to the accounts
15. Investments in associates
Unlisted
companies Listed
share of companies
reserves share of
Cost (restated) reserves Loans Total
GBPm GBPm GBPm GBPm GBPm
At the
beginning
of the year 43 26 14 2 85
Currency
translation
adjustment (1) (1) (1) - (3)
Additions 1 - - - 1
Other reserve
movement - (17) - - (17)
Share of
retained profit
for the year - 7 - - 7
At the end
of the year 43 15 13 2 73
The share of profits before taxation was GBP32m (2003: GBP24m) and dividends received were GBP15m (2003: GBP13m).
The principal associate is a 23.75% (2003: 25%) equity interest in Britannia Soft Drinks Limited, a company engaged in the manufacture and sale of soft drinks. Britannia has adopted a defined benefit scheme which has resulted in a GBP17m reduction in the Group's shares of the net assets.
Other associates include Baskin-Robbins Japan (44% equity interest), Baskin-Robbins Korea (33% equity interest) and the Group's interest in the Miller RTD commercial partnership.
The above figures comprise the amounts attributable to the Group based on the latest accounts it has been practicable to obtain, some of which are unaudited management accounts.
16. Stocks
31 August 31 August
2004 2003
GBPm GBPm
Raw materials and consumables 27 45
Maturing inventory 1,025 1,047
Finished products 273 293
Bottles, cases and pallets 18 22
1,343 1,407
17. Debtors
Group Parent Company
31 August 31 August
2003
2004 (restated) 2004 2003
GBPm GBPm GBPm GBPm
Amounts falling
due within one year
Trade debtors 450 501 - -
Amounts due from
subsidiary undertakings - - 94 -
Deferred tax
assets (note 19) 18 22 - -
Other debtors 94 108 4 12
Prepayments and
accrued income 58 53 - -
620 684 98 12
Amounts due after
more than one year
Other debtors 3 2 - -
Prepayments and
accrued income 13 15 - -
16 17 - -
Debtors 636 701 98 12
The Group has adopted "FRS 17 - Retirement benefits". As a result pension assets and liabilities are now included within the new balance sheet classification "Pension and post-retirement liabilites" This has been accounted for as a prior year adjustment.
Notes to the accounts
18. Creditors
Group Parent Company
31 August 31 August
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Amounts due
within one year
Trade creditors 233 216 - -
Bills payable 18 17 - -
Amounts owed to
subsidiary
undertakings - - - 81
Other
creditors 255 312 11 6
Social
security 9 10 - -
Taxation 196 228 - -
Accruals and
deferred income 273 285 - -
Proposed
dividend
(note 11) 104 93 104 93
1,088 1,161 115 180
Amounts due
after more
than one year
Other creditors 33 34 - -
Accruals and
deferred income 10 12 - -
43 46 - -
19. Provisions for liabilities and charges
Post
retirement
medical Reorganisation
benefits and
(restated) restructuring
GBPm GBPm
At the beginning of the year 90 31
Prior year adjustment (90) -
At the beginning of the year
(restated) - 31
Currency translation adjustment - 4
Timing differences within - -
statement of recognised gains
and losses
Utilised during the year - (44)
Charged during the year - 32
At the end of the year - 23
Deferred
Surplus taxation Total
properties (restated)
GBPm GBPm GBPm
At the beginning of the year 9 153 283
Prior year adjustment - (67) (157)
At the beginning of the year
(restated) 9 86 126
Currency translation adjustment - (5) (1)
Timing differences within - 23 23
statement of recognised gains and losses
Utilised during the year - - (44)
Charged during the year - 43 75
At the end of the year 9 147 179
The Group has adopted "FRS 17 - Retirement benefits". As a result pensions and post-retirement medical liabilities and the related deferred tax are now included within the new balance sheet classification "Pension and post-retirement liabilities" This has been accounted for as a prior year adjustment.
GBP11m of reorganisation and restructuring provisions brought forward from previous years were utilised during the year. New provisions totalling GBP7m were created during the year. Of the provisions outstanding at the year end, GBP11m relate to the termination of a land lease in California and GBP2m for the trust fund established for social and community projects in Mexico. The remainder relates to the Group restructuring programme.
It is expected that the majority of reorganisation and restructuring costs will be incurred in the financial year ending 31 August 2005, whilst the trust funds will be disbursed as the projects develop. The provision for surplus properties will be utilised over the terms of the leases to which the provisions relate.
Notes to the accounts
19. Provisions for liabilities and charges (continued)
Deferred taxation
31 August
31 August 2003
2004 (restated)
GBPm GBPm
Accelerated capital allowances 37 16
Goodwill and other intangible assets 117 82
Tax losses and credits (58) (37)
Pensions and post-retirement benefits (174) (181)
Other timing differences 33 3
Net deferred taxation asset (45) (117)
Comprising :
Deferred tax asset (note 17) (18) (22)
Deferred tax liability (note 19) 147 86
Pensions and post retirement
benefits (note 5) (174) (181)
(45) (117)
Movement in deferred taxation
31 August
2004
GBPm
At the beginning of the year 136
Prior year adjustment (253)
At the beginning of the year (restated) (117)
Currency translation adjustment -
Timing differences within statement of recognised
gains and losses 22
Charged during the year 50
At the end of the year (45)
The prior year adjustment arises following the introduction of "FRS 17 - Retirement Benefits"
Deferred tax assets of GBP39m at 31 August 2004 (2003: GBP42m) have not been recognised due to the degree of uncertainty over the utilisation of the underlying tax losses and deductions in certain tax jurisdictions.
Deferred tax has not been provided for liabilities which might arise on unremitted earnings of overseas subsidiaries and associates, as such earnings are reinvested by the Group and no tax is expected to be payable on them in the foreseeable future.
Notes to the accounts
20. Net debt
31 August 31 August
Redemption 2004 2003
date GBPm GBPm
Unsecured loans
GBP250m Bond (6.625%)* 2014 247 247
EUR600m Bond (5.875%)* 2009 402 410
GBP450m Bond (6.625%)* 2011 448 447
EUR800m Bond (5.5%)* 2006 539 550
NZD125m Capital Notes (9.3%) 2006 45 45
DEM500m Notes (4.75%)* 2005 173 176
NZD100m Revolving Credit Facility* 2006 19 23
MXN 600m Revolving Credit Facility 2008 28 34
Foreign currency swaps Various (209) (115)
1,692 1,817
Less amounts repayable within one year - (2)
Loan capital 1,692 1,815
Short-term borrowings 378 772
Cash at bank and in hand (129) (175)
Net debt 1,941 2,412
* Borrowings and interest guaranteed by Allied Domecq PLC or Allied Domecq (Holdings) PLC The Euro and GBP Bonds have been partially swapped into floating rate US dollars. The Parent Company has short-term borrowings of nil (2003: nil)
31 August 31 August
2004 2003
GBPm GBPm
Repayment schedule
More than five years 695 1,104
Between two and five years 222 711
Between one and two years 775 -
Loan capital 1,692 1,815
Short-term borrowings 378 772
Total borrowings 2,070 2,587
The funding policy of the Group is to maintain a broad portfolio of debt, diversified by source and maturity and to maintain committed facilities sufficient to cover with a minimum of GBP300m above peak borrowing requirements. At 31 August 2004 the Group had available undrawn committed bank facilities of GBP1,192m (2003: GBP1,346m) of which GBP77m (2003: GBP167m) mature in less than one year and GBP1,115m (2003: GBP1,179m) between two and five years.
Notes to the accounts
21. Financial instruments
The Group's treasury policies are set out in the Operating and Financial Review. Set out below is a year end comparison of the current and book values of the Group's financial instruments by category, excluding short-term debtors and creditors. Where available, market rates have been used to determine current values. Where market rates are not available, current values have been calculated by discounting cash flows at prevailing interest and exchange rates.
31 August 2004 31 August 2003
Book Current Book Current
value value value value
GBPm GBPm GBPm GBPm
Cash at bank
and in hand 129 129 175 175
Short-term
borrowings (378) (378) (772) (772)
Loan capital (1,692) (1,799) (1,815) (1,932)
Net debt (1,941) (2,048) (2,412) (2,529)
Interest rate risk management Exposure to interest rate fluctuations on borrowings and deposits is managed by using cross currency swaps, interest rate swaps and purchased interest rate options. The Group has a fixed/floating debt target of 70% +/- 10%. At the year end, taking account of swaps, 71% (2003: 70%) of net debt was at fixed rates of interest. At the year end, the weighted average maturity of net debt was approximately 3.4 years (2003: 4 years).
31 August 2004 31 August 2003
Book Current Book Current
value value value value
GBPm GBPm GBPm GBPm
Interest rate
swaps 1 (30) 1 (34)
Cross currency
swaps 8 32 7 44
9 2 8 10
There is a deferred loss in respect of interest rate swaps, being the net of the current value less book value, of which GBP10m (2003: GBP9m) relates to the financial year ending 31 August 2005 and GBP21m (2003: GBP26m) thereafter.
There is a deferred gain in respect of cross currency swaps, being the net of the current value less book value, of which GBP4m (2003: GBP6m) relates to the financial year ending 31 August 2005 and GBP20m (2003: GBP31m) thereafter.
After taking account of cross currency and interest rate swaps, the currency and interest rate exposure of net debt as at 31 August 2004 was:
31 August 2004
Fixed rate debt
Weighted
Floating average
Net rate net Fixed rate interest
debt debt debt rate
GBPm GBPm GBPm %
Sterling 18 18 - -
US dollar 1,205 443 762 5.8
Euro 562 89 473 5.2
NZ dollar 95 22 73 8.1
Japanese Yen 103 34 69 0.7
Other (42) (42) - -
Net debt 1,941 564 1,377 5.7
31 August 2003
Fixed rate debt
Weighted
average
time for Floating
which rate Net rate net
is fixed debt debt
Years GBPm GBPm
Sterling - 65 5
US dollar - 1,471 523
Euro 2 701 166
NZ dollar 2 108 35
Japanese Yen 3 110 36
Other - (43) (43)
Net debt 4 2,412 722
Weighted
Weighted average
average time for
Fixed rate interest which rate
debt rate is fixed
GBPm % Years
Sterling 60 11.2 8
US dollar 948 5.7 5
Euro 535 5.1 4
NZ dollar 73 8.1 3
Japanese Yen 74 0.7 4
Other - - -
Net debt 1,690 5.6 6
Some of the interest rate swaps included in the above table are cancellable at the option of the banks at various dates between 1 September 2004 and 31 August 2006.
The floating rate debt includes bank debt bearing interest at rates based on the relevant inter bank rate and on commercial paper rates in the UK, US, Canada and France. These rates are fixed in advance for periods up to six months. The weighted average interest rate on floating net debt as at 31 August 2004 was approximately 3.6% (2003: 2.8%).
Notes to the accounts
21. Financial instruments (continued)
Foreign exchange The Group estimates its net transaction cash flows in its main currencies of business which are then hedged forward for up to 18 months using a combination of forward exchange contracts and purchased foreign exchange options. At the year end 82% (2003: 84%) of such currency exposures had been hedged for the following 12 months.
The estimated current value of the foreign exchange cover forward contracts and options entered into to hedge future transaction flows is set out below based on quoted market prices where available and option pricing models.
31 August 2004
Nominal
value of Book Current
derivatives value value
GBPm GBPm GBPm
Foreign exchange forward rate
contracts - assets 140 - 5
- liabilities 53 - (1)
Options - assets 110 - 3
- liabilities - - -
303 - 7
31 August 2003
Nominal
value of Book Current
derivatives value value
GBPm GBPm GBPm
Foreign exchange forward rate
contracts - assets 155 - 4
- liabilities 72 - (4)
Options - assets 19 - -
- liabilities 19 - -
265 - -
A net gain of GBP13m was recognised on all foreign exchange forward contracts and options maturing in the year to 31 August 2004 (2003: GBP13m).
At 31 August 2004 and 31 August 2003, there were no material monetary assets or liabilities in currencies other than the functional currencies of Group companies, having taken into account the effect of derivative financial instruments that have been used to hedge foreign currency exposure.
22. Share capital
Allotted, called up
Authorised and fully paid
31 August 31 August 31 August 31 August
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Equity
Ordinary Shares of 25p 400 400 277 277
Authorised Issued
Million Million Million Million
Number of shares 1,600 1,600 1,107 1,107
Notes to the accounts
22. Share capital (continued)
Share option schemes During the year options have been granted under the existing employee share option schemes over both Ordinary Shares and American Depositary Shares (ADSs) totalling 13,159,067* shares. Options were exercised over 3,986,000* shares and options over 2,349,338* shares lapsed during the year. * These totals include ADSs each of which represents four underlying Ordinary Shares
Details of the unexercised options granted under the Company's employee share option schemes at 31 August 2004 were as follows: Options over Ordinary Shares
Option Ordinary
Date of grant Price (p) shares
SAYE Scheme 1999 3 December 1999 262.0 593,197
International SAYE
Scheme 1999 2 June 2000 265.0 117,883
30 November 2001 282.0 522,009
Approved Executive Share
Option Scheme 1999 5 May 2000 331.0 9,063
8 May 2001 408.0 845,480
2 November 2001 351.5 298,442
3 May 2002 438.0 34,245
1 November 2002 382.0 426,548
1 May 2003 351.0 25,641
1 November 2003 383.0 353,751
1 May 2004 455.3 6,589
Executive Share
Option Scheme 1999 1 November 1999 342.0 3,524,647
16 November 1999 331.5 292,500
5 May 2000 331.0 15,937
8 May 2001 408.0 2,679,218
2 November 2001 351.5 4,465,579
3 May 2002 438.0 214,353
1 November 2002 382.0 7,122,334
1 May 2003 351.0 64,359
1 November 2003 383.0 8,209,060
1 May 2004 455.3 129,901
Long Term Incentive
Scheme 1999 2 November 2001 0.1 1,563,889
3 May 2002 0.1 77,054
1 November 2002 0.1 1,015,906
1 November 2003 0.1 1,051,959
1 May 2004 0.1 49,423
33,708,967
Options over ADSs
Option
Date of grant price $ ADSs
US Schedule to the Executive
Share Option Scheme 1999 1 November 2002 24.45 425,715
8 January 2003 25.85 3,868
1 May 2003 22.93 3,750
1 October 2003 26.16 373,566
Executive Share Option
Scheme 1999 1 November 2002 24.45 37,975
8 January 2003 25.85 33,366
1 May 2003 22.93 1,750
1 November 2003 26.16 337,638
Long Term Incentive
Scheme 1999 8 January 2003 0.006 21,276
1 November 2003 0.006 41,952
1,280,856
Notes to the accounts
22. Share capital (continued)
The Company currently satisfies the exercise of options using existing shares that are purchased in the market by the Company's employee trusts. The profit and loss expense under the option plans is determined based upon the excess of the option price of the underlying options and the market value on the date of the award and is amortised over the vesting period. As at 31 August 2004 the Company's employee trusts held 27,073,905 shares (including ADSs) in the Company all of which were the subject of awards made under the Company's employee share schemes. The trustees are obliged to waive the dividends on these shares. The options exercised during the year were all satisfied by the transfer of shares to participants by the employee trusts.
23. Capital and reserves
Share
Share premium Merger
capital account reserve
GBPm GBPm GBPm
Group
At the beginning of the year 277 165 (823)
Prior year adjustment - - -
At the beginning of the year (restated) 277 165 (823)
Profit earned for Shareholders for
the year - - -
Currency translation differences
on foreign currency net investments - - -
Taxation on translation differences - - -
Movement on shares in employee trusts - - -
Associated undertaking reserve movement - - -
Actuarial gain on net pension liabilities
(net of deferred tax) - - -
Ordinary dividends - - -
At the end of the year 277 165 (823)
Shares
held in Profit
employee and loss
trusts account
(restated) (restated) Total
GBPm GBPm GBPm
Group
At the beginning of the year - 1,299 918
Prior year adjustment (129) (552) (681)
At the beginning of the year (restated)(129) 747 237
Profit earned for Shareholders for
the year - 356 356
Currency translation differences
on foreign currency net investments - 108 108
Taxation on translation differences - (26) (26)
Movement on shares in employee trusts 17 - 17
Associated undertaking reserve movement - (17) (17)
Actuarial gain on net pension liabilities
(net of deferred tax) - 2 2
Ordinary dividends - (167) (167)
At the end of the year (112) 1,003 510
Goodwill (at historic exchange rates) of GBP2,284m has been written off to reserves.
The following adjustments have been made to opening Shareholders' funds as a result of the adoption of "FRS 17 - Retirement benefits", "Application Note G - revenue recognition" an amendment to "FRS 5 - Reporting the substance of transactions" and "UITF 38 - Accounting ESOP Trusts".
31 August
2004
GBPm
Reversal of SSAP 24 pension debtor (309)
Reversal of SSAP 24 post-retirement medical benefit 90
Gross pension and post-retirement benefits reported under FRS 17(586)
Deferred taxation adjustments on above 253
UITF 38 reclassification of shares held by employee trusts (129)
Total prior year adjustments (681)
Notes to the accounts
23. Capital and reserves (continued)
Share
Share premium Merger
capital account reserve
GBPm GBPm GBPm
Parent Company
At the beginning of the year 277 165 2,420
Prior year adjustment - - -
At the beginning of the year
(restated) 277 165 2,420
Profit earned for Shareholders
for the year - - -
Movement on shares in employee
trusts - - -
Ordinary dividends - - -
At the end of the year 277 165 2,420
Shares
held in
employee Profit
Capital trusts and loss
reserve (restated) account Total
GBPm GBPm GBPm GBPm
Parent Company
At the beginning of the year 651 - 534 4,047
Prior year adjustment - (129) - (129)
At the beginning of the year
(restated) 651 (129) 534 3,918
Profit earned for Shareholders
for the year - - 301 301
Movement on shares in employee
trusts - 17 - 17
Ordinary dividends - - (167) (167)
At the end of the year 651 (112) 668 4,069
24. Minority interests
Equity Non-equity Total
GBPm GBPm GBPm
At the beginning of the year 72 4 76
Currency translation adjustment (3) - (3)
Share of profits of subsidiary
undertakings 12 2 14
Dividends declared (4) (1) (5)
Disposals (2) - (2)
At the end of the year 75 5 80
The principal minority shareholdings relate to Jinro Ballantines Company Limited and Corby Distilleries Limited.
Notes to the accounts
25. Detailed analysis of gross cash flows
Year to
Year to 31 August
31 August 2003
2004 (restated)
GBPm GBPm
Returns on investments and servicing of finance
Interest received 7 22
Interest paid (124) (149)
Dividends paid to minority shareholders (5) (21)
(122) (148)
Taxation paid
UK taxation (1) -
Overseas taxation (81) (65)
(82) (65)
Capital expenditure and financial investment
Purchase of tangible fixed assets (112) (144)
Sale of tangible fixed assets 53 21
Purchase of intangible fixed assets (8) -
Purchase of trade investments - (3)
Disposal of trade investments 9 6
(58) (120)
Acquisitions and disposals
Purchase of subsidiary undertaking (10) -
Purchase of associated undertaking (1) -
Sale of subsidiary undertaking 20 -
9 -
Financing
Net movement of Ordinary Share capital within 17 (36)
employee trusts*
Redemption of debt - (175)
(Decrease)/increase in other borrowings (1) 11
16 (200)
Following the adoption of "UITF 38 - Accounting for ESOP trusts' the net cash outflow arising from the purchase and disposal of shares by the trusts in 2003 has been reclassified from "Capital expenditure and financial investment" to "Financing"
* includes American Depositary Shares representing underlying Ordinary Shares.
Notes to the accounts
Year to Year to
31 August 31 August
2004 2003
26. Reconciliation of net cash inflow GBPm GBPm
from operating activities to free cash
flow
Net cash inflow from operating activities 655 748
Capital expenditure net of sale of tangible assets (59) (123)
Dividends received from associated undertakings 15 13
Operating cash net of fixed assets 611 638
Taxation paid (82) (65)
Net interest paid (117) (127)
Dividends paid - Ordinary Shareholders (156) (144)
- minorities (5) (21)
Free cash flow 251 281
Other
short-term
Cash at Overdrafts borrowings
bank and due within due within
in hand one year one year
27. Net debt GBPm GBPm GBPm
At the beginning of the year 175 (90) (682)
(Decrease)/increase in cash (37) - 310
Increase/(decrease) in 4 - -
liquid resources
Decrease/(increase) in loan - - 2
capital and other loans
Exchange adjustments (13) 16 66
At the end of the year 129 (74) (304)
Year to 31 August
Loan capital 2004 2003
due after Net Net
one year debt debt
27. Net debt GBPm GBPm GBPm
At the beginning of the year (1,815) (2,412) (2,578)
(Decrease)/increase in cash - 273 134
Increase/(decrease) in - 4 (50)
liquid resources
Decrease/(increase) in loan (1) 1 164
capital and other loans
Exchange adjustments 124 193 (82)
At the end of the year (1,692) (1,941) (2,412)
Liquid resources comprise short-term deposits which have maturity dates of less than three months
31 August 31 August
2004 2003
28. Capital commitments GBPm GBPm
Contracted for but not provided 3 1
in the accounts
Land and
buildings Other
31 August 31 August
2004 2004
29. Operating lease commitments GBPm GBPm
The minimum operating lease
payments to be made in
the year ending 31 August 2005
for leases expiring:
Within one year 5 4
Within two to five years 24 7
After five years 21 -
50 11
Land and
buildings Other
31 August 31 August
2003 2003
29. Operating lease commitments GBPm GBPm
The minimum operating lease
payments to be made in
the year ending 31 August 2005
for leases expiring:
Within one year 4 1
Within two to five years 14 8
After five years 26 -
44 9
Notes to the accounts
Parent Company
31 August 31 August
2004 2003
30. Contingent liabilities GBPm GBPm
Guarantees in respect of 2,188 2,555
liabilities of subsidiary undertakings
In the normal course of business, the Group has a number of legal claims or potential claims against it, none of which are expected to give rise to significant loss. We are not currently involved in any legal or arbitration proceedings, including any proceedings which are threatened or pending of which we are aware, which may have a material effect on our financial position, results of operations or liquidity. Allied Domecq, together with the other major players in the US drinks industry, has been named in a putative class action lawsuit in the State of Ohio alleging a consistent, long-running deceptive programme of advertising and marketing which is illegally targeted at children and underage drinkers and claiming disgorgement of unlawful profits. The lawsuit, which is being vigorously defended, is in the very early pre-discovery, pre-trial pleading stages; accordingly, it is too early to determine the materiality of the contingent liability arising from this lawsuit and no reserve has been established in connection therewith.
31. Related party transactions
Transactions with associated undertakings
All transactions with these undertakings arise in the normal course of the business.
Year to Year to
31 August 2004 31 August 2003
GBPm GBPm
Sales to associated undertakings 52 43
Purchases of goods and other services (2) (11)
Marketing expenditure charged (11) (14)
Dividends received 15 13
As at As at
31 August 2004 31 August 2003
GBPm GBPm
Loans to associated undertakings 2 2
Net amounts due from 10 6
associated undertakings
Transactions with Directors
Remuneration and shareholdings of Directors are disclosed in the Directors' Remuneration Report which will be published in November 2004.
Notes to the accounts
32. Statutory accounts
The financial statements of Allied Domecq PLC for the year ended 31 August 2004 and this preliminary announcement were approved by the Board of Directors on 20 October 2004. This announcement does not constitute the Group's statutory accounts but is derived from those accounts.
The financial information for the year ended 31 August 2003 is derived from the Group's statutory accounts for 2003 which have been delivered to the Registrar of Companies. The auditors have reported on the 2003 statutory accounts and on the 2004 statutory accounts; both of these audit reports were unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The 2004 statutory accounts will be delivered to the Registrar of Companies following the Annual General Meeting.
33. Annual Report and Annual General Meeting
The Annual Report will be sent to shareholders by the end of November 2004. The Annual General Meeting of the Company will be held on 28 January 2005 at the The Landmark London Hotel, 222 Marylebone Road, London NW1 6JQ.
34. Financial calendar
Ex dividend date for final dividend 5 January 2005 Record date for final dividend 7 January 2005 Annual General Meeting 28 January 2005 Final dividend payable 2 February 2005 (Ordinary Shares) Final dividend payable (ADRs) 9 February 2005 Interim results announced (provisional) 21 April 2005 Ex dividend date for interim dividend 29 June 2005 (provisionsal) Record date for interim dividend 1 July 2005 (provisional) Interim dividend payable (Ordinary 29 July 2005 Shares) (provisional) Interim dividend payable (ADRs) 5 August 2005 (provisional)
US GAAP reconciliation
Allied Domecq PLC listed on the New York Stock Exchange on 31 July 2002. Pages 52 to 55 provide an explanation and reconciliation from UK to US GAAP.
Differences between UK and US Generally Accepted Accounting Principles The Group's consolidated financial statements are prepared in accordance with UK GAAP, which differ from those generally accepted in the United States ("US GAAP"). The significant differences between UK GAAP and US GAAP which affect the Group's net income and shareholders' equity are summarised below.
Restatement of previously reported US GAAP information
In the course of doing preparatory work to convert its financial statements from UK GAAP to International Financial Reporting Standards (IFRS), the Group has identified an error in its prior reconciliation to US GAAP. The error relates to the foreign currency translation of certain assets and liabilities in connection with past business combinations. The principal assets and liabilities involved are brands, goodwill and related deferred tax. As a result, we have restated the US GAAP reconciliation for prior periods. This reconciliation adjustment does not affect any of our UK GAAP financial statements.
"SFAS No. 52 - Foreign Currency Translation", requires the Group to use the functional currency of the acquired entity to measure these assets and liabilities. As exchange rates between pounds sterling (the Group's reporting currency) and the various functional currencies of the acquired entities move, SFAS No. 52 requires a corresponding change in the valuation of these assets and liabilities in the Group's consolidated financial statements, with an offsetting charge or credit to currency translation adjustments within other comprehensive income.
In prior US GAAP reconciliations, the Group used pounds sterling in measuring certain of these assets and liabilities and as a result, the Group did not follow SFAS No. 52. The Group has followed SFAS No. 52 in the US GAAP reconciliation of its 2004 consolidated financial statements. The Group has restated the US GAAP reconciliation for prior periods and the impact in 2003 was a GBP1m charge on net income, a GBP105m credit to comprehensive income and a reduction in Shareholders' equity of GBP26m. The impact of these restatements for prior periods 2000 to 2003 is as follows:
US GAAP reconciliation changes Year ended 31 August
2003 2002
GBPm GBPm
Net income as reported 280 406
Effects of restatement:
Brands - -
Goodwill - -
Stocks (1) 1
Deferred taxation - -
Net income as restated 279 407
Net earnings per Ordinary share (pence)
Basic as reported 26.0p 38.0p
Effect of net income restatement - 0.1p
Basic as restated 26.0p 38.1p
Diluted as reported 26.0p 38.0p
Effect of net income restatement (0.1p) 0.1p
Diluted as restated 25.9p 38.1p
Comprehensive income as reported 297 73
Effects of restatement:
Currency translation differences 106 (48)
Restatement of net income (1) 1
Comprehensive income as restated 402 26
Shareholders equity as reported 1,657 1,541
Effects of restatement:
Brands (48) (110)
Goodwill 17 (49)
Other Intangible assets - -
Stock 3 -
Deferred taxation 2 28
Other - -
Shareholders equity as restated 1,631 1,410
US GAAP reconciliation changes Year ended 31 August
2001 2000
GBPm GBPm
Net income as reported 332 1,554
Effects of restatement:
Brands 2 3
Goodwill 2 1
Stocks - -
Deferred taxation (1) (1)
Net income as restated 335 1,557
Net earnings per Ordinary share (pence)
Basic as reported 31.5p 146.7p
Effect of net income restatement 0.3p 0.3p
Basic as restated 31.8p 147.0p
Diluted as reported 31.5p 146.7p
Effect of net income restatement 0.3p 0.3p
Diluted as restated 31.8p 147.0p
Comprehensive income as reported 114 1,592
Effects of restatement:
Currency translation differences (10) 3
Restatement of net income 3 3
Comprehensive income as restated 107 1,598
Shareholders equity as reported 1,484 1,513
Effects of restatement:
Brands (60) (51)
Goodwill (44) (48)
Other Intangible assets 1 -
Stock (1) -
Deferred taxation 20 21
Other - 1
Shareholders equity as restated 1,400 1,436
US GAAP reconciliation (continued)
a) Brands, goodwill and other intangible assets Under UK GAAP, goodwill arising on acquisitions of a business since 1 September 1998 is capitalised and is held in pounds sterling and amortised by equal instalments over its anticipated useful life, but not exceeding 20 years. Goodwill arising on acquisitions prior to 1 September 1998 was charged directly to reserves. On disposal of a business, any attributable goodwill previously eliminated against reserves is included in the calculation of any gain or loss. Purchased intangible assets are capitalised and amortised over their estimated useful economic lives on a straight-line basis, except for purchased brand intangible assets. Purchased brand intangible assets are considered by the Board of Directors, to have an indefinite life given the long-term nature of premium spirits brands and the level of marketing support. We do not amortise purchased brand intangible assets but they are subject to annual impairment reviews.
Under US GAAP, prior to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 141 - Business Combinations and SFAS No. 142 - Goodwill and Other Intangible Assets, goodwill and other intangible assets arising on acquisition were capitalised and amortised over their useful economic lives, but not exceeding 40 years. The Group adopted the provisions of SFAS No. 141 as at 1 July 2001, and SFAS No. 142 as at 1 September 2001. Under SFAS No. 52 purchase accounting adjustments of acquired assets, liabilities and goodwill should be translated into the functional currency of the entity to which they relate. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination are no longer amortised and are subjected to annual impairment testing. Accordingly, net income no longer includes amortisation of brands, and goodwill amortisation recognised under UK GAAP is reversed.
The amount of goodwill under UK GAAP differs to that under US GAAP due to currency translation and the fair values allocated to intangible assets (including significant brands), stock, and the exclusion from the purchase price consideration of certain costs.
b) Associated undertakings
The principal difference between UK GAAP and US GAAP relates to the accounting treatment of goodwill which is discussed in note a).
c) Stocks
Under UK GAAP, stock acquired through a business combination is valued at the lower of replacement cost and net realisable value. Under US GAAP, stock acquired through a business combination reflects the selling price less costs to complete, costs of disposal and a reasonable element of profit for the selling effort by the acquiring company. The GAAP difference relates to maturing stock, which is being released over a number of years when it is sold to third parties.
d) Restructuring costs
Under UK GAAP, provisions are made for restructuring costs once a detailed formal plan is in place and valid expectations have been raised in those affected that the restructuring will be carried out. Provision is made for voluntary redundancy payments to the extent that it is expected that volunteers will come forward. US GAAP requires a number of specific criteria to be met before restructuring costs can be recognised as an expense. Also, to the extent restructuring costs are related to the activities of an acquired company, US GAAP allows them to be recognised as a liability upon acquisition provided certain specific criteria are met whereas UK GAAP does not. Accordingly, timing differences arise between UK GAAP and US GAAP recognition of restructuring costs.
e) Pension costs and other post-retirement benefits
In accordance with FRS 17 - Retirement benefits, the operating and financing costs of pension and post-retirement schemes are recognised separately in the profit and loss account. Service costs are systematically spread over the service lives of the employees and financing costs are recognised in the period in which they arise. Financing costs include the interest cost and the expected return on assets (calculated using the market value of assets). The costs of past service benefit enhancements, settlements and curtailments are also recognised in the period in which they arise. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of total recognised gains and losses.
Under US GAAP, SFAS No. 87-Employers' Accounting for Pensions, where the unfunded accumulated benefit obligation (being the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to that date and based on current and past compensation levels) exceeds the fair value of plan assets, a liability must be recognised in the statement of financial position. If this liability exceeds the unrecognised prior service cost, the excess is recorded as a reduction of shareholders' equity, net of tax.
f) Share compensation
Under UK GAAP, the cost of share option plans are amortised based on the excess of the option price of the underlying options and the market value at the date of the grant. Under US GAAP, compensation for fixed plan awards is determined at the date of grant, based on the cost of the fair value of the shares subject to the award, less the option exercise or purchase price, if any, except for allowable discounts with respect to certain qualified plans where the discount is no greater than 15% of the fair value of the shares. Compensation costs for variable plan awards is estimated at the end of each period from the date of grant to the date final compensation costs are determinable based on the difference between the fair value of the shares subject to the award and the option exercise or purchase price. Such cost is allocated to compensation expense over the vesting period and, if performance criteria are applicable to the award, based on actual performance attained.
US GAAP reconciliation (continued)
g) Proposed dividends
Under UK GAAP, the proposed dividends on Ordinary Shares, as recommended by the Directors, are deducted from Shareholders' equity and shown as a liability in the balance sheet at the end of the period to which they relate, including proposed dividends which have been recommended but not yet approved by shareholders. Under US GAAP, such dividends are only deducted from Shareholders' equity at the date of declaration of the dividend.
h) Derivative instruments and debt translation
The Group's foreign currency, interest rate and commodity contracts that hedge against forecast exposures do not meet the US GAAP hedge accounting criteria. Under US GAAP, these contracts are marked to market at the balance sheet date and gains and losses arising are included in net income. Under UK GAAP, these gains and losses can be deferred until the hedged transactions actually occur.
Under UK GAAP, where the Group issues or holds foreign currency debt outside of its domestic country, translation gains and losses together with foreign exchange gains and losses on related cross currency swaps, are recorded in reserves. Under US GAAP, the Group does not meet the hedge accounting criteria and therefore both translation gains and losses on such debt and the mark to market on related swaps are recorded in income.
The Group may enter into foreign currency contracts to hedge the purchase price consideration on certain acquisitions. Under UK GAAP, the gains and losses arising on these foreign currency contracts are recognised in the purchase price consideration. Under US GAAP, the gains and losses arising on these foreign currency contracts are recognised within net income.
i) Deferred taxation
Other than the tax effect of other UK to US GAAP differences there was only one material difference in the year ended 31 August 2003 between UK GAAP and US GAAP. This difference related to the recognition criteria for recording deferred tax assets under US GAAP and UK GAAP. Under US GAAP, the calculation of current and deferred tax assets is based on the probable tax treatment of the tax position taken. Once it is determined that there is a probable deferred tax asset, it is then reduced by a valuation allowance to the extent it is deemed more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realised. Under UK GAAP, both the existence of the asset and the probability of its recoverability are considered in combination, and a deferred tax asset is recognised only to the extent that its existence and recoverability are more likely than not.
j) Exceptional items
Under UK GAAP, exceptional items are material charges or gains that are associated with the ordinary activities of the Group that the Board of Directors determine, individually or in aggregate, would have a material impact on the true and fair view of specific line items in the consolidated financial statements. Such items are included within the profit and loss account heading and disclosed in the notes to the consolidated financial statements. Under US GAAP, there is no such concept as exceptional items. Exceptional items would not be considered extraordinary or non-operating items under US GAAP.
k) Mexican excise rebate
Under UK GAAP, we recognised the amount due when offset against future excise duty and other taxes payable. Under US GAAP, the Mexican excise rebate was recognised upon the issuance of a favourable court judgment and additional interest and inflation adjustments are recognised as they accrue.
l) Liabilities
The Group is contractually obligated to make a payment to a business venture partner upon termination of the venture which, unless renewed, is scheduled to terminate in 2029. Under UK GAAP, the Group records the obligation at the present value of the payment obligation, discounted at a risk-adjusted rate to reflect the time value of money, and recognises interest expense each period such that the recorded obligation will equal the payment obligation at the currently best estimated scheduled maturity. Under US GAAP, the obligation is recorded at the amount payable at maturity (i.e. undiscounted).
m) Franchise income
The Group has entered into agreements to sell the right to develop multiple stores within a specified territory, which entitles the Group to non-refundable franchise fees. Under UK GAAP, these franchise fees are recognised upon signing of the agreement. Under US GAAP, the revenue recognition is based on store openings or until the rights to develop the territory have been forfeited.
US GAAP reconciliation (continued) Year to Year to
31 August 31 August
2004 2003
(restated)
Note GBPm GBPm
Profit earned for Ordinary 356 337
Shareholders in accordance
with UK GAAP (as restated,
see page 20)
Adjustments to conform with US GAAP:
Brands a) (69) -
Goodwill a) 42 42
Other intangible assets a) (3) (3)
Stocks c) (14) (23)
Restructuring costs d) - (7)
Pension costs and other
post-retirement benefits e) (26) 24
Share compensation f) (17) 5
Derivative instruments and debt
translation h) 205 (61)
Mexican excise rebate k) - (40)
Franchise income m) (6) (10)
Other 6 (3)
Deferred taxation - other i) - (11)
Deferred taxation - on above US GAAP
adjustments i) (18) 29
Minority share of above adjustments - -
Net income in accordance with US GAAP 456 279
Other comprehensive income :
Minimum pension liability 8 (61)
Currency translation differences (175) 184
Comprehensive income in accordance with US GAAP 289 402
Net earnings per Ordinary Share
Basic 42.4p 26.0p
Diluted 42.1p 25.9p
Shareholders' equity
Year to Year to
31 August 31 August
2004 2003
(restated)
Note GBPm GBPm
Shareholders' funds as reported in 510 237
the Group balance sheet (as
restated, see page 20)
Adjustments to conform with US GAAP:
Brands a) 1,144 1,361
Goodwill a) 270 244
Other intangible assets - costs a) 159 179
Other intangible assets - accumulated
amortisation a) (143) (158)
Associated undertakings b) 54 57
Stock c) 12 26
Restructuring costs d) 1 1
Pension and other post
retirement-benefits e) 104 185
Share compensation f) (8) 6
Proposed dividends g) 104 93
Derivative instruments and debt
translation h) (1) (18)
Liabilities l) (38) (42)
Franchise income m) (23) (19)
Other 17 8
Deferred taxation - other i) - -
Deferred taxation - on above US GAAP
adjustments i) (425) (529)
Minority share of above adjustments - -
Shareholders' equity in accordance with
US GAAP 1,737 1,631
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