Interim results for the six months to 29 February 2000

Highlights	Group Balance Sheet
Key Performance Indicators	Group Cash Flow Statement
Key Initiatives	Review Report (Auditors)
Review	Notes 1 - 7, Notes 8 - 15
Financial Information	Further Information
Group Profit & Loss Account	City Presentation

Review

• A strong six months' performance has followed rapid and efficient implementation of our plans throughout the group in the latter part of the last financial year.
  
  
• Turnover and trading profit for the ongoing businesses (excluding UK Retail, Cantrell & Cochrane, Panrico and Britannia), were up 4% and 11% respectively.
  
  
• Proforma normalised earnings per share increased by 14% from 12.6p to 14.4p. The normalised tax charge remains at 26% as we anticipate that this rate will be sustainable for the second half of this year.
  
  

Spirits & Wine

• On volumes +1%, improved mix and stronger pricing (particularly in Mexico and Europe) are the primary driving forces behind contribution growth.
  
  
• We estimate that 1% of the Spirits & Wine trading profit growth of 9% (from £207m to £225m) can be attributed to the so-called "millennium effect".
  
  
• Our Core 4 brands continue to be the primary focus to drive profitable growth with the average gross margin per case double that of the average for the rest of the portfolio. Core 4 volumes were increased +5%, despite the negative volume impact of raw material (agave) shortages on Sauza. Gross margin grew +15% and contribution +15%.
  
  
• Continued brand investment behind our Core 4 brands +14%, now nearly half of our total spend, is delivering these strong returns.
  
  
• Other key 21 brands;
  - Tia Maria, volumes +8% (UK +17%)
  - Makers Mark volumes +10% (US +14%)
  - Courvoisier volumes +8% in both VS and premium, indicating strong performances in core US and UK markets and reflecting the recovery in Asia.
  - US wines business volume +17%, continues its excellent progress.
  - Ongoing agency volume is +4% and we will add incremental agency brands, where they add value.

Europe

• Western Europe profit growth of +7% was driven by the sustained development of Ballantine's, which accounts for 21% of regional volume. Europe's performance was further boosted by the continuing recovery in the Central and Eastern region, primarily in Yugoslavia, to deliver overall trading profit growth in Europe of +14%.
  
  
• In Spain, Ballantine's volumes of +8% and Beefeater +11% are the primary drivers and Gavanes (golden rum) has been successfully introduced in the market.
  
  
• In the UK, our category management strategy is delivering excellent returns. Teachers volumes were +21%, Tia Maria +17% and Courvoisier +14%.
  
  
• We are well placed to take advantage of the move towards the increasing globalisation of key international retailers as we roll out our pan European account management capabilities world wide.
  
  
• The anticipated profit impact of the abolition of European duty free has been less than originally forecast as a result of proactive involvement with our customers to develop duty paid propositions.

Americas

• In North America, favourable product mix, effective pricing and focused on-premise promotions delivered profitable growth of +7%. US shipment volumes of Kahlua, Sauza, Beefeater and Courvoisier increased in aggregate by +15%. Depletions exceeded shipments by 1% as distributor inventories continue to be effectively managed.
  
  
• The US wines business continues to outpace the market, category and all major competitors, with a +17% increase in volumes (+25% on an annualised basis), against the total market for Super and Ultra Premium wines increased by 14% and 11% respectively.
  
  
• The Latin American business recovered with Brazil the primary driver, where Nielsen information indicates a record 19.4% share of the whisky market. Argentina remains depressed with a poor economic outlook following tax increases.

Mexico

• Mexico achieved a strong +10% trading profit growth for the period despite being affected by the industry wide agave issue.
  
  
• A shortage of agave, the core raw material of Tequila with a growth cycle of 7 years, has developed following the explosive growth of Tequila demand worldwide and shortfalls in the anticipated stock of mature agave plants. As a result of this shortage, spot prices for the agave cactus have increased by up to 800% between September 1999 and April 2000. We anticipate that this shortfall will continue to impact the Tequila industry for the next 3 years. We are proactively managing the impact of this situation on the development of the Sauza brand by:
  - implementing price increases in all markets, in particular the key markets of the US and Mexico,
  - concentrating our focus on enhancing the premium and more profitable mix of Sauza in all markets,
  - accelerating our earlier decision to exit lower margin Tequila brands such as Giro in the US resulting in a limited impact on profitability,
  - investing in research and equipment to optimise the production yields of agave, and
  - investment in measures to improve husbandry of existing plantations as well as substantial new plantings on leased land under company control.
  
  
• Transfer prices between Mexico and other marketing regions have not been changed during the current financial year but will be updated for the 2000/2001 financial year. The additional cost relating to exported Tequila included in the Mexico regional profit for the 6 months to February 2000 was £3m; this is anticipated to increase significantly for the full year.
  
  
• We are achieving excellent real improvements in overall pricing in the Mexican market.
  
  
• Despite volume declines in the lower margin brandies we are increasing market share against our key competitor in the market, Bacardi rums.

Asia Pacific

• We have produced a +35% growth in profit in Asia Pacific. With proactive management of price and mix, we have capitalised upon the economic recovery in many countries within the region.
  
  
• Our Korean business has experienced an excellent first six months after a dramatic recovery in consumer sentiment and overseas travel. The Jinro joint venture has been operational since 15 February 2000 although no trading profit benefit is included in the period. We expect this JV to add volume of 400k cases and enhance trading profit in this financial year.
  
  
• In the Philippines, we have improved distributor management and relaunched Fundador, which has delivered a strong profit performance.
  
  
• In Australasia trading profit was only marginally behind last year, despite the sale of the New Zealand Wines and Spirits business. Our joint venture with Swift & Moore in Australia has been more tightly focused and has delivered improved depletions across most brands.

Cost Base and Supply Chain

• We are managing our supply chain more closely and more strategically. We are progressively implementing a global market ordering system which is delivering benefits in lower finished goods inventory in those markets where already implemented. In parallel we continue to focus on leveraging production efficiencies and procurement effectiveness.
  
  
• Overall productivity increase is +3%, but excluding Mexico, which has been impacted by the agave shortage, this is +7%.
  
  
• Our reorganisation in Scotland, consolidating all bottling and support functions on a single site in Dumbarton, is both on schedule and on target financially.
  
  
• Measures were succesfully implemented last year to reduce the central cost base by over £10m p.a., benefiting the period to February 2000 by over £4m. There have, however, been other overhead increases in the business resulting in a net increase of £13m. The increases include Information Technology depreciation, the loss of the recharge to the UK Retail business and the reduced usage of prior year provisions. We are undertaking a review of the overall cost base of the business, the results of which will be announced by the end of the current financial year.

Quick Service Restaurants

• The QSR business has delivered a total trading profit of £19m, up from £12m last year, driven primarily by the turnaround in the International business from a loss of £5m to break-even and an increase in the US from £17m to £19m.
  
  
• US same store growth remains strong in Dunkin' Donuts +7%.
  
  
• Total systemwide sales are +7% (US +8%) despite the total number of distribution points being in line with August last year, as the rationalisation of Baskin-Robbins accelerates.
  
  
• The headline revenue investment (up to $22m over 2 years) in Baskin-Robbins to ensure the long term future of the brand is significant. This activity is focused on transforming the brand in terms of the value proposition to the consumer and franchisee as well as converting the business to a true franchise structure. The impact on QSR's continuing profit growth will be reduced by the phasing of this investment, the resulting improvement in franchise income and the continued growth of other parts of the QSR business.
  
  
• The strong economics of the multi-branding concept are increasingly apparent to franchisees. Multi-brand outlets increased by +7% in the period. Our franchisees are responding well to the economic and marketing synergy benefits that are being achieved.

Non-Core and Discontinued Businesses

• Trading profit includes £4m for UK Retail being the profit between 31 August 1999 and the date of its disposal, 6 September 1999. As a result of this disposal net assets in the group were reduced by £2,294m including £129m paid directly to Punch Taverns (see note 12 of the financial statements).
  
  
• We still retain our 25% interest in Britannia Soft Drinks which was not sold to Punch Taverns as part of the UK Retail disposal. The Group's share of Britannia's profits was £2m in the period, compared to break-even last year. We continue to pursue options to dispose of this shareholding on appropriate terms.
  
  
• The Group disposed of the 50% interest in Panrico on 30 March 2000 in line with the agreement announced last year. The gain on disposal will be included in the second half year, together with our share of profits up to the date of disposal. In the six months to February 2000 our share of Panrico's profits at £6m was the same as last year.
  
  
• John Bull Pubs was divested on 22 December 1999 with no material trading profit impact this year or last.

Cash Flow and Borrowings

• Operating cash flow on an ongoing basis generated £117m in the period, despite the investment in higher levels of working capital, particularly in Mexico due to raw material price increases associated with Tequila.
  
  
• Free cash flow at £101m compares to an outflow of £127m; the 1999 comparative includes the payment of a FID dividend of £163m not included this year. In addition the group has this year benefited from a significant repayment of ACT on that dividend.
  
  
• A project to examine working capital utilisation throughout the business has recently commenced. The benefits of this should become evident in the next fiscal year.
  
  
• There was an overall increase in net borrowings from £1,315m to £1,491m largely due to the payment to Punch Taverns of £129m and the £100m net investment in the Jinro whisky business, offset by the free cash flow.

Taxation

• While we anticipate that the normalised tax charge will remain at 26% for the current financial year, the proposed changes to double taxation relief announced as part of this years budget are likely to result in an increase in the tax rate in future years.

Outlook

There is strong underlying momentum within the business. We anticipate that good earnings growth will be achieved by the continuing business for the full year. Factors such as the impact of the price and availability of agave on the performance of the Sauza brand and our investment programme in Baskin-Robbins will reduce the rate of growth for the full year compared to that achieved in the first half.