DBRS Confirms Diageo plc at A (low) & R-1 (low) with Stable Trends

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Diageo plc (Diageo or the Company) at R-1 (low) and A (low). The credit risk profile remains on track, based on the Company’s leading position in the stable spirits industry. Diageo’s strong portfolio of brands, size and scale, and superior capabilities in distribution, marketing and pricing continue to drive the Company’s profitability. The earnings base is also well-diversified geographically with each of the North American, European and International segments contributing over 30% of EBIT, respectively.

Diageo has benefited from healthy growth rates in the United States and developing markets. Consumption in the U.S. spirits industry increased by approximately 3.5% in 2005, and demand for premium alcoholic beverages, in which Diageo’s brands are well positioned, should continue to drive sales. In Europe, volumes have been relatively flat as a result of challenging demographic and economic environments, and growth is expected to remain flat to modest. Nonetheless, the Company has maintained stable profit levels as cost savings initiatives have helped offset pressure from volume declines and rising commodity prices in the region.

Recent consolidation activity in the industry seems to have had a neutral to positive impact on pricing for the entire industry. DBRS expects the earnings profile to remain strong as growth in income should continue to be driven by favourable trends in North America and developing markets tempered somewhat in the near term by rising input costs.

In terms of the financial profile, cash flow is strong and stable and can comfortably cover low capital expenditures and sizeable dividends. Diageo has received almost GBP 1.9 billion over F2005 and F2006 for the sale of its shares in General Mills Inc. This, combined with the Company’s free cash flow generation, has enabled it to undertake a GBP 1 billion of share repurchases in F2005 and GBP 700 million in H1 2006, while also reducing net debt by a moderate level.

Diageo also continued to undertake relatively small tack-on acquisitions as displayed by its investment of GBP 258 million to acquire The Chalone Wine Group, Ltd. and Ursus Vodka Holding NV in F2005, and GBP 207 million to acquire Bushmills Irish Whiskey in the first half of F2006.

The outlook for the financial profile is stable, based on continued strength in cash flow generation while the Company is expected to continue returning excess cash to shareholders. Share repurchases are expected to total GBP 1.4 billion for each of the full years F2006 and F2007, which should result in a moderately increasing net debt in absolute terms, but relatively stable credit metrics over the medium term – reflected within the current rating.

Note:
These ratings are based on public information.