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An insight into Treasury management in a FTSE 100 company

An insight into Treasury management in a FTSE 100 company. Marcel Miller Director of Treasury Middle Office Diageo plc Nov 2006. 1. Agenda. Diageo overview Who we are Our brands Our global scope Diageo Strategy Treasury management @ Diageo Treasury KPIs Organisation Design

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An insight into Treasury management in a FTSE 100 company

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  1. An insight into Treasury management in a FTSE 100 company Marcel Miller Director of Treasury Middle Office Diageo plc Nov 2006 1

  2. Agenda • Diageo overview • Who we are • Our brands • Our global scope • Diageo Strategy • Treasury management @ Diageo • Treasury KPIs • Organisation Design • Financial Policies • Liquidity Profile • Pension Risk Management

  3. Overview of Diageo • The world’s leading premium drinks business • Leading brands in the world’s major beverage alcohol categories • Accounts for 55% of the volume of the world's top 10 premium spirits brands and manages 9 of the world’s top 20 brands1 • Operates in over 180 markets with approximately 23,000 employees worldwide • Generates strong and stable free cash flows (£1.4bn)2 • Market capitalisation of £27.5bn3 (LSE / NYSE listed) 1 Source: Impact International (as at February 2006) 2 Year ended 30 June 2006. 3 Source: Bloomberg (as at 14 November 2006)

  4. Market Cap £26bnNet Sales £7.3bn Market Cap £10bnNet Sales £4.2bn Market Cap N/ANet Sales £2.1bn Market Cap £5bnNet Sales £1.4bn World’s leading premium drinks company EXCEL SOURCE copied at 19-Sep-2006 02:12:13 : SPICEGIRLS\Roadshow\01 World's Leading Premium Drinks Company.xls(Diageo) EXCEL SOURCE copied at 19-Sep-2006 12:22:29 : SPICEGIRLS\Roadshow\01 World's Leading Premium Drinks Company.xls(Diageo) Source Net Sales (after deducting excise duties from premium drinks): Diageo (2006 Report & Accounts); Pernod Ricard (Press Release 21 September 2006); Bacardi (Company Report, March 2005); Brown Forman (2006 Report & Accounts) Source: Market Cap: Bloomberg, 22 September 2006 Note: For Net Sales average exchange rates over reporting period applied for conversion to Pounds Sterling

  5. World’s leading brands • Diageo’s top 9 global brands account for over 60% of net sales #1 Scotch Whisky #1 Stout #1 Vodka #2 Scotch Whisky #1 Liqueur #2 Rum #1 Tequila #1 Canadian Whisky #1 Import Gin in US Source: Market share position from Impact International (as at February 2006); Note: Cuervo is an Agency brand

  6. Geographically diversified revenue streams Europe North America Net sales £2.5bn Net sales £2.5bn Operating profit £0.7bn 6% Operating profit £0.8bn 6% International Net sales £2.2bn Operating profit £0.6bn 9% Year ended 30 June 2006. Net sales is after deducting excise duties. Operating profit before exceptional items. Organic growth before exceptional items.

  7. Treasury Management 7

  8. F07 Treasury Performance Promise Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Delivering superlative performance meansmanaging our risks Status Status • KPI Scorecard • Developing our people • Delivering Treasury Operating Model • Sustaining an effective control environment, including SOX compliance • Sustaining IFRS / US GAAP capability • 5 Sustaining compliance with Treasury policies • 6 Managing interest P&L charge and cash flow • 7 Managing transaction FX volatility 8 Sustaining processing and reporting effectiveness and efficiency 9 Managing debt issuance and liquidity at world class cost 10 Managing the credit rating and capital structure 11 Delivering effective Capital management 12 Providing support to our Business Partners 13 Driving efficient delivery of risk financing strategy

  9. Director, Capital Mkts & Corporate Finance Jonathan Slade Director, Middle Office Marcel Miller Director, Business Insurance & Risk Financing Adrian Donald Treasury Performance Director Gabor Wavrik Treasury Reporting & Control Director Zoltán Bodnár • All aspects of policy creation, including FX • Capital structure • Bank & Credit Ratings Agency relationships • Finance Committee/ASC paper preparation • Share buy-back & option hedging • Long-term debt • Relationship & co-ordination across London, Budapest and Dublin • Finance Comm/Board paper co-ordination • Filing Assurance Committee • Projects • Pension risk management • Global process owner, CPI • CARM (London only) • IFSC, Dublin • Management of Risk financing strategy • Fin Comm/Board paper preparation and presentation • Support to businesses and global functions • External market negotiations • Management of external partners/ suppliers & processes • Markets & Execution • Interest/cash-flow forecasting • FX transaction and b/sheet hedging • Short-term debt/cash management • MAC reports • FX support for markets & projects • Treasury accounting, control and reporting • Monthly reporting & magnitude • US GAAP • CARM (Budapest only) • Short-term cash flow forecasting • Confirmations • Settlements • Payments • Bank reconciliations New Treasury organisational design ` Budapest London (& Dublin) Group Treasurer Deirdre Mahlan (from April 07) Director of FP&R & Treasury Lisa Nichols Treasury Leadership Team

  10. Summary financial policy Policy of targeting a range of ratios which are currently broadly consistent with an A band credit rating • Capital Structure • Balances interests of various stakeholders including debt and equity holders • Optimises the balance between • Capital efficiency • Financial flexibility • Access to the debt markets at attractive cost levels • Dividend per share growth held to around 5% annually to rebuild dividend cover • Share buybacks are consistent with targeted financial ratios • £1.4bn planned buybacks in 2007 will be in line with 2006 levels • We will make selective acquisitions which meet our investment criteria • Aim to cover Diageo’s WACC rate within a reasonable period

  11. Liquidity profile • Consistent operating cash flows since formation in 1997 • Diversified funding sources • US$ Shelf Debt Issuance programme • Euro Debt Issuance programme • US Commercial Paper programme • US$3.2bn term committed credit facilities (undrawn) • Single financial covenant : P&L Interest Cover1 2.0x • Strong and supportive bank group • Conservative debt management policy, including • Maintaining a smooth maturity profile and • Commercial paper to be less than 30% of net debt 1 Operating Profit before exceptional items plus Share of Associates Profit / Net Interest charge

  12. Goals of Diageo’s pension risk review • Continue to provide pension benefits in a cost efficient manner • Minimise negative impact of volatility which might endanger corporate financial strategy • Avoid over funding the pension scheme • Consider obligations arising from changes in the laws governing pensions • Develop consistent approach to risk across UK and Irish schemes • Work in partnership with Trustees

  13. Developing a De-risking Roadmap • Clear Goals • Risks Analysis • Solution Design • Stakeholder Agreement • Implementation

  14. Risk Analysis The main risks facing the pension funds can be summarised as: Type of risk Liability risks (IAS19) VAR(1 year) Interest rate volatility £0.7bn Inflation Volatility £0.2bn Asset risks Equity volatility £0.8bn Foreign exchange risks £0.1bn Total £1.0bn (but correlation assumptions) Mortality risk ?? (£180m-1 year increase in life expectancy) Salary Growth ?? (but UK scheme closed, and mature profiles)

  15. Risk Tolerance • Diageo schemes employ a long-term “out-performance” strategy in order to benefit from the equity risk premium over the longer term. • Risk management needs to balance the requirement for out performance with the potential risks it carries. • Diageo’s pension liabilities are 20% of its market capitalisation which is towards the middle of the range for the FTSE 100. • Financial and operational strength to cope with substantial volatility in short term. • Risk budget established.

  16. Solution Design Key elements: • Reduce liabilities exposure to interest rate and inflation using real rate swaps • Increase diversification within the asset portfolio • Progressively switch from risk assets to bonds as solvency improves • Consider further protection against unacceptable volatility

  17. Cautionary statement concerning forward-looking statements This document contains certain forward-looking statements within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the US Securities Exchange Act of 1934. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Diageo does not undertake to update forward-looking statements to reflect any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in documents it files with the US Securities and Exchange Commission.

  18. #1 Liqueur #2 Rum #1 Stout #1 Canadian Whisky #1 Tequila #1 Import Brand in US #1 Scotch Whisky #2 Scotch Whisky

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