Interim Results

15th Feb 2007 07:02

Diageo PLC15 February 2007 Interim results for the six months ended 31 December 2006 Diageo reports strong first half performance and increases guidance for fullyear organic operating profit growth to 8% Paul Walsh, Chief Executive of Diageo, commenting on the six months ended 31December 2006 said: 'Diageo has made a strong start to the year. Excellent performances in NorthAmerica and International and unchanged profits in Europe delivered double digitunderlying earnings growth. Our spirits brands, especially Scotch where netsales grew 11%, did particularly well, benefiting from increased investment inmarketing. As a result of this strong start we are increasing our guidance fororganic operating profit growth to 8% for the full year. We still expect toreturn a total of £1.4 billion to shareholders through share buybacks this yearand to continue our progressive dividend policy. 'In North America our continued outperformance in the US spirits market was thekey driver of the 11% organic operating profit growth we delivered. Operatingleverage from price and mix improvements in beer, wine and ready to drink alsocontributed to the margin expansion we achieved. 'In International, we again grew marketing spend faster than net sales. Thisinvestment delivered stronger top line growth, share gains in markets from Chinato Mexico, organic operating margin expansion and organic operating profit grew17%. 'In Europe, growth in our Continental Europe hub and in Russia was offset byweaker top line performance in Great Britain, Ireland and Spain and total netsales declined. However, as in North America, price and mix improvement led toorganic operating margin expansion and on an organic basis operating profit wasmaintained. 'We believe that a capital structure broadly consistent with a single A creditrating gives Diageo the appropriate level of flexibility and given our strongfree cash flow this capital structure would allow us to fund a £1 billion sharebuyback programme in fiscal 2008.' Key highlights of the six months ended 31 December 2006 • 8% net sales growth in spirits is the key driver of overall performance • Marketing spend increased by a further 6% with spend focused on growth brands and markets • Operating margin improved by 90 basis points • Using an effective tax rate of 25% eps before exceptional items rose from 31.1 pence in first half F'06 to 34.4 pence in first half F'07, which adjusted for exchange is a 14% increase • Return on invested capital increased 90 basis points to 17.7% • Strong free cash flow of £672 million • High payout ratio maintained as interim dividend per share is increased by 5% to 12.55 pence • £1.22 billion returned to shareholders through £524 million in dividends and £700 million of share buybacks Results at a glance First half First half Reported Organic F'07 F'06 movement movement Volume in millions of equivalent units 75.7 72.6 4% 4%Net sales £ million 4,022 3,960 2% 6%Operating profit £ million 1,306 1,261 4% 8%Profit attributable to parent company's equity shareholders £ million 895 1,166 (23)%Basic eps Pence 32.8* 40.4* (19)% 14% * For six months ended 31 December 2006 tax rate 28.3%. For six months ended 31December 2005 tax rate 14.0%. Net sales in this document are sales after deducting excise duties. Percentagemovements in this document are organic movements unless otherwise stated.Commentary, unless otherwise stated, refers to organic movements. Share, unlessotherwise stated, refers to volume share. See page 27 for additional information for shareholders and an explanation of non-GAAP measures including the reconciliation of basic eps as reported to underlying basic eps. Regional Summary North America - focus on priority brands delivered share gains in spirits • Volume up 3%• Net sales up 7%• Marketing spend up 6%• Operating profit up 11% In North America, net sales grew 8% for spirits, 9% for wine and 5% for beer,while ready to drink declined 1%. The outperformance of Diageo's spirits brandswas the key driver of overall top line growth and operating margin expansion.Spirits grew volume by 4%, ahead of overall market growth of approximately 2%,as Diageo continued to gain both value and volume share, up 0.7 percentagepoints and 1.2 percentage points respectively. The priority brands drove volumegrowth and mix improvement with strong consumer demand for Johnnie Walker,Smirnoff vodka, Baileys, Captain Morgan and Jose Cuervo. Europe - strong growth in the Continental Europe hub was offset by weakness inother markets • Volume down 5%• Net sales down 2%• Marketing spend reduced by 7%• Operating profit unchanged In Europe, strong growth in the Continental Europe hub, led by Johnnie Walker,Smirnoff and Baileys, was offset by weaker volume performance mainly in GreatBritain but also in Ireland and Spain. In Great Britain, promotional activitywas reduced in the off trade, and while net sales per case improved and brandequity was maintained, volume declined. A reduction in marketing spend behindready to drink in Great Britain and France was the main driver of the reductionin total marketing spend. However, investment was increased behind spiritsbrands in the Continental Europe hub. International - top and bottom line growth improved • Volume up 14%• Net sales up 16%• Marketing spend up 22%• Operating profit up 17% Growth in Diageo's International business was driven by a focus on key brands ingrowth markets, innovation, additional high levels of marketing spend andimproved sales execution with customers. The strong performance of Diageo'sScotch brands was the key driver of top line mix improvement. In the deluxeScotch segment, brands such as Windsor in Korea and Buchanan's in Latin Americacontinued to gain share. In Africa, beer grew strongly as did spirits and readyto drink in South Africa. Investment in marketing spend again grew ahead of netsales growth particularly in fast growing markets such as India and Mexico. InChina marketing spend was up 70% resulting in strong net sales growth and sharegains. Financial • The deficit in respect of post employment plans reduced by £42 million from £801 million at 30 June 2006 to £759 million at 31 December 2006• In the six months ended 31 December 2006, exchange rate movements reduced operating profit by £53 million and the interest charge by £7 million• At current exchange rates, exchange rate movements are estimated to reduce operating profit by £90 million and the interest charge by approximately £10 million (excluding the exchange impact of re-translating trading and short term inter-company loans under IAS 21) for the full year ending 30 June 2007 Brand performance summary Reported Organic Reported Organic volume volume net sales net sales movement movement movement movement % % % % Global priority brands 5 5 1 6Local priority brands (1) (1) (2) 2Category brands 7 6 5 10Total 4 4 2 6 Key brands:Smirnoff vodka 6 6 2 7Smirnoff ready to drink (6) (6) (12) (6)Johnnie Walker 10 10 8 13Guinness - - (1) 2Baileys 3 3 3 6Captain Morgan (excl. ready to drink) 5 5 2 9J&B (1) (1) (4) (1)Crown Royal 4 4 (1) 8 Jose Cuervo (excl. ready to drink) 7 7 1 8Tanqueray 4 4 (1) 6 Buchanan's - Venezuela 65 65 88 71 Windsor - Korea 13 13 15 13 The global priority brands grew volume by 5% as growth in Johnnie Walker,Smirnoff and Baileys offset a decline in Smirnoff ready to drink and J&B.Strong growth of Guinness in International, where volume grew 8%, was offsetby the performance in Europe and therefore volume was flat. Net sales of globalpriority brands grew 6% as a result of price increases in some markets and miximprovement throughout the world. Local priority brands volume declined 1% as strong growth of Buchanan's andWindsor was offset by declines in Bell's and Gordon's. Mix improved and as aresult, net sales were up by 2%. Category brands grew volume by 6% and net sales were up 10% as mix improved dueto the strong growth of Scotch brands such as Old Parr and Black & White. OPERATING AND FINANCIAL REVIEW For the six months ended 31 December 2006 OPERATING REVIEW Analysis by region North America Summary: • Continued share growth in spirits: value and volume share up 0.7 and 1.2 percentage points respectively• Volume growth of priority brands and price increases drove 7% growth in net sales Key measures: First half First half F'06 Reported Organic F'07 movement movement £ million £ million % % Volume 3 3Net sales 1,313 1,329 (1) 7Marketing spend 206 209 (1) 6Operating profit 486 476 2 11 Reported performance: Net sales were £1,313 million in the six months ended 31 December 2006 down by£16 million from £1,329 million in the comparable period. Operating profitincreased by £10 million to £486 million in the period ended 31 December 2006. Organic performance: The weighted average exchange rate used to translate US dollar sales and profitmoved from £1 = $1.76 in the six months ended 31 December 2005 to £1 = $1.91 inthe six months ended 31 December 2006. Net sales decreased by £99 million as aresult of the weakening US dollar. Acquisitions increased net sales by £1million and there was an organic increase in net sales of £82 million.Operating profit decreased by £38 million as a result of exchange ratemovements. Acquisitions had no impact on operating profit. There was anorganic increase in operating profit of £48 million. Organic brand performance: Reported Organic Organic volume volume Reported net net sales movement movement sales movement movement % % % % Global priority brands 6 6 - 8Local priority brands 1 1 (5) 3Category brands (2) (2) 1 8Total 3 3 (1) 7 Key brands: Smirnoff vodka 8 8 4 12Smirnoff ready to drink (20) (20) (22) (16)Captain Morgan (excl. ready to drink) 5 5 1 9Crown Royal 4 4 (1) 8Jose Cuervo (excl. ready to drink) 5 5 (2) 7Baileys 22 22 16 25Johnnie Walker 2 2 (2) 6Tanqueray 3 3 (4) 4Guinness 2 2 (3) 5Beaulieu Vineyard (8) (8) (14) (6)Sterling Vineyards 8 8 (9) (1) Smirnoff vodka grew volume 8%, outpacing category growth of 3%. A priceincrease in many states led to 12% growth in net sales. Smirnoff vodka grewvalue and volume share 0.2 and 0.8 percentage points respectively. Price increases on Captain Morgan Original Spiced Rum and Parrot Bay flavouredrum in most states drove growth of net sales of 9% on a 5% increase in volume. Jose Cuervo, excluding ready to drink, grew volume 5%, driven by growth of JoseCuervo Flavored Tequilas. Strong performance of super premium variants improvedmix and net sales grew 7%. The successful launch of Jose Cuervo Black Medallionin February 2006 and the continued growth of Jose Cuervo Tradicional have almostdoubled Cuervo's participation in the super premium and ultra premium tequilasegments. Baileys showed particularly strong growth with volume up 22% and net sales up25% following the national launch of Baileys flavours and the continued strongperformance of Baileys Original Irish Cream. Johnnie Walker outpaced the category and increased share by 1.6 percentagepoints with growth across all variants. Volume grew 2% reflecting furtherreductions in stock levels. Mix improvement toward Johnnie Walker Black Labeland the super deluxe variants drove 6% growth in net sales. Tanqueray grew volume 3%, share increased by 0.9 percentage points and net salesrose 4%. Guinness Draught in Bottle grew volume 13% while Guinness Draught increasedvolume by 4%. Changes in shipment phasing benefited the prior period performanceand therefore Guinness Extra Stout volume declined. As a result, total Guinnessvolume grew 2%. A national price increase on Guinness Draught and select marketincreases on other packs drove mix improvement and as a consequence, net saleswere up 5%. Volume on the local priority brands grew 1%, as strong performances by CrownRoyal, Buchanan's and Sterling Vineyards were partly offset by declines inGordon's gin, Seagram's VO and Beaulieu Vineyard. Net sales of local prioritybrands rose 3% following the positive mix shift towards Crown Royal andBuchanan's. Crown Royal volume grew 4% and net sales were up 8% following aprice increase in selected states and the introduction of the super premiumvariant Crown Royal Extra Rare. In wines, mix of Beaulieu Vineyard improved dueto lower sales of the mid-priced variant Century Cellars, while SterlingVineyards mix was diluted as a result of lower sales of the Reserve winesfollowing the warehouse fire in October 2005. Category brands' volume declined 2%. Lower value brands such as Popov andGordon's vodka declined but more premium spirits brands such as Ciroc, Don Julioand Bushmills, premium beer brands like Red Stripe and wine brands such asChalone Vineyards increased. As a result of this mix improvement, net sales grew8%. Ready to drink volume was down 6% as continued growth of Jose Cuervo ready todrink and the launch of Parrot Bay was more than offset by a decline in SmirnoffIce and Twisted V. However, prices increased, mix improved and as a result, netsales were down only 1%. Europe Summary: • Net sales down 2% due to weakness in Great Britain, Ireland and Spain• Strong growth in Continental Europe hub led by Johnnie Walker, Smirnoff vodka and Baileys• Marketing spend declined 7% due to reduced spend on ready to drink in Great Britain and France, and lower investment in Spain following a significant increase in the prior period Key measures: First half First half Reported Organic movement F'07 F'06 movement £ million £ million % % Volume (4) (5)Net sales 1,357 1,408 (4) (2)Marketing spend 208 225 (8) (7)Operating profit 484 494 (2) - Reported performance: Reported net sales in Europe in the period ended 31 December 2006 were down £51million from £1,408 in the comparable period, to £1,357 million. Reportedoperating profit decreased by 2% from £494 million to £484 million. Organic performance: Net sales decreased by £9 million as a result of the impact of exchange ratemovements. Acquisitions increased net sales by £4 million, disposals decreasednet sales by £14 million and there was an organic decrease in net sales of £32million. The exchange impact resulted primarily from a weakening of the euro.Operating profit decreased by £2 million as a result of exchange rate movements.Acquisitions increased operating profit by £2 million and disposals decreasedoperating profit by £2 million compared to the comparable six month period ended31 December 2005. Additional costs of £7 million were transferred to theregion. There was an organic decrease in operating profit of £1 million. Organic brand performance: Reported Organic Organic volume volume Reported net net sales movement movement sales movement movement % % % % Global priority brands (4) (4) (3) (3)Local priority brands (11) (11) (7) (6)Category brands (1) (2) (2) 1Total (4) (5) (4) (2) Key brands:Smirnoff vodka - - (1) 1Smirnoff ready to drink (17) (17) (15) (14)Johnnie Walker (1) (1) 4 4Baileys (8) (8) (6) (5)J&B (4) (4) (3) (3)Guinness (7) (7) (5) (4) Smirnoff vodka volume was flat as a decline in volume in Great Britain wasoffset by growth in Germany, Belgium and Greece. Net sales grew 1% benefitingfrom stronger pricing in Greece and Germany. Smirnoff ready to drink volume wasdown 17%, as the segment continued to decline in Great Britain. Net sales weredown 14% as promotions were moderated. Johnnie Walker volume was down 1% due to a decline in Johnnie Walker Red Labelvolume in Spain, where the standard Scotch segment has contracted, and inGreece, where there was a shortage of product following a strike at the port ofPiraeus. Volume of Johnnie Walker Black Label and Johnnie Walker super deluxeincreased in Greece and Eastern Europe as marketing continued to trade consumersup from standard variants. This, together with mix improvement in Russia onJohnnie Walker Red Label, improved overall mix and as a result, net sales grew4%. Baileys volume declined by 8% and net sales were down 5%. In Great Britain,funding of promotions was limited, which maintained brand equity but negativelyimpacted Baileys volume. Excluding Great Britain, volume grew 6% driven bystrong growth in Belgium and France and the successful launch of Baileysflavours throughout the region. J&B volume was down 4% as the continued decline in standard Scotch inSpain was only partially offset by good performance in France where volume grew4% and in Central and Eastern Europe where volume was up 19%. Guinness volume declined 7% due to the continued consumer shift from the ontrade to the off trade and exceptionally warm weather in both Great Britain andIreland. Net sales decline was restricted to 4% as a result of price increasesin both markets. Total local priority brands' performance was negatively impacted by the declineof Bell's and Gordon's in Great Britain and the decline of lagers in Ireland. Category brands' volume declined 2% and net sales increased 1% as growth ofBushmills, Pampero and the Classic Malts offset declines in Piat D'Or and VAT69. In Great Britain, a shift from the on trade to the off trade, a reduction inretailer funded promotions and a smoking ban introduced in Scotland in March2006 have resulted in a volume decline of 1% in the beverage alcohol market. Inaddition, there has been a consumer trend to value brands and a reduction incustomer stock levels ahead of the introduction of strip stamps. Diageoincreased prices in July 2006 and moderated its Christmas promotions to protectbrand equity and increase net sales per case. This provided a challengingbackground for Diageo's performance and as a result, volume declined 12% and netsales were down 9%. In Ireland, on trade beer volume continued to decline, while off trade beer andoverall wine and spirits consumption increased. Consumers are widening theirrepertoire and becoming more value conscious particularly in the off trade.These trends affected Diageo's performance in Ireland with beer net sales down3%, while spirits and wine net sales were both up 5%. Total volume and netsales declined 3% and 2% respectively. The trend to lower on trade consumption led to a 3% decline in the Spanishspirits market. The standard Scotch category lost share to rum and was down 6%.Diageo's volume in Iberia was down 6%, although net sales were only down 3%due to stronger pricing in Portugal. In the Continental Europe hub, volume grew 4% driven by growth in Central andEastern Europe, Benelux and Italy. Consumers continued to trade up to deluxeand super deluxe variants of Johnnie Walker throughout the hub. This miximprovement was offset by the continued decline of ready to drink in France andGermany and as a result, net sales were up 4%. The introduction of excise duty strip stamps severely disrupted the Russianmarket. As a result, Diageo volume was down 12%. However, termination of theprevious distribution contract and the formation of a 75% owned company for thedistribution, sale and marketing of spirits brands, led to higher net sales percase and as a result, net sales were up by 8%. International Summary: • Continued strong growth in Latin America, Asia and Africa • Further investment with marketing spend up 22% • Strong performance in Global Travel despite disruptions due to increased airport security • Strong growth and share gains in the Scotch category, especially in Latin America and China • Strong Guinness performance particularly in Nigeria and East Africa First half First half Reported Organic movementKey measures: F'07 F'06 movement £ million £ million % % Volume 14 14Net sales 1,314 1,183 11 16Marketing spend 212 184 15 22Operating profit 413 371 11 17 Reported performance: Reported net sales in the period ended 31 December 2006 were £1,314 million, up£131 million from £1,183 million in the comparable prior period. Reportedoperating profit was up 11% to £413 million for the six months ended 31 December2006. Organic performance: Net sales decreased by £50 million as a result of exchange rate impacts. Therewas an organic increase in net sales of £181 million. Operating profitdecreased by £15 million as a result of exchange rate movements and additionalcosts transferred to the region decreased operating profit by £4 million. Therewas an organic increase in operating profit of £61 million. Acquisitions anddisposals had no impact on net sales or operating profit for the period. Organic brand performance: Reported Organic Organic volume volume Reported net net sales movement movement sales movement movement % % % % Global priority brands 14 14 10 16Local priority brands 7 7 8 11Category brands 16 16 16 20Total 14 14 11 16 Key brands:Smirnoff vodka 12 12 3 13Smirnoff ready to drink 31 31 14 26Johnnie Walker 17 17 13 18Baileys 13 13 9 13Guinness 8 8 7 11Buchanan's - Venezuela 65 65 88 71Windsor - Korea 13 13 15 13 Smirnoff vodka grew volume 12% and net sales by 13% driven by increaseddistribution and successful advertising throughout Latin America, Africa andAsia. Smirnoff ready to drink volume grew 31% due to continued growth inBrazil, the successful launch of Smirnoff Storm in South Africa and the relaunchof Smirnoff Ice in Japan. Johnnie Walker continued to benefit from increased investment throughout Asiaand Latin America and continued activation of its grand prix team sponsorship.As a result, the brand grew volume 17% and net sales were up 18%. Baileys grew volume 13% reflecting the successful launch of Baileys flavours inGlobal Travel, Latin America and Australia, as well as 5% volume growth ofBaileys Original Irish Cream. Net sales grew by 13%. Guinness volume grew 8% driven by strong performances in Nigeria and East Africadue to increased marketing spend, renewed customer focus and economic growth.Net sales were up 11% mainly due to stronger pricing in Nigeria. Local priority brands' performance was driven by growth of Buchanan's inVenezuela and Windsor in Korea. The Scotch category drove very strong growth in category brands resulting in a16% increase in volume and a 20% increase in net sales. Old Parr, Buchanan's(excluding Venezuela where it is a local priority brand) and Black & White wereall up, particularly in Latin America and Benmore continued to perform stronglyin Thailand. Asia Pacific In Asia Pacific, share gains in fast growing markets such as India and China, aswell as in more established markets, such as Thailand and Korea, resulted involume growth of 7%. Net sales increased by 9%, driven by strong growth ofJohnnie Walker Black Label, particularly in China. In Australia, spirits brands drove volume growth of 7%. Johnnie Walker volumewas up 13% reflecting increases in both Johnnie Walker Red Label and JohnnieWalker Black Label. The launch of Baileys flavours resulted in a 10% increasein Baileys volume. Total net sales were up 3%, as ready to drink volumeincreased 1%. In Korea, the whisky market grew marginally, and therefore, performance wasdriven by share gains. Overall share increased by 1.5 percentage points asDiageo further established its leadership position in the Scotch category. Thesuccessful renovation of the Windsor brand continued to resonate with consumersas the brand increased share by 3.0 percentage points and as a result, volumeand net sales both grew 13%. In Japan, volume declined 1% while net sales grew 11%. Mix improved as a resultof the relaunch of Smirnoff Ice. Consumers moved away from the larger standardScotch segment to more premium Scotch segments. Reflecting this trend, JohnnieWalker super deluxe volume grew 13% but Johnnie Walker Red Label volume declined20%. In Thailand, volume grew 5% and net sales grew 18%. Mix improved due to a 68%increase in Johnnie Walker Red Label volume led by a 23% increase in marketingspend. Benmore continued to build its appeal to consumers and grew net sales by56%, more than offsetting declines in Spey Royal and Golden Knight as thesebrands have been de-emphasised. In Taiwan, volume declined 1% and net sales were flat. Johnnie Walker GreenLabel grew volume 15% offsetting a decline in Johnnie Walker Red Label andJohnnie Walker Black Label as consumers migrated from standard and deluxeblended Scotch to malts. In China, volume grew 43% and net sales were up 73%. Johnnie Walker Black Labelwas key to this performance as volume grew 92% and net sales doubled, driven bymarketing spend which was up more than 70%. Share was estimated to be up 8percentage points. Johnnie Walker super deluxe volume and net sales alsodoubled from a small base. In India, volume grew 26% and net sales were up 24%. Johnnie Walker Black Labeland Smirnoff vodka grew strongly with volume up 46% and 28% respectively, due tocontinued category growth and successful marketing. Haig Gold Label Scotch andShark Tooth vodka were launched to broaden consumer appeal in the premium valuesegment. Africa Africa grew volume 15% and net sales increased 16% due to strong growththroughout the region. In Nigeria, volume grew 11% and net sales were up 8%. A price increase onGuinness led net sales to increase by 12% on 8% volume growth. However, improvedperformance of Malta Guinness and the continued growth of Harp had an overallnegative impact on mix. Harp volume was up 12% as the brand benefited from itsfirst national marketing programme. In East Africa, volume grew 22% and net sales were up 23%. East Africa hastraditionally been a lager market, however, increased marketing spend onGuinness led volume to grow 23% and net sales to increase 30%. The continueddecline of Pilsner in Kenya was offset by strong growth of Pilsner and Tusker inUganda and continued success of Senator in Kenya. Trading in Cameroon improved due to increased promotions and a more stablemarket place. As a result, Guinness returned to growth with volume up 26% andnet sales up 33%. In Ghana, volume grew 3% and net sales were up 16%. Malta Guinness droveperformance with volume up 9% and net sales grew 26% following a price increasein November 2006 and 2005. In South Africa, volume grew 14% and net sales were up 23%. Mix improved due tocontinued strong growth of Smirnoff ready to drink, which grew volume 54%.Diageo's Scotch brands grew as a result of the increased consumer interest inthe category. Johnnie Walker grew volume 46%, Bell's grew volume by 17% and J&Bgrew volume by 9%. Share grew in vodka, standard Scotch, deluxe Scotch, readyto drink and cream liqueurs. Latin America and Caribbean Increased share gains in Scotch and overall growth in the Scotch category werethe key factors driving Diageo's performance in Latin America. Total volumegrew 21% and net sales were up 26%. In Mexico, volume grew 17% driven by growth across Diageo's Scotch brandsresulting in a 3.4 percentage point increase in share. Buchanan's volume was up14% and Johnnie Walker was up 26%, driven by Johnnie Walker Black Label volumegrowth of 41%. In Venezuela, the trend towards premium products continued as consumers tradedup from value Scotch. As a result of this trend, Diageo's total share in Scotchincreased by 6.2 percentage points. In Paraguay, Uruguay and Brazil, total volume grew 11% and net sales were up21%. Positive mix was driven by strong growth in Johnnie Walker and Smirnoffready to drink. Johnnie Walker Red Label grew volume 13%, net sales were up 18%and share increased 1.7 percentage points. Johnnie Walker Black Label grewvolume 12% and net sales were up 16%. Smirnoff ready to drink grew volume 26%and net sales were up by 53% as the brand continued to gain traction withconsumers. Global Travel and Middle East Despite the disruption caused by the conflict in Lebanon, reduced tourismfollowing the military coup in Thailand and issues around airport security,Global Travel and Middle East volume grew 9% and net sales were up 11%. JohnnieWalker grew volume 7%, driven by 10% growth in Johnnie Walker Red Label ascontinued promotions leveraged Johnnie Walker's ongoing grand prix teamsponsorship. Johnnie Walker Black Label declined 1% mainly due to the conflictin the Middle East. Johnnie Walker super deluxe grew volume 29%, with stronggrowth in Asia due to the continued focus on gift packs and the launch ofJohnnie Walker Blue Label King George V, a new super deluxe variant.Performance also benefited from the global roll out of Baileys flavours and as aresult, Baileys volume increased by 15%. Continued growth in Scotch in LatinAmerica resulted in strong performances of Buchanan's and Old Parr, which grewvolume 179% and 129% respectively. Corporate revenue and costs Net sales were £38 million in the six months ended 31 December 2006, down by £2million from £40 million in the prior period. Net reported operating costsdecreased by £3 million to £77 million in the six months ended 31 December 2006. Net operating costs decreased by £11 million as a result of additional costsbeing transferred to the regions and there was a net decrease of £2 million inrespect of exchange rate movements that included a charge of £5 million forexchange adjustments on inter-company short term balances under IAS 21 - Theeffects of changes in foreign exchange rates. Diageo will report preliminary results for the year ending 30 June 2007 on thenew basis of four regions: North America, Europe, International and AsiaPacific, together with Corporate. The results for the year ended 30 June 2006and for the six months ended 31 December 2006, restated for the new fourregions, will be issued at the time of the year end trading statement. FINANCIAL REVIEW Condensed consolidated income statement Six months ended 31 Six months ended 31 December 2006 December 2005 £ million £ million Sales 5,358 5,359Excise duties (1,336) (1,399) Net sales 4,022 3,960 Operating costs (2,716) (2,699)Operating profit 1,306 1,261Disposal of investments - 151Net finance charges (98) (88)Associates' profits 91 77Profit before taxation 1,299 1,401Taxation (367) (196)Profit for the period 932 1,205 Attributable to:Equity shareholders 895 1,166Minority interests 37 39 932 1,205 Sales and net sales On a reported basis, sales decreased by £1 million from £5,359 million in thesix months ended 31 December 2005 to £5,358 million in the six months ended 31December 2006. On a reported basis net sales increased by £62 million from£3,960 million in the six months ended 31 December 2005 to £4,022 million in thesix months ended 31 December 2006. Acquisitions and disposals contributed a netdecrease to both reported sales and net sales of £9 million in the period andexchange rate movements also decreased reported sales by £199 million andreported net sales by £158 million, principally arising from the weakening ofthe US dollar. Operating costs On a reported basis operating costs increased by £17 million in the six monthsended 31 December 2006 due to an increase in marketing costs of £8 million, from£618 million to £626 million, an increase in cost of sales of £23 million, from£1,511 million to £1,534 million, offset by a decrease in other operating costsof £14 million, from £570 million to £556 million. The impact of exchange ratemovements decreased total operating costs by £105 million. Post employment plans Post employment costs for the six months ended 31 December 2006 of £28 million(2005 - £44 million) included amounts charged to operating profit of £52 million(2005 - £54 million) and finance income of £24 million (2005 - £10 million). At31 December 2006, Diageo's deficit before taxation for all post employment planswas £759 million (30 June 2006 - £801 million). Operating profit Operating profit for the six months ended 31 December 2006 increased by £45million to £1,306 million from £1,261 million in the comparable prior period. Exchange rate movements reduced operating profit for the six months ended 31December 2006 by £53 million. Disposal of investments In the six months ended 31 December 2005 disposal of investments represented thegain of £151 million on the sale of all of the group's remaining 25 millionshares of common stock of General Mills. Net finance charges Net finance charges increased by £10 million from £88 million in the six monthsended 31 December 2005 to £98 million in the six months ended 31 December 2006. The net interest charge increased by £28 million from £92 million in thecomparable prior period to £120 million in the six months ended 31 December2006. This increase principally resulted from the increase in net borrowings inthe period and the increase in floating US Dollar interest rates. Exchange ratemovements reduced interest by £7 million. Other net finance income of £22 million (2005 - £4 million) included income of£24 million (2005 - £10 million) in respect of the group's post employmentplans. This movement in income related to the post employment plans principallyreflects the increase in the value of the assets held between 1 July 2005 and 30June 2006. Other finance income in the six months to 31 December 2005 alsoincluded £5 million dividend income in respect of the group's interest inGeneral Mills. Other finance charges for the six months ended 31 December 2006include income of £4 million (2005 - charge of £4 million) in respect ofexchange rate translation differences on inter-company funding arrangements thatdo not meet the accounting criteria for recognition in equity. Associates The group's share of profits of associates after interest and tax was £91million for the six months ended 31 December 2006 compared to £77 million in thecomparable period last year. Diageo's 34% equity interest in Moet Hennessycontributed £84 million to share of profits of associates after interest and tax(2005 - £71 million). Profit before taxation Profit before tax decreased by £102 million from £1,401 million to £1,299million in the six months ended 31 December 2006, primarily as a result of the£151 million gain on disposal of General Mills shares in the six months ended 31December 2005. Taxation The tax charge is based upon the estimate of the tax rate expected for the fullfinancial year. The reported tax rate for the six months ended 31 December 2006 is 28.3%compared with 14.0% for the six months ended 31 December 2005. Factorsincreasing the reported tax rate for the six months ended 31 December 2006 are aprovision for the settlement of tax liabilities relating to the Guinness/GrandMet merger and a reduction in the carrying value of deferred tax assets. Exchange rates Effect of exchange rate movements on the results for the six months ended 31December 2006 as compared with the results for the six months ended 31 December2005. Gains/(losses) £ millionOperating profit Translation impact (46) Transaction impact (7) Interest and other finance charges Translation impact 7 Net exchange movements on short term inter-company loans 8Total FX effect on profit before taxation (38) Six months ended 31 Six months ended 31 December 2006 December 2005Exchange rates Translation US$/£ rate 1.91 1.76 Translation •/£ rate 1.48 1.47 Transaction US$/£ rate 1.87 1.81 Transaction •/£ rate 1.44 1.46 The weakening of the US dollar had adverse translation and transaction effectson operating profit and a favourable impact on US dollar denominated interestcharges. Outlook for the impact of exchange rate movements For the year ending 30 June 2007 the impact of exchange rate movements based oncurrent exchange rates is estimated to have an adverse impact of £90 million onoperating profit and a positive impact of approximately £10 million on interest(excluding the exchange impact of retranslating trading and short term loaninter-company balances under International Accounting Standards 21 - The effectsof changes in foreign exchange rates). Dividend An interim dividend of 12.55 pence per share will be paid to holders of ordinaryshares and ADRs on the register on 9 March 2007. This represents an increase of5% on last year's interim dividend. The interim dividend will be paid toshareholders on 10 April 2007. Payment to US ADR holders will be made on 16April 2007. A dividend reinvestment plan is available in respect of the interimdividend and the plan notice date is 19 March 2007. Cash flow Extract from the consolidated cash flow statement Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million Cash generated from operations 914 957Interest paid (net) (104) (61)Dividends paid to equity minority interests (22) (20)Taxation (72) (118)Net sale/(purchase) of investments 1 (1)Net capital expenditure (45) (106)Free cash flow 672 651 Cash generated from operations decreased from £957 million to £914 million inthe six months ended 31 December 2006 principally as a result of cash outflowsin relation to working capital which were greater by £52 million than in theprior period mainly because of higher sales. Interest payments increased by £43million largely as a result of the loss of Burger King subordinated debtinterest income received in the six month period ended 31 December 2005,increased net borrowings during the period and higher US Dollar interest rates.The decrease in cash generated from operations and increased interest paymentswere principally offset by reduced taxation payments (down £46 million to £72million) and reduced net capital expenditure (down £61 million to £45 million)and as a result free cash flow increased £21 million to £672 million from £651million in the prior period. In the six months ended 31 December 2006, Diageo invested £20 million inbusiness acquisitions and purchased 72.8 million shares as part of the sharebuyback programme (2005 - 84.4 million shares) at a cost including fees of £704million (2005 - £704 million). Net payments to acquire shares for employee shareschemes totalled £48 million (2005 - £42 million). Diageo continues to target a range of ratios which are currently broadlyconsistent with an A band credit rating. In 2008, assuming similar levels offree cash flow and acquisition activity to those that arose in 2006 and areexpected to arise in 2007, Diageo would expect, under this capital structure, tohave the financial capacity to fund a share buyback programme of approximately£1 billion. Balance sheet At 31 December 2006, total equity was £4,290 million compared with £4,681million at 30 June 2006. This decrease was mainly due to the profit for theperiod of £932 million offset by the dividend paid out of shareholders' equityof £524 million and the shares repurchased of £704 million. Net borrowings were £4,554 million at 31 December 2006, an increase of £472million from net borrowings at 30 June 2006 of £4,082 million. The principalcomponents of this increase were the free cash inflow of £672 million offset bypayments of £704 million to repurchase shares and a £524 million equity dividendpaid. Economic profit Economic profit increased by £47 million from £468 million in the six monthsended 31 December 2005 to £515 million in the six months ended 31 December 2006.See page 34 for the calculation and definition of economic profit. DIAGEO CONSOLIDATED INCOME STATEMENT Six months ended 31 Six months ended 31 December 2006 December 2005 Notes £ million £ million Sales 2 5,358 5,359Excise duties (1,336) (1,399)Net sales 4,022 3,960Cost of sales (1,534) (1,511)Gross profit 2,488 2,449Marketing spend (626) (618)Other operating expenses (556) (570)Operating profit 2 1,306 1,261Sale of General Mills shares 3 - 151Net interest payable 4 (120) (92)Net other finance income 4 22 4Share of associates' profits after tax 91 77Profit before taxation 1,299 1,401Taxation 5 (367) (196)Profit for the period 932 1,205 Attributable to:Equity shareholders of the parent company 895 1,166Minority interests 37 39 932 1,205 Pence per shareBasic earnings 32.8p 40.4pDiluted earnings 32.6p 40.4pAverage shares 2,725m 2,886m DIAGEO CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million £ million £ million Exchange differences on translation of foreign operations- group (230) 164- associates (24) 18Exchange differences on hedges of net investment in foreignoperations 159 (90)Effective portion of changes in fair value of net investmenthedges 12 (41)Effective portion of changes in fair value of cash flow hedges- gains taken to equity 15 (24)- transferred to profit for the period 25 7Fair value movement on available for sale securities- unrealised gains arising during the period - 33- realised gains reclassified to profit for the period - (181)Actuarial gains on post employment plans 13 236Tax on items taken directly to equity (17) (50)Net (charges)/income recognised directly in equity (47) 72Profit for the period- group 841 1,128- associates 91 77Profit for the period 932 1,205Total recognised income and expense for the period 885 1,277Impact of IAS 39 adoption on 1 July 2005 (net of tax)- group 170- associates (6)Impact of adoption of IAS 39 164 1,441Attributable to:- equity shareholders of the parent company 856 1,229- minority interests 29 48Total recognised income and expense for the period 885 1,277 DIAGEO CONSOLIDATED BALANCE SHEET 31 December 2006 30 June 2006 31 December 2005 Notes £ million £ million £ million £ million £ million £ million Non-current assetsIntangible assets 4,399 4,534 4,723Property, plant and equipment 1,889 1,952 1,987Biological assets 3 13 5Investments in associates 1,405 1,341 1,347Other investments 72 69 66Other receivables 14 12 40Other financial assets 51 42 96Deferred tax assets 837 1,113 705Post employment benefit assets 17 14 11 8,687 9,090 8,980Current assetsInventories 6 2,474 2,386 2,488Trade and other receivables 2,183 1,681 2,185Other financial assets 87 71 -Cash and cash equivalents 7 975 699 1,039 5,719 4,837 5,712Total assets 14,406 13,927 14,692Current liabilitiesBorrowings and bank overdrafts 7 (1,279) (759) (1,047)Other financial liabilities (24) (36) -Trade and other payables (2,021) (1,803) (1,984)Corporate tax payable (788) (681) (806)Provisions (66) (56) (101) (4,178) (3,335) (3,938)Non-current liabilitiesBorrowings 7 (4,222) (4,001) (3,907)Other financial liabilities (82) (78) (149)Other payables (11) (37) (107)Provisions (287) (306) (286)Deferred tax liabilities (560) (674) (406)Post employment benefit liabilities (776) (815) (1,110) (5,938) (5,911) (5,965)Total liabilities (10,116) (9,246) (9,903)Net assets 4,290 4,681 4,789 EquityCalled up share capital 868 883 883Share premium 1,340 1,340 1,339Other reserves 3,135 3,168 3,187Retained deficit (1,242) (889) (817)Equity attributable to equity shareholders of the parent company 4,101 4,502 4,592Minority interests 189 179 197Total equity 9 4,290 4,681 4,789 DIAGEO CONSOLIDATED CASH FLOW STATEMENT Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million £ million £ millionCash flows from operating activities Profit for the period 932 1,205 Taxation 367 196 Share of associates' profits after taxation (91) (77) Net interest and other finance income 98 88 Gains on disposal of shares in General Mills - (151) Depreciation and amortisation 104 105 Movements in working capital (515) (463) Dividend income 7 14 Other items 12 40 Cash generated from operations 914 957 Interest received 21 37 Interest paid (125) (98) Dividends paid to equity minority interests (22) (20) Taxation paid (72) (118) Net cash from operating activities 716 758 Cash flows from investing activities Net purchase/(sale) of investments 1 (1) Disposal of property, plant and equipment 39 2 Purchase of property, plant and equipment (84) (108) Disposal of shares in General Mills - 651 Disposal of businesses - 122 Purchase of subsidiaries (20) (207) Net cash (outflow)/inflow from investing activities (64) 459 Cash flows from financing activities Proceeds from issue of share capital - 2 Net purchase of own shares for share schemes (48) (42) Own shares repurchased for cancellation or holding as treasury shares (704) (704) Net increase in loans 900 296 Equity dividends paid (524) (529) Net cash used in financing activities (376) (977) Net increase in net cash and cash equivalents 276 240 Exchange differences (28) 12 Net cash and cash equivalents at beginning of the period - - 651 729 Net cash and cash equivalents at end of the period 899 981 Net cash and cash equivalents consist of: Cash and cash equivalents 975 1,039 Bank overdrafts (76) (58) 899 981 NOTES 1. Basis of preparation The consolidated financial statements are prepared in accordance withInternational Financial Reporting Standards as endorsed and adopted for use inthe European Union (IFRS). This interim consolidated financial information isunaudited and has been prepared on the basis of accounting policies consistentwith those applied in the consolidated financial statements for the year ended30 June 2006. IFRS is subject to ongoing review and endorsement by the EU orpossible amendment by interpretative guidance from the International AccountingStandards Board (IASB). The following interpretations, issued by the International Financial ReportingInterpretations Committee (IFRIC), are effective for the first time in thecurrent financial year and have been adopted by the group with no significantimpact on its consolidated results or financial position: IFRIC 4 - Determining whether an arrangement contains a lease (effective for annual periods beginning on or after 1 January 2006). IFRIC 5 - Rights to interests arising from decommissioning, restorationand environmental rehabilitation funds (effective for annual periods beginningon or after 1 January 2006). IFRIC 6 - Liabilities arising from participating in a specific market:waste electrical and electronic equipment (effective for annual periodsbeginning on or after 1 December 2005). IFRIC 7 - Applying the restatement approach under IAS 29 - Financial reporting in hyperinflationary economies (effective for annual periods beginning on or after 1 March 2006). IFRIC 8 - Scope of IFRS 2 - Accounting for share based payments (effective for annual periods beginning on or after 1 May 2006). IFRIC 9 - Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006). The following standards and interpretations, issued by the IASB or IFRIC, havenot been adopted by the group: IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009) IFRIC 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after 1 November 2006). IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007). IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008). IFRS 8 contains requirements for the disclosure of information about an entity'soperating segments and also about the entity's products and services, thegeographical areas in which it operates, and its major customers. The standardis concerned only with disclosure and replaces IAS 14 - Segment reporting. Thegroup is currently assessing the impact this standard will have on thepresentation of its consolidated results. The group does not currently believe the adoption of the interpretations willhave a material impact on the consolidated results or financial position of thegroup. The comparative figures for the financial year ended 30 June 2006 are not thecompany's statutory accounts for that financial year. Those accounts have beenreported on by the company's auditors and delivered to the registrar ofcompanies. The report of the auditor was (i) unqualified, (ii) did not includea reference to any matters to which the auditors drew attention by way ofemphasis without qualifying their report, and (iii) did not contain a statementunder section 237(2) or (3) of the Companies Act 1985. 2. Business and geographical analyses Business analysis is presented under the categories of Diageo North America,Diageo Europe, Diageo International and Corporate, reflecting the group'smanagement and internal reporting structure. Business analysis: Six months ended Six months ended 31 December 2006 31 December 2005 Operating profit/ Operating Sales (loss) Sales profit/(loss) £ million £ million £ million £ million North America 1,543 486 1,565 476Europe 2,122 484 2,221 494International 1,655 413 1,533 371 5,320 1,383 5,319 1,341Corporate 38 (77) 40 (80) 5,358 1,306 5,359 1,261 Net corporate operating costs and trading losses decreased from £80 million to£77 million in the six months ended 31 December 2006. Corporate revenues andcosts are in respect of central costs including finance, human resources andlegal as well as certain information system, service centre, facilities andemployee costs that are not directly allocated to the geographical operatingunits. They also include the revenues and costs related to rents receivable inrespect of properties not used by Diageo in the manufacture, sale ordistribution of premium drinks, exchange movements on short term inter-companytrading balances and the results of Gleneagles Hotel. Geographical analysis of sales and operating profit by destination: Six months ended Six months ended 31 December 2006 31 December 2005 Operating profit Operating Sales Sales profit £ million £ million £ million £ million North America 1,564 498 1,581 485Europe 2,197 417 2,292 426Asia Pacific 609 129 561 122Latin America 459 141 402 106Rest of World 529 121 523 122 5,358 1,306 5,359 1,261 Sales and operating profit by geographical destination have been statedaccording to the location of the third party customers. Certain businesses within Diageo International for internal management purposeshave been reported within the appropriate market in the geographical analysisabove. Corporate sales and operating loss (principally central costs) areincurred in Europe. Diageo will report preliminary results for the year ending 30 June 2007 on thenew basis of four regions: North America, Europe, International and AsiaPacific, together with Corporate. The results for the year ended 30 June 2006and for the six months ended 31 December 2006, restated for the new fourregions, will be issued at the time of the year end trading statement. 31 December 30 June 31 December 2006 2006 2005Analysis of total assets: £ million £ million £ million North America 898 872 994Europe 1,300 1,190 1,563International 1,244 1,139 1,278Moet Hennessy 1,364 1,303 1,304 Corporate and other 9,600 9,423 9,553 14,406 13,927 14,692 Corporate and other total assets consist primarily of brands that arecapitalised in the balance sheet, property, plant and equipment, maturing whiskyinventories and other assets that are not readily allocable to the group'soperating segments. Weighted average exchange rates used in the translation of profit and lossaccounts were US dollar - £1 = $1.91 (2005 - £1 = $1.76) and euro - £1 = €1.48(2005 - £1 = €1.47). Exchange rates used to translate assets and liabilities atthe balance sheet date were US dollar - £1 = $1.96 (31 December 2005 - £1 =$1.72) and euro - £1 = €1.48 (31 December 2005 - £1 = €1.46). The group usesexchange rate transaction hedges to mitigate the effect of exchange ratemovements. The festive holiday season provides the peak period for sales. Approximately30% of annual sales volume arises in the last three months of each calendaryear. 3. Exceptional items The group identifies separately certain items as "exceptional". These are itemswhich, in management's judgement, need to be disclosed by virtue of their sizeor incidence in order for the user to obtain a proper understanding of thefinancial information. Exceptional items in the six months ended 31 December 2006 were £nil. In thesix months ended 31 December 2005 the gain on sale of shares in General Mills of£151 million was identified as an exceptional item. 4. Net interest and other finance charges Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million Interest payable (145) (107)Interest receivable 26 15Market value movements on interest rate instruments (1) - Net interest payable (120) (92) Net finance income in respect of post employment plans 24 10Investment income - dividends receivable from General Mills - 5Unwinding of discounts on provisions and receivables (6) (7)Other finance income 18 8Net exchange movements on certain financial instruments 4 (4) Net other finance income 22 4 5. Income taxes The £367 million taxation charge for the six months ended 31 December 2006comprises a UK tax charge of £55 million and a foreign tax charge of £312million. 6. Inventories 31 December 30 June 31 December 2006 2006 2005 £ million £ million £ million Raw materials and consumables 249 236 273Work in progress 16 17 22Maturing inventories 1,741 1,644 1,610Finished goods and goods for resale 468 489 583 2,474 2,386 2,488 7. Net borrowings 31 December 30 June 31 December 2006 2006 2005 £ million £ million £ million Borrowings due within one year and bank overdrafts (1,279) (759) (1,047)Borrowings due after one year (4,222) (4,001) (3,907)Interest rate fair value hedging instruments (16) (44) 9Cross currency interest rate swaps (19) - -Foreign currency swaps and forwards (5) (17) (9)Finance lease obligations (13) (9) (10) Gross borrowings (5,554) (4,830) (4,964)Less:Cash and cash equivalents 975 699 1,039Other liquid resources 25 49 14Net borrowings (4,554) (4,082) (3,911) In the period ended 31 December 2006, the group issued a US $600 million globalbond repayable in January 2012 with a coupon of 5.125%, a US $600 million globalbond repayable in September 2016 with a coupon of 5.5%, a US $600 million globalbond repayable in 2036 with a coupon of 5.875%. A US $500 million bond and a€300 million medium term note matured and were repaid in the period. 8. Reconciliation of movement in net borrowings Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million Net borrowings at beginning of the period (4,082) (3,706)Adoption of IAS 39 on 1 July 2005 3Restated net borrowings at beginning of the period (3,703) Increase in net cash and cash equivalents before exchange 276 240Cash flow from change in loans (900) (296)Change in net borrowings from cash flows (624) (56)Exchange differences on net borrowings 159 (150)Other non-cash items (7) (2)Net borrowings at end of the period (4,554) (3,911) 9. Total equity - movements in capital and reserves Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ million Total equity at beginning of the period 4,681 4,626Adoption of IAS 39 on 1 July 2005 164Restated total equity at beginning of the period 4,790 Total recognised income and expense for the period 885 1,277Share trust arrangements 32 (39)Share-based incentive plans 14 12Tax on share-based incentive plans 5 -Shares issued - 2Purchase of own shares for cancellation or holding as treasuryshares (704) (704)Purchase of own shares for holding as treasury shares for share scheme hedging (80) -Acquisition of minority interest 3 -Dividends paid to equity shareholders (524) (529)Dividends paid to minority interests (22) (20) Net movement in total equity (391) (1) Total equity at end of the period 4,290 4,789 Total equity at the end of the period includes gains of £7 million in respect ofcumulative translation differences (30 June 2006 - £107 million) and £2,339million in respect of own shares held as treasury shares (30 June 2006 - £2,070million). 10. Dividends Six months ended Six months ended 31 December 2006 31 December 2005 £ million £ millionAmounts recognised as distributions to equity holders in the period Final dividend paid for the year ended 30 June 2006 of 19.15p (2005 -18.2p) per share 524 529 An interim dividend of 12.55 pence per share for the six months ended 31December 2006 (2005 - 11.95 pence per share) was approved by the Board on 14February 2007. As this was after the balance sheet date, this dividend has notbeen included as a liability in the balance sheet at 31 December 2006. 11. Contingent liabilities and legal proceedings (i) Guarantees In connection with the disposal of Pillsbury, Diageo hasguaranteed the debt of a third party to the amount of $200 million (£102million) until November 2009. Including this guarantee, but net of the amountprovided in the consolidated financial information, at 31 December 2006 thegroup has given performance guarantees and indemnities to third parties of £159million. In February 2007, Diageo was released from certain guarantee obligations in theamount of £51 million arising from the acquisition of the Seagram's business.Save as disclosed above, there has been no material change since 31 December2006 in the group's performance guarantees and indemnities. (ii) Colombian litigation An action was filed on 8 October 2004 in the UnitedStates District Court for the Eastern District of New York by the Republic ofColombia and a number of its local government entities against Diageo and otherspirits companies. The complaint alleges several causes of action. Includedamong the causes of action is a claim that the defendants allegedly violated theFederal RICO Act by facilitating money laundering in Colombia through theirsupposed involvement in the contraband trade to the detriment of governmentowned spirits production and distribution businesses. Diageo intends to defenditself vigorously against this lawsuit. (iii) Alcohol advertising litigation A number of similar putative class actionsare pending in state and federal courts in the United States against Diageo plc,Diageo North America Inc and other Diageo entities, along with a large group ofother beverage alcohol manufacturers, brewers and importers. All have beenbrought by the same national counsel. In each action, the plaintiffs seek topursue their claims on behalf of parents and guardians of people under the legaldrinking age who illegally bought alcohol beverages during the period from 1982to the present. Plaintiffs allege several causes of action, principally fornegligence, unjust enrichment and violation of state consumer fraud statutes.Some complaints include additional claims based on conspiracy, nuisance andother legal theories. Diageo intends to defend itself vigorously against theseclaims. (iv) Turkish customs litigation In common with other beverage alcohol importers,litigation is ongoing against Diageo's Turkish subsidiary in the Turkish CivilCourts in connection with the methodology used by the Turkish customsauthorities in assessing the importation value of and duty payable on thebeverage alcohol products sold in the domestic channel in Turkey. The matterinvolves multiple cases against Diageo's Turkish subsidiary at various stages oflitigation including a group of cases under correction appeal following anadverse finding at the Turkish Supreme Court. Diageo's Turkish subsidiaryintends to defend its position vigorously. (v) Other The group has extensive international operations and is defendant in anumber of legal proceedings incidental to these operations. There are a numberof legal claims against the group, the outcome of which cannot at present beforeseen. Save as disclosed above, neither Diageo, nor any member of the Diageo group, isor has been engaged in, nor (so far as Diageo is aware) is there pending orthreatened by or against it, any legal or arbitration proceedings which may havea significant effect on the financial position of the Diageo group. INDEPENDENT REVIEW REPORT TO DIAGEO PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 31 December 2006 which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet and the consolidated cash flow statement and therelated notes. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing PracticesBoard for use in the UK. A review consists principally of making enquiries ofgroup management and applying analytical procedures to the financial informationand underlying financial data and, based thereon, assessing whether theaccounting policies and presentation have been consistently applied unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 December 2006. KPMG Audit PlcChartered AccountantsLondon, England14 February 2007 ADDITIONAL INFORMATION FOR SHAREHOLDERS EXPLANATORY NOTES Definitions Unless otherwise stated, percentage movements given throughout this announcementfor volume, sales, net sales, marketing spend and operating profit are organicmovements (at level exchange rates and after adjusting for exceptional items,acquisitions and disposals) for continuing operations. Comparisons are with theequivalent period in the last financial year. For an explanation of organicmovements please refer to 'Reconciliation to GAAP measures' in thisannouncement. Volume has been measured on an equivalent units basis to nine litre cases ofspirits. An equivalent unit represents one nine litre case of spirits, which isapproximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine,or 330ml of ready to drink or beer. Therefore, to convert volume of products,other than spirits, to equivalent units, the following guide has been used: beerin hectolitres divide by 0.9, wine in nine litre cases divide by five and readyto drink in nine litre cases divide by 10, with certain pre-mixed products thatare classified as ready to drink divided by 5. Net sales are sales after deducting excise duties. Exceptional items are those that in management's judgement need to be disclosedby virtue of their size or incidence in order for the user to obtain a properunderstanding of the financial information. Such items are included within theincome statement caption to which they relate. References to ready to drink include flavoured malt beverages in the UnitedStates. References to Smirnoff ready to drink include Smirnoff Ice, SmirnoffBlack Ice, Smirnoff Twisted V, Smirnoff Mule, Smirnoff Spin, Smirnoff Storm,Smirnoff Caesar, Smirnoff Fire, Smirnoff Raw Tea, Smirnoff Caipiroska, SmirnoffSignatures and Smirnoff Source. References to Smirnoff Black Ice includeSmirnoff Ice Triple Black in the United States. Volume share is a brand's volume when compared to the volume of all brands inits segment. Value share is a brand's retail sales when compared to the retailsales of all brands in its segment. Unless otherwise stated, share refers tovolume share. Share of voice is the media spend on a particular brand whencompared to all brands in its segment. The share and share of voice datacontained in this announcement is taken from independent industry sources in themarkets in which Diageo operates. This announcement contains forward-looking statements that involve risk anduncertainty. There are a number of factors that could cause actual results anddevelopments to differ materially from those expressed or implied by theseforward-looking statements, including factors beyond Diageo's control. Pleaserefer to page 35 - 'Cautionary statement concerning forward-looking statements'for more details. This announcement includes names of Diageo's products which constitutetrademarks or trade names which Diageo owns or which others own and license toDiageo for its use. Reconciliation to GAAP measures (i) Organic movement Organic movement in volume, sales, net sales, operating profit and basicearnings per share are measures not specifically used in the consolidatedfinancial statements themselves (non-GAAP measures). The performance of thegroup is discussed using these measures. In the discussion of the performance of the business, certain information ispresented using sterling amounts on a constant currency basis. This strips outthe effect of exchange rate movements and enables an understanding of theunderlying performance of the market that is most closely influenced by theactions of that market's management. The risk from exchange rate movement ismanaged centrally and is not a factor over which local managers have anycontrol. Acquisitions and disposals and exceptional items also impact the reportedperformance and therefore the reported movement in any period in which theyarise. Management adjusts for the impact of such transactions in assessing theperformance of the underlying business. The underlying performance on a constant currency basis and excluding the impactof acquisitions and disposals and exceptional items is referred to as 'organic'performance. Organic movement calculations enable the reader to focus on theperformance of the business which is common to both periods. Organic movement in volume, sales, net sales and operating profit Diageo's strategic planning and budgeting process is based on organic movementin volume, sales, net sales and operating profit, and these measures closelyreflect the way in which operating targets are defined and performance ismonitored by the group's management. Therefore organic movement measures mostclosely reflect the way in which the business is managed. These measures are chosen for planning, budgeting, reporting and incentivepurposes since they represent those measures which local managers are mostdirectly able to influence and they enable consideration of the underlyingbusiness performance without the distortion caused by fluctuating exchangerates, acquisitions and disposals. The group's management believes these measures provide valuable additionalinformation for users of the financial statements in understanding the group'sperformance since they provide information on those elements of performancewhich local managers are most directly able to influence and focus on thatelement of the core brand portfolio which is common to both periods. Theyshould be viewed as complementary to, and not a replacement for, the comparableGAAP measures: sales, net sales, operating profit and reported movements inindividual income statement captions. These GAAP measures reflect all of thefactors which impact on the business. The organic movement calculations for volume, sales, net sales and operatingprofit for the six months ended 31 December 2006 were as follows: 1. Volume (1)(a)(b) Acquisitions and disposals Organic movement 2005 units million units million 2006 Organic units* units million movement % million North America 25.6 0.1 0.8 26.5 3 Europe 24.0 0.1 (1.1) 23.0 (5) International 23.1 (0.1) 3.2 26.2 14Total 72.7 0.1 2.9 75.7 4 2. Sales (a)(b) 2005 Acquisitions Organic 2006 Organic Reported Exchange(3) and disposals(4) movement Reported movement £ million £ million £ million £ million £ million % North America 1,565 (116) 1 93 1,543 6 Europe 2,221 (12) (10) (77) 2,122 (4) International 1,533 (71) - 193 1,655 13 Corporate 40 - - (2) 38 (6)Total sales 5,359 (199) (9) 207 5,358 4 3. Net sales (a)(b) 2005 Acquisitions Organic 2006 Organic Reported Exchange(3) and disposals(4) movement Reported movement £ million £ million £ million £ million £ million % North America 1,329 (99) 1 82 1,313 7 Europe 1,408 (9) (10) (32) 1,357 (2) International 1,183 (50) - 181 1,314 16 Corporate 40 - - (2) 38 (6)Total net sales 3,960 (158) (9) 229 4,022 6Excise duties 1,399 1,336 Total sales 5,359 5,358 4. Operating profit (a)(b) 2005 Acquisitions Organic 2006 Organic Reported Transfers(2) Exchange(3) and disposals(4) movement Reported movement £ million £ million £ million £ million £ million £ million % North America 476 - (38) - 48 486 11 Europe 494 (7) (2) - (1) 484 - International 371 (4) (15) - 61 413 17 Corporate (80) 11 2 - (10) (77) (15)Total 1,261 - (53) - 98 1,306 8 * Adjusted for equivalent units of mid strength brands Notes - Information relating to the current period (1) Differences between the reported volume movements and organic volumemovements are due to acquisitions and disposals. (2) Transfers represent the movement between operating units of certainactivities, the most significant of which were the reallocation of supplyrelated overheads from corporate to the regions and the reallocation of prioryear transaction exchange differences into corporate. (3) The exchange adjustments for sales, net sales and operating profit areprincipally in respect of the US dollar. (4) The only acquisition in the six months ended 31 December 2006 was theacquisition of the Smirnov brand in Russia. The other acquisition impacting thecalculation of organic growth in the period was the acquisition of The 'OldBushmills' Distillery Company Limited in August 2005. Disposals affecting theperiod were the disposal of United Beverages Limited and Three Barrels (bothEurope) and contributed sales, net sales and operating profit of £16 million,£14 million and £2 million, respectively, in the six months ended 31 December2005 and had no impact on volume. Notes - Information relating to the organic movement calculations a) The organic movement percentage is the amount in the columnheaded 'Organic movement' in the tables above expressed as a percentage of theaggregate of the columns headed 2005 Reported, Transfers, Exchange and theamounts in respect of disposals (see note 4 above) included in the column headedAcquisitions and disposals. The inclusion of the column headed Exchange in theorganic movement calculation reflects the adjustment to exclude the effect ofexchange rate movements by recalculating the prior period results as if they hadbeen generated at the current period's exchange rates. Organic movementpercentages are calculated as the organic movement amount in £ million,expressed as the percentage of the prior period results at current year exchangerates and after adjusting for disposals. The basis of calculation means that theresults used to measure organic movement for a given period will be adjustedwhen used to measure organic movement in the subsequent period. b) Where a business, brand, brand distribution right or agency agreementwas disposed of, or terminated, in the current period, the group, in organicmovement calculations, adjusts the results for the comparable prior period toexclude the amount the group earned in that period that it could not have earnedin the current period (i.e. the period between the date in the prior period,equivalent to the date of the disposal in the current period, and the end of theprior period). As a result, the organic movement numbers reflect only comparableperformance. Similarly, if a business was disposed of part way through theequivalent prior period then its contribution would be completely excluded fromthat prior period's performance in the organic movement calculation, since thegroup recognised no contribution from that business in the current period. Inthe calculation of operating profit the overheads included in disposals wereonly those directly attributable to the businesses disposed, and do not resultfrom subjective judgements of management. For acquisitions, a similar adjustmentis made in the organic movement calculations. For acquisitions subsequent to theend of the equivalent prior period, the post acquisition results in the currentperiod are excluded from the organic movement calculations. For acquisitions inthe prior period, post acquisition results are included in full in the priorperiod but are only included from the anniversary of the acquisition date in thecurrent period. Underlying movement in earnings per share The group's management believes basic earnings per share on an underlyingmovement basis provides valuable additional information for users of thefinancial statements in understanding the group's overall performance. Thegroup's management believes that the comparison of movements on both a reportedand underlying basis provides information as to the individual components of themovement in basic earnings per share being: the impact of exceptional items,fluctuating exchange rates, acquisitions and disposals arising in the period andthe application of an underlying effective rate of tax. These measures shouldbe viewed as complementary to, and not a replacement for, the comparable GAAPmeasures such as basic and diluted earnings per share and reported movementstherein. These GAAP measures reflect all of the factors which impact on thebusiness. The underlying movement calculation in earnings per share for the six monthsended 31 December 2006 was as follows: Pence per share (5)Reported basic eps for six months ended 31 December 2005 40.4Exceptional items (1) (9.3)Tax equalisation (4) -Basic eps before exceptional items and after tax equalisation for six months ended 31 December2005 31.1Disposals (2) (a) 0.1Exchange (3) (d) (1.0)Adjusted basic eps for six months ended 31 December 2005 30.2 Reported basic eps for six months ended 31 December 2006 32.8Exceptional items (1) -Tax equalisation (4) 1.6Basic eps before exceptional items and after tax equalisation for six months ended 31 December2006 34.4Exchange (3) (d) (0.1)Acquisitions (2) (b) -Adjusted basic eps six months ended 31 December 2006 34.3 Reported basic eps movement amount (7.6)Basic eps before exceptional items and after tax equalisation movement amount 3.3Underlying movement amount (after impact of acquisitions and exchange) (c) 4.1Reported basic eps growth (19%)Basic eps before exceptional items growth and after tax equalisation 11%Underlying growth (c) 14% Notes - Information relating to the current period 1) The exceptional items in the six months ended 31 December 2006were £nil. The exceptional items (after tax and attributable to equityshareholders) reported by the group for the six months ended 31 December 2005was a gain of £151 million relating to the gain on disposal of General Millsshares, and taxation credits reported as exceptional items of £117 million,primarily related to the increase in the group's deferred tax balances. 2) Acquisitions in the six months ended 31 December 2006 are inrespect of the acquisition of the Smirnov brand in Russia. Acquisitionsimpacting the calculation of organic growth in the period were in respect of theacquisition of The 'Old Bushmills' Distillery Company Limited in August 2005.Disposals affecting the period are the disposal of United Beverages Limited andThree Barrels and the impact of the disposal of General Mills shares. 3) Exchange - the exchange adjustments for operating profit, netfinance charges and taxation are principally in respect of the US dollar.Transaction exchange adjustments are taxed at the effective tax rate for theperiod. 4) Tax equalisation - the impact of adjusting the rate of tax onprofit before exceptional items and taxation from the reported rate to theunderlying effective rate of tax for the group. The group's underlying effectiverate of tax for the year ending 30 June 2007 is expected to be 25.0% (2006 -24.9%). The reported rate of tax for the six months ended 31 December 2006 is28.3% (2005 - 14.0%). Factors increasing the reported tax rate are the provisionfor the settlement of tax liabilities relating to the Guinness/GrandMet mergerand a reduction in the carrying value of deferred tax assets. Adjusting forthese items the group has an underlying effective tax rate of 25% in the sixmonths ended 31 December 2006. 5) All amounts are derived from amounts in £ million divided by theweighted average number of shares in issue for the period ended 31 December 2006of 2,725 million (2005 - 2,886 million). Notes - Information relating to the organic movement calculations a) Where a business, brand, brand distribution right or agencyagreement or investment was disposed of, or terminated, in the current period,the group, in underlying movement calculations, adjusts the profit for theperiod attributable to equity shareholders for the comparable prior period toexclude the following: i) the amount the group earned in that period that itcould not have earned in the current period (i.e. the period between the date inthe prior period, equivalent to the date of the disposal in the current period,and the end of the prior period), ii) a capital return in respect of thereduction in interest charge had the disposal proceeds been used entirely toreduce borrowings, and iii) taxation at the rate applying in the jurisdiction inwhich the asset or business disposed was domiciled. As a result, the underlyingmovement numbers reflect only comparable performance. Similarly, if a businessor investment asset was disposed of part-way through the equivalent prior periodthen its impact on the profit for the year attributable to equity shareholders(i.e. after adjustment for a capital return from use of the proceeds of thedisposal to reduce borrowings and tax at the rate applying in the jurisdictionin which the asset or business disposed was taxed) would be completely excludedfrom that prior period's performance in the underlying movement calculation,since the group recognised no contribution from that business in the currentperiod. b) Where a business, brand, brand distribution right or agency agreement orinvestment is acquired subsequent to the end of the equivalent prior period, inunderlying movement calculations the group adjusts the profit for the currentperiod attributable to equity shareholders to exclude the following: i) theamount the group earned in the current period that it could not have earned inthe prior period, ii) a capital charge in respect of the increase in interestcharge had the acquisition been funded entirely by an increase in borrowings,and iii) taxation at the rate applying in the jurisdiction in which the businessacquired is domiciled. As a result, the underlying movement numbers reflectonly comparable performance. Similarly, if a business or investment asset wasacquired part way through the equivalent prior period then its impact on theprofit for the year attributable to equity shareholders (i.e. after adjustmentfor a capital charge for the funding of the acquisition and tax at the rateapplying in the jurisdiction in which the acquired business is taxed) would beadjusted only to include the results from the anniversary of the acquisition inthe current period's performance in the underlying movement calculation, sincethe group recognised a full period's contribution from that business in thecurrent period. c) Organic movement percentages for basic earnings per share are calculatedas the underlying movement amount in pence (p), expressed as the percentage ofthe prior period results at current year exchange rates, and after adjusting forexceptional items, tax equalisation and acquisitions and disposals. The basis ofcalculation means that the results used to measure underlying movement for agiven period will be adjusted when used to measure underlying movement in thesubsequent period. d) The exchange effects of IAS 21 in respect of short term inter-companyfunding balances as recognised in other finance charges / income are removedfrom both the current and prior period as part of the underlying movementcalculation. (ii) Free cash flow Free cash flow is a non-GAAP measure that comprises net cash from operatingactivities as well as the net purchase and disposal of investments and property,plant and equipment that form part of net cash from investing activities. Thegroup's management believe the measure assists users of the financial statementsin understanding the group's cash generating performance as it comprises itemsthat arise from the running of the ongoing business. The remaining components of net cash from investing activities that do not formpart of free cash flow, as defined by the group's management, relate to thepurchase and disposal of subsidiaries, associates and businesses. The group'smanagement regards the purchase and disposal of property, plant and equipment asultimately non-discretionary since ongoing investment in plant and machinery isrequired to support the day-to-day operations, whereas purchases and disposalsof businesses are discretionary. However, free cash flow does not necessarilyreflect all amounts that the group either has a constructive or legal obligationto incur. Where appropriate, separate discussion is given for the impacts ofacquisitions and disposals of businesses, equity dividends and purchase of ownshares - each of which arises from decisions that are independent from therunning of the ongoing underlying business. The free cash flow measure is also used by management for their own planning,budgeting, reporting and incentive purposes since it provides information onthose elements of performance which local managers are most directly able toinfluence. (iii) Return on average total invested capital Return on average total invested capital is a non-GAAP measure that is used bymanagement to assess the return obtained from the group's asset base. Thismeasure is not specifically used in the consolidated financial statements, butis calculated to aid comparison of the performance of the business. The profit used in assessing the return on total invested capital reflects theoperating performance of the business after the effective tax rate for theperiod stated before exceptional items and interest. Average total investedcapital is calculated using the average derived from the consolidated balancesheets at the beginning and the end of the period. Capital employed comprisesnet assets for the period, excluding post employment benefit liabilities (net ofdeferred tax) and net borrowings. This average capital employed is thenaggregated with the average restructuring and integration costs net of tax,which have been charged to exceptional items, and goodwill written off toreserves at 1 July 2004, the date of transition to IFRS, to obtain the averagetotal invested capital. Calculations for the return on average total invested capital for the six monthsended 31 December 2006 and 31 December 2005 were as follows: 2006 2005 £ million £ million Operating profit 1,306 1,261Associates after interest and taxation 91 77Dividends receivable from investments - 5Effective tax rate at 25% (349) (336) 1,048 1,007 Average net assets (excluding net post employment liabilities) 5,033 5,671Average net borrowings 4,318 3,807Average integration costs (net of tax) 931 931Average goodwill 1,562 1,562Average total invested capital 11,844 11,971 Return on average total invested capital 17.7% 16.8% (iv) Economic profit Economic profit is a non-GAAP measure that is used by management to assess thegroup's return from its asset base compared to a standard cost of capitalcharge. The measure is not specifically used in the consolidated financialstatements, but is calculated to aid comparison of the performance of thebusiness. The profit used in assessing the return from the group's asset base and theasset base itself are the same as those used in the calculation for the returnon average total invested capital (see (iii) above). The standard capital chargeapplied to the average total invested capital is currently 9%, beingmanagement's assessment of a constant minimum level of return that the groupexpects to generate from its asset base. Economic profit is calculated as thedifference between the standard capital charge on the average invested assetsand the actual return achieved by the group on those assets. Calculations for economic profit for the six months ended 31 December 2006 and31 December 2005 were as follows: 2006 2005 £ million £ million Average total invested capital (see (iii) above) 11,844 11,971 Operating profit 1,306 1,261Associates after interest and taxation 91 77Dividends receivable from investments - 5Effective tax rate at 25% (349) (336) 1,048 1,007Capital charge at 9% of average total invested capital (50% half year) (533) (539)Economic profit 515 468 Cautionary statement concerning forward-looking statements This document contains statements with respect to the financial condition,results of operations and business of Diageo and certain of the plans andobjectives of Diageo with respect to these items. These forward-lookingstatements are made pursuant to the 'Safe Harbor' provisions of the UnitedStates Private Securities Litigation Reform Act of 1995. In particular, allstatements that express forecasts, expectations and projections with respect tofuture matters, including trends in results of operations, margins, growthrates, overall market trends, the impact of interest or exchange rates, theavailability of financing to Diageo, anticipated cost savings or synergies andthe completion of Diageo's strategic transactions, are forward-lookingstatements. By their nature, forward-looking statements involve risk anduncertainty because they relate to events and depend on circumstances that willoccur in the future. There are a number of factors that could cause actualresults and developments to differ materially from those expressed or implied bythese forward-looking statements, including factors that are outside Diageo'scontrol. These factors include, but are not limited to: • increased competitive product and pricing pressures and unanticipatedactions by competitors that could impact Diageo's market share, increaseexpenses and hinder growth potential; • the effects of future business combinations, partnerships,acquisitions or disposals, existing or future, and the ability to realiseexpected synergies and/or costs savings; • Diageo's ability to complete existing or future acquisitions anddisposals; • legal and regulatory developments, including changes in regulationsregarding consumption of, or advertising for, beverage alcohol, changes in taxlaw (including tax rates) or accounting standards, changes in taxationrequirements, such as the impact of excise tax increases with respect to thebusiness, and changes in environmental laws, health regulations and the lawsgoverning pensions; • developments in the alcohol advertising class actions and any similarproceedings or other litigation directed at the drinks and spirits industry; • developments in the Colombian litigation and any similar proceedings; • changes in consumer preferences and tastes, demographic trends orperception about health related issues; • changes in the cost of raw materials and labour costs; • changes in economic conditions in countries in which Diageo operates,including changes in levels of consumer spending; • levels of marketing spend, promotional and innovation expenditure byDiageo and its competitors; • renewal of distribution rights on favourable terms when they expire; • termination of existing distribution rights on agency brands; • technological developments that may affect the distribution ofproducts or impede Diageo's ability to protect its intellectual property rights;and • changes in financial and equity markets, including significantinterest rate and foreign currency exchange rate fluctuations, which may affectDiageo's access to or increase the cost of financing or which may affectDiageo's financial results. All oral and written forward-looking statements made on or after the date ofthis announcement and attributable to Diageo are expressly qualified in theirentirety by the above factors and the 'risk factors' contained in the AnnualReport on Form 20-F for the year ended 30 June 2006 filed with the US Securitiesand Exchange Commission. Any forward-looking statements made by or on behalf ofDiageo speak only as of the date they are made. Diageo does not undertake toupdate forward-looking statements to reflect any changes in Diageo'sexpectations with regard thereto or any changes in events, conditions orcircumstances on which any such statement is based. The reader should, however,consult any additional disclosures that Diageo may make in documents it fileswith the US Securities and Exchange Commission. The information in this announcement does not constitute an offer to sell or aninvitation to buy shares in Diageo plc or any other invitation or inducement toengage in investment activities. This document includes disclosure about Diageo's debt rating. A security ratingis not a recommendation to buy, sell or hold securities and may be subject torevision or withdrawal at any time by the assigning rating organisation. Eachrating should be evaluated independently of any other rating. Past performance cannot be relied upon as a guide to future performance. For further information Diageo's interim results presentation to analysts and investors will bebroadcast at 09.30 (UK time) on Thursday 15 February 2007. The presentationwill be available on the Diageo website www.diageo.com and also atwww.cantos.com. Prior to the event the presentation slides will also beavailable to download from Diageo's home page. You will be able to listen to a live broadcast of the presentation and to thequestion and answer session. The number to call is: France + 33 1 70 75 00 04 Germany + 49 69 2222 52104 Ireland + 353 1 246 0036 Netherlands + 31 20 710 9321 Spain + 34 91 414 1544 UK + 44 20 7019 0812 USA (toll free) + 877 818 6787 Passcode: Diageo results After the presentation the slides and accompanying text will be available todownload from Diageo's homepage. You will be able to view a recording of the presentation and question and answersession on the Diageo website from 14.00 (UK time) on the day. This facilitywill be available until 30 March 2007. A press conference will take place beginning at 12.30 (UK time) on 15 February2007 and will be broadcast live from a link on www.diageo.com. Diageo management will host a conference call for analysts and investors at15.00 (UK time) on Thursday 15 February 2007. Call this number to participate: France + 33 1 70 75 00 04 Germany + 49 69 2222 52104 Ireland + 353 1 246 0036 Netherlands + 31 20 710 9321 Spain + 34 91 414 1544 UK + 44 20 7019 0812 USA (toll free) + 877 818 6787 Passcode: Diageo results The teleconference will be available on instant replay from 17.00 (UK time) andwill be available until 30 March 2007. The number to call is: UK/Europe +44 20 7970 8412 USA/Canada +1 203 369 4860 Investor enquiries to: Darren Jones +44 (0) 20 7927 4223 Sandra Moura +44 (0) 20 7927 4326 [email protected] Media enquiries to: Isabelle Thomas +44 (0) 20 7927 5967 Jennifer Crowl +44 (0) 20 7927 5749 [email protected] This information is provided by RNS The company news service from the London Stock Exchange

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