Interim Results

16th Feb 2006 07:01

Diageo PLC16 February 2006 Interim results for the six months ended 31 December 2005 STRONG OPERATING PERFORMANCE ON ALL MEASURES Operational highlights • North America: continued share gains, especially in spirits where value share in the US is now 28% • Europe: organic operating profit up driven by growth in spirits brands and cost efficiencies • International: very strong top and bottom line growth, particularly in Latin America, driven by growth of priority brands and successful innovation. Performance improvements delivered in Korea, Taiwan and Nigeria Results at a glance First half First half Reported Organic F'06 F'05 movement movement Volume in equivalent units Million 72.6 68.9 5% 5%Net sales after deducting excise duties £ million 3,960 3,674 8% 5%Operating profit before exceptional items £ million 1,261 1,185 6% 7%Basic eps before exceptional items Pence 31.1 25.0(^) 24% 11%Basic eps Pence 40.4 32.2(^) 25% (^) First half F'05 basic eps before exceptional items restated from 24.1p to25.0p for IAS 21 amendment adoption and other changes to finance charges.Similarly, first half F'05 basic eps has been restated from 31.3p to 32.2p. Financial highlights • Spirits net sales after deducting excise duties up 7%, ready to drink down 3%, beer up 4%, wine up 5% • 5% organic growth in marketing spend • Further operating margin expansion of 0.2 percentage points on an organic basis • Return on invested capital increased 1.2 percentage points to 16.8% • Free cash flow increased to £651 million • Share buyback doubled to £700 million • Interim dividend increased 5% to 11.95 pence • Strong first half results underpin full year guidance of 7% organic growth in operating profit before exceptional items First half First half Reported F'06 F'05 movement Operating profit after operating exceptional items £ million 1,261 1,169 8%Profit attributable to parent company's equityshareholders* £ million 1,166 967 21% Diageo will prepare its annual financial statements for F'06 in accordance withIFRS adopted for use in the European Union. The first half of F'06 is presentedon this basis and the first half of F'05 has been restated for IFRS as issued bythe IASB, as described in note 1 to the interim financial statements on page 22. Percentage movements are organic movements unless otherwise stated. Thesemovements and operating margins are before exceptional items. Commentary,unless otherwise stated, refers to organic movements. Share, unless otherwisestated, refers to volume share. See page 32 for additional information forshareholders and an explanation of non-GAAP measures including thereconciliation of basic eps as reported to basic eps as restated and the organiceps movement calculation. * First half F'05 restated for IAS 21 amendment adoption and other changes tofinance charges. Paul Walsh, Chief Executive of Diageo, commenting on the interim results said: 'This is a strong first half performance. We have invested in our brands andbuilt our market positions. We have again achieved our financial objectivesdelivering top and bottom line organic growth, organic operating marginimprovement and an increase in return on invested capital. 'We continue to capitalise on our opportunities in the US where our marketleadership and superior route to market have led to further volume share gainsof 0.4 percentage points in spirits. In Europe, where we face a more challengingtrading environment, we have created a more efficient organisation and this hasenabled us to deliver 7% organic operating profit growth in the period.Sustained investment behind our brands in International markets has led tostrong top line growth, up 12%. Throughout the business, mix improvementthrough stronger growth of brands such as Johnnie Walker together with thecreation of a lower cost base have led to overall organic margin expansion of0.2 percentage points. 'Strong cash flow and the liquidation of our remaining interest in General Millsand Burger King have enabled us to double our share buy back programme,returning a further £700 million to shareholders in the period. 'Material changes to these first half trends are unlikely in the balance of theyear and we are therefore comfortable in reiterating our full year guidance of7% organic operating profit growth'. Key features of the half year • North America Volume grew 4%, net sales after deducting excise duties increased 7%, marketing spend increased 5% and operating profit improved 5%. In spirits, excluding ready to drink, strong performance by the priority brands in the US and growth of the higher value reserve brands have been the key drivers, delivering top line mix improvement with net sales after deducting excise duties up 8%. Value share of spirits increased 0.2 percentage points to 28% and volume share was up 0.4 percentage points. Ready to drink net sales after deducting excise duties declined 2%. In beer, net sales excluding excise duties increased 18% as a result of strong growth in Guinness, Red Stripe and Smithwicks. Wine sales were up 6% with good volume growth and mix improvement driven by Sterling wines. Higher input costs, primarily as a result of the higher oil price and increased costs behind our innovation pipeline, together with the adverse impact of the hurricane season, have constrained operating profit growth. • Europe Volume was flat, net sales after deducting excise duties were down 1%, marketing spend was down 7% and operating profit increased 7%. The changes implemented in our European business have resulted in a more profitable organisation focused on future opportunities for profitable top line growth. As a result, although the continued decline in the ready to drink segment has negatively impacted top line growth, operating profit is up and margins have expanded. Spirits volume, excluding ready to drink, grew 2% driven by continued strong growth from Smirnoff vodka, up 9%, and Johnnie Walker, up 2%. • International Volume was up 11%, net sales after deducting excise duties grew 12%, marketing spend increased 24% and operating profit was up 12%. This strong top line performance was driven primarily by the global priority brands, where volume was up 9% in the period, with Johnnie Walker up 12% and Smirnoff up 13%. In addition, category brand growth of 19% was driven by successful innovations in Asia and in Africa. Performance improvements have been delivered in Korea, Taiwan and Nigeria. • Brand performance Organic Reported Organic volume* movement net sales** net sales** % movement movement % % Smirnoff vodka 7 13 10Smirnoff ready to drink (4) (3) (6)Johnnie Walker 8 10 12Guinness (2) 3 2Baileys 2 2 1J&B - - 1Captain Morgan 10 19 14Jose Cuervo 5 17 12Tanqueray 3 8 5 Total global priority brands 4 7 5Local priority brands 2 8 4Category brands 8 11 8Total 5 8 5 * On a reported basis, volume increased by 4% for global priority brands, 2% forlocal priority brands, 12% for category brands and 5% in total. Differencesfrom the organic volume movements shown above are due to acquisitions and theexclusion of royalty volumes. ** Net sales after deducting excise duties. • Continued high investment in brands as marketing spend again grew in line with sales. Marketing spend was focused behind the priority spirits brands particularly in the fast growing International market. • The acquisition of Bushmills Irish Whiskey for approximately £200 million was completed on 25 August 2005 and the brand is now fully integrated into the Diageo business. OPERATING AND FINANCIAL REVIEW For the six months ended 31 December 2005 Percentage movements, unless otherwise stated, are organic movements. Thesemovements and operating margins are before exceptional items. Commentary,unless otherwise stated, refers to organic movements. Share, unless otherwisestated, refers to volume share. See page 32 for additional information forshareholders and an explanation of non-GAAP measures. OPERATING REVIEW Analysis by region North America Summary: • Volume was up 4%, net sales after deducting excise duties grew 7% and operating profit increased 5% • In spirits, further share gains have taken Diageo's overall value share to 28% • Top line mix improvement was driven by the global priority brands, Crown Royal and Don Julio • Operating profit growth was constrained by higher raw material costs and increased spend on innovation Key measures: First half First half Reported Organic movement F'06 F'05 movement £ million £ million % % Volume 4 4Sales 1,565 1,385 13 7Net sales after deducting excise duties 1,329 1,168 14 7Marketing 209 188 11 5Operating profit before exceptional items 476 454 5 5 Reported performance: Sales were £1,565 million in the period ended 31 December 2005 up by £180million from £1,385 million in the comparable period. Operating profit beforeexceptional items increased by £22 million to £476 million in the period ended31 December 2005. Organic performance: The weighted average exchange rate used to translate US dollar sales and profitsmoved from £1 = $1.85 in the six months ended 31 December 2004 to £1 = $1.76 inthe six months ended 31 December 2005. The strengthening of the US dollarresulted in a £60 million increase in sales. Acquisitions added £23 million ofsales and there was a further organic increase in sales of £97 million.Operating profit before exceptional items decreased by £2 million as a result offoreign exchange impacts. Acquisitions increased operating profit beforeexceptional items by £3 million and organic growth of £21 million was achieved. Organic brand performance: Organic Reported net Organic volume* sales** net sales** movement movement movement % % % Smirnoff vodka 6 13 8Smirnoff ready to drink (8) (5) (9)Johnnie Walker 4 14 10Jose Cuervo 5 18 12Baileys 6 13 9Captain Morgan 10 22 16Tanqueray 3 8 5Guinness 12 18 15Total global priority brands 5 12 7Local priority brands 1 10 6Category brands 2 30 12Total 4 14 7 * On a reported basis, volume increased by 5% for global priority brands, 1% forlocal priority brands, 5% for category brands and 4% in total. Differences fromthe organic volume movements shown above are due to acquisitions. ** Net sales after deducting excise duties Smirnoff vodka performed strongly, led by the successful media campaign "ClearlySmirnoff" which leveraged the very positive New York Times taste test report.Net sales after deducting excise duties grew 8% on volume increases of 6% due toa price increase on Smirnoff Twist in the first quarter. The first half of theyear also saw the introduction of two new Smirnoff Twist flavours, Black Cherryand Lime. Smirnoff vodka growth outpaced the category gaining 0.4 percentagepoints in value share. While Smirnoff ready to drink remains the market leader, the ready to drinkcategory continued to decline and Smirnoff ready to drink volume was down 8%. Strong consumer demand for premium brands drove Johnnie Walker performance, withvolume up 4% and net sales after deducting excise duties up 10%. This reflectedprice increases in some states and stronger growth in Johnnie Walker Black Labeland super deluxe variants. The Johnnie Walker brands grew value share by 1.4percentage points. Although the tequila market has experienced strong pricing pressures, Diageo'sstrategy has been to hold price and enhance Jose Cuervo's premium positioning.As a result, the brand lost both volume share and value share. Volume grew 5%and net sales after deducting excise duties increased 12% driven by the launchof Cuervo Golden Margaritas, a ready to drink variant. Baileys volume grew 6% and net sales after deducting excise duties were up 9%.Performance was driven by the test launch of Baileys flavours and good growth inCanada, as the comparable period reflected the strike of the Quebec LiquorBoard. For the second consecutive year price increases have been achieved onBaileys. Captain Morgan continued its strong performance with volume up 10% on theconsistent growth in Original Spiced Rum and the introduction of Tattoo andParrot Bay Passion Fruit. Increased marketing spend behind all Captain Morganvariants helped drive performance. Captain Morgan net sales after deductingexcise duties grew 16% and the brand increased its value share by 1.5 percentagepoints as price increases were implemented in the first half. The success of the "Tony Sinclair - Ready to Tanqueray" advertising campaign hasreturned Tanqueray to growth. Volume grew 3% and net sales after deductingexcise duties were up 5% as a result of price increases in selected markets andgrowth of the super premium variant, Tanqueray 10. The Tanqueray brandoutperformed the gin category gaining value share by 1.2 percentage points. Guinness volume was up 12% as a result of successful advertising and promotionsbehind several formats. Net sales after deducting excise duties grew 15% astargeted price increases were taken in those markets that did not have priceincreases the previous year. The local priority brands performed well despite the impact of the hurricaneseason on some of the biggest markets. Crown Royal volume grew 5%, net salesafter deducting excise duties were up 9% and the brand gained value share by 0.4percentage points. Crown Royal was able to increase prices in 70% of the statesas it built on its sponsorship of NASCAR among key consumer groups. Crown Royalvolume growth was partially offset by weakness in Seagram's VO and 7 Crown, withvolumes down 7% and 1% respectively, as a result of a portfolio strategy toincrease focus on premium brands and de-prioritise lower value brands. Performance of the California winery local priority brands continued to improve.Sterling volume was up 6% and net sales after deducting excise duties grew 11%driven by a positive mix shift toward more premium Sterling products. BeaulieuVineyards also grew volume by 8% due to strong growth of its mid-priced CenturyCellars brand, resulting in 3% growth in net sales after deducting exciseduties. A fire at a third-party warehouse destroyed most of the SterlingVineyard's 2003 vintage and single-vineyard wines. This will impact performancein the second half and in future years when the wines were expected to bereleased. Category brands grew volume by 2% and net sales after deducting excise dutiesincreased 12% due to strong growth of Red Stripe, volume up 27%, Smithwicks,volume up 72% and Don Julio, up 69%. The development of the newly acquired Chalone brands is progressing well and thebrand equity has been leveraged across a number of new variants. Bushmills,which was acquired in August 2005, is now fully integrated. As anticipated, thebrand's performance in the first half of the year has been impacted by the stockbuild which took place prior to acquisition. Performance was strong in Canada as the comparable period reflected the strikeof the Quebec Liquor Board. Volume grew 6% and net sales after deducting exciseduties were up 14%. Growth was particularly strong in the global prioritybrands, with volume up 8% and net sales after deducting excise duties up 18%,driven by a strong performance of Smirnoff ready to drink. Europe Summary: • Volume was flat, net sales after deducting excise duties declined 1%, marketing declined 7%, which, together with a more cost efficient organisation, led operating profit to increase 7% • Spirits and wine drove performance with volume up 2% and 5% respectively, offsetting a 24% decline in ready to drink and a 5% decline in beer • Europe remains a difficult trading environment due to increased duties and regulations, and a continued shift from the on-trade to the off-trade in key markets Key measures: First half First half Reported Organic movement F'06 F'05 movement £ million £ million % % Volume 1 0Sales 2,221 2,244 (1) 0Net sales after deducting excise duties 1,408 1,450 (3) (1)Marketing 225 241 (7) (7)Operating profit before exceptional items 494 463 7 7 Reported performance: Reported sales in Europe in the period ended 31 December 2005 were down £23million from £2,244 in the comparable period, to £2,221 million. Operatingprofit before exceptional items increased by 7% from £463 million to £494million. Organic performance: Sales decreased by £14 million as a result of the impact of foreign exchangerates. Acquisitions net of the impact of disposals added sales of £3 millionand there was an organic decline in sales of £4 million. The exchange impactresults primarily from a weakening of the euro compared to the comparable periodin 2004. Operating profit before exceptional items increased by £31 million asa result of £30 million of organic growth and the profit generated byacquisitions of £8 million and an adverse exchange rate movement effect of £3million. In the calculation of organic growth transfers between businesssegments reduced prior period sales and operating profit before exceptionalitems by £8 million and £4 million respectively. Organic brand performance: Organic Reported net Organic sales** net sales** volume* movement movement movement % % % Smirnoff vodka 9 11 10Smirnoff ready to drink (22) (21) (23)Johnnie Walker 2 5 6Guinness (5) (3) (2)Baileys (1) (3) (3)J&B (3) (4) (3)Total global priority brands 0 (2) (1)Local priority brands 1 0 1Category brands (1) (6) (2)Total 0 (3) (1) * On a reported basis, volume was flat for global priority brands, increased by1% for local priority brands, 4% for category brands and 1% in total.Differences from the organic volume movements shown above are due toacquisitions. ** Net sales after deducting excise duties Smirnoff vodka grew volume 9%, and net sales after deducting excise duties wereup 10% due to continued strong performance in Great Britain, Spain and Greece.Further decline of the ready to drink segment in Europe impacted Smirnoff readyto drink and, as a result, volume was down 22% and net sales after deductingexcise duties declined 23%. Johnnie Walker volume grew 2% and product mix improved due to strong growth ofthe higher margin Johnnie Walker Black Label and the super deluxe variants,which represent about 15% of total volume. Volume of Johnnie Walker Black Labeland super deluxe variants was up 13% and 19% respectively, due to continuedgrowth in Russia, Greece, Spain and Germany. Johnnie Walker Red Label alsoperformed well in Russia and Germany, however its overall volume was flat as aresult of more difficult market conditions in Portugal and the Canaries. Over 90% of Guinness volume in Europe is sold in Great Britain and Ireland.Consequently the declining beer market in both countries heavily impactedperformance. Guinness volume was down 5% and net sales after deducting exciseduties declined 2%, as pricing offset some of the volume weakness. Guinness waslaunched in Russia following the new distribution agreement with Heineken, whichbegan in July 2005. Baileys volume was down 1% as growth in Russia, Italy and France was offset byweakness in Iberia and Benelux. Net sales after deducting excise dutiesdeclined 3% due to the decision to reduce focus on Baileys Glide in GreatBritain. The contraction of the standard whisky segment in Portugal and the Canariesoffset strong growth in France and Benelux. As a result, J&B volume andnet sales after deducting excise duties declined 3%. Local priority brand volume and net sales after deducting excise dutiesincreased 1%. Growth in spirits brands around the region offset continuedweakness of the lager brands in Ireland. Category brand volume declined 1% and net sales after deducting excise dutieswere down 2%. Blossom Hill continued to grow in Great Britain while in Spain,Gordon's and standard scotches declined due to aggressive pricing by competitorbrands. Great Britain In a weak market, Diageo delivered volume growth of 2%. Volume growth of 5% inspirits and 4% in wine offset a 22% decline in ready to drink and a 5% declinein beer. Net sales after deducting excise duties declined 3% mainly as a resultof the negative impact of the further decline in the ready to drink segment. In a growing category, Smirnoff vodka continued to outperform the market.Volume grew 11% and net sales after deducting excise duties were up 13%. Shareincreased 2.4 percentage points due to a strong marketing programme andconsistent promotional activities. Marketing spend increased 4% and improvedour share of voice. The ready to drink segment declined 15% and while Smirnoffready to drink remains the segment leader with a 28% share, volume was down 20%. Baileys volume declined 1% and net sales after deducting excise duties were down5% reflecting the reduced focus on Baileys Glide. Excluding ready to drink,Baileys volumes were flat and net sales after deducting excise duties declined2% as retailers' promotions focused on less profitable SKUs during Christmas. Local priority brand performance was mixed. Bell's volume grew 10% and thebrand increased share by 3.5 percentage points to 19%. New variants andconsistent advertising enabled Gordon's to grow volume by 2%, to increase netsales after deducting excise duties by 4% and increase share by 3.2 percentagepoints. Archers volume was down 20% due to a 37% volume decline of the ready todrink variants. In a weak beer market, Guinness volume declined 5% but the brand held share. Aprice increase in February 2005 partially offset volume weakness with net salesafter deducting excise duties down 3%. Category brand volume was up 4% driven by wine performance. There was a shiftin the wine market in Great Britain away from French towards New World wines.This dynamic influenced the growth of 12% in Blossom Hill volume and the 19%decline in Piat D'Or volume. Ireland The results for Ireland reflect the continued shift from the on-trade to theoff-trade as well as growth in wines and spirits and in the value segment.These market dynamics have a significant impact on performance in Ireland as themajority of Diageo's business is focused on premium brands and the on-trade.Volume and net sales after deducting excise duties declined by 4% and 1%respectively. This was driven by a 6% decline in beer volume, which was onlypartially offset by a 4% increase in spirits volume and 15% increase in winevolume. Guinness volume was down 9% but net sales after deducting excise duties declinedonly 2% due to pricing. The brand lost share, as performance was affected by aparticularly hot summer. In spirits, Smirnoff vodka continues to be the number one vodka brand in Irelandand volume grew 5% while Baileys volume declined 4% due to increased competitionfrom lower value brands. Local priority brand volume was down 5% driven by the continued decline of thebeer brands. Of the agency brands, Carlsberg's performance was stronger due tothe launch of successful new advertising, which enabled it to capitalise on thehot summer and slow its volume decline to 1%. Iberia Overall, volume in Iberia declined 4% and net sales after deducting exciseduties declined 3% driven by the contraction of the scotch category in Portugaland the Canaries. Spain, which accounts for over 80% of Iberia's volume, grewvolume by 1% and net sales after deducting excise duties were up 3% due to aprice increase on a number of brands in January 2005. The 10% increase in dutyimplemented by Spanish regulatory authorities in September 2005 has been fullypassed on to customers. J&B volume in Iberia declined 6% driven by a 33% and 41% decline involumes in Portugal and the Canaries. In Spain, J&B volume and net salesafter deducting excise duties were flat. The brand is the leading standardwhisky in the Spanish market and gained share by 0.5 percentage points in acategory that was down 3%. In Spain, Johnnie Walker volume grew 12% and net sales after deducting exciseduties were up by 15%. Johnnie Walker Black Label volume grew 23% due to strongperformance in the high end on-trade. Johnnie Walker Red Label gained share by0.4 percentage points, while Johnnie Walker Black Label grew share by 0.7percentage points. Performance was weak in the rest of Iberia due to the rapiddecline of the scotch category. Baileys volume declined 9%. In Spain, although the brand gained share by 0.6percentage points due to good performance in the off-trade, volume declined 6%. The local priority brands, Cacique and Cardhu in Spain, delivered a 7% increasein volume and grew net sales after deducting excise duties by 10% due tostronger pricing. Continued growth of the dark rum category and a successfuladvertising campaign resulted in a 7% increase in Cacique volume. Althoughshare was flat, the brand remains the leader of the dark rum segment with 23%share. Category brand volume was down 15% driven by the continued decline of standardscotch brands and a significant decrease in Gordon's in Spain due to adversepricing versus the competition. Rest of Europe The rest of Europe accounts for a third of Diageo's European business. Totalvolume was up 3% and net sales after deducting excise duties increased 2%. A27% decline in ready to drink volume had a negative impact on mix. Performanceexcluding ready to drink was stronger, with volume up 4% and net sales afterdeducting excise duties up 5%, driven by strong growth in Greece, Russia andGermany. Volume in Greece increased 6%. Johnnie Walker volume was up 3% driven by a 17%increase in Johnnie Walker Black Label, which is benefiting from a newadvertising campaign. Haig volume was up 30% due to the continued growth ofstandard scotch in the off-trade. Volume in France declined by 2% as a resultof a 36% decline in ready to drink volume. However, in a tough market, J&B grew volume 9% and Baileys volume grew 8%. In Germany, volume wasflat, due to a 54% reduction in ready to drink volume. Excluding ready todrink, performance in Germany, as in France, was stronger with volume growth of2% and a 5% increase in net sales after deducting excise duties. Growth wasdriven by Johnnie Walker volume, up 14%, led by faster growth of Johnnie WalkerBlack Label and the super deluxe variants, as well as a 5% increase in Smirnoffvodka volume. Russia continued its strong growth trajectory with volume up 41%, and net salesafter deducting excise duties up 51%. Johnnie Walker and Baileys were the maingrowth drivers with volume up 41% and 25% respectively. Johnnie Walker BlackLabel, Johnnie Walker Red Label and Baileys all gained share and are the clearleaders in their segments. Guinness was launched in Russia in July of 2005 as aresult of the new distribution agreement with Heineken. International Summary: • Volume grew 11%, net sales after deducting excise duties were up 12% and operating profit increased 12% • International's strong performance was across the vast majority of brands and markets • Marketing spend was up 24% with a significant up weight in investment in China, India and Brazil First half First half Reported Organic movement F'06 F'05 movementKey measures: £ million £ million % % Volume 12 11Sales 1,533 1,289 19 15Net sales after deducting excise duties 1,183 1,028 15 12Marketing 184 143 29 24Operating profit before exceptional items 371 346 7 12 Reported performance: Reported sales in the period ended 31 December 2005 were £1,533 million, up £244million from £1,289 million in the comparable prior period. Operating profitbefore exceptional items was up 7% at £371 million for the period ended 31December 2005. Organic performance: Sales increased by £36 million as a result of exchange rate impacts.Acquisitions added sales of £10 million and there was an organic increase insales of £198 million. These factors combined to generate the reported increaseof £244 million in the period. There was a £25 million increase in reported operating profit before exceptionalitems. Organic growth added £40 million to operating profit before exceptionalitems, and acquisitions added a further £1 million; however, these increaseswere offset by unfavourable exchange rate movements of £14 million. In thecalculation of organic growth, transfers between business segments reduced priorperiod operating profit before exceptional items by £2 million. Organic brand performance: Organic Reported net Organic volume* sales** net sales** movement movement movement % % % Johnnie Walker 12 12 14Smirnoff vodka 8 18 15Smirnoff ready to drink 35 47 42Guinness (2) 5 2Baileys 5 4 3Total global priority brands 9 13 12Local priority brands 4 13 5Category brands 19 20 17Total 11 15 12 * On a reported basis, volume increased by 9% for global priority brands, 4% forlocal priority brands, 22% for category brands and 12% in total. Differencesfrom the organic volume movements shown above are due to acquisitions and theexclusion of royalty volumes. ** Net sales after deducting excise duties Johnnie Walker volume grew 12% driven by growth in Asia and Latin America.Product mix improved due to stronger growth of the super deluxe variants. Smirnoff ready to drink grew volume 35% and net sales after deducting exciseduties increased by 42% due to growth in Brazil, Venezuela, and successfulinnovations in Australia and South Africa. Smirnoff vodka performance wasparticularly strong in Brazil, India and Asia Pacific with volume up 15%, 39%and 15% respectively. Guinness volume declined 2% as difficult trading conditions in Cameroon offsetgood performances in East Africa, Ghana and Asia. Stronger sales in South Asiaand Japan improved mix and as a result, net sales after deducting excise dutieswere up 2%. Baileys volume grew 5% due to volume growth in Asia and the test launch ofBaileys flavours in Global Duty Free. Net sales after deducting excise dutieswere only up 3% due to adverse product mix, as the comparable period's volumebenefited from the launch of Baileys Glide and Minis in Australia. Local priority brand volume and net sales after deducting excise duties were up4% and 5% respectively, due to strong growth of Windsor in Korea, Buchanan's inVenezuela and Malta Guinness and Bell's in Africa. Category brand volume and net sales after deducting excise duties were up 19%and 17%, respectively. Key drivers of performance were the successful re-launchof Harp in Nigeria and the launch of Benmore and Golden Knight in Thailand. Asia Pacific In Australia, volume was up 2% and net sales after deducting excise duties wereflat as global priority brand growth was offset by a planned reduction in stocklevels of ready to drink category brands. Smirnoff volume grew 20% driven bystrong growth of Smirnoff ready to drink which increased share by 4.0 percentagepoints. Johnnie Walker grew volume 9% as a result of strong brand equitybuilding activity. Bundaberg held share even though volume declined 1%, whilevolume of the ready to drink variant was flat. In Korea, performance was driven by the renovation of the Windsor brand and thelaunch of new premium line extensions. A recovering economy also helpedstabilise the trading environment for beverage alcohol. Volume was up 6% andnet sales after deducting excise duties increased 7%. The launch of a superdeluxe variant combined with a 22% increase in marketing spend, led Windsorvolume to increase 8%. Both Johnnie Walker and Windsor increased share by 0.6percentage points. In Taiwan, volume was up 12%. Johnnie Walker volume increased by 10% and netsales after deducting excise duties were up 13%, driven by 36% growth in volumeof the super deluxe variants. The launch of Real Mackenzie, a new whisky brand,in April 2005 increased volume growth but had a dilutive effect on mix. In Japan, volume grew 3% due to 82% growth in Baileys volume, albeit off a smallbase, following the national roll out of an up weighted marketing programme.Guinness volume grew 29% as distribution gains continued. In Thailand, volume was up 73% and net sales after deducting excise duties grew26%. Benmore and Golden Knight, two new whiskey brands launched in the firsthalf of 2005, drove volume growth but had an adverse impact on mix. JohnnieWalker volume was up 19%, as Johnnie Walker Red Label regained momentum andincreased share by 4.3 percentage points in the premium scotch segment due tonew promotional activities. Spey Royal grew volume 18% and increased share by1.0 percentage point as a result of a new, lower-priced strategy aimed atattracting standard scotch consumers. In total, Diageo gained 9.9 percentagepoints of share in the imported whisky segment in the period. In India, volume increased 26%, albeit off a small base, due to continued stronggrowth in global priority brands. Smirnoff vodka delivered the most significantgrowth with volume up 39% and share up 9.7 percentage points as a result ofincreased distribution and a successful advertising campaign. Johnnie Walkervolume grew 33% driven by continued advertising and increased distribution. China also experienced rapid growth in volume and net sales after deductingexcise duties, driven primarily by an increase in Johnnie Walker volume of 54%.Advertising on Johnnie Walker was upweighted significantly during the periodbenefiting Johnnie Walker Black Label volume, which was up 75%. A new route tomarket model also supported growth in Guinness, Baileys and Smirnoff vodka. Africa Africa grew volume by 8% and net sales after deducting excise duties by 9%. In Nigeria, volume and net sales after deducting excise duties were up 17% asturnaround plans started to take hold and a focus on innovation led to improvedperformance. Harp's successful re-launch in April 2005 is a key driver ofNigeria's recovery. Harp volume more than doubled and share grew by 4.2percentage points. Guinness volume declined 1%, however, as a result of thelaunch of Guinness Extra Smooth in June 2005 net sales after deducting exciseduties increased by 6%. Malta Guinness returned to growth with volume up 13%. In East Africa, volume grew 17% and net sales after deducting excise duties wereup 8% due to faster growth in low value beers and spirits. Premium beerperformance was mixed. Tusker volume was up 2% due to an improved promotionalprogramme, while Pilsner volume declined 1% due to increased competition fromlower value beers. In South Africa, volume grew 2% while net sales after deducting excise dutieswere up 11%. Strong growth in Johnnie Walker drove product mix improvement.Smirnoff volume declined 2% as a 23% increase in ready to drink was offset by asignificant decline in Smirnoff vodka. Bell's, the leading scotch brand inSouth Africa, grew volume by 12%. In Ghana, volume grew 15% and net sales after deducting excise duties were up24%. Guinness grew volume 5% and net sales after deducting excise dutiesincreased by 18%. Malta Guinness benefited from a favourable relative pricepoint compared to soft drinks and as a result volume grew 21%. Latin America There was strong growth across Latin America with volume for the region as awhole up 14% and net sales after deducting excise duties up 22%. In Venezuela, a significant improvement in the environment led to 23% volumegrowth and a 36% increase in net sales after deducting excise duties. Theproduct mix improvement was driven by the successful launch of Smirnoff ready todrink and strong growth in the super deluxe variants of Johnnie Walker andBuchanan's. Category brands also performed well with volume up 18% and netsales after deducting excise duties increasing by 29% driven by strong growth ofChequers and Ye Monks. Performance in Brazil, Paraguay and Uruguay benefited from strong economicconditions. Volume was up 27% and net sales after deducting excise duties grewby 45% driven by the strong growth of ready to drink. Johnnie Walker volumeincreased 33% and net sales after deducting excise duties were 44% higher due tostrong growth of the super deluxe variants as the Reserve Brand Group gainedtraction. Johnnie Walker Red Label and Johnnie Walker Black Label gained shareby 7.1 percentage points and 4.2 percentage points respectively. Smirnoff grewvolume 19% and net sales after deducting excise duties increased 55% due tostrong performance in ready to drink. Smirnoff vodka gained 2.9 percentagepoints of share and Smirnoff ready to drink increased share by 4.6 percentagepoints. Performance in Mexico was strong with overall volume up 28% and net sales afterdeducting excise duties up 33% primarily driven by growth across the scotchcategory. Buchanan's increased share by 1.9 percentage points, Johnnie WalkerRed Label increased share by 2.6 percentage points and J&B increasedshare by 1.8 percentage points. Global Duty Free Volume grew 13% and net sales after deducting excise duties were up 14% due tostrong growth in Europe, Australia and parts of Asia. Smirnoff and the JohnnieWalker super deluxe variants had particularly good performances due to intensivemarketing initiatives in airports. Baileys returned to growth due in part tothe test launch of Baileys flavours in Europe. Corporate revenue and costs Reported sales increased by £12 million to £40 million from £28 million for thecomparable prior period. Net corporate operating costs before exceptional itemsincreased by £2 million to £80 million from £78 million in the comparable priorperiod. Transfers between business regions increased corporate sales by £8million and decreased operating costs before exceptional items by £6 million. FINANCIAL REVIEW Condensed consolidated income statement Six months ended 31 December 2005 Six months ended 31 December 2004 Before Before exceptional exceptional Exceptional items Exceptional Total items items Total (restated) items (restated) £ million £ million £ million £ million £ million £ million Sales 5,359 - 5,359 4,946 - 4,946Excise duties (1,399) - (1,399) (1,272) - (1,272) Net sales 3,960 - 3,960 3,674 - 3,674Operating costs (2,699) - (2,699) (2,489) (16) (2,505) Operating profit 1,261 - 1,261 1,185 (16) 1,169Investment income 5 - 5 8 - 8Disposal of investments/businesses 151 151 218 218Finance charges (93) - (93) (74) - (74)Associates' profits 77 - 77 71 - 71 Profit before taxation 1,250 151 1,401 1,190 202 1,392Taxation (313) 117 (196) (404) 14 (390) Profit for the period 937 268 1,205 786 216 1,002 Attributable to:Equity shareholders 898 268 1,166 751 216 967Minority interests 39 - 39 35 - 35 937 268 1,205 786 216 1,002 Adoption of IFRS The interim results for the period ended 31 December 2005 have been prepared inaccordance with International Accounting Standards and International FinancialReporting Standards (IFRS). The results for the comparative period to 31December 2004 have been restated and are also presented in accordance with IFRS.For further information related to the conversion to IFRS please see the notesto the interim results, specifically note 1 'Basis of preparation' and note 12 'Explanation of transition to IFRS'. Sales and net sales after deducting excise duties On a reported basis, sales increased by £413 million (8%) from £4,946 million inthe period ended 31 December 2004 to £5,359 million in the period ended 31December 2005. On a reported basis net sales after deducting excise dutiesincreased by £286 million (8%) from £3,674 million in the period ended 31December 2004 to £3,960 million in the period ended 31 December 2005.Acquisitions and disposals contributed a net increase to reported sales and netsales after deducting excise duties of £36 million and £26 million respectivelyin the period and foreign exchange rate movements also increased reported salesby £82 million and reported net sales after deducting excise duties by £56million, principally arising from strengthening of the US dollar. Operating costs On a reported basis operating costs before exceptional items increased by £210million principally due to an increase in cost of goods sold of £146 million andan increase in marketing costs of 8% from £572 million to £618 million. Therewere no exceptional operating costs in the period (2004 - £16 million). On areported basis, operating costs increased by £194 million (8%) from £2,505million in the period ended 31 December 2004 to £2,699 million in the periodended 31 December 2005. Overall, the impact of exchange rate movements increasedtotal operating costs before exceptional items by £75 million. Post employment plans Post employment costs for the period ended 31 December 2005 of £44 million (2004- £43 million) included amounts charged to operating profit of £54 million (2004- £47 million) and finance income of £10 million (2004 - £4 million). At 31December 2005, Diageo's deficit before taxation for all post employment planswas £1,099 million (30 June 2005 - £1,294 million). Operating profit Operating profit before exceptional items for the period increased by £76million to £1,261 million from £1,185 million in the comparable prior period.There were no exceptional operating charges in the period ended 31 December2005, compared to costs in respect of the period ended 31 December 2004 of £16million. Exchange rate movements reduced operating profit before exceptional items forthe six months ended 31 December 2005 by £19 million. Non-operating exceptional items Non-operating exceptional items before taxation were a gain of £151 million inthe six months ended 31 December 2005 compared with a gain of £218 million inthe six months ended 31 December 2004. The gain in the period to 31 December2005 represents the gain on sale of all of the group's remaining 25 millionshares of common stock of General Mills. In the period to 31 December 2004non-operating exceptional items included a gain of £219 million on the disposalof 54 million shares of common stock of General Mills and a net charge of £1million in respect of the disposal of businesses. Finance charges Finance charges increased by £19 million from £74 million in the period ended 31December 2004 to £93 million in the six months ended 31 December 2005. The net interest charge increased by £14 million from £78 million in thecomparable prior period to £92 million in the six months ended 31 December 2005.This increase principally resulted from increasing US dollar interest rates,the loss of interest income on the Burger King subordinated debt, the increasein net borrowings in the period and the termination of certain financingarrangements. IAS 39 - Financial instruments: recognition and measurement had nonet impact on the interest charge for the six months ended 31 December 2005. Other finance charges of £1 million (2004 - income of £4 million) includedincome of £10 million (2004 - income of £4 million) in respect of the group'spost employment plans. This beneficial movement principally reflects theincrease in the value of the assets held by the post employment plans between 1July 2004 and 30 June 2005. Other finance charges also include a £5 millioncharge (2004 - gain of £3 million) in respect of foreign exchange translationdifferences on inter-company funding arrangements that do not meet theaccounting criteria for recognition in equity. Associates The group's share of profits of associates after interest and tax was £77million for the period compared to £71 million in the comparable period lastyear. Diageo's 34% equity interest in Moet Hennessy contributed £71 million toshare of profits of associates after interest and tax (2004 - £66 million). Profit before taxation After exceptional items, profit before taxation increased by £9 million from£1,392 million to £1,401 million in the six months ended 31 December 2005. Taxation The tax charge is based upon the estimate of the average annual effective taxrate expected for the full financial year with the exception of tax in respectof transactions that are presented by the group as exceptional items or taxpresented by the group as an exceptional item in its own right which areaccounted for in the period in which the items arise. The effective tax rate before exceptional items for the six months ended 31December 2005 is 25% compared with 34% for the six months ended 31 December2004. The higher effective tax rate in the period ended 31 December 2004mainly resulted from the reduction in the carrying value of deferred tax assetsfollowing a change in tax rate. The effective tax rate for the six months ended 31 December 2005 afterexceptional items is 14% compared with 28% for the six months ended 31 December2004. The effective tax rate in the current period has been reduced followingthe agreement of certain brand carrying values with fiscal authorities whichresulted in recognising an increase in the group's deferred tax assets of £110million. The profit on disposal arising on the sale of General Mills shares inthe period and the comparative period is not subject to tax. Exchange rates Based on current exchange rates, it is estimated that in the year ending 30 June2006 there will be an adverse impact from exchange rate movements on profitbefore exceptional items and taxation of £30 million (translation exchange onlyon reported share of profits of associates). Based on current exchange rates itis estimated that the impact from exchange rate movements on profit beforeexceptional items and taxation for the year ending 30 June 2007 will not bematerial. Dividend An interim dividend of 11.95 pence per share will be paid to holders of ordinaryshares and ADR's on the register on 10 March 2006. This represents an increaseof 5% on last year's interim dividend. The interim dividend will be paid toshareholders on 6 April 2006. Payment to US ADR holders will be made on 12 April2006. A dividend reinvestment plan is available in respect of the interimdividend and the plan notice date is 16 March 2006. In the AGM statement in October 2004 Diageo announced that while final decisionson annual dividends will continue to be taken in the light of earningsperformance, inflation and other external factors, the Diageo Board wouldexpect, from February 2006, to hold the company's dividend increase toshareholders to around 5% annually to gradually rebuild dividend cover. Cash flow Extract from the consolidated cash flow statement Six months ended Six months ended 31 December 2005 31 December 2004 £ million £ million Cash generated from operations 957 1,029Interest paid (net) (61) (93)Dividends paid to equity minority interests (20) (25)Taxation (118) (153)Net purchase of investments (1) (2)Net capital expenditure (106) (114) Free cash flow 651 642 Cash generated from operations decreased from £1,029 million to £957 million inthe period to 31 December 2005 principally as a result of a £141 millioninvestment in working capital driven mainly by growth in the underlyingbusiness. The decrease in cash generated from operations was principally offsetby reduced interest payments (down £32 million to £61 million) and reduced taxpayments (down £35 million to £118 million) and as a result free cash flowincreased £9 million to £651 million from £642 million in the prior period. In the six months ended 31 December 2005, Diageo issued new share capitalgenerating proceeds of £2 million (2004 - £3 million) and purchased 84.4 millionshares as part of the share buy-back programme (2004 - 48.2 million shares) at acost of £704 million (2004 - £353 million). Diageo's stance on capital structureis unchanged: it continues to target a range of ratios which are currentlybroadly consistent with an A band credit rating. Diageo expects to continue theshare repurchase programme at broadly the current level. Balance sheet At 31 December 2005, total equity was £4,789 million compared with £4,626million at 30 June 2005. This increase was mainly due to the profit for theperiod of £1,205 million offset by the dividend paid out of shareholders' equityof £529 million and the shares repurchased of £704 million. Net borrowings were £3,911 million at 31 December 2005, an increase of £208million from 1 July 2005 net borrowings of £3,703 million. The principalcomponents of this increase were the free cash inflow of £651 million, proceedsfrom disposal of shares of General Mills of £651 million offset by payments of£704 million (including costs of £4 million) to repurchase shares to be held astreasury shares, the payment of £207 million to acquire Bushmills Irish Whiskeyand a £529 million equity dividend paid. Economic profit Economic profit increased by £68 million from £400 million in the six monthsended 31 December 2004 to £468 million in the six months ended 31 December 2005.See page 39 for calculation and definition of economic profit. DIAGEO CONSOLIDATED INCOME STATEMENT Six months ended 31 December 2005 Six months ended 31 December 2004 Before Before exceptional exceptional Exceptional items Exceptional Total items items Total (restated) items (restated) £ million £ million £ million £ million £ million £ million Sales 2 5,359 - 5,359 4,946 - 4,946Excise duties (1,399) - (1,399) (1,272) - (1,272) Net sales 3,960 - 3,960 3,674 - 3,674Cost of sales 4 (1,511) - (1,511) (1,365) (14) (1,379) Gross profit 2,449 - 2,449 2,309 (14) 2,295Marketing (618) - (618) (572) - (572)Other operating 4 expenses (570) - (570) (552) (2) (554) Operating profit 2 1,261 - 1,261 1,185 (16) 1,169Investment income 5 - 5 8 - 8Sale of General Mills shares 4 151 151 219 219Sale of other businesses 4 - - (1) (1)Net interest 3 (92) - (92) (78) - (78)Other finance (charges)/ income 3 (1) - (1) 4 - 4Share of associates' profits after tax 77 - 77 71 - 71 Profit before taxation 1,250 151 1,401 1,190 202 1,392Taxation 5 (313) 117 (196) (404) 14 (390) Profit for the period 937 268 1,205 786 216 1,002 Attributable to:Equity shareholders 898 268 1,166 751 216 967Minority interests 39 - 39 35 - 35 7 937 268 1,205 786 216 1,002 Pence per shareBasic earnings 40.4p 32.2pDiluted earnings 40.4p 32.2pAverage shares 2,886m 2,999m DIAGEO CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Six months ended Six months ended 31 December 2004 31 December 2005 (restated) £ million £ million £ million £ million Net foreign exchange translation differences - group (including minority interests) 33 (46) - associates 18 54Holding gains on available for sale securities - unrealised gains arising during the year (including exchange) 33 - - realised gains reclassified to profit for the period (181) -Effective portion of changes in fair value of cash flow hedges - group (18) - - associates 1Actuarial gains on post employment plans 236 -Tax on items taken directly to equity (50) - Net income recognised directly in equity 72 8Profit for the period - group 1,128 931 - associates 77 71 -Profit for the period 1,205 - 1,002Total recognised income and expense for the period 1,277 1,010Impact of IAS 39 adoption on 1 July 2005 (net of tax) - group 170 - associates (6)Impact of adoption of IAS39 164 - 1,441 -Attributable to - equity shareholders of the parent company 1,229 982 - minority interests 48 28Total recognised income and expense for the period 1,277 1,010 DIAGEO CONSOLIDATED BALANCE SHEET 31 December 2005 30 June 2005 31 December 2004 Notes £ million £ million £ million £ million £ million £ million Non-current assetsIntangible assets 4,723 4,392 4,050Property, plant and equipment 1,987 1,936 1,794Biological assets 5 14 6Investments in associates 1,347 1,261 1,308Other investments 66 719 1,048Deferred tax assets 705 778 955Post employment benefit assets 11 12 10Other financial assets 96 - -Trade and other receivables 40 68 116 8,980 9,180 9,287Current assetsInventories 8 2,488 2,347 2,245Trade and other receivables 2,185 1,607 2,114Cash and cash equivalents 1,039 787 1,082 5,712 4,741 5,441Total assets 14,692 13,921 14,728Current liabilitiesBorrowings and bank overdrafts 10 (1,047) (869) (2,109)Trade and other payables (1,984) (1,912) (2,107)Corporate tax payable (806) (746) (795)Provisions (101) (88) (173) (3,938) (3,615) (5,184)Non-current liabilitiesBorrowings 10 (3,907) (3,677) (2,911)Other payables (107) (95) (60)Deferred tax liabilities (406) (298) (387)Post employment benefit Liabilities (1,110) (1,306) (1,056)Other financial liabilities (149) - -Provisions (286) (304) (133) (5,965) (5,680) (4,547)Total liabilities (9,903) (9,295) (9,731)Net assets 4,789 4,626 4,997 EquityCalled up share capital 883 883 883Share premium 1,339 1,337 1,334Other reserves 3,187 3,180 3,074Retained deficit (817) (941) (452)Equity attributable to equity shareholders of the company 4,592 4,459 4,839Minority interests 197 167 158Total equity 7 4,789 4,626 4,997 DIAGEO CONSOLIDATED CASH FLOW STATEMENT Six months ended Six months ended 31 December 2005 31 December 2004 £ million £ million £ million £ million Cash flows from operating activities Profit for the period 1,205 1,002 Taxation 196 390 Share of associates' profit after taxation (77) (71) Investment income (5) (8) Net interest and finance charges 93 74 Net non-operating exceptional gains (151) (218) Depreciation and amortisation 105 119 Movements in working capital (463) (322) Dividend income 14 20 Other items 40 43 Cash generated from operations 957 1,029 Interest paid (98) (168) Interest received 37 75 Dividends paid to equity minority interests (20) (25) Taxation paid (118) (153) Net cash from operating activities 758 758 Cash flows from investing activities Net purchase of investments (1) (2) Disposal of property, plant and equipment 2 10 Purchase of property, plant and equipment (108) (124) Disposal of shares in General Mills 651 1,210 Disposal of subsidiaries, associates and businesses 122 13 Purchase of subsidiaries (207) (15) Net cash from investing activities 459 1,092 Cash flows from financing activities Proceeds from issue of share capital 2 3 Net purchase of own shares for share trusts (42) (54) Own shares repurchased for cancellation - (61) Own shares repurchased for holding as treasury shares (704) (292) Increase/(decrease) in loans 296 (264) Redemption of guaranteed preferred securities - (302) Equity dividends paid (529) (512) Net cash used in financing activities (977) (1,482) Net increase in cash and cash equivalents 240 368 Exchange differences 12 (66) Cash and cash equivalents at beginning of the period 729 668Cash and cash equivalents at end of the period 981 970 Cash and cash equivalents consist of: Other cash and cash equivalents 1,039 1,082 Bank overdrafts (58) (112) 981 970 NOTES 1. Basis of preparation For all periods up to and including the year ended 30 June 2005, Diageo preparedits primary financial statements under UK generally accepted accountingprinciples (UK GAAP). From 1 July 2005, the group is required to prepare itsconsolidated financial statements in accordance with International AccountingStandards, International Financial Reporting Standards and interpretations ofthe International Financial Reporting Interpretations Committee (IFRSs) asadopted for use in the European Union (EU). These interim results have beenprepared in accordance with IFRSs as expected to be applied in the group'sannual financial results for the year ended 30 June 2006. The group accountingpolicies applied in these interim results are those available on Diageo'swebsite, www.diageo.com with exception of the adoption of the amendment to IAS21 - The effects of changes in foreign exchange rates, the impact of which isoutlined below. Further details of the impact of the transition to IFRSs arepresented in note 12. IFRSs are subject to ongoing review and endorsement by the EU or possibleamendment by interpretative guidance from the International Accounting StandardsBoard (IASB) and are therefore still subject to change. Accordingly, theinformation presented here and the format of presentation may be subject tochange as standards are endorsed by the EU, new guidance is issued or practicedevelops. IFRS 1 - First-time adoption of International Financial Reporting Standardspermits certain optional exemptions from full retrospective application of IFRSaccounting policies and the following options have been adopted: • Business combinations: Business combinations prior to the date of transition have not been restated onto an IFRS basis. • Cumulative translation differences: The cumulative translation difference arising on consolidation has been deemed to be zero at the date of transition. • Share-based payments: Full retrospective application has been adopted. • Financial instruments: The group has adopted the provisions of IAS 39 - Financial instruments: recognition and measurement and IAS 32 - Financial instruments: presentation and disclosure from 1 July 2005. Financial instruments in the year ended 30 June 2005 remain recorded in accordance with previous UK GAAP accounting policies, and the adjustment to IAS 39 is reflected in the balance sheet at 1 July 2005. The group expects to be able to adopt the amendment to IAS 21 - The effects ofchanges in foreign exchange rates approved by the IASB in November 2005 in itsannual financial statements for the year ending 30 June 2006 and therefore hasadopted this amendment in the interim financial statements. Whilst passed by theIASB, this amendment has yet to be endorsed by the European Parliament. Thisamendment clarifies the accounting treatment for net investments in foreignsubsidiaries and for the treatment of foreign exchange differences on monetaryitems which form part of a reporting entity's net investment in a foreignoperation. The effect of implementing this amendment is that a number of intra-groupfinancing arrangements are now regarded as part of the group's net investment inforeign operations and the foreign exchange arising on translation of thesebalances is recorded in equity. Prior to adoption of the amendment, IAS 21required the foreign exchange arising on translation of these balances to betaken to income. The effect on implementation of the amendment is to increasethe interest charge by £2 million (2004 - decrease of £1 million). Basic anddiluted earnings per share for the period ended 31 December 2005 have beendecreased by 0.1p (2004 - increased by 0.1p). There is no impact on net assets. In the process of implementing the amendment to IAS 21, the group reconsideredits interpretation of the wording of the original IAS 21 standard and hasidentified that other foreign exchange losses of £26 million in the preliminaryIFRS information previously published for the period ended 31 December 2004 inrespect of intra-group financing arrangements forming part of the group's netinvestment in foreign operations were originally charged to income and shouldhave been recognised directly in equity. The group has reclassified theseexchange losses resulting in an increase in other finance income of £26 millionin the six months ended 31 December 2004. Basic and diluted earnings per sharefor the period ended 31 December 2004 have been increased by 0.8p. There is noimpact on net assets. This interim financial information is unaudited but has been reviewed by theauditors, KPMG Audit Plc, and their report is reproduced after these notes. Theinformation does not comprise the statutory accounts of the group. Thestatutory accounts of Diageo plc for the year ended 30 June 2005, which wereprepared under UK GAAP, have been filed with the registrar of companies. KPMGAudit Plc have reported on these accounts; their report was unqualified and didnot contain any statement under section 237 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 2005 31 December 2004 Operating profit/ Operating Sales (loss) Sales profit/(loss)* £ million £ million £ million £ million North America 1,565 476 1,385 454Europe 2,221 494 2,244 463International 1,533 371 1,289 346 5,319 1,341 4,918 1,263Corporate 40 (80) 28 (78) 5,359 1,261 4,946 1,185 Geographical analysis of sales and operating profit by destination: Six months ended Six months ended 31 December 2005 31 December 2004 Operating profit Operating Sales Sales profit* £ million £ million £ million £ million Europe 2,292 426 2,296 394North America 1,581 485 1,405 465Asia Pacific 561 122 482 120Latin America 402 106 310 97Rest of World 523 122 453 109 5,359 1,261 4,946 1,185 * Operating profit for the period ended 31 December 2004 is before exceptionaloperating charges of £16 million. 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. Net corporate operating costs and trading losses increased 3% to £80 million.Corporate revenues and costs are in respect of central costs including finance,human resources and legal as well as certain information system, service centre,facilities and employee costs that are not directly allocated to thegeographical operating units. They also include the revenues and costs relatedto rents receivable in respect of properties not used by Diageo in themanufacture, sale or distribution of premium drinks and the results ofGleneagles Hotel. 31 December 2005 31 December 2004 £ million £ millionTotal assets:North America 994 660Europe 1,563 1,474International 1,278 1,159Moet Hennessy 1,304 1,263Corporate and other 9,553 10,172 14,692 14,728 Weighted average exchange rates used in the translation of profit and lossaccounts were US dollar - £1 = $1.76 (2004 - £1 = $1.85) and euro - £1 = €1.47(2004 - £1 = €1.46). Exchange rates used to translate assets and liabilities atthe balance sheet date were US dollar - £1 = $1.72 (2004 - £1 = $1.92) and euro- £1 = €1.46 (2004 - £1 = €1.42). The group uses foreign exchange transactionhedges to mitigate the effect of exchange rate movements. The Christmas holiday season provides the peak period for sales. Approximately30% of annual sales volume occurs in the last three months of each calendaryear. 3. Interest and other finance charges Six months ended Six months ended 31 December 31 December 2004 2005 (restated) £ million £ million Interest payable (107) (135)Interest receivable 15 57Net interest (92) (78) Net finance income in respect of post employment plans 10 4Unwinding of discounts on provisions and debtors (6) (3)Other finance charges (1) - 3 1Net exchange movements on certain financial instruments (4) 3 Other finance (charges)/income (1) 4 4. Exceptional items Following the implementation of IFRS, the group has decided to continue with itsseparate presentation of certain items as "exceptional". These are items which,in management's judgement, need to be disclosed by virtue of their size orincidence in order for the user to obtain a proper understanding of thefinancial information. Six months ended Six months ended 31 December 2005 31 December 2004 £ million £ millionOperating costs Park Royal brewery accelerated depreciation - (14) Seagram integration costs - (6) Disposal of fixed assets - 4 - (16)Disposals Shares in General Mills 151 219 Other - (1) 151 202 5. Income taxes The £196 million total taxation charge for the six months ended 31 December 2005comprises a UK tax charge of £50 million and a foreign tax charge of £146million. Exceptional tax credits amounted to £117 million in the period (2004 -£14 million) reflecting a £110 million increase in the group's deferred taxassets following agreement of certain brand carrying values with fiscalauthorities. 6. Dividends Six months ended Six months ended 31 December 2005 31 December 2004 £ million £ millionAmounts recognised as distributions to equity holders in the period Final dividend paid for the year ended 30 June 2005 of 18.2p (2004 -17.0p) per share 529 512 An interim dividend of 11.95 pence per share for the six months ended 31December 2005 (2004 - 11.35 pence per share) was approved by the Board on 15February 2006 and as the approval was after the balance sheet date it has notbeen included as a liability. 7. Movements in total equity Six months ended Six months ended 31 December 2005 31 December 2004 (restated) £ million £ million Total equity at beginning of the period 4,626Adoption of IAS 39 on 1 July 2005 164Restated total equity at beginning of the period 4,790 5,229 Profit for the period 1,205 1,002Dividends paid to equity shareholders (529) (512)Dividends paid to minority interests (20) (25)Exchange adjustments 51 8Tax on exchange adjustments in reserves 7 -New share capital issued 2 3Share trust arrangements (27) (42)Purchase of own shares for cancellation - (61)Purchase of own shares held as treasury shares (704) (292)Actuarial gains on post employment plans 179 -Redemption of preferred securities (net) - (312)Other recognised losses -(165) (1)Net movement in total equity (1) (232) Total equity at end of the period 4,789 4,997 Total equity at the end of the period includes gains of £169 million in respectof cumulative translation differences (2004 - gains of £14 million) and £1,349million in respect of own shares held as treasury shares (2004 - £292 million). 8. Inventories 31 December 31 December 2005 2004 £ million £ million Raw materials and consumables 273 231Work in progress 22 15Maturing stocks 1,610 1,484Finished goods and goods for resale 583 515 2,488 2,245 9. Reconciliation of movement in net borrowings Six months ended Six months ended 31 December 2005 31 December 2004 £ million £ million Net borrowings at beginning of the period (3,706) (4,156)Adoption of IAS 39 on 1 July 2005 3 - Restated net borrowings at beginning of the period (3,703) (4,156) Increase in cash and cash equivalents after exchange 252 302Cash flow from change in loans (296) 264Change in net borrowings from cash flows (44) 566Exchange adjustments on borrowings (162) 98Other non-cash items (2) 8(Increase)/decrease in net borrowings (208) 672Net borrowings at end of the period (3,911) (3,484) 10. Net borrowings 31 December 31 December 2005 2004 £ million £ million Debt due within one year and overdrafts (1,047) (2,109) Debt due after one year (3,907) (2,911)Interest rate swaps 9 - Obligations under finance leases (10) (10) (4,955) (5,030)Less: Cash and cash equivalents 1,039 1,082Other liquid resources 14 506Foreign currency swaps (9) (42)Net borrowings (3,911) (3,484) In the period ended 31 December 2005 the group issued a US$ 750 million globalbond repayable in 2015 with a coupon of 5.30% and a US$ 250 million medium termnote repayable in 2008 with floating rate coupons. A US$ 500 million bondmatured and was repaid in the period. 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 (£116million) until November 2009. Including this guarantee, but net of the amountprovided in the consolidated financial statements, the group has givenperformance guarantees and indemnities to the third parties of £176 million.There has been no material change since 31 December 2005 in the group'sperformance 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. The complaint was amendedon 29 December 2004 to add eight additional local Colombian government entitiesas plaintiffs. Diageo intends to defend itself vigorously against this lawsuit. (iii) Alcohol advertising litigation At least nine nearly identical putativeclass actions were filed in state and federal courts in the United Statesagainst Diageo plc, Diageo North America Inc and other Diageo entities, alongwith a large group of other beverage alcohol manufacturers, brewers andimporters. All have been brought by the same national counsel. In eachaction, the plaintiffs seek to pursue their claims on behalf of parents andguardians of people under the legal drinking age who illegally bought alcoholbeverages during the period from 1982 to the present. Plaintiffs allege several causes of action, principally for negligence, unjustenrichment and violation of state consumer fraud statutes. Some complaintsinclude additional claims based on conspiracy, nuisance and on other legaltheories. The litigation is ongoing and Diageo intends to defend itself vigorously againstthese claims. (iv) Other The group has extensive international operations and is defendant ina number 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. 12. Explanation of transition to IFRS These are the group's first consolidated interim results for part of the periodcovered by the first annual consolidated financial statements prepared inaccordance with IFRS. The group has adopted the amendment to IAS 21 and accordingly the results forthe comparative period have been restated (see note 1 for further information). In preparing its IFRS balance sheet at the transition date (1 July 2004),comparative information for the six months ended 31 December 2004 and financialstatements for the year ended 30 June 2005, the group has adjusted amountsreported previously in financial statements prepared in accordance with UK GAAP.Set out in the following tables is the UK GAAP to IFRS reconciliation ofprofit for the period for the six months ended 31 December 2004 and year ended30 June 2005 and a reconciliation of total equity at 1 July 2004, 31 December2004 and 30 June 2005. Reconciliation of profit for the period Year ended Six months ended 30 June 2005 31 December 2004 (restated) (restated) £ million £ million Profit after taxation under UK GAAP 1,439 908 Reversal of goodwill recycled to income statement on disposal (IAS 38) 247 247Amortisation of deferred tax assets (IAS 12) (267) (149)Foreign exchange differences on inter-company funding loans (IAS 21) (8) 3Share based payments (IFRS 2) (9) (4)Other (3) (3)Profit for the period under IFRS 1,399 1,002 Reconciliation of total equity 30 June 31 December 1 July 2004 2005 2004 £ million £ million £ million Total shareholders' funds and minority interests under UK GAAP 3,834 4,284 4,183Valuation of net post employment benefit liability (IAS 19) (52) (58) (54)Net deferred tax asset on brands and group re-organisations (IAS 12) 423 548 706De-recognition of final dividend creditor (IAS 10) 530 336 513Elimination of revaluation reserve (IAS 16) (111) (111) (113)Other 2 (2) (6)Total equity under IFRS 4,626 4,997 5,229Net impact of implementation of IAS 39 164Total equity under IFRS at 1 July 2005 4,790 In accordance with the exemption available in IFRS 1, the group has adopted IAS39 - Financial instruments recognition and measurement and IAS 32 - Financialinstruments presentation and disclosure with effect from 1 July 2005, theprincipal impact of these standards being to change the carrying value offinancial instruments in the group's financial statements. The impact ofadoption of these standards on the balance sheet at 1 July 2005 (date ofadoption) is set out in the following table: 30 June Impact of 1 July 31 December 2005 IAS 39 2005 2005 £ million £ million £ million £ millionNon-current assetsInvestments in associates 1,261 (6) 1,255 1,347Other investments 719 148 867 66Deferred tax assets 778 10 788 705Other financial assets 96 96 96Other non-current assets 6,422 70 6,492 6,766 9,180 318 9,498 8,980Current assets 4,741 - 4,741 5,712Total assets 13,921 318 14,239 14,692 Current liabilities (3,615) 41 (3,574) (3,938)Non-current liabilitiesBorrowings (3,677) (67) (3,744) (3,907)Other financial liabilities (128) (128) (149)Other non-current liabilities (2,003) - (2,003) (1,909) (5,680) (195) (5,875) (5,965)Total liabilities (9,295) (154) (9,449) (9,903) Net assets 4,626 164 4,790 4,789 Equity Other reserves 5,400 123 5,523 5,409Retained deficit (941) 41 (900) (817)Equity attributable to equity shareholdersof the company 4,459 164 4,623 4,592Minority interests 167 - 167 197Total equity 4,626 164 4,790 4,789 The group accounting policies applied to the financial information for the sixmonths ended 31 December 2005, the comparative information for the six monthsended 31 December 2004, the financial statements for the year ended 30 June2005, and the preparation of an opening balance sheet at 1 July 2004 (thegroup's date of transition), are available on Diageo's website, www.diageo.comwith the exception of the adoption of the amendment to IAS 21, the impact ofwhich is outlined in note 1. INDEPENDENT REVIEW REPORT TO DIAGEO PLC Introduction We have been engaged by the company to review the financial information set outon pages 18 to 30 and we have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies 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 directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. This isbecause, as disclosed in note 1, the directors have anticipated that theamendment to IAS 21 - The effects of changes in foreign exchange rates, whichhas yet to be formally adopted for use in the EU, will be so adopted in time tobe applicable to the next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof group management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel 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 2005. KPMG Audit PlcChartered AccountantsLondon, England15 February 2006 ADDITIONAL INFORMATION FOR SHAREHOLDERS EXPLANATORY NOTES Definitions Unless otherwise stated, percentage movements given throughout this announcementfor volume, sales, net sales after deducting excise duties, marketing andoperating profit are organic movements (at level exchange rates and afteradjusting for acquisitions and disposals) for continuing operations. They arebefore exceptional items. Comparisons are with the equivalent period in thelast financial year. For an explanation of organic movements please refer toDiageo's annual report for the year ended 30 June 2005 and 'Reconciliation toGAAP measures' in this announcement. 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. Net sales are sales less 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 Caesarand Smirnoff Signatures. References to Smirnoff Black Ice include Smirnoff IceTriple 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. The share data contained in thisannouncement is taken from independent industry sources in the markets in whichDiageo operates. Unless otherwise stated, share refers to volume share. Share of voice is the media spend of a particular brand when compared to allbrands in its segment. The share of voice data in this announcement is takenfrom independent industry sources in the markets 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 40 -'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 after deducting excise duties,operating profit before exceptional items and basic earnings per share aremeasures not specifically used in the consolidated financial statementsthemselves (non-GAAP measures). The performance of the group is discussed usingthese 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 foreign exchange rate movements and enables an understanding ofthe underlying performance of the market that is most closely influenced by theactions of that market's management. The risk from foreign exchange is managedcentrally and is not a factor over which local managers have any control. Acquisitions and disposals also impact the reported performance and thereforethe reported movement in any period in which they arise. Management adjusts forthe impact of such transactions in assessing the performance of the underlyingbusiness. The underlying performance on a constant currency basis and excluding the impactof acquisitions and disposals is referred to as 'organic' performance. Organicmovement calculations enable the reader to focus on the performance of thebusiness which is common to both periods. Organic movement in volume, sales, net sales after deducting excise duties, andoperating profit before exceptional items Diageo's strategic planning and budgeting process is based on organic movementin volume, sales, net sales after deducting excise duties and operating profitbefore exceptional items, and these measures closely reflect the way in whichoperating targets are defined and performance is monitored by the group'smanagement. Therefore organic movement measures most closely reflect the way inwhich 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 after deducting excise duties and reportedmovements in individual income statement captions. These GAAP measures reflectall of the factors which impact on the business. The organic movement calculations for volume, sales, net sales after deductingexcise duties and operating profit before exceptional items for the six monthsended 31 December 2005 were as follows: 1. Volume Organic 2004 Acquisitions movement 2005 Organic units units units units movement million million million million % North America 24.5 0.1 0.9 25.5 4 Europe 23.8 0.2 - 24.0 - International 20.6 0.2 2.3 23.1 11 Total 68.9 0.5 3.2 72.6 5 2. Sales Acquisitions Organic 2004(1) Transfers Exchange and disposals Organic 2005 movement Reported (2) (3) (4) movement Reported (a) £ million £ million £ million £ million £ million £ million % North America 1,385 - 60 23 97 1,565 7 Europe 2,244 (8) (14) 3 (4) 2,221 - International 1,289 - 36 10 198 1,533 15 Corporate 28 8 - - 4 40 11 Total 4,946 - 82 36 295 5,359 6 3. Net sales after deducting excise duties Acquisitions Organic 2004(1) Transfers Exchange and disposals Organic 2005 movement Reported (2) (3) (4) movement Reported (a) £ million £ million £ million £ million £ million £ million % North America 1,168 49 22 90 1,329 7 Europe 1,450 (8) (15) (4) (15) 1,408 (1) International 1,028 22 8 125 1,183 12 Corporate 28 8 - - 4 40 11 Total 3,674 - 56 26 204 3,960 5 Excise duties 1,272 1,399 Sales 4,946 5,359 4. Operating profit before exceptional items (b) Acquisitions Organic 2004(1) Transfers Exchange and disposals Organic 2005 movement Reported (2) (3) (4) movement Reported (a) £ million £ million £ million £ million £ million £ million % North America 454 - (2) 3 21 476 5 Europe 463 (4) (3) 8 30 494 7 International 346 (2) (14) 1 40 371 12 Corporate (78) 6 - - (8) (80) (11) Total 1,185 - (19) 12 83 1,261 7 Notes - Information relating to the current period (1) Results for 2004 have been restated for the impacts of implementing IFRS. (2) Transfers represents the reallocation of the Guinness Storehouse visitor centre in Dublin from Europe into the corporate business segment and the transfer of the costs relating to a global information technology project from Corporate into Europe and International. (3) The exchange adjustments for sales, net sales after deducting excise duties and operating profit before exceptional items are principally inrespect of the US dollar. (4) Acquisitions in the period ended 31 December 2005 are only in respect of the acquisition of The Old Bushmills Distillery Company Limited.Acquisitions impacting the calculation of organic growth in the period were inrespect of the acquisition of The Chalone Wine Group (North America), UrsusVodka Holdings B.V. (Europe) and Ghana Breweries Limited (International).Disposals affecting the period are only the disposal of United Beverages Limited(Europe) which contributed sales, net sales after deducting excise duties andoperating profit before exceptional items of £16 million, £16 million and £nilrespectively in the six months ended 31 December 2004. Notes - Information relating to the organic movement calculations a) The organic movement percentage is the amount in the column headed 'Organic movement' in the table above expressed as a percentage of theaggregate of the columns headed 2004 Reported, Transfers, Exchange and thevalues for disposals (see note 4 above) from the column headed Acquisitions anddisposals. The inclusion of the column headed Exchange in the organic movementcalculation reflects the adjustment to exclude the effect of exchange ratemovements by recalculating the prior period results as if they had beengenerated at the current period's exchange rates. Organic movement percentagesare calculated as the organic movement amount in £ million, expressed as thepercentage of the prior period results at current year exchange rates and afteradjusting for disposals. The basis of calculation means that the results used tomeasure organic movement for a given period will be adjusted when used tomeasure 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 before exceptional items the overheadsincluded in disposals were only those directly attributable to the businessesdisposed, and do not result from subjective judgements of management. Foracquisitions, a similar adjustment is made in the organic movement calculations.For acquisitions subsequent to the end of the equivalent prior period, the postacquisition results in the current period are excluded from the organic movementcalculations. For acquisitions in the prior period, post acquisition results areincluded in full in the prior period but are only included from the anniversaryof the acquisition date in the current period. c) A further adjustment in organic movement is made to exclude theeffect of exchange rate movements by recalculating the prior period's results asif they had been generated at the current period's exchange rates. Organic movement in earnings per share The group's management believes basic earnings per share on a reported andorganic movement basis, provides valuable additional information for users ofthe financial statements in understanding the group's overall performance. Thegroup's management believe that the comparison of movements on both a reportedand organic 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 andchanges in the effective rate of tax. These measures should be viewed ascomplementary to, and not a replacement for, the comparable GAAP measures suchas basic and diluted earnings per share and reported movements thereon. TheseGAAP measures reflect all of the factors which impact on the business. The organic movement calculation in earnings per share for the six months ended31 December 2005 was as follows: p per share (5) Reported basic eps for period ended 31 December 2004 32.2Exceptional items (1) (7.2)Basic eps before exceptional items for period ended 31 December 2004 25.0Disposals (2) (a) 0.3Exchange (3) (d) (1.1)Tax equalisation to 25% (4) 3.9Restated basic eps for period ended 31 December 2004 28.1 Reported basic eps for period ended 31 December 2005 40.4Exceptional items (1) (9.3)Acquisitions (2) (b) (0.1)Exchange (3) (d) 0.1Basic eps before exceptional items for the period ended 31 December 2005 31.1 Reported basic eps movement amount 8.2pBasic eps before exceptional items movement amount 6.1pOrganic movement amount (c) 3.0pReported basic eps growth 25%Basic eps before exceptional items growth 24%Organic growth (c) 11% Notes - Information relating to the current period 1) The exceptional items (after tax and attributable to equityshareholders) reported by the group for the period ended 31 December 2005 were again of £268 million (2004 - a gain of £216 million) equating to 9.3 pence pershare for the period ended 31 December 2005 and 7.2 pence per share for theperiod ended 31 December 2004. 2) Acquisitions in the period ended 31 December 2005 are in respect of the acquisition of The Old Bushmills Distillery Company Limited. Acquisitionsimpacting the calculation of organic growth in the period were in respect of theacquisition of The Chalone Wine Group (North America), Ursus Vodka Holdings B.V.(Europe) and Ghana Breweries Limited (International). Disposals affecting theperiod are the disposal of United Beverages Limited (Europe) and the impact ofthe disposal of 25 million shares of the common stock of General Mills.Acquisitions contributed 0.1 pence per share for the period ended 31 December2005. 3) Exchange - The exchange adjustments for operating profit beforeexceptional items, net finance charges and taxation before exceptional items areprincipally in respect of the US dollar. Transaction exchange adjustments aretaxed at the effective tax rate for the period. Exchange had an adverse impactof 0.1 pence per share for the period ended 31 December 2005. 4) Tax equalisation - the impact of equalising the effective rate oftax on profit before exceptional items and tax from the reported rate to 25%.The group's underlying effective rate of tax before exceptional items isexpected to be 25%. This adjustment is expected to be applied in the financial year ending 30 June2006 only. The group adopted IFRS in the period ended 31 December 2005 and thegroup's results for the period ended 31 December 2004 have been restated from UKGAAP to IFRS. Under IFRS the effective rate of tax on profit before exceptionalitems for the period ended 31 December 2004 was 34%, the equivalent rate underUK GAAP was 24%. The increase in the effective tax rate under IFRS aroseprimarily as a result of the implementation of IAS 12 - Income taxes in respectof the recognition of movements in deferred tax. 5) All amounts are derived from amounts in £ million divided by theweighted average number of shares in issue for the period to 31 December 2005 of2,886 million (2004 - 2,999 million). Notes - Information relating to the organic movement calculations a) Where a business, brand, brand distribution right or agency agreement or investment was disposed of, or terminated, in the current period, the group, in organic movement calculations, adjusts the profit for the periodattributable to equity shareholders for the comparable prior period to excludethe following: i) the amount the group earned in that period that it could nothave earned in the current period (i.e. the period between the date in the priorperiod, equivalent to the date of the disposal in the current period, and theend of the prior period), ii) a capital return in respect of the reduction ininterest charge had the disposal proceeds been used entirely to reduceborrowings, and iii) taxation at the rate applying in the jurisdiction in whichthe asset or business disposed was domiciled. As a result, the organic movementnumbers reflect only comparable performance. Similarly, if a business orinvestment 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 organic movement calculation, sincethe group recognised no contribution from that business in the current period. b) Where a business, brand, brand distribution right or agency agreement orinvestment is acquired subsequent to the end of the equivalent prior period, thegroup, in organic movement calculations 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 organic movement numbers reflect onlycomparable 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 in that prior period's performance in the organic movement calculation,since the group recognised a full period's contribution from that business inthe current period. c) Organic movement percentages for basic earnings per share are calculatedas the organic movement amount in pence (p), expressed as the percentage of theprior 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 organic movement for a givenperiod will be adjusted when used to measure organic movement in the subsequentperiod. d) The exchange effects of IAS 21 in respect of short term intercompanyfunding balances as recognised in other finance charges / income are removedfrom both the current and prior period as part of the organic 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 total invested capital isaggregated with restructuring and integration costs net of tax, which have beencharged to exceptional items, and goodwill written off to reserves at 1 July2004 being the date of transition to IFRS. Calculations for the return on average total invested capital for the six monthsended 31 December 2005 and 31 December 2004 were as follows: 2005 2004 £ million £ million Operating profit before exceptional items 1,261 1,185Associates after interest and taxation 77 71Dividends receivable from investments 5 8Effective tax rate 25% (2004 - 25%)* (336) (316) 1,007 948 Average net assets 5,671 5,880Average net borrowings 3,807 3,820Average integration costs (net of tax) 931 916Average goodwill 1,562 1,562Average total invested capital 11,971 12,178 Return on average total invested capital 16.8% 15.6% * The effective tax rate for 2004 has been adjusted to 25% to achieve acomparable measure in the year of IFRS adoption (2004 effective tax rate underIFRS was 34%) (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 2005 and31 December 2004 were as follows: 2005 2004 £ million £ million Average total invested capital (see (iii) above) 11,971 12,178 Operating profit before exceptional items 1,261 1,185Associates after interest and taxation 77 71Dividends receivable from investments 5 8Effective tax rate 25% (2004 - 25%)* (336) (316) 1,007 948Capital charge at 9% of average total invested capital (50% half year) (539) (548)Economic profit 468 400 * The effective tax rate for 2004 has been adjusted to 25% to achieve acomparable measure in the year of IFRS adoption (2004 effective tax rate underIFRS was 34%) 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, acquisitionsor disposals, existing or future, and the ability to realise expected synergiesand/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 inaccounting standards, taxation requirements, such as the impact of excise taxincreases with respect to the business, environmental laws and the lawsgoverning pensions; • developments in the alcohol advertising class actions and any similar proceedings 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 or perception 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, promotional and innovation expenditure by Diageo 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 of products or impede Diageo's ability to protect its intellectual property rights; and • changes in financial and equity markets, including significant interest rate and foreign currency exchange rate fluctuations, which may affect Diageo's access to or increase the cost of financing or which may affect Diageo'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 2005 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 16 February 2006. 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 02 Germany +49 69 2222 52100 Ireland +353 1 246 0034 Netherlands +31 20 710 0075 Spain +34 91 414 15 45 UK +44 20 7019 0810 USA (toll free) 1 877 951 7311 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 16 March 2006. A press conference will take place beginning at 12.30 (UK time) on Thursday 16February 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 16 February 2005. Call this number toparticipate: France +33 1 70 75 00 02 Germany +49 69 2222 52100 Ireland +353 1 246 0034 Netherlands +31 20 710 0075 Spain +34 91 414 15 45 UK +44 20 7019 0810 USA (toll free) 1 877 951 7311 Passcode: Diageo results The teleconference will be available on instant replay from 17.00 (UK time) andwill be available until 16 March 2005. The number to call is: UK/Europe +44 20 7970 4974 USA/Canada +1 203 369 4770 Investor enquiries to: Catherine James +44 (0) 20 7927 5272 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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