Interim Results

14th Feb 2008 07:01

Diageo PLC14 February 2008 Interim results for the six months ended 31 December 2007 Diageo is on track to deliver full year guidance with strong first halfperformance - volume up 4%, net sales up 7% and operating profit up 9%. Paul Walsh, Chief Executive of Diageo, commenting on six months ended 31December 2007 said: "Diageo's strength is its geographic diversity with leading brands across allcategories. We have again delivered broad based growth in a half when we havecontinued to invest behind our brands and in our routes to market. In the halfnet sales grew 7%, operating margin increased by 80 basis points and return oninvested capital was also up 80 basis points. 'While performance was broadly based some individual areas of the business werekey in driving these first half results. In North America our US spiritsbusiness again delivered strong top line growth. In Europe we have captured theopportunities offered by growing consumer demand for premium brands in EasternEurope and Russia and we improved our sales execution in Great Britain in thekey Christmas selling season. In International we have driven top line growthand margin improvement with continued strong performance across the region.Performance in Asia Pacific reflects our continued investments to build ourroute to market and widen our brand offerings in both India and China. In thefirst half overall performance in Asia Pacific has been affected by the loss ofour import licence in Korea. 'Looking at our individual brand performances; Johnnie Walker has againdelivered double-digit net sales growth as have Smirnoff and Captain Morgan. Theperformance of Guinness has also improved with net sales up 6% and share gainsin Great Britain and Ireland. In addition, a new marketing campaign hasreintroduced J&B to consumers in Continental Europe, Mexico and SouthAfrica and the brand grew strongly in the first half. 'This first half performance demonstrates that our brands are well supported andour routes to market remain strong and therefore, while we continue to watch forany impact that recent financial market volatility may have on broader tradingconditions, we are maintaining our guidance for 9% organic operating profitgrowth for the current fiscal year." Results at a glance First half First half Reported Organic F'08 F'07 movement movementVolume in millions of equivalent units 78.9 75.7 4% 4%Net sales £ million 4,287 4,022 7% 7%Operating profit £ million 1,414 1,306 8% 9%Profit attributable to parent company's equity shareholders * £ million 975 895 9%Basic eps * pence 37.6 32.8 15% * For six months ended 31 December 2007 tax rate 26.0%. For six months ended 31December 2006 tax rate 28.3%. Includes exceptional items. • Marketing spend increased 4%. Excluding Korea, spend on non-ready to drink brands increased 8% • 12% underlying growth of eps before exceptional items using an effective tax rate of 26% and adjusted for foreign exchange • Free cash flow of £436 million • Interim dividend per share increased by 5.2% to 13.20 pence • £1.0 billion returned to shareholders: £523 million in dividends and £488 million of share buybacks Unless otherwise stated in this announcement: net sales are sales afterdeducting excise duties; percentage movements are organic movements; commentaryrefers to organic movements and share refers to value share. See page 30 foradditional information for shareholders and an explanation of non-GAAP measuresincluding the reconciliation of basic eps as reported to underlying basic eps. Regional summary North America - Continued strength in premium spirits drives overall growth • Volume up 3% • Net sales up 6% • Marketing spend up 4% • Operating profit up 7% North America again delivered strong performance led by US spirits where netsales were up 8%. The priority brands Smirnoff, Captain Morgan, Johnnie Walker,Crown Royal and Sterling and Chalone wines were the primary growth drivers.These together with price increases and mix benefits across the business frominnovation and premiumisation, drove top line growth and margin improvementdespite increased spend behind key growth drivers such as the Reserve BrandsGroup. Europe - Growth continued in line with the improved performance delivered in thesecond half of F'07 driven by Great Britain, Russia and Eastern Europe • Volume up 3% • Net sales up 4% • Marketing spend up 7% • Operating profit up 2% Europe's performance overall reflected the success of the strategy to focus onpremium brands and growth markets. In Great Britain recovery against the priorperiod was the result of increased marketing spend and a simplified Christmaspricing strategy on Smirnoff Red and Baileys. Guinness returned to growth inGreat Britain and Ireland following increased marketing investment resulting inshare gains in both markets. Johnnie Walker and Baileys were the majorcontributors to growth in the Russian business where consumers continue todemand premium brands. Sales recovered following the disruption caused in theprior period by the introduction of strip stamps. There was strong growththroughout Eastern Europe as a result of strong performance of Johnnie Walker, J&B and Smirnoff. In Continental Europe deluxe and reserve brands wereagain the key drivers of growth. International - Double-digit growth in net sales and operating profit achievedin Latin America, Africa and Global Travel and Middle East • Volume up 7% • Net sales up 16% • Marketing spend up 14% • Operating profit up 20% In International a strong performance from Diageo's beer brands in Africa andcontinued growth of scotch in Latin America, South Africa and Global Travel andMiddle East were the main drivers of this strong performance. The growth ofSmirnoff, Baileys and J&B also made a significant contribution to thegrowth in the region. Price increases and mix improvements across Diageo'sscotch brands and price increases in beer in Africa drove the significantimprovement in overall price/mix and delivered operating margin improvement. Asia Pacific - Performance in the half impacted by Korea and investments inmarket infrastructure • Volume up 6% • Net sales up 1% • Marketing spend down 12% • Operating profit down 12% Consumer demand in the region remained strong and Diageo continued to enhanceroutes to market by introducing brands into markets such as India, exploringopportunities in new markets such as Vietnam and focusing on priority brands inmarkets such as Australia. Diageo has continued to grow share in the key scotchmarkets of the region such as China. The overall performance in Asia Pacific hasbeen affected by a number of factors including the loss of the import licence inKorea. Financial • The deficit in respect of post employment plans decreased by £34million from £419 million at 30 June 2007 to £385 million at 31 December 2007.For the full year ending 30 June 2008, finance income under IAS 19 is expectedto be £47 million, broadly in line with the benefit in the year ended 30 June2007. • In the six months ended 31 December 2007, exchange rate movementsreduced operating profit by £13 million and reduced the net interest charge by£3 million. • Based on current exchange rates, it is estimated that exchange ratemovements for the year ending 30 June 2008 will not have a material impact onoperating profit or the interest charge excluding the exchange impact ofre-translating trading and short term inter-company loans under IAS 21 andexcluding the impact of IAS 39. Brand performance summary Reported Organic Volume movement* net sales net sales movement movement % % %Global priority brands 5 6 7Local priority brands 4 6 6Category brands 3 9 9Total 4 7 7 Key spirits brands**:Smirnoff vodka 9 10 11Johnnie Walker 5 12 10Captain Morgan 7 6 11Baileys 5 6 6J&B 5 10 8Jose Cuervo (4) (7) (3)Tanqueray 5 6 11Crown Royal - North America 5 5 10Buchanan's - International 8 33 14Windsor - Asia Pacific 42 (23) (20) Guinness 3 6 6 Ready to drink (3) (2) (1) * Reported and organic volume movements are the same for all brands in all regions ** Spirits brands excluding ready to drink Smirnoff performed strongly with net sales growth in each region. The principaldriver was North America where strong marketing campaigns drove both net salesgrowth and share gains. In Great Britain, Brazil, India, Australia and SouthAfrica Smirnoff also achieved significant growth supported by focused marketinginvestment. Johnnie Walker's performance was driven by International where net sales were up16% and by Europe where net sales were up 13%. Volume growth of 7% in JohnnieWalker Black Label and price increases in a number of markets drove mix. Captain Morgan had a strong first half with double-digit net sales growth ineach region, supported by increased marketing investment. Baileys growth was driven by Great Britain and Russia in Europe and byInternational. Net sales of Baileys Original Irish Cream were up across allregions as Baileys flavours renewed interest in the core brand. J&B has been reinvigorated by a new advertising campaign and newpackaging. International and Europe were the key growth drivers. While the growth of the super and ultra premium tequila segments has had anegative impact on Jose Cuervo, innovation such as super premium Jose CuervoPlatino and advertising focus has improved mix. Tanqueray grew net sales 11% on volume growth of 5%. The principal driver wasthe growth in North America following the launch of Tanqueray Rangpur and aprice increase on the core brand. Net sales growth was delivered in allregions. Within local priority brands Crown Royal in North America performed stronglywith improvement in price/mix. Growth in Buchanan's was driven by continuedstrong performance in Latin American markets and by strong growth in NorthAmerica where net sales grew 31%. In Korea, Windsor maintained number oneposition in the market. Volume was up as a result of shipment timing due to thethird party distributor arrangements in place in the half which also reduced netsales per case. Guinness grew net sales in its four largest markets, Great Britain, Ireland,Nigeria and the US as marketing investment increased behind successful newcampaigns in each market. Ready to drink net sales were down 1%. Strong growth of Bundaberg and Cola inAustralia and Smirnoff ready to drink in Brazil and Africa offset most of theimpact of the segment's decline in North America and Europe. Management Reports As communicated at the time of the 2007 preliminary results announcement, thishalf yearly report forms one of the management reports Diageo is required topublish under the EU Transparency Directive from the financial year beginning 1July 2007. Diageo will issue the next interim management statement on 8 May2008. The year end preliminary results announcement will be issued on 28 August2008. The trading update to be issued at the time of the AGM on 15 October 2008will form the first interim management statement for the year ended 30 June2009. Interim Report Recent changes to the Listing Rules of the Financial Services Authority haveremoved the requirement to issue a hard copy interim report to shareholders.However, if you require a copy of this statement please contact the Registrar'soffice. This statement will be available on www.diageo.com. BUSINESS REVIEW For the six months ended 31 December 2007 OPERATING RESULTS - analysis by brand and business area North America Summary: • Priority spirit brands continued to drive growth • Premiumisation drove mix improvement with acceleration in growth of reserve brands • Investment in overhead has constrained growth in operating profit • Innovation delivered one third of the growth in net sales Key measures: First half First half Reported movement Organic F'08 F'07 movement £ million £ million % %Volume 3 3Net sales 1,321 1,313 1 6Marketing spend 201 206 (2) 4Operating profit 491 486 1 7 Reported performance: Net sales were £1,321 million in the six months ended 31 December 2007 up £8million from £1,313 million in the comparable prior period. Reported operatingprofit increased by £5 million from £486 million to £491 million in the sixmonths ended 31 December 2007. Organic performance: The weighted average exchange rate used to translate US dollar sales andoperating profit moved from £1 = $1.91 in the six months ended 31 December 2006to £1 = $2.03 in the six months ended 31 December 2007. Exchange rate impactsdecreased net sales by £65 million. Disposals decreased net sales by £4 millionand there was an organic increase in net sales of £77 million. Exchange rateimpacts reduced operating profit by £25 million. There was an organic increasein operating profit of £30 million. Brand performance: Reported net Organic sales movement Volume movement net sales movement % % %Global priority brands 3 (1) 4Local priority brands 4 5 10Category brands 2 1 9Total 3 1 6 Key spirits brands*:Smirnoff vodka 8 7 12Johnnie Walker 5 4 10Captain Morgan 6 5 11Baileys (3) (6) (2)Jose Cuervo (4) (8) (2)Tanqueray 6 5 12Crown Royal 5 5 10 Guinness 2 - 5 Ready to drink (12) (13) (9) * Spirits brands excluding ready to drink Diageo North America continued to drive broadly based growth. Price increaseswere taken on the majority of the priority brands and price/mix improved acrossspirits. Net sales of spirits were up 8%, beer up 6% and wine up 12%. Weaknessin the ready to drink brands in the US, with net sales down 9%, cost the region1 percentage point of net sales growth overall. Smirnoff vodka grew volume 8% on the continued strong performance of SmirnoffRed and the growth in Smirnoff flavours, which benefited from the successfulmarketing campaign highlighting how to make cocktails at home. Net salesincreased 12% following price increases in key markets. Smirnoff's share of thevodka category increased 0.3 percentage points. Johnnie Walker volume grew 5% with growth achieved across all variants.Stronger performance within Johnnie Walker Black Label and super deluxe combinedwith price increases, drove 10% net sales growth. Johnnie Walker continued tolead the category finding growth opportunities in a declining category and sharewas up a further 1.6 percentage points. Johnnie Walker has now gained share forthe last four consecutive calendar years. Captain Morgan volume was up 6% and net sales up 11% as price increases wereimplemented. Strong marketing campaigns continued to build the brand withconsumers. Captain Morgan maintained share of the rum category. Baileys volume and net sales were down 3% and 2% respectively as Baileysflavours lapped the national launch in the prior period. Baileys Original IrishCream grew volume and net sales as price increases were taken and strong holidayand multicultural marketing, with singer John Legend, drove growth. Baileys'share of the cordials and liqueur category increased 0.2 percentage pointsagainst an overall category decline. While Jose Cuervo volume decreased 4%, net sales decreased 2% as price increaseswere implemented. Category growth was driven by the super premium segment andtherefore advertising has been refocused on the super premium Jose Cuervo brandssuch as Jose Cuervo Black Medallion and Jose Cuervo Tradicional. An innovation,Jose Cuervo Platino, has also been launched in the super premium segment. Tanqueray volume grew 6% and net sales increased 12% driven by price increaseson the core brand and Tanqueray Rangpur, an innovation launched nationally inFebruary 2007, which continued to build distribution and attract consumers.Tanqueray grew share 2.2 percentage points against an overall decline in the gincategory. Crown Royal grew volume 5% and net sales 10% benefiting from both priceincreases and innovation as the new super premium Crown Royal Cask 16 improvedmix within the brand. Crown Royal grew share 0.4 percentage points in the NorthAmerican whiskey category. Guinness held share in the import beer segment with volume up 2% and net salesup 5% with mix improvement and price increases. Local priority brand volume was up 4%. Seagram's 7 Crown and Seagram's VO werebroadly flat and growth was driven by the higher margin brands. As a result netsales were up 10% with Buchanan's up 31% and US wine up 11% driven bydouble-digit growth of Chalone brands and Sterling Vineyards. Diageo Chateauand Estate grew share of the premium wine segment 0.7 percentage points. Category brands grew net sales 9% on volume growth of 2%. Favourable mix wasdriven by the growth of Don Julio, the Classic Malts and French agency and otherimport wines. Don Julio is the clear number two in the premium tequila segmentgrowing share 0.5 percentage points. The Classic Malts' performance was drivenby double-digit growth on Dalwhinnie, Oban and Talisker. Ready to drink declined in a declining segment, with volume down 12% and netsales down 9%. Ready to drink consists of progressive adult beverages andspirit based cocktails. The overall decline was driven by progressive adultbeverages which includes Smirnoff Ice. Diageo lost 0.3 percentage points inshare but remained the clear segment leader. Spirits based cocktails showed goodmomentum with the introduction of Smirnoff cocktails, a new innovation andcontinued growth in consumer off take of Jose Cuervo Golden Margaritas. Overall marketing increased 4% with spending increases directed toward thereserve brands and new product launches such as Crown Royal Cask 16 and Smirnoffcocktails. Europe Summary: • Performance improvement continued in the first half • Guinness returned to growth supported by increased marketing spend • Growth of key spirits brands driven by Great Britain, Russia and Eastern Europe • Premiumisation continued across the region, led by Johnnie Walker Black Label and Smirnoff Black Key measures: First half First half Reported movement Organic movement F'08 F'07 £ million £ million % %Volume 3 3Net sales 1,433 1,357 6 4Marketing spend 228 208 10 7Operating profit 509 484 5 2 Reported performance: Net sales were £1,433 million in the six months ended 31 December 2007, up £76million from £1,357 million in the comparable prior period. Reported operatingprofit increased by £25 million from £484 million to £509 million in the sixmonths ended 31 December 2007. Organic performance: The weighted average exchange rate used to translate euro sales and profit movedfrom £1 = €1.48 in the six months ended 31 December 2006 to £1 = €1.43 in thesix months ended 31 December 2007. Exchange rate impacts increased net sales by£28 million. Transfers between markets decreased net sales by £1 million andthere was an organic increase in net sales of £49 million. Exchange rate impactsincreased operating profit by £11 million. Transfers between markets increasedoperating profit by £3 million and there was an organic increase in operatingprofit of £11 million. Brand performance: Reported Organic Volume movement net sales net sales movement movement % % %Global priority brands 4 7 5Local priority brands (1) - (2)Category brands 3 7 5Total 3 6 4 Key spirits brands*:Smirnoff vodka 6 6 4Johnnie Walker 6 16 13Baileys 7 10 7J&B - 8 4 Guinness 3 6 4 Ready to drink (11) (14) (15) * Spirits brands excluding ready to drink Volume grew 3% and positive price/mix contributed to net sales growth of 4%.Strong performance in Great Britain, Russia and Eastern Europe offset weakerperformance in Iberia and Greece. Global priority brands benefited fromincreased marketing spend of 11% with Guinness, Smirnoff and Baileys the keybeneficiaries. Smirnoff vodka volume increased 6% while net sales increased 4%. The brandperformed strongly in Great Britain benefiting from two new marketing campaignsand a simplified Christmas pricing strategy. New marketing campaigns in Irelandalso drove increases in both net sales and share. Johnnie Walker volume was up 6% and net sales increased 13% as a result ofstrong growth in Russia, Eastern Europe, Benelux and Spain. In Spain net salesof Johnnie Walker Red Label grew 11% and the brand increased share 1.7percentage points. The growth of Johnnie Walker Black Label in Russia andEastern Europe combined with price increases drove positive mix. Baileys volume and net sales increased 7%. In the key Great Britain marketBaileys net sales increased 11%. The return to growth of Baileys Original IrishCream was a result of the simplified Christmas pricing strategy. Russia againdelivered strong growth and the launch of Baileys flavours was extended toHungary and the Czech Republic. Marketing spend grew 11% and the brand launchedits first regional campaign across Europe with a successful digital promotion. Strong performance of J&B in France and Eastern Europe drove net salesgrowth of 4%. In Spain, while volume was down 5% as a result of the continueddecline of the standard scotch segment, price increases drove 3% net salesgrowth. Captain Morgan net sales grew 12% across the region. This growth was supportedwith marketing investment up over 60%. Guinness returned to growth with volume up 3% and net sales up 4%. Increasedmarketing spend, up 20% for the first half, was a major contributor to thisturnaround. In both Great Britain and Ireland, the success of new advertisingcampaigns were key factors in the improvement. In a declining beer categoryGuinness grew 8 percentage points ahead of the category to gain 0.5 percentagepoints of share, consolidating its position as the number three on trade beerbrand in Great Britain. In Ireland Guinness grew net sales 3% and gained 1.3percentage points of share in the on trade supported by a slow down in theconsumer switch to the off trade. Total ready to drink volume declined 11% and net sales declined 15%, primarilydriven by Smirnoff Ice in Great Britain and France. Within local priority brands, Bell's and Gordon's in Great Britain benefitedfrom the simplified Christmas pricing strategy, increased off trade visibilityfor Bell's over the seasonal period and a stronger print campaign for Gordon's.This performance was offset by Cacique in Spain, local beer brands in Irelandand Gordon's in Continental Europe. Category brand volume increased 3% and net sales increased 5% as strongperformance in scotch offset the decline in Pimm's which was impacted by thepoor summer weather. International Summary: • Double-digit net sales growth achieved in Latin America, Africa and Global Travel and Middle East • Beer brands continue to grow strongly in Africa with spirits brands now delivering a third of the growth • Strong net sales growth of scotch brands across Latin America and in South Africa and Global Travel and Middle East • Focus on categories outside of scotch and beer drove broader based growth First half First half Reported movement Organic movementKey measures: F'08 F'07 £ million £ million % %Volume 7 7Net sales 1,050 884 19 16Marketing spend 125 112 12 14Operating profit 347 298 16 20 Reported performance: Net sales were £1,050 million in the six months ended 31 December 2007, up £166million from £884 million in the comparable prior period. Reported operatingprofit increased by £49 million from £298 million to £347 million in the sixmonths ended 31 December 2007. Organic performance: Exchange rate impacts increased net sales by £23 million. Transfers betweenregions increased net sales by £1 million and there was an organic increase innet sales of £142 million. Exchange rate impacts reduced operating profit by £4million and transfers of costs between regions reduced operating profit by £6million. There was an organic increase in operating profit of £59 million. Brand performance: Reported net Organic sales movement Volume movement net sales movement % % % Global priority brands 9 17 16Local priority brands 7 25 18Category brands 5 17 13Total 7 19 16 Key spirits brands*:Smirnoff vodka 10 23 21Johnnie Walker 10 21 16Baileys 8 15 15Buchanan's 8 33 14Guinness 5 11 14Ready to drink 5 12 14 * Spirits brands excluding ready to drink Growth was led by the global priority brands with net sales up 16%, driven byJohnnie Walker, Guinness and Smirnoff. Price/mix improvement was achieved acrossglobal priority, local priority and category brands. Smirnoff vodka delivered volume and net sales growth throughout the region, up10% and 21% respectively. The key markets were Brazil and South Africa where thevodka category displayed strong growth. In both these markets Smirnoff is thecategory leader and strong marketing campaigns helped to drive further sharegains. Johnnie Walker volume was up 10% as a result of strong growth across the region.This was fuelled by growth in Latin America, especially in Mexico, South Africaand the Middle East. Net sales were up 16% driven by price increases implementedin Latin America and Global Travel and Middle East. Baileys volume was up 8% and net sales were up 15% as premium priced gift packsand consumer promotions in Global Travel and the launch of Baileys flavours inMexico drove overall growth. Buchanan's is the clear leader in the deluxe scotch segment in Venezuela andMexico and strong consumer demand in these two markets drove overall volumegrowth, up 8%. Net sales grew 14% as price increases were implemented. Guinness delivered 5% volume growth driven by the successful "Guinness Greatness" campaign, economic expansion in East Africa and a positive performance inCameroon. Price increases and a benefit from changes in excise tax in somemarkets have resulted in strong price/mix with net sales up 14%. J&B also delivered strong growth in the region with volume up 18% fuelledby strong consumer demand in Mexico, South Africa and Global Travel. Priceincreases implemented in South Africa and Global Travel led to net sales up 24%. Local priority brands grew volume 7% and net sales 18%. Buchanan's, Tusker andPilsner all delivered double-digit net sales growth as price increases wereimplemented following successful advertising campaigns. Malta Guinness also grewnet sales by double-digits driven by Nigeria and Ghana. Category brands grew volume 5% driven by the growth of beer brands in Africa.Price/mix was achieved as a result of significant price increases on lowerpriced scotch brands in Latin America and as a result net sales were up 13%. Ready to drink volume increased 5%. This was the result of growth in Smirnoffready to drink brands, particularly the launch of new flavours of SmirnoffCaipiroska in Brazil, continued growth of Smirnoff Ice in Nigeria and Smirnoffready to drink in South Africa. Net sales grew 14% mainly as a result of priceincreases in Venezuela and South Africa. Most African markets delivered double-digit net sales growth, however EastAfrica and South Africa drove overall performance, with net sales up 26% and 25%respectively. In East Africa this was the result of successful marketing campaigns on Guinnessand Tusker and expanded distribution of Senator beer. In South Africa Diageo'sscotch brands drove the growth as they continued to outperform a growing andcompetitive category in both volume and net sales terms with price increasesimplemented across most brands. Net sales grew 11% and 25% respectively in Nigeria and Ghana, with strongperformances from Guinness and Malta Guinness. This was driven by priceincreases which were implemented on these key brands. Strong consumer demand for scotch has driven performance in both Venezuela andMexico. In Venezuela net sales grew 10% and in Mexico increased investmentbehind the sales force and expansion of the customer base led to share gains andnet sales up 31%. In the Paraguay, Uruguay and Brazil hub net sales were up 7% with Smirnoff vodkaand ready to drink the key drivers. The new marketing campaign on Smirnoff vodkacombined with expansion into other regions resulted in volume growth ahead ofthe category despite taking two price rises in the last year. Smirnoff ready todrink also benefited from the campaign. Performance in Global Travel and Middle East where volume was up 7% and netsales up 14% was driven by Johnnie Walker, particularly Johnnie Walker BlackLabel and super deluxe which benefited from increased visibility behind the "Winners stay in control" campaign in Global Travel. Price increases drove theprice/mix improvement. Asia Pacific Summary: • Continued growth in consumer demand • Improved performance in Australia led by continued strength of the ready to drink segment • Continued share gains in deluxe scotch in China • Loss of import licence in Korea reduced operating profit in the half • Launch of new brands in India strengthened the route to market First half First half Reported movement Organic movementKey measures: F'08 F'07 £ million £ million % %Volume 6 6Net sales 438 430 2 1Marketing spend 89 100 (11) (12)Operating profit 99 115 (14) (12) Reported performance: Net sales were £438 million in the six months ended 31 December 2007, up £8million from £430 million in the comparable prior period. Reported operatingprofit decreased by £16 million from £115 million to £99 million in the sixmonths ended 31 December 2007. Organic performance: Exchange rate impacts increased net sales by £2 million. There was an organicincrease in net sales of £6 million. Transfers between regions decreasedoperating profit by £3 million and there was an organic decrease in operatingprofit of £13 million. Brand performance: Reported net Organic sales movement Volume movement net sales movement % % %Global priority brands 4 4 4Local priority brands 16 (8) (7)Category brands 3 10 7Total 6 2 1 Key spirits brands*:Smirnoff vodka 23 37 31Johnnie Walker (5) (2) (1)Windsor 42 (23) (20)Guinness (10) (5) (3)Ready to drink 12 20 14 * Spirits brands excluding ready to drink Smirnoff vodka continued to deliver strong growth with volume up 23% driven byIndia and Australia. A focus on Smirnoff flavours in these markets, the growthof Smirnoff Black in Australia and a price increase in India resulted in price/mix improvement with net sales up 31%. The performance of Johnnie Walker was impacted by closures in the Indian dutyfree channel and lower shipments into China, although Johnnie Walker gainedshare in the growing deluxe scotch segment in China. Price/mix of 4 percentagepoints was driven by price increases in a number of markets. Guinness volume declined 10% and net sales declined 3%. This was the result of achange in tax in Japan which disrupted shipments to our distributor and aplanned reduction of stock levels in Indonesia. Australia remains the key market for Diageo's ready to drink brands in AsiaPacific and strong growth of Bundaberg and Cola, Smirnoff Ice Double Black andJohnnie Walker ready to drink, has resulted in 14% net sales growth for ready todrink in the region. Local priority brand performance was driven by Windsor in Korea. Volume was upas a result of shipment timings, whilst net sales were impacted by third partydistributor costs. Bundaberg delivered growth in both volume and net sales up2% and 15% respectively. Growth in ready to drink positively impacted mix. Category brands were driven by the growth of locally bottled scotch brands inIndia. The loss of Diageo's import licence in Korea in July 2007 has had a significantimpact on the overall growth rate for the Asia Pacific region in the first half. Following the loss of the import licence the route to market was through athird party distributor and therefore sales were recognised at the time stockwas transferred to the distributor while net sales per case reduced to reflectthe transfer of costs, including marketing spend, to the distributor. The netimpact therefore was to increase volume and reduce net sales per case, marketingspend and operating profit. Diageo however maintained leadership of the whiskycategory. An application for a new import licence was submitted on 26 December2007. In Australia there has been increased focus on the priority brands to driveprofitability. This resulted in 9% growth in net sales on broadly flat volume.The fast growing ready to drink brands were a key driver of this growth as newmedia campaigns and up weighted investment on major sporting events such as therugby world cup, drove growth in Bundaberg, Johnnie Walker and Smirnoff ready todrink. In spirits Johnnie Walker and Smirnoff both delivered double-digit netsales growth. In Thailand the focus has been on improving profitability following two years ofvolume out performance. Low value products were discontinued and pricesincreased on a number of brands despite price reductions on competitor brands.Therefore volume declined 17% and net sales declined 5%. Diageo remains theleader in premium and deluxe whisky but lost volume share in the deluxe segment. In China the scotch category is estimated to have grown by a further 20% andDiageo has again gained share. The appreciation of the RMB created a market forUS dollar priced Johnnie Walker into China and therefore while consumer off takeis estimated to have increased by 30%, shipments were down 8%. Diageo Chinabecame fully operational in the half and as a result, brand awareness for thebrands it distributes such as Baileys and J&B increased and Smirnoffvolume share was up 2 percentage points in a category growing 15%. Thereforedespite a 10% fall in net sales of Johnnie Walker, overall net sales were up 2%. In India volume grew 28% as Diageo's Bottled in India (BII) business grew as aresult of improved distribution and further growth of the innovation brands,Haig and Shark Tooth. This increase was however offset by the closure of anumber of high volume duty free airport retail stores and sales of JohnnieWalker halved resulting in overall net sales growth of 7%. Corporate revenue and costs Net sales were £45 million in the six months ended 31 December 2007, up £7million from £38 million in the prior period. Net reported operating costs were£32 million in the six months ended 31 December 2007 and were £77 million in thesix months ended 31 December 2006. A number of costs are recharged by corporateto the four regions at fixed exchange rates and the difference between thesefixed rates and actual rates is included in corporate. Centrally incurredoverheads and other expenses were down slightly in the period. FINANCIAL REVIEW Summary consolidated income statement Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionSales 5,667 5,358Excise duties (1,380) (1,336)Net sales 4,287 4,022Operating costs (2,873) (2,716)Operating profit 1,414 1,306Sale of businesses 5 -Net finance charges (156) (98)Share of associates' profit after tax 105 91Profit before taxation 1,368 1,299Taxation (354) (367)Profit for the period 1,014 932 Attributable to:Equity shareholders of the parent company 975 895Minority interests 39 37 1,014 932 Sales and net sales On a reported basis, sales increased by £309 million from £5,358 million in thesix months ended 31 December 2006 to £5,667 million in the six months ended 31December 2007. On a reported basis net sales increased by £265 million from£4,022 million in the six months ended 31 December 2006 to £4,287 million in thesix months ended 31 December 2007. Exchange rate movements decreased reportedsales and net sales by £12 million. Disposals resulted in a net decrease inreported sales and net sales of £4 million for the period. Operating costs On a reported basis, operating costs increased by £157 million in the six monthsended 31 December 2007 due to an increase in cost of sales of £143 million, from£1,534 million to £1,677 million and an increase in marketing costs of £17million, from £626 million to £643 million, offset by a decrease in otheroperating expenses of £3 million, from £556 million to £553 million. The impactof exchange rate movements increased total operating costs by £1 million. Post employment plans Post employment costs for the six months ended 31 December 2007 of £25 million(2006 - £28 million) comprised amounts charged to operating profit of £48million (2006 - £52 million) and finance income of £23 million (2006 - £24million). At 31 December 2007, Diageo's deficit before taxation for all post employmentplans was £385 million (30 June 2007 - £419 million). The decrease in thedeficit is primarily a result of higher returns on assets for the UK pensionplans offset by an increase in the inflation assumption. Operating profit Reported operating profit for the six months ended 31 December 2007 increased by£108 million to £1,414 million from £1,306 million in the comparable priorperiod. Exchange rate movements reduced operating profit for the six monthsended 31 December 2007 by £13 million. Net finance charges Net finance charges increased by £58 million from £98 million in the six monthsended 31 December 2006 to £156 million in the six months ended 31 December 2007. The net interest charge increased by £37 million from £120 million in the prioryear to £157 million in the six months ended 31 December 2007. This increaseprincipally resulted from the increase in net borrowings in the period andmaturing US dollar fixed debt being refinanced at higher market rates and theincrease in average floating rates on euro and sterling denominated debt.Exchange rate movements reduced the net interest charge by £3 million. Other net finance income of £1 million (2006 - £22 million) included income of£23 million (2006 - £24 million) in respect of the group's post employmentplans. Other finance charges in the six months to 31 December 2007 include £2million (2006 - £4 million income) in respect of exchange rate translationdifferences on inter-company funding arrangements that do not meet theaccounting criteria for recognition in equity, £5 million (2006 - nil) inrespect of exchange movements on net borrowings not in a hedge relationship andtherefore recognised in the income statement, £8 million (2006 - £6 million)unwinding of discounts on liabilities and £7 million (2006 - nil) on theconversion of cash transferred out of Diageo subsidiaries in countries whereexchange controls are in place. Associates The group's share of profits of associates after interest and tax was £105million for the six months ended 31 December 2007 compared to £91 million in thecomparable period last year. Diageo's 34% equity interest in Moet Hennessycontributed £96 million to share of profits of associates after interest and tax(2006 - £84 million). Profit before taxation Profit before tax increased by £69 million from £1,299 million to £1,368 millionin the six months ended 31 December 2007, primarily as a result of increasedoperating profit, offset by higher net finance charges in the period. Taxation The tax charge is based upon the estimate of the tax rate expected for the fullfinancial year. The reported tax rate for the six months ended 31 December 2007 is 26% comparedwith 28.3% for the six months ended 31 December 2006. Factors that led to ahigher reported tax rate for the six months ended 31 December 2006 were aprovision for the settlement of tax liabilities relating to the Guinness/GrandMet merger and a reduction in the carrying value of deferred tax assets. Exchange rates The estimated effect of exchange rate movements on the results for the sixmonths ended 31 December 2007 as compared with the results for the six monthsended 31 December 2006 is as follows: Gains/(losses) £ millionOperating profit Translation impact (20) Transaction impact 7Associates Translation impact 3 Transaction impact -Interest and other finance charges Translation impact - interest 3 Net exchange movements on short term inter-company loans (6) Net exchange movements on undesignated net debt (5)Total exchange effect on profit before taxation (18) Six months ended 31 Six months ended 31 December 2007 December 2006Exchange rates Translation US$/£ rate 2.03 1.91 Translation •/£ rate 1.43 1.48 Transaction US$/£ rate 1.88 1.87 Transaction •/£ rate 1.41 1.44 The weakening of the US dollar had adverse translation and transaction effectson operating profit and a favourable impact on US dollar denominated interestcharges. Outlook for the impact of exchange rate movements: Based on current exchange rates, it is estimated that exchange rate movementsfor the year ending 30 June 2008 will not have a material impact on operatingprofit or the interest charge excluding the exchange impact of re-translatingtrading and short term inter-company loans under IAS 21 and excluding the impactof IAS 39. Dividend An interim dividend of 13.20 pence per share will be paid to holders of ordinaryshares and ADR's on the register on 7 March 2008. This represents an increaseof 5.2% on last year's interim dividend. The interim dividend will be paid toshareholders on 7 April 2008. Payment to US ADR holders will be made on 11 April2008. A dividend reinvestment plan is available in respect of the interimdividend and the plan notice date is 17 March 2008. Cash flow Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionCash generated from operations 830 914 Interest paid (net) (140) (104)Dividends paid to minority interests (37) (22)Taxation (118) (72)Net sale of businesses and other investments 6 1Net capital expenditure (105) (45)Free cash flow 436 672 Cash generated from operations decreased from £914 million to £830 million inthe six months ended 31 December 2007 principally as a result of cash outflowsin relation to working capital which were £192 million greater than in the priorperiod. This increase was principally due to increased inventory levels,including higher maturing spirit stocks and higher receivables including theimpact of some later phasing of sales in the period. Net capital expenditure onproperty, plant and equipment increased £60 million to £105 million in theperiod, the biggest drivers being the capital investment in the new distilleryin Scotland in the period and disposal proceeds of £30 million relating to ParkRoyal received in the six months ended 31 December 2006. The decrease in cashgenerated from operations, increased interest payments and increased capitalexpenditure resulted in a reduction in free cash flow of £236 million to £436million from £672 million in the prior period. In the six months ended 31 December 2007, Diageo purchased 46.4 million sharesas part of the share buyback programme (2006 - 72.8 million shares) at a costincluding fees of £492 million (2006 - £704 million). Net payments to acquireshares for employee share schemes totalled £85 million (2006 - £48 million).Equity dividends of £523 million were paid during the period (2006 - £524million). In the six months ended 31 December 2007, Diageo made no investmentsin business acquisitions (2006 - £20 million). Diageo continues to target a range of ratios which are currently broadlyconsistent with an A band credit rating. Balance sheet At 31 December 2007, total equity was £4,051 million compared with £4,170million at 30 June 2007. This decrease was mainly due to the dividend paid outof shareholders' equity of £523 million and the shares repurchased forcancellation of £492 million, partly offset by the profit for the period of£1,014 million. Net borrowings were £5,724 million at 31 December 2007, an increase of £879million from net borrowings at 30 June 2007 of £4,845 million. The principalcomponents of this increase were the payments of £492 million as part of theshare buyback programme, £85 million net repurchase of own shares for shareschemes, adverse exchange rate movements of £227 million and a £523 millionequity dividend paid offset by free cash inflow of £436 million. Economic profit Economic profit increased by £62 million from £515 million in the six monthsended 31 December 2006 to £577 million in the six months ended 31 December 2007.See page 38 for the calculation and definition of economic profit. DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT Six months ended Six months ended 31 December 2007 31 December 2006 Notes £ million £ million Sales 2 5,667 5,358Excise duties (1,380) (1,336)Net sales 4,287 4,022Cost of sales (1,677) (1,534)Gross profit 2,610 2,488Marketing expenses (643) (626)Other operating expenses (553) (556)Operating profit 2 1,414 1,306Sale of businesses 3 5 -Net interest payable 4 (157) (120)Net other finance income 4 1 22Share of associates' profits after tax 105 91Profit before taxation 1,368 1,299Taxation 5 (354) (367)Profit for the period 1,014 932 Attributable to:Equity shareholders of the parent company 975 895Minority interests 39 37 1,014 932Pence per shareBasic earnings 37.6p 32.8pDiluted earnings 37.4p 32.6pAverage shares 2,590m 2,725m DIAGEO CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ million Exchange differences on translation of foreign operations excluding borrowings 239 (254)Exchange differences on borrowings and derivative net investment hedges (212) 171Effective portion of changes in fair value of cash flow hedges - (Losses)/gains taken to equity (16) 15 - Transferred to income statement (46) 25Actuarial gains on post employment plans 23 13Tax on items taken directly to equity 2 (17)Net expense recognised directly in equity (10) (47)Profit for the period 1,014 932Total recognised income and expense for the period 1,004 885 Attributable to: - equity shareholders of the parent company 958 856- minority interests 46 29Total recognised income and expense for the period 1,004 885 DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET 31 December 2007 30 June 2007 31 December 2006 Notes £ million £ million £ million £ million £ million £ millionNon-current assetsIntangible assets 4,440 4,383 4,399Property, plant and equipment 2,008 1,932 1,889Biological assets 2 12 3Investments in associates 1,682 1,436 1,405Other investments 124 128 72Other receivables 19 17 14Other financial assets 82 52 51Deferred tax assets 694 771 837Post employment benefit assets 20 38 17 9,071 8,769 8,687Current assetsInventories 6 2,695 2,465 2,474Trade and other receivables 2,541 1,759 2,183Other financial assets 69 78 87Cash and cash equivalents 7 811 885 975 6,116 5,187 5,719Total assets 15,187 13,956 14,406Current liabilitiesBorrowings and bank overdrafts 7 (1,372) (1,535) (1,279)Other financial liabilities (99) (43) (24)Trade and other payables (2,180) (1,888) (2,021)Corporate tax payable (799) (673) (788)Provisions (64) (60) (66) (4,514) (4,199) (4,178)Non-current liabilitiesBorrowings 7 (5,154) (4,132) (4,222)Other financial liabilities (96) (104) (82)Other payables (31) (38) (11)Provisions (278) (274) (287)Deferred tax liabilities (658) (582) (560)Post employment benefit liabilities (405) (457) (776) (6,622) (5,587) (5,938)Total liabilities (11,136) (9,786) (10,116)Net assets 4,051 4,170 4,290 EquityCalled up share capital 832 848 868Share premium 1,342 1,341 1,340Other reserves 3,175 3,186 3,135Retained deficit (1,505) (1,403) (1,242)Equity attributable to equity shareholders of the parent company 3,844 3,972 4,101Minority interests 207 198 189Total equity 9 4,051 4,170 4,290 DIAGEO CONDENSED CONSOLIDATED CASH FLOW STATEMENT Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ million £ million £ millionCash flows from operating activities Profit for the period 1,014 932 Taxation 354 367 Share of associates' profits after taxation (105) (91) Net interest and other net finance income 156 98 Gains on sale of businesses (5) - Depreciation and amortisation 109 104 Movements in working capital (707) (515) Dividend income 7 7 Other 7 12 Cash generated from operations 830 914 Interest received 53 21 Interest paid (193) (125) Dividends paid to minority interests (37) (22) Taxation paid (118) (72) Net cash from operating activities 535 716 Cash flows from investing activities Disposal of property, plant and equipment 19 39 Purchase of property, plant and equipment (124) (84) Net disposal of other investments 6 1 Disposal of businesses 4 - Purchase of businesses - (20) Net cash outflow from investing activities (95) (64) Cash flows from financing activities Net purchase of own shares for share schemes (85) (48) Own shares repurchased (492) (704) Net increase in loans 580 900 Equity dividends paid (523) (524) Net cash used in financing activities (520) (376) Net (decrease)/increase in net cash and cash equivalents (80) 276 Exchange differences 12 (28) Net cash and cash equivalents at beginning of the period 839 651Net cash and cash equivalents at end of the period 771 899 Net cash and cash equivalents consist of: Cash and cash equivalents 811 975 Bank overdrafts (40) (76) 771 899 NOTES 1. Basis of preparation These condensed consolidated financial statements are prepared in accordancewith IAS 34 'Interim Financial Reporting' as endorsed and adopted for use in theEuropean Union and the Disclosure and Transparency Rules (DTR) of the FinancialServices Authority. These condensed consolidated financial statements are alsoprepared in accordance with IAS 34 'Interim Financial Reporting' as issued bythe International Accounting Standards Board (IASB). This interim condensedconsolidated financial information is unaudited and has been prepared on thebasis of accounting policies consistent with those applied in the consolidatedfinancial statements for the year ended 30 June 2007. The following interpretations, issued by the International Financial ReportingInterpretations Committee (IFRIC), are effective for the first time in thecurrent financial year and have been adopted by the group with no significantimpact on its consolidated results or financial position: IFRIC 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after 1 November 2006). IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007) The following standards and interpretations, issued by the IASB or IFRIC, havenot yet been adopted by the group: Amendment to IAS 1 - Presentation of financial statements: capital disclosures(effective for annual periods beginning on or after 1 January 2007). Theamendment to IAS 1 requires additional disclosures in the Annual Report on theobjectives, policies and processes for managing capital. Appropriate additionaldisclosures will be included in the 2008 Annual Report. Amendment to IAS 23 - Borrowing costs (effective for annual periods beginning onor after 1 January 2009). The amendment to IAS 23 generally eliminates theoption to expense borrowing costs attributable to the acquisition, constructionor production of a qualifying asset as incurred and instead requires thecapitalisation of such borrowing costs as part of the cost of specific assets.The group is currently assessing the impact of the amendment on the results andnet assets of the group. IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009). IFRS 8 contains requirements for the disclosure of informationabout an entity's operating segments and also about the entity's products andservices, the geographical areas in which it operates, and its major customers.The standard is concerned only with disclosure and replaces IAS 14 - Segmentreporting. The group is currently assessing the impact this standard would haveon the presentation of its consolidated results. IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008) IFRIC 13 - Customer loyalty programmes (effective for annual periods beginningon or after 1 July 2008) IFRIC 14 - IAS 19 - The limit on a defined benefit asset, minimum fundingrequirements and their interaction (effective for annual periods beginning onor after 1 January 2008) The group does not currently believe the adoption of the interpretations wouldhave a material impact on the consolidated results or financial position of thegroup. The amendment to IAS 23, IFRIC 12, IFRIC 13 and IFRIC 14 have not yetbeen endorsed or adopted for use in the European Union. The comparative figures for the financial year ended 30 June 2007 are not thecompany's statutory accounts for that financial year. Those accounts have beenreported on by the company's auditors and delivered to the registrar ofcompanies. The report of the auditor was (i) unqualified, (ii) did not includea reference to any matters to which the auditors drew attention by way ofemphasis without qualifying their report, and (iii) did not contain a statementunder section 237(2) or (3) of the Companies Act 1985. 2. Business and geographical analyses Business analysis is presented under the categories of Diageo North America,Diageo Europe, Diageo International, Diageo Asia Pacific and Corporate,reflecting the group's management and internal reporting structure. The DiageoAsia Pacific business was established in January 2007. The results for theperiod ended 31 December 2006 have been revised for the new reporting structure. Business analysis: Six months ended Six months ended 31 December 2007 31 December 2006 Operating profit/ Operating profit/ Sales (loss) Sales (loss) £ million £ million £ million £ millionNorth America 1,546 491 1,543 486Europe 2,217 509 2,122 484International 1,277 347 1,070 298Asia Pacific 582 99 585 115 5,622 1,446 5,320 1,383Corporate 45 (32) 38 (77) 5,667 1,414 5,358 1,306 Corporate sales and costs are in respect of central costs including finance,human resources and legal as well as certain information systems, servicecentres, 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, exchange movements on shortterm inter-company trading balances and the results of Gleneagles Hotel. Geographical analysis of sales and operating profit by destination: Six months ended Six months ended 31 December 2007 31 December 2006 Operating profit Operating Sales Sales profit £ million £ million £ million £ millionNorth America 1,566 502 1,564 498Europe 2,291 484 2,197 417Asia Pacific 601 107 609 129Latin America 568 160 459 141Rest of World 641 161 529 121 5,667 1,414 5,358 1,306 Sales and operating profit by geographical destination have been statedaccording to the location of the third party customers. Certain businesses reported for internal management purposes within DiageoInternational have been reported within the appropriate market in thegeographical analysis above. Corporate sales and operating loss are principallyincurred in Europe. 31 December 30 June 31 December 2007 2007 2006Analysis of total assets: £ million £ million £ million North America 894 842 898Europe 1,576 1,063 1,300International 1,028 808 828Asia Pacific 479 406 416Moet Hennessy 1,584 1,348 1,364Corporate and other 9,626 9,489 9,600 15,187 13,956 14,406 Corporate and other total assets consist primarily of brands that arecapitalised in the balance sheet, property, plant and equipment, maturing whiskyinventories and other assets that are not directly allocated to the group'soperating segments. Weighted average exchange rates used in the translation of profit and lossaccounts were US dollar - £1 = $2.03 (2006 - £1 = $1.91) and euro - £1 = €1.43(2006 - £1 = €1.48). Exchange rates used to translate assets and liabilities atthe balance sheet date were US dollar - £1 = $1.99 (30 June 2007 - £1 = $2.01;31 December 2006 - £1 = $1.96) and euro - £1 = €1.36 (30 June 2007 - £1 = €1.48;31 December 2006 - £1 = €1.48). The group uses exchange rate transaction hedgesto mitigate the effect of exchange rate movements. The festive holiday season provides the peak period for sales. Approximately 30%of annual sales volume arises in the last three months of each calendar year. 3. Exceptional items 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. In the six months ended 31 December 2007, there was an exceptional gain of £5million on the sale of shares in Top Table. This gain is identified as apre-tax exceptional item. There were no exceptional items in the six monthsended 31 December 2006. 4. Net interest and other finance charges Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionInterest payable (196) (145)Interest receivable 43 26Market value movements on interest rate instruments (4) (1)Net interest payable (157) (120) Net finance income in respect of post employment plans 23 24Unwinding of discounts (8) (6)Other finance charges (7) - 8 18Net exchange movements on certain financial instruments (7) 4Net other finance income 1 22 5. Taxation The £354 million (2006 - £367 million) taxation charge for the six months ended31 December 2007 comprises a UK tax charge of £23 million (2006 - £55 million)and a foreign tax charge of £331 million (2006 - £312 million). 6. Inventories 31 December 30 June 31 December 2007 2007 2006 £ million £ million £ millionRaw materials and consumables 280 239 249Work in progress 18 14 16Maturing inventories 1,870 1,745 1,741Finished goods and goods for resale 527 467 468 2,695 2,465 2,474 7. Net borrowings 31 December 30 June 31 December 2007 2007 2006 £ million £ million £ millionDebt due within one year and overdrafts (1,372) (1,535) (1,279)Debt due after one year (5,154) (4,132) (4,222)Fair value of interest rate hedging instruments 29 (20) (16)Fair value of foreign currency swaps and forwards (27) (29) (24)Obligations under finance leases (11) (14) (13) (6,535) (5,730) (5,554)Less: Cash and cash equivalents 811 885 975Other liquid resources - - 25 (5,724) (4,845) (4,554) In the period ended 31 December 2007, the group issued a US $750 million globalbond repayable in January 2013 with a coupon of 5.2% and a US $1,250 millionglobal bond repayable in October 2017 with a coupon of 5.75%. A US $1,000million global bond and two US $5 million medium term notes matured and wererepaid in the period. 8. Reconciliation of movement in net borrowings Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionNet borrowings at beginning of the year (4,845) (4,082)(Decrease)/increase in net cash and cash equivalents before exchange (80) 276Cash flow from change in loans (580) (900)Change in net borrowings from cash flows (660) (624)Exchange differences (227) 159Other non-cash items 8 (7)Net borrowings at end of the year (5,724) (4,554) 9. Movements in total equity Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionTotal equity at beginning of the period 4,170 4,681Total recognised income and expense for the period 1,004 885Dividends paid to equity shareholders (523) (524)Dividends paid to minority interests (37) (22)Share trust arrangements 43 46Tax on share trust arrangements (2) 5Own shares repurchased (492) (704)Purchase of own shares for holding as treasury shares for share scheme hedging (112) (80)Acquisition of minority interest - 3Net movement in total equity (119) (391)Total equity at end of the period 4,051 4,290 Total equity at the end of the period includes gains of £60 million in respectof cumulative translation differences (30 June 2007 - gains of £42 million) and£2,361 million (30 June 2007 - £2,333 million) in respect of own shares held astreasury shares. 10. Dividends Six months ended Six months ended 31 December 2007 31 December 2006 £ million £ millionAmounts recognised as distributions to equity holders in theperiod - - Final dividend paid for the year ended 30 June 2007 of 20.15p(2006 - 19.15p) per share 523 524 An interim dividend of 13.20 pence per share for the six months ended 31December 2007 (2006 - 12.55 pence per share) was approved by the Board on 13February 2008. As this was after the balance sheet date, this dividend has notbeen included as a liability in the balance sheet at 31 December 2007. 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 (£101million) until November 2009. Including this guarantee, but net of the amountprovided in the consolidated financial information, at 31 December 2007 thegroup has given performance guarantees and indemnities to third parties of £106million. There has been no material change since 31 December 2007 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. Diageo is unable toquantify meaningfully the possible loss or range of loss to which the lawsuitmay give rise. Diageo intends to defend itself vigorously against this lawsuit. (iii) Turkish customs litigation In common with other beverage alcoholimporters, litigation is ongoing against Diageo's Turkish subsidiary in theTurkish Civil Courts in connection with the methodology used by the Turkishcustoms authorities in assessing the importation value of and duty payable onthe beverage alcohol products sold in the domestic channel in Turkey. The matterinvolves multiple cases against Diageo's Turkish subsidiary at various stages oflitigation including a group of cases under correction appeal following anadverse finding at the Turkish Supreme Court. Diageo is unable to quantifymeaningfully the possible loss or range of loss to which these cases may giverise. Diageo's Turkish subsidiary intends to defend its position vigorously. (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. Post balance sheet events On 28 January 2008 Diageo entered into an agreement to acquire Rosenblum Cellarsfor $105 million. The acquisition is subject to regulatory approval and otherconditions and is expected to complete by the end of February 2008. On 5 February 2008 Diageo entered into an agreement to form a new 50:50 companywith the Nolet family, owner of Ketel One, giving the new company the exclusiveglobal rights to market, sell and distribute the brand in perpetuity. Diageowill consolidate the new company with a minority interest. Diageo has agreed topay $900 million for a 50% equity stake in the newly formed company, which willbe based in the Netherlands. The Nolet family will have an option to sell their50% share in the new company to Diageo for $900 million plus interest in years 4or 5 after completion. If the Nolet family exercise their option to sell andshould Diageo choose not to buy, Diageo will pay $100 million and the Noletfamily may then pursue a sale of their 50% share to a third party. Thetransaction is expected to complete by the end of March 2008, subject toregulatory approvals and other conditions. STATEMENT OF DIRECTORS' RESPONSIBILITIES The directors' confirm that to the best of their knowledge: • the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed and adopted by the EU; • the interim management report includes a fair review of the information required by: (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being anindication of important events that have occurred during the first six months ofthe financial year and their impact on the condensed set of financialstatements; and a description of the principal risks and uncertainties for theremaining six months of the year; and (b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related partytransactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in therelated party transactions described in the 2007 Annual Report. The directors of Diageo plc are listed in the Diageo Annual Report for 30 June2007, with the exception of the following changes in the period: Jonathan (Jon)Symonds, CBE retired on 16 October 2007 and Philip Scott was appointed on 17October 2007. By order of the board of Diageo plc N.C. RoseChief Financial Officer13 February 2008INDEPENDENT REVIEW REPORT TO DIAGEO PLC Introduction We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 31December 2007 which comprises the condensed consolidated income statement, thecondensed consolidated statement of recognised income and expense, the condensedconsolidated balance sheet, the condensed consolidated cash flow statement andthe related explanatory notes. We have read the other information contained inthe half-yearly financial report and considered whether it contains any apparentmisstatements or material inconsistencies with the information in the condensedset of financial statements. 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 Disclosureand Transparency Rules ("the DTR") of the UK's Financial Services Authority("the UK FSA"). Our review has been undertaken so that we might state to thecompany those matters we are required to state to it in this report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the company for our review work, forthis report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the group areprepared in accordance with IFRSs as endorsed and adopted by the EU. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with IAS 34 Interim Financial Reportingas endorsed and adopted by the EU. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationconsists of making enquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance withInternational Standards on Auditing (UK and Ireland) and consequently does notenable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express anaudit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 31 December 2007 is not prepared, in allmaterial respects, in accordance with IAS 34 as endorsed and adopted by the EUand the DTR of the UK FSA. KPMG Audit PlcChartered Accountants 8 Salisbury SquareLondon, EC4Y 8BB, UK13 February 2008 ADDITIONAL INFORMATION FOR SHAREHOLDERS EXPLANATORY NOTES Definitions Unless otherwise stated, percentage movements given throughout this announcementfor volume, sales, net sales, marketing spend and operating profit are organicmovements (at level exchange rates and after adjusting for the effect ofexceptional items, acquisitions and disposals) for continuing operations.Comparisons are with the equivalent period in the last financial year. For anexplanation of organic movements please refer to 'Reconciliation to GAAPmeasures' 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, with certain pre-mixed products thatare classified as ready to drink divide by 5. Net sales are sales after deducting excise duties. Exceptional items are those that in management's judgement need to be disclosedby virtue of their size or incidence in order for the user to obtain a properunderstanding of the financial information. Such items are included within theincome statement caption to which they relate. References to ready to drink include progressive adult beverages in the UnitedStates. References to Smirnoff ready to drink include Smirnoff Ice, SmirnoffBlack Ice, Smirnoff Twisted V, Smirnoff Mule, Smirnoff Spin, Smirnoff Storm,Smirnoff Caesar, Smirnoff Caipiroska, Smirnoff Signatures, Smirnoff Source,Smirnoff Fire, Smirnoff Raw Tea and Smirnoff Cocktails. References to SmirnoffBlack Ice include Smirnoff Ice Triple Black in the United States and SmirnoffIce Double Black in Australia. Volume share is a brand's volume when compared to the volume of all brands inits segment. Value share is a brand's retail sales when compared to the retailsales of all brands in its segment. Unless otherwise stated, share refers tovalue share. Share of voice is the media spend on a particular brand whencompared to all brands in its segment. The share and share of voice datacontained in this announcement is taken from independent industry sources in themarkets in which Diageo operates. This announcement contains forward-looking statements that involve risk anduncertainty. There are a number of factors that could cause actual results anddevelopments to differ materially from those expressed or implied by theseforward-looking statements, including factors beyond Diageo's control. Pleaserefer to page 39 - '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. Certain brands formerly treated as local priority brands were classified ascategory brands and vice versa in 2007 to reflect the change in contribution ofthese brands in individual countries. All comparative figures have beenrestated. Changes to local priority brand classification These changes reflect the classification of brands to a regional basis ratherthan a single market basis. Previous classification New classificationEuropeArchers Great Britain Archers EuropeBell's Great Britain Bell's EuropeCacique Spain Cacique EuropeCardhu Spain Cardhu EuropeGordon's gin Great Britain Gordon's gin EuropeBudweiser Ireland Budweiser Europe*Carlsberg Ireland Carlsberg Europe*Harp Ireland Harp EuropeSmithwicks Ireland Smithwicks EuropeInternationalBell's South Africa Bell's InternationalBuchanan's Venezuela Buchanan's InternationalMalta Africa Malta InternationalPilsner Kenya Pilsner InternationalTusker Kenya Tusker InternationalRed Stripe Jamaica Red Stripe InternationalAsia PacificOld Parr Japan Old Parr Asia PacificDimple/Pinch Korea Dimple/Pinch Asia PacificBundaberg rum Australia Bundaberg rum Asia PacificWindsor Premier Korea Windsor Premier Asia Pacific * Distribution rights for these brands are held for the Irish market only. In North America the following changes were made to reflect the priority brandfocus of the region. Moved from local priority brands to category brands: GoldschlagerGordon's ginMyersRomana SambucaRumple Minze Moved from category brands to local priority brands: Chalone and other US wines The following brands remain local priority brands in the North America region: Buchanan'sCrown RoyalSeagram's 7 CrownSeagram's VOBeaulieu VineyardSterling Vineyards Reconciliation to GAAP measures (i) Organic movement Organic movement in volume, sales, net sales, operating profit, operating marginand basic earnings per share are measures not specifically used in theconsolidated financial statements themselves (non-GAAP measures). Theperformance of the group is discussed using these measures. In the discussion of the performance of the business, certain information ispresented using sterling amounts on a constant currency basis. This strips outthe effect of exchange rate movements and enables an understanding of theunderlying performance of the market that is most closely influenced by theactions of that market's management. The risk from exchange rate movement ismanaged centrally and is not a factor over which local managers have anycontrol. Acquisitions, disposals and exceptional items also impact the reportedperformance and therefore the reported movement in any period in which theyarise. Management adjusts for the impact of such transactions in assessing theperformance of the underlying business. The underlying performance on a constant currency basis and excluding the impactof acquisitions, disposals and exceptional items is referred to as 'organic'performance. Organic movement calculations enable the reader to focus on theperformance of the business which is common to both periods. Organic movement in volume, sales, net sales, operating profit and operatingmargin Diageo's strategic planning and budgeting process is based on organic movementin volume, sales, net sales, operating profit and operating margin, and thesemeasures closely reflect the way in which operating targets are defined andperformance is monitored by the group's management. Therefore organic movementmeasures most closely reflect the way in which the business is managed. These measures are chosen for planning, budgeting, reporting and incentivepurposes since they represent those measures which local managers are mostdirectly able to influence and they enable consideration of the underlyingbusiness performance without the distortion caused by fluctuating exchangerates, acquisitions, disposals and exceptional items. 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 replacements for, the comparableGAAP measures. The organic movement calculations for volume, sales, net sales and operatingprofit for the six months ended 31 December 2007 were as follows: 1. Volume (1)(a)(b) 2006 Organic Organic units movement 2007 movement million units million units million % North America 26.5 0.7 27.2 3 Europe 23.0 0.7 23.7 3 International 19.5 1.4 20.9 7 Asia Pacific 6.7 0.4 7.1 6Total 75.7 3.2 78.9 4 2. Sales (a)(b) Transfers(2) Organic 2007 Organic 2006 and movement movement Reported Exchange(3) disposals Reported £ million £ million £ million £ million £ million % North America 1,543 (78) (4) 85 1,546 6 Europe 2,122 39 (1) 57 2,217 3 International 1,070 20 1 186 1,277 17 Asia Pacific 585 7 - (10) 582 (2) Corporate 38 - - 7 45 19Total sales 5,358 (12) (4) 325 5,667 6 3. Net sales (a)(b) Transfers(2) Organic 2007 Organic 2006 and movement movement Reported Exchange(3) disposals Reported £ million £ million £ million £ million £ million % North America 1,313 (65) (4) 77 1,321 6 Europe 1,357 28 (1) 49 1,433 4 International 884 23 1 142 1,050 16 Asia Pacific 430 2 - 6 438 1 Corporate 38 - - 7 45 19Total net sales 4,022 (12) (4) 281 4,287 7Excise duties 1,336 - - 44 1,380Total sales 5,358 (12) (4) 325 5,667 4. Operating profit (a)(b) Transfers(2) Organic 2007 Organic 2006 movement movement Reported Exchange(3) Reported £ million £ million £ million £ million £ million % North America 486 (25) - 30 491 7 Europe 484 11 3 11 509 2 International 298 (4) (6) 59 347 20 Asia Pacific 115 - (3) (13) 99 (12) Corporate (77) 5 6 34 (32) 52Total 1,306 (13) - 121 1,414 9 Notes - Information in respect of the current period (1) Differences between the reported volume movements and organic volumemovements are due to acquisitions and disposals. (2) Transfers represent the movement between operating units of certainactivities, the most significant of which were the reallocation of certain netoverheads from corporate to the regions. Transfers reduced restated prior yearoperating profit for International and Asia Pacific by £6 million and £3 millionrespectively and reduced net costs in Europe and Corporate by £3 million and £6million respectively. (3) The exchange adjustments for sales, net sales and operating profit areprincipally in respect of the US dollar and the euro. Notes - Information relating to the organic movement calculations a) The organic movement percentage is the amount in the columnheaded 'Organic movement' in the tables above expressed as a percentage of theaggregate of the columns headed 2006 Reported, the column headed Exchange andthe amounts in respect of transfers (see note (2) above) and disposals includedin the column headed Transfers and disposals. The inclusion of the column headedExchange in the organic movement calculation reflects the adjustment to excludethe effect of exchange rate movements by recalculating the prior period resultsas if they had been generated at the current period's exchange rates. Organicmovement percentages are calculated as the organic movement amount in £ million,expressed as the percentage of the prior period results at current year exchangerates and after adjusting for transfers and disposals. The basis of calculationmeans that the results used to measure organic movement for a given period willbe adjusted when used to measure organic movement in the subsequent period. b) Where a business, brand, brand distribution right or agency agreementwas disposed of, or terminated, in the current period, the group, in organicmovement calculations, adjusts the results for the comparable prior period toexclude the amount the group earned in that period that it could not have earnedin the current period (i.e. the period between the date in the prior period,equivalent to the date of the disposal in the current period, and the end of theprior period). As a result, the organic movement numbers reflect only comparableperformance. Similarly, if a business was disposed of part way through theequivalent prior period then its contribution would be completely excluded fromthat prior period's performance in the organic movement calculation, since thegroup recognised no contribution from that business in the current period. Inthe calculation of operating profit the overheads included in disposals wereonly those directly attributable to the businesses disposed, and do not resultfrom subjective judgements of management. For acquisitions, a similar adjustmentis made in the organic movement calculations. For acquisitions subsequent to theend of the equivalent prior period, the post acquisition results in the currentperiod are excluded from the organic movement calculations. For acquisitions inthe prior period, post acquisition results are included in full in the priorperiod but are only included from the anniversary of the acquisition date in thecurrent period. c) Organic movement in operating margin is the difference between the2007 reported operating margin (operating profit excluding exceptional itemsexpressed as a percentage of sales) and an operating margin where the amountsfor each of sales and operating profit are the aggregate of those captions inthe columns headed 2006 Reported, the column headed Exchange and the amounts inrespect of transfers (see note (2) above) and disposals included in the columnheaded Transfers and disposals. Organic movement in operating margin iscalculated as the movement amount in margin percentage, expressed in basispoints between the operating margin for the prior period results at current yearexchange rates and after adjusting for transfers and disposals and the operatingmargin for the current period results. The basis of calculation means that theresults used to measure organic movement for a given period will be adjustedwhen used to measure organic movement in the subsequent period. Underlying movement in earnings per share The group's management believes basic earnings per share on an underlyingmovement basis provides valuable additional information for users of thefinancial statements in understanding the group's overall performance. Thegroup's management believes that the comparison of movements on both a reportedand underlying basis provides information as to the individual components of themovement in basic earnings per share being: the impact of exceptional items,fluctuating exchange rates, acquisitions and disposals arising in the period andthe application of an underlying effective tax rate. These measures should beviewed as complementary to, and not a replacement for, the comparable GAAPmeasures such as basic and diluted earnings per share and reported movementstherein. These GAAP measures reflect all of the factors which impact on thebusiness. The underlying movement calculation in earnings per share for the period ended31 December 2007 was as follows: Pence per share (4) Reported basic eps for six months ended 31 December 2006 32.8Tax adjustment effective underlying tax rate 26% (3) 1.1Basic eps before exceptional items and after tax equalisation for six months ended 31 December 2006 33.9Exchange (2) (d) (0.3)Adjusted basic eps six months ended 31 December 2006 33.6 Reported basic eps for six months ended 31 December 2007 37.6Exceptional items (1) (0.1)Basic eps before exceptional items for six months ended 31 December 2007 37.5Exchange (d) 0.1Adjusted basic eps for six months ended 31 December 2007 37.6 Reported basic eps movement amount 4.8Underlying movement amount (after impact of exchange) (c) 4.0Reported basic eps growth 15%Underlying growth (c) 12% Notes - Information relating to the current period 1) The exceptional item in the six months ended 31 December 2007 wasthe gain on sale of a business. There were no exceptional items in the sixmonths ended 31 December 2006. 2) Exchange - the exchange adjustments for operating profit, netfinance charges and taxation are principally in respect of the US dollar and theeuro. Transaction exchange adjustments are taxed at the underlying effectivetax rate for the period. 3) Tax adjustment - the impact of adjusting the group's prior yearreported tax rate on operating profit from continuing businesses to the currentyear underlying effective tax rate on profit from continuing businesses beforeexceptional items (see (v) below). 4) All amounts are derived from amounts in £ million divided by theweighted average number of shares in issue for the period ended 31 December 2007of 2,590 million (2006 - 2,725 million). Notes - Information relating to the organic movement calculations a) Where a business, brand, brand distribution right or agencyagreement or investment was disposed of, or terminated, in the current period,the group, in underlying movement calculations, adjusts the profit for theperiod attributable to equity shareholders for the comparable prior period toexclude the following: i) the amount the group earned in that period that itcould not have earned in the current period (i.e. the period between the date inthe prior period, equivalent to the date of the disposal in the current period,and the end of the prior period), ii) a capital return in respect of thereduction in interest charge had the disposal proceeds been used entirely toreduce borrowings, and iii) taxation at the rate applying in the jurisdiction inwhich the asset or business disposed was domiciled. As a result, the underlyingmovement numbers reflect only comparable performance. Similarly, if a businessor investment asset was disposed of part-way through the equivalent prior periodthen its impact on the profit for the year attributable to equity shareholders(i.e. after adjustment for a capital return from use of the proceeds of thedisposal to reduce borrowings and tax at the rate applying in the jurisdictionin which the asset or business disposed was taxed) would be excluded from thatprior period's performance in the underlying movement calculation, since thegroup 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, inunderlying movement calculations the group adjusts the profit for the currentperiod attributable to equity shareholders to exclude the following: i) theamount the group earned in the current period that it could not have earned inthe prior period, ii) a capital charge in respect of the increase in interestcharge had the acquisition been funded entirely by an increase in borrowings,and iii) taxation at the rate applying in the jurisdiction in which the businessacquired is domiciled. As a result, the underlying movement numbers reflectonly comparable performance. Similarly, if a business or investment asset wasacquired part way through the equivalent prior period then its impact on theprofit for the year attributable to equity shareholders (i.e. after adjustmentfor a capital charge for the funding of the acquisition and tax at the rateapplying in the jurisdiction in which the acquired business is taxed) would beadjusted only to include the results from the anniversary of the acquisition inthe current period's performance in the underlying movement calculation, sincethe group recognised a full period's contribution from that business in thecurrent period. c) Underlying movement percentages for basic earnings per share arecalculated as the underlying movement amount in pence (p), expressed as thepercentage of the prior period results at current year exchange rates, and afteradjusting for exceptional items, tax equalisation and acquisitions anddisposals. The basis of calculation means that the results used to measureunderlying movement for a given period will be adjusted when used to measureunderlying movement in the subsequent period. d) The exchange effects of IAS 21 in respect of short term inter-companyfunding balances and the impact of IAS 39 as recognised in other finance charges/ income are removed from both the current and prior period as part of theunderlying movement calculation. (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, are in respect ofthe purchase and disposal of subsidiaries, associates and businesses. Thegroup's management regards the purchase and disposal of property, plant andequipment as ultimately non-discretionary since ongoing investment in plant andmachinery is required to support the day-to-day operations, whereas purchasesand disposals of businesses are discretionary. However, free cash flow does notnecessarily reflect all amounts that the group either has a constructive orlegal obligation to incur. Where appropriate, separate discussion is given forthe impacts of acquisitions and disposals of businesses, equity dividends andpurchase of own shares - each of which arises from decisions that areindependent from the running 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 applying the underlying effectivetax rate for the period stated before exceptional items and interest. Averagetotal invested capital is calculated using the average derived from theconsolidated balance sheets at the beginning and the end of the period. Capitalemployed comprises net assets for the period, excluding post employment benefitliabilities (net of deferred tax) and net borrowings. This average capitalemployed is then aggregated with the average restructuring and integration costsnet of tax, which have been charged to exceptional items, and goodwill writtenoff to reserves at 1 July 2004, the date of transition to IFRS, to obtain theaverage total invested capital. Calculations for the return on average total invested capital for the six monthsended 31 December 2007 and 31 December 2006 were as follows: 2007 2006 £ million £ millionOperating profit 1,414 1,306Associates after interest and taxation 105 91Tax at the underlying effective tax rate of 26% (2006 - 25%) (395) (349) 1,124 1,048 Average net assets (excluding net post employment liabilities) 4,386 5,033Average net borrowings 5,285 4,318Average integration costs (net of tax) 931 931Average goodwill 1,562 1,562Average total invested capital 12,164 11,844 Return on average total invested capital 18.5% 17.7% (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 2007 and31 December 2006 were as follows: 2007 2006 £ million £ millionAverage total invested capital (see (iii) above) 12,164 11,844 Operating profit 1,414 1,306Associates after interest and taxation 105 91Tax at the underlying effective tax rate of 26% (2006 - 25%) (395) (349) 1,124 1,048Capital charge at 9% of average total invested capital (547) (533)Economic profit 577 515 (v) Underlying effective tax rate The underlying effective tax rate is a non-GAAP measure that reflects theadjusted tax charge on profit from continuing businesses before exceptionalitems as a percentage of profit from continuing businesses before exceptionalitems. The underlying effective tax rate is also used by management for theirown planning, budgeting, reporting and incentive purposes since it providesinformation on those elements of performance which management is most directlyable to influence. The group's management believe the measure assists users of the financialstatements in understanding the group's effective tax rate as it reflects thetax arising on the profits from the ongoing business. The components of the reported tax charge which do not form part of the adjustedtax charge, as defined by the group's management, relate to tax on itemsreported as exceptional, movement on deferred tax assets arising from intragroupreorganisations which are due to changes in estimates in expected futureutilisation, any other tax charge or credit that arises from intra groupreorganisations and items which are offset by credits or debits in discontinuedoperations. In the period ended 31 December 2007, there was no difference between thereported tax rate of 26% and the underlying tax rate. The reported tax rate forthe period ended 31 December 2006 was 28% and the underlying tax rate was 25%. Principal risks The group's aim is to manage risk and control its business and financialactivities cost-effectively and in a manner that enables it to: exploitprofitable business opportunities in a disciplined way; avoid or reduce risksthat can cause loss, reputational damage or business failure; supportoperational effectiveness; and enhance resilience to external events. To achievethis, an ongoing process has been established for identifying, evaluating andmanaging risks faced by the group. Details of the key risks particular to thegroup can be found in the 2007 Annual Report, some or all of which have thepotential to impact our results or financial position during the remaining sixmonths of the year. Cautionary statement concerning forward-looking statements This announcement contains "forward looking statements" within the meaning of 'Safe Harbor' provisions of the United States Private Securities LitigationReform Act of 1995 with respect to the financial condition, results ofoperations and business of Diageo and certain of the plans and objectives ofDiageo with respect to and outlook for these items. In particular, allstatements that express forecasts, expectations and projections with respect toand outlook for future matters, including trends in results of operations,margins, growth rates, overall market trends, the impact of interest or exchangerates, the availability of financing to Diageo, anticipated cost savings orsynergies and the completion of Diageo's strategic transactions, areforward-looking statements. By their nature, forward-looking statements involverisk and uncertainty because they relate to events and depend on circumstancesthat will occur in the future. There are a number of factors that could causeactual results and developments to differ materially from those expressed orimplied by these forward-looking statements, including factors that are outsideDiageo's control. These factors include, but are not limited to: • increased competitive product and pricing pressures and unanticipated actions by competitors that could impact Diageo's market share, increase expenses and hinder growth potential; • the effects of future business combinations, partnerships, acquisitions or disposals, existing or future, and the ability to realise expected synergies and/or costs savings; • Diageo's ability to complete existing or future acquisitions and disposals; • legal and regulatory developments, including changes in regulations regarding consumption of, or advertising for, beverage alcohol, changes in tax law (including tax rates) or accounting standards, changes in taxation requirements, such as the impact of excise tax increases with respect to the business, and changes in environmental laws, health regulations and the laws governing pensions; • developments in litigation or any similar proceedings directed at the drinks and spirits industry; • developments in the Colombian and Turkish 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 spend, promotional and innovation expenditure by Diageo and its competitors; • renewal of distribution or licence manufacturing rights on favourable terms when they expire; • termination of existing distribution or licence manufacturing 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 2007 filed with the United StatesSecurities and Exchange Commission (SEC). Any forward-looking statements made byor on behalf of Diageo speak only as of the date they are made. Diageo does notundertake to update forward-looking statements to reflect any changes inDiageo's expectations with regard thereto or any changes in events, conditionsor circumstances on which any such statement is based. The reader should,however, consult any additional disclosures that Diageo may make in anydocuments which it publishes and/or files with the SEC. All readers, whereversituated, should take note of these disclosures. 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 announcement includes disclosure about Diageo's debt rating. A securityrating is not a recommendation to buy, sell or hold securities and may besubject to revision or withdrawal at any time by the assigning ratingorganisation. Each rating should be evaluated independently of any otherrating. Past performance cannot be relied upon as a guide to future performance. For further information Analysts and Investors Presentation At 09.30 (GMT) on Thursday 14 February, Paul Walsh, CEO and Nick Rose, CFO willpresent the interim results for analysts and investors. The presentation and Q&A session will be webcast only and will be available toview at Diageo.com. The presentation slides and transcript will be availablefor download from 08.45 (GMT). An archived video and podcast of thepresentation and Q&A session will also be made available later that day. If you would like to ask a question during the live Q&A session, please use thefollowing dial-in numbers: 0800 028 1277 UK Toll free 1888 935 4577 USA Toll free 900 974 419 Spain Toll free 0800 020 0905 Netherlands Toll free 1800 882 157 Ireland Toll free 0800 000 5462 Germany Toll free 0800 942 823 France Toll free Please quote confirmation code: 2595476 A transcript of the Q&A session will be available for download from Diageo.comon 15 February. Conference Call Diageo management will host a conference call for analysts and investors at15.00 (GMT) on Thursday 14 February. To participate, please use the followingdial-in numbers: 0800 901 2160 UK Toll free 1866 602 0258 USA Toll free 800 099 823 Spain Toll free 0800 020 3464 Netherlands Toll free 1800 992 779 Ireland Toll free 0800 101 2633 Germany Toll free 0805 770 153 France Toll free Please quote confirmation code: 6715467 Investor enquiries to: Darren Jones +44 (0) 20 7927 4223 Sarah Paul +44 (0) 20 7927 4326US investor enquiries to: Kelly Padgett 001 202 715 1110 [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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