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Diageo cuts target as sees recovery only by 2010

DIAGEO Plc, the world's biggest spirits group, warned recovery would come in 2010 at the earliest, prompting it to cut its growth target after it met forecasts with a 10 percent rise in annual earnings.

The London-based maker of Smirnoff vodka, Johnnie Walker whisky and Guinness beer sounded a note of caution on Thursday, with uncertainty driven by weak European markets such as Spain, Ireland and Russia, which sent Diageo shares down.

Finance Director Nick Rose said he expected trading to stay relatively weak in the last six months of 2009, with the speed of any pick-up in 2010 being critical to its performance.

"There is all to play for, and critical is the speed of the recovery in most of our markets in 2010 ... We are cautiously optimistic, but we are not shouting about green shoots as loudly as some," Rose told a results telephone briefing.

Diageo shares dipped as much as 4.6 percent to 951 pence (US$1.54) before recovering some losses. At 0840 GMT they traded down 3 percent at 966-1/2p, the second-biggest loser in the FTSE 100 index.

The group posted basic earnings for the year to end-June of 65.2 pence a share in line with a range of 57.6 to 72.6 and a consensus of 64.6p in a Reuters survey of seven analysts, while it raised its final dividend 5 percent to 22.2p.

Analyst Matthew Webb at Cazenove said he was holding his earnings and profit forecasts for the current year and added the share dip came after they had risen 7 percent since Monday.

"We would note that this guidance is being given against the backdrop of a relatively cautious view from Diageo on the outlook for the global economy," Webb added.

The British group's annual underlying sales were flat, and its volumes slipped 4 percent, but the weak pound and cost cutting pushed operating profit up 4 percent, at the bottom of its 4 to 6 percent growth range.

Heineken, the world's third-largest drinks group, also published results a day earlier showing profit had been supported by cost cuts and price rises despite lower sales volumes.


Diageo, which cut its operating growth target from 7 to 9 percent only in February due to weak European demand and destocking in the U.S., again reset the target to a low single digit percentage for the current year to June 2010.

Its sales growth shuddered to a halt then tipped downwards over the year as the recession hit drinkers, and profit growth slowed as consumers turned to cheaper priced drinks.

Rose said Diageo would keep price rises this year to only around 1 percent in a bit to protect volumes, which fell 4 percent last year. He hoped this action plus more marketing spending and product innovation would see volumes flat this year.

Diageo said its biggest market in North America was still very resilient, with the destocking seen earlier this year now largely over. Earlier this week the world's biggest brewer Anheuser-Busch InBev NV said it planned to raise beer prices in the U.S., reflecting a more robust economy.

Diageo Chief Executive Paul Walsh said though the global economy appeared to be stabilising, there was still uncertainty as to the sustainability and pace of any recovery.

Diageo shares have underperformed the FTSE 100 by 6 percent so far this year, but have risen from a low of 727p in March to close Wednesday at 996-1/2p. They have outperformed rival Pernod Ricard by 7 percent in 2009.

The French group, No 2 in the spirits market with brands such as Absolut vodka and Chivas Regal whisky, said in July it expected flat sales in its year to June 2009, with operating profits at the lower end of its 3-5 percent growth range. It reports full results next week on Sept. 3.


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