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Diageo's Earnings Rise, Maintains Full-Year Target

Diageo, the world's biggest alcoholic drinks group, said it expects to hit 2008 forecasts after double-digit growth in Johnnie Walker whisky sales helped it to a 15-percent rise in first-half earnings.

London-based Diageo said Smirnoff vodka and Captain Morgan rum also managed double-digit first-half sales growth, and an advertising blitz for its Guinness beer had helped it grow sales in all key markets, including a return to growth in Britain.

Chief Executive Paul Walsh, saying he saw "no signs of a global dampening of demand" for premium drinks, told reporters its first half showed "our brands are well supported and our routes to market remain strong."

Walsh also said the euro's strengthening was offsetting ongoing dollar weakness and should mean there would be no net impact from foreign exchange at the full-year stage, after a 60 million pound ($117 million) hit in 2006/07.

With analysts raising their forecasts for Diageo, its shares were up 2.6 percent at 1,061 pence to value the company at 28 billion pounds ($55 billion).

"Crucially, Diageo reiterated organic EBIT (earnings before interest and tax) growth of 9 percent," said UBS analyst Melissa Earlam, who rates Diageo stock a "buy."

Diageo said group earnings per share rose to 37.6 pence in the six months to end-December, meeting forecasts. Pretax profit rose 5.3 percent to 1.37 billion pounds, on sales up 5.8 percent to 5.67 billion pounds.

The interim dividend was raised 5.2 percent to 13.2 pence.

US in Good Spirits

Walsh said while the improved performance was broad based, some areas were key. "Our U.S. spirits business again delivered strong top line growth," he said, adding Diageo's premium brands had not been affected by a downturn in the value market for spirits priced below $10 a bottle.

Finance director Nick Rose said the income of a typical Johnnie Walker buyer in the United States was such that they would have to see a marked reversal in their fortunes before cutting back on the two or three bottles of "an affordable luxury" they buy each year.

Diageo said in Europe it had tapped growing consumer demand for premium brands in Eastern Europe and Russia and improved its sales performance in the UK during the Christmas season.

Elsewhere, Diageo is looking to the newly affluent in emerging economies for growth, with Johnnie Walker leading the way in China and Russia, and Smirnoff doing the business in Brazil and India.

"While we continue to watch for any impact recent financial market volatility may have on broader trading conditions, we are maintaining our guidance for 9 percent organic operating profit growth for the current fiscal year," Walsh said.

Credit Suisse said: "With solid operating results, limited input cost pressure, and currency working in the group's favor for the first time in four years, we believe the share price is now likely to see outperformance as a safe defensive harbor in uncertain markets."

The bank, which rates Diageo stock an "outperform," raised its forecast for the company's 2008 earnings by 4 percent.

Last week, Diageo pulled out of the $6 billion-plus auction for Swedish vodka Absolut after buying a half stake in fast-growing Dutch rival Ketel One for $900 million.