Diageo : Interim management statement for the three months ended 30 September 2014

Performance in the three months ended 30 September 2014 was in line with expectations, with organic net sales down 1.5% and volume down 3.5%, as Diageo again drove good mix from the stronger performance of its reserve brands, up 10%.

On a reported basis, net sales declined 1.7% in the quarter as a result of the organic movement; negative foreign exchange, mainly in respect of the devaluation of the Venezuelan bolivar against the rate used in the first half last year, offset by the effect of full consolidation of United Spirits Limited (USL) from 2 July 2014; and the termination of the transitional arrangements following the disposal of Jose Cuervo.

Organic net sales growth by region:

Commentary on the quarter ended 30 September 2014:

In North America, consumer trends are broadly unchanged and the performance in the quarter reflects the comparison against a very strong first quarter last year in US Spirits & Wines, partially offset by sale of bulk stocks and a modest rise in stock levels which will be reversed in the next quarter.

Performance in Europe was impacted by declining net sales in Russia and Eastern Europe as a result of weak consumer confidence and the uncertainty arising from events in Ukraine. In Western Europe net sales declined 1%. Consumer trends across the region were broadly unchanged, however the quarter was affected by a weaker performance in Benelux, following price increases there and continued weakness in Germany which is not expected to improve until the second half.

In Africa, although Nigeria was weak, performance was strong in Diageo's Africa Regional Markets and East Africa. Underlying growth in South Africa was also good, however net sales growth was affected by the transfer of production of Smirnoff Ice Double Black Guarana to Diageo's DHN joint venture.

Latin America and Caribbean delivered a good performance in the main domestic markets, however net sales in Brazil declined in the quarter as price increases were taken in some states to align prices across the country. This short term negative impact will strengthen the long term performance of the market. The border zone business in West LAC declined as currency weakness continued, leading to both lower trade confidence and lower consumer demand.

In Asia Pacific, the weak performance in the quarter reflects the decision to reduce inventory levels in South East Asia and the continued challenging trading environment in mainland China, although organic net sales decline there has moderated to around 20% in the quarter. In contrast India and Global Travel Asia and Middle East delivered good growth.

Net assets increased £0.8 billion from £7.6 billion at 30 June 2014 to £8.4 billion at 30 September 2014, primarily as a result of the profit for the period and the full consolidation of USL, which was partly offset by the accrual for the final dividend payable in respect of the year ended 30 June 2014.

Net borrowings increased £1,997 million from £8,850 million at 30 June 2014 to £10,847 million at 30 September 2014, primarily as a result of the £1,107 million consideration paid for an additional 26% investment in USL and the consolidation of net borrowings of USL estimated at £765 million.

Exchange rate movements are estimated to adversely impact operating profit for the year ending 30 June 2015 by £95 million, with no impact on finance charges, based on current exchange rates of £1= $1.61 and £1= €1.27. This guidance excludes the impact of IAS 21 and 39. Assuming the current SICAD II exchange rate of $1= VEF49.96 (£1= VEF80.43) it is estimated that the hyperinflation charge for the year ending 30 June 2015 will be approximately £50 million.

Ivan Menezes, Chief Executive of Diageo commented:

"Consumer trends in most markets are unchanged and our first quarter performance is in line with our expectations given the prior year comparison of the performance of our US Spirits & Wines business and the destock we have implemented in South East Asia.

In North America, consumer demand for mainstream brands is still constrained by weak consumer confidence in average income households while our reserve brands and our innovations continue to perform well, as they do globally. Western Europe is now stable and I continue to expect full year performance to be flat although there will be quarterly fluctuations around that level.

Emerging markets' performance remains weak with further currency weakness in a few markets and specific geopolitical situations in some areas. However our brand performance has been strong in many markets including Turkey, East Africa, India and Colombia.

We expect full year top line growth to improve on last year's performance. Our focus on our six performance drivers continues to build our capabilities and deliver the cultural change I want to see across the business. I am confident we are on the road to realise our full potential."

For further information

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Global.press.office@diageo.com

Investor relations:
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Pier Falcione +44 (0) 208 978 4838
Colette Wright +44 (0) 208 978 1380
Angela Ryker Gallagher +44 (0) 208 978 4911
investor.relations@diageo.com

About Diageo

Diageo is a global leader in beverage alcohol with an outstanding collection of brands across spirits, beer and wine categories. These brands include Johnnie Walker, Crown Royal, J&B, Buchanan's, Windsor and Bushmills whiskies, Smirnoff, Cîroc and Ketel One vodkas, Captain Morgan, Baileys, Don Julio, Tanqueray and Guinness.

Diageo is a global company, and our products are sold in more than 180 countries around the world. The company is listed on both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO). For more information about Diageo, our people, our brands, and performance, visit us at www.diageo.com. Visit Diageo's global responsible drinking resource, www.DRINKiQ.com, for information, initiatives, and ways to share best practice.

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