The weakness of key currencies and a tough European market contributed to Diageo today reporting a fall in profits before taxation and minority interests by 4.8% to £1,190m for the six months ended 31 December 2004. In the same period last year, the company reported profits before tax of £1,259m.

Turnover was down by £76m from £5,060m in the first half last year to  £4,984m in the first six months this year. Turnover was adversely impacted by exchange rate movements of £303m, principally arising from weakening of the US dollar

However, the strength of the US market helped drive organic growth of 3% in volumes, 5% in net sales (after deducting excise duties) and 8% in operating profit before exceptional items, for the period.

In North America, volumes grew 5%. Together with price increases and mix improvement the company delivered 8% growth in net sales (after deducting excise duties) in the region. Operating profit before exceptional items grew 12% and operating margin was up 1.1 percentage points driven by strong brand performance, lower marketing and incremental Seagram synergy of £20m, the company said.

In Europe, total volumes were up 1%, while net sales (after deducting excise duties) declined 1%.  Performance, excluding ready to drink, was stronger, with both volume and net sales (after deducting excise duties) growing 2% during the period.

Paul Walsh, the company's CEO, said: "Diageo's aim is to consistently deliver across key performance measures and in this half we have again delivered top line organic growth and margin improvement and increased return on capital.  This is the tenth consecutive set of results in which we have delivered these improvements."

The company said that its main engines for growth during the half year continued to be its global priority brands, where volume increased by a further 4%. Meanwhile its North American business saw organic operating profit is up 12%.

"Even in Europe, where the consumer environment is far more challenging, we have delivered 4% organic operating profit growth. The performance of our International business, where organic operating profit was also up 4%, reflected improving trading conditions in Latin America, partially offset by difficult trading conditions in Korea, Taiwan and Nigeria, and a 13% increase in marketing investment, said Walsh.

He continued: "We have made a good start to the year and we can maintain our full year guidance of 6% organic operating profit growth despite absorbing an increase in the cost of executing additional productivity initiatives in the second half."

On a reported basis, net sales (after deducting excise duties) reached £3,705m, down 2% on the same period last year.

Reported operating profit before exceptional items increased by £11m from £1,181m in 2003 to £1,192m for the period this year. Exchange rate movements reduced operating profit before exceptional items by £73m (mainly arising from a £57 million impact of a weakening US dollar).