The world's largest spirits and wine group Diageo today reported profit before tax and exceptional items for the first half of 2004 of £1,297m, compared to £1,274m last year.

On a reported basis, turnover decreased by £273m (5%) from £5,333m, hit by the sale of Burger King. But for premium drinks, now the sole focus of the business, turnover increased by £206m (4%).

The weakening of the US dollar was offset by the strengthening of the euro, and therefore turnover was broadly unaffected by the impact of exchange rate movements. The effect of disposals and the termination of certain distribution rights reduced turnover by £72 million in premium drinks. 

Paul Walsh, chief executive of Diageo, said: "Diageo, focused as it is now on premium drinks, continues to deliver growth with improvement in key measures of performance in this first half. 

"Further mix improvement, combined with good volume growth, has led to a 6% organic increase in both net sales (after deducting excise duties) and operating profit at a time when investment in marketing has again increased ahead of net sales growth and we have absorbed restructuring costs.  Looking forward the trends that we have seen in the first half are expected to continue despite the uneven recovery in Europe, although the current exchange rate volatility will impact reported results.

"These results also reflect our financial strength; return on invested capital is up 3 percentage points to 17.6%, free cash flow is up £257 million in the period, the interim dividend is up 7% and we have returned a further £256 million to shareholders.

"Diageo is committed to creating shareholder value even in uncertain times. These results demonstrate our ability to do so," he said.

On a reported basis total volume increased 2% from 65.8 million equivalent units to 66.9 million equivalent units. On the same basis, net sales (after deducting excise duties) increased 5% from £3,628m to £3,795m.

Of the company's priority brands, Smirnoff volume, excluding ready to drink, was up 4% and net sales (after deducting excise duties) were up 7%. Captain Morgan volume, excluding ready to drink, was up 7% and net sales (after deducting excise duties) were up 10%.

Volume growth of the global priority brands, excluding ready to drink, was 5%, compared to 3% in the six months ended 31 December 2002. Net sales growth of the global priority brands after deducting excise duties and excluding ready to drink, was 7%, compared to 5% in the six months ended 31 December 2002.

However, ready to drink products slowed, with volume down 4%, as volume declined in the UK and the roll-out to new markets was completed.