Shares in Diageo where down 3.5% in early trading today, after the company unveiled flat full year results that were hit by the weakness of the US dollar.

The world's largest wine and spirits group said that although organic volumes were up 4% and organic net sales rose 6% (after deducting excise duties), operating profits in its on-going premium drinks reached only £1,911m, from £1,902m last year.

Paul Walsh, CEO said: "Diageo has again demonstrated with these results that its outstanding collection of brands and its geographic diversity is delivering improvement in the important measures of trading and financial performance.  The global priority brands have been the key driver of the improvement we have achieved in volume growth, up from 1% last year to 4% this year.

"Continued growth in North America and in other large markets such as Africa, has delivered improved sales mix and further organic operating margin expansion, building return on invested capital to 14.5%. While the strength of sterling against many currencies has cost 5 percentage points of eps growth before exceptional items, the overall quality of our trading performance is reflected in the level of free cash flow we have generated, up £24m  this year to £1.5 billion."

Walsh said that the group was reiterating the guidance it gave at the time of the July trading statement as it did not see any major changes in the trading environment. 

"Europe remains our key business challenge and North America continues to provide our biggest opportunity.  We will continue to invest in our brands and markets to capture the highest value growth opportunities for our shareholders," he added. 

Organic volume growth was driven by the continued performance of Diageo's global priority brands, volume up 5%, and improved performance on category brands, volume up 3%.  Local priority brands were flat.  Ready to drink improved, with organic volume growth of 7% as a result of the successful launch in North America of Smirnoff Twisted V.

The company said that marketing investment increased 6%, with a further 1% growth in promotional spend.  This reflected a 10% increase in spend behind brands excluding ready to drink and lower spend behind ready to drink products

Diageo said that basic EPS before exceptional items of 48.2p will be negatively impacted in the year ending 30 June 2005 by 2.5p in respect of currency movements and 3.0p in respect of the change in treatment for the investment held in General Mills from equity to investment accounting.  This gives a rebased EPS figure for the year ended 30 June 2004 of 42.7p.