Weak consumer demand in the economic downturn has caused Diageo to report a fall in half-year profits, but the drinks group said that a recovery is on the way.

Net profits for the six months to the end of December fell by 10% to GBP1bn (US$1.56bn), against GBP1.13bn in the same period of 2008, said the producer of Johnnie Walker Scotch whisky and Smirnoff vodka today (11 February).

Like-for-like sales fell by 2%, as a steeper decline in the first quarter was tempered by stronger sales in the second. One a reported basis, net sales rose by 3% to GBP5.2bn.

“As we had anticipated this was a challenging six months,” said Diageo CEO Walsh, adding that the firm has reduced stock in all regions to adapt to lower demand. Consumers have also traded down on price, he said.

Among the firm’s priority brands, only Johnnie Walker showed volume growth for the half-year, up 3% on a reported basis, but like-for-like net sales fell 3%. Only Guinness showed a rise in like-for-like sales, up 2%.

Operating profits fell by 6% in the half-year, to GBP1.53bn from GBP1.63bn.

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But, Diageo maintained its full-year guidance of a low single digit rise in like-for-like operating profits.

“We are in the early stages of recovery with more encouraging signs in the emerging and developing markets,” said Walsh.

Analysts expect the firm’s second six months to show more momentum as economic conditions improve slightly and the group cycles a tough second half of fiscal 2009.

Diageo’s share price fell 2% on the London Stock Exchange this morning.

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