Trading Statement

Diageo PLC
07 July 2005



                                                                     7 July 2005



Diageo issues statement in respect of year ended 30 June 2005





Diageo will announce preliminary results for the year ended 30 June 2005 on 1
September 2005 and has today issued the following statement.



Summary



The sales trends outlined in the interim results in February continued to impact
trading in the second half of the financial year. Volume growth and mix
improvement slowed as the result of tougher trading in Europe and a slow down in
the ready to drink segment in the US.  However, organic operating profit growth
for the year ended 30 June 2005 is expected to be in line with the guidance of
6% given at the time of the interim results. Looking forward to the new
financial year Diageo believes that organic growth in volume will be similar to
that achieved in the year just ended while a renewed focus on achieving price
increases together with the benefits of the planned cost efficiency programme
will deliver continued improvement in operating margin.





Diageo makes annual payments to the Thalidomide Trust (£7.2 million in the year
ended 30 June 2005) and has made an offer in respect of future payments. For the
year ended 30 June 2005 Diageo will make an exceptional operating charge of
about £150 million in respect of future payments to the Trust. An exceptional
credit may arise from the release of the provisions held in respect of
commitments to the Burger King Corporation.



Full year outlook for net sales



Spirits growth was led by the performance of the global priority brands which
have continued to grow volume by around 4%. The more difficult trading
environment in beer has however led to a slow down in the performance of
Diageo's beer brands.  Diageo's wine brands continue to grow strongly in their
key markets of the US and  GB.



In North America Diageo's spirits brands, particularly the global priority
brands and Crown Royal, continued to outperform the market. Overall mix
improvement however is lower partly as a result of the decline in ready to drink
sales in the second half. The growth of Smirnoff RTDs has been affected by the
comparison against the prior period when Smirnoff Twisted V was launched.



The consumer environment throughout Europe has worsened. Net sales, which were
down 1% in the first half, are therefore likely to be down further  in the
second half. The business in Europe is beginning to benefit from operational
efficiencies and this is expected to improve operating profit performance.



Top line performance of the International business continues to be strong
following a further substantial increase in marketing investment this year.
Growth has been led by the strength of Diageo's business in Latin America and
strong volume growth in the developing BRIC markets partly offset by difficult
trading conditions during the year in Nigeria and Korea.





Cost reduction initiatives



Diageo has announced a number of initiatives which will drive greater cost
efficiency across the business. As expected these initiatives have given rise to
costs in the year ended 30 June 2005 of approximately £80 million. These have
been charged to operating expenses. It is anticipated that restructuring costs
amounting to some  £70 million will be incurred in the year ending 30 June 2006.
  The programme is being implemented as planned and is on track to deliver the
forecast benefits. These benefits amounted to a £22 million reduction in cost in
the year ended 30 June 2005. It is expected that the cost base will be reduced
by approximately £50 million in the year ending 30 June 2006.



Seagram synergy



The integration of the acquired Seagram businesses was completed during the year
and incremental synergy of £24 million was achieved. There will be no
incremental synergy in the next financial year.



Interest



It is estimated that in the year ended 30 June 2005 Diageo's average debt was
approximately £3.7 billion and the closing debt was approximately £3.8 billion.
The effective interest rate for the year ended 30 June 2005  is estimated to be
approximately 4.1%. With around 50% of Diageo's debt at floating rates the rise
in short term US interest rates is expected to increase the interest charge in
the new financial year by about £25 million. Certain financing structures which
reduced interest in the year ended 30 June 2005 by approximately £10 million
were terminated and will not be replaced. In addition if Burger King Corporation
(BKC) is successfully refinanced during the new financial year the BKC
subordinated debt held by Diageo will be repaid. In the year ended 30 June 2005
interest earned on this debt amounted to £13 million.



Exchange rate movements



As previously advised adverse exchange rates are expected to impact reported
profit before exceptionals and tax for the year ended 30 June 2005 by some £80
million.  Based on current exchange rates, the adverse impact of exchange rate
movements on profit before exceptionals and tax in the year ending 30 June 2006
is estimated to be £50 million.



Return of capital to shareholders



Diageo has returned a further £710 million to shareholders in the financial year
through the repurchase of 94 million shares. The number of shares in issue at
the end of the year, excluding 86 million treasury shares, was 2,964 million.
The weighted average number of shares used to calculate eps in the year ended 30
June 2005 is expected to be 2,972 million shares. As announced on 23 June 2005,
Diageo has put in place an irrevocable, non-discretionary programme to buy back
shares during the close period which ends on 1 September 2005.



Outlook for the new financial year



Looking forward to the new financial year Diageo expects that organic growth in
volume will be similar to that achieved in the year ended 30 June 2005. Diageo
will be looking to achieve a higher level of price increase in the coming year
and over the next few weeks price increases will be announced on a number of
brands in North America. Diageo believes that this renewed focus on pricing
together with the positive impact of the cost efficiency programme will lead to
further year on year improvement in operating margin.



Conversion to International Financial Reporting Standards  ('IFRS')



The preliminary results for the year ended 30 June 2005 will be presented under
UK GAAP. The income statement, balance sheet and cash flow will also be
available under the relevant IFRS. The IFRS restatement will include
explanations of differences to the corresponding UK GAAP reporting. It is not
expected that the impact of the application of IFRS will differ from that
outlined at the time of the interim results. Diageo will update the market on
the implications of IFRS for the company on the morning of 2 September 2005.



Other



Diageo holds $212.5 million of subordinated debt in the Burger King Corporation
(BKC) and provides a guarantee in respect of $750 million of senior debt and
$100 million of revolving credit facilities. Any refinancing of BKC would lead
to the termination of Diageo's guarantee and the repayment of the subordinated
debt together with accrued interest.  Diageo has balance sheet provisions
totalling $100 million in respect of residual financing obligations to BKC. A
review of the ongoing need for these provisions is being carried out in the
light of the trading performance improvement of BKC and greater clarity as to
its future financing expectations. If the provisions are not required, either in
whole or in part, they will be released to exceptional sale of business.



Diageo is in discussions with the Thalidomide Trust with respect to the payment
it makes each year to the Trust. Diageo currently makes an annual payment of
£2.8 million to the Trust although in the year ended 30 June 2005 an additional
contribution of  £4.4 million was made. Based on the current negotiations it is
expected that the future annual payment will increase to around £6.5 million per
annum. This amount will be index-linked.  The new agreement is anticipated to be
finalized by the end of the calendar year and is expected to be a final
settlement payable over the period to 2037. Consequently Diageo will make an
exceptional operating  charge of about £150 million in the year ended 30 June
2005 to cover the discounted value of future payments.



Paul Walsh, CEO of Diageo, said:



'Diageo's business model has two particular strengths: our outstanding
collection of brands with broad geographic reach and our strong financial
position. These strengths allow us to deliver top and bottom line growth
consistently, while returning the strong cash flow of this business to
shareholders in the form of growing dividends and share buybacks.



'In the year just ended we have strengthened our business in a number of ways.
In North America having completed the implementation of our new distributor
strategy we are now seeing the benefits as with each consecutive month we report
share gains. Increasingly our brands there are supported with innovative
marketing executions and line extensions. In Europe we are reorganising to face
the challenges there and create a platform from which our brands can outperform
and from which we can deliver operating profit growth. In International we
continue to invest behind our brands and this is driving strong top line growth.
Going forward we believe that our focus on achieving cost efficiencies will not
only improve our operating margin but will make our business able to respond
faster to changing environments.



'During the year we have enhanced our brand positions with targeted acquisitions
which we believe will create value for shareholders, completing the acquisition
of Ursus and the Chalone Wine Group and reaching agreement on the potential
acquisitions of Bushmills and Montana.



'There is now the potential that Burger King's existing financing facilities may
be refinanced and that we could dispose of the remaining 25 million shares we
hold in General Mills during the first half of the year. Therefore as we enter
the new financial year we have increasing confidence that we will take the final
steps of the strategic realignment we undertook to become the world leading
focused premium drinks business we are today. '









Cautionary statement concerning forward-looking statements

This document contains statements with respect to the financial condition,
results of operations and business of Diageo and certain of the plans and
objectives of Diageo with respect to these items.  These forward-looking
statements are made pursuant to the 'Safe Harbor' provisions of the US Private
Securities Litigation Reform Act of 1995.  In particular, all statements that
express forecasts, expectations and projections with respect to future matters,
including trends in results of operations, margins, growth rates, overall market
trends, the impact of interest or exchange rates, the availability of financing
to Diageo and parties or consortia who have purchased Diageo's assets, actions
of parties or consortia who have purchased Diageo's assets, anticipated cost
savings or synergy and the completion of Diageo's strategic transactions, are
forward-looking statements.  By their nature, forward-looking statements involve
risk and uncertainty because they relate to events and depend on circumstances
that will occur in the future.  There are a number of factors that could cause
actual results and developments to differ materially from those expressed or
implied by these forward-looking statements, including factors that are outside
Diageo's control.

These factors include, but are not limited to:

•         Increased competitive product and pricing pressures and unanticipated
actions by competitors that could impact Diageo's market share, increase
expenses and hinder growth potential;

•         The effects of completed or future business combinations, acquisitions
or disposals and the ability to realise expected synergy and/or costs savings;

•         Diageo's ability to complete future acquisitions and disposals;

•         The ability of Diageo to monetise its remaining stake in General
Mills;

•         Legal and regulatory developments, including changes in regulations
regarding consumption of, or advertising for, beverage alcohol, changes in
accounting standards, taxation requirements, such as the impact of excise tax
increases with respect to the premium drinks business, and environmental laws;

•         Developments in the alcohol advertising class actions  and any similar
proceedings;

•         Changes in the food industry in the United States, including increased
competition and changes in levels of consumer preferences;

•         Developments in the Colombian litigation or similar proceedings;

•         Changes in consumer preferences and tastes, demographic trends or
perception about health related issues;

•         Changes in the cost of raw materials and labour costs;

•         Changes in economic conditions in countries in which Diageo operates,
including changes in levels of consumer spending;

•         Levels of marketing and promotional expenditure by Diageo and its
competitors;

•         Renewal of distribution rights on favourable terms when they expire;

•         Termination of existing distribution rights on agency brands;

•         Technological developments that may affect the distribution of
products or impede Diageo's ability to protect its intellectual property rights;
and

•         Changes in financial and equity markets, including significant
interest rate and foreign currency rate fluctuations which may affect Diageo's
access to or increase the cost of financing or which may affect Diageo's
financial results.

All oral and written forward-looking statements made on or after the date of
this document and attributable to Diageo are expressly qualified in their
entirety by the above factors and the 'Risk Factors' contained in Diageo's
Annual Report on Form 20-F, as amended, for the year ended 30 June 2004 filed
with the U.S. Securities and Exchange Commission.

The information in this announcement does not constitute an offer to sell or an
invitation to buy shares in Diageo plc or any other invitation or inducement to
engage in investment activities.

Past performance cannot be relied upon as a guide to future performance.





ENDS



Contacts:



Investors enquiries      Catherine James  [phone]
[e-mail]

Media enquiries           Isabelle Thomas   [phone]
[e-mail]



Notes to Editor:



Diageo is the world's leading premium drinks business. With its global vision,
and local marketing focus, Diageo brings to consumers an outstanding collection
of beverage alcohol brands across the spirits, wine and beer categories
including Smirnoff, Guinness, Johnnie Walker, Baileys, J&B, Cuervo, Captain
Morgan and Tanqueray, and Beaulieu Vineyard and Sterling Vineyards wines. Diageo
trades in some 180 countries around the world and is listed on both the New York
Stock Exchange (DEO) and the London Stock Exchange (DGE). For more information
about Diageo, its people, brands and performance, visit us at www.diageo.com












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