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UPDATE 4-Diageo cuts target as sees recovery only by 2010

Published 08/27/2009, 10:26 AM

* Diageo see recovery in 2010 at the earliest

* Diageo annual basis EPS up 10 percent at 65.2p vs f'cast 64.6p

* Underlying sales flat, operating profit up 4 percent

* Targets operating profit growth in low single digits

* Shares dip over 4 percent

(Adds Chief Exec comments, analysts, updates shares)

By David Jones

LONDON, Aug 27 (Reuters) - Diageo Plc, the world's biggest spirits group, warned recovery would come in 2010 at the earliest, prompting it to cut its growth target after meeting forecasts with a 10 percent rise in annual earnings.

The London-based maker of Smirnoff vodka, Johnnie Walker whisky and Guinness beer sounded a note of caution on Thursday, with uncertainty driven by weak European markets such as Spain, Ireland and Russia, which sent Diageo shares sharply down.

Chief Executive Paul Walsh said he expected trading to stabilise in the last six months of 2009, but the underlying trends were positive as he hoped for recovery in 2010.

"In the second half of our fiscal year (Jan-June 2010), we would hope to start to expect real fundamental improvement to put us in a strong position for fiscal 2011," Walsh told a news conference after annual results.

He added that although the global economy appeared to be stabilising, there was still uncertainty as to the sustainability and pace of any recovery, and so had no plans to restart its share buyback programme.

Diageo shares dipped as much as 4.9 percent to 948 pence before recovering some losses. At 1400 GMT they traded down 4.3 percent at 954p, the second-biggest loser in the FTSE 100 index dragging other spirits groups lower.

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Shares in French rival Pernod Ricard dipped 3.8 percent to 53 euros, while in the U.S. Fortune Brands was off 1.8 percent and Brown Forman down 0.2 percent.

"We are also taking a cautious view, but we believe that with destocking trends abating, the worst may be behind the spirits companies, and Diageo is best-positioned for a rebound in sales trends," said Credit Suisse analyst Anthony Bucalo.

The group posted basic earnings for the year to end-June of 65.2 pence a share in line with a range of 57.6 to 72.6 and a consensus of 64.6p in a Reuters survey of seven analysts, while it raised its final dividend 5 percent to 22.2p.

The British group's annual underlying sales were flat, and its volumes slipped 4 percent, but the weak pound and cost cutting pushed operating profit up 4 percent, at the bottom of its 4 to 6 percent growth range.

Heineken, the world's third-largest brewer, also published results a day earlier showing profit had been supported by cost cuts and price rises despite lower sales volumes.

CUTS TARGET

Diageo, which cut its operating growth target from 7 to 9 percent only in February due to weak European demand and destocking in the U.S., again reset the target to a low single digit percentage for the current year to June 2010.

Its sales growth shuddered to a halt then tipped downwards over the year as the recession hit drinkers, and profit growth slowed as consumers turned to cheaper priced drinks.

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Finance Director Nick Rose said prices would rise this year only by around 1 percent in a bid to protect volumes, which fell 4 percent last year. He hoped this action plus more marketing spending and innovation would see volumes flat this year.

Diageo said its biggest market in North America was still very resilient, with the destocking seen earlier this year now largely over. Earlier this week, the world's biggest brewer Anheuser-Busch InBev NV said it planned to raise beer prices in the U.S., reflecting a more robust economy.

Diageo shares have underperformed the FTSE 100 by 6 percent so far this year, but have risen from a low of 727p in March to top 10 pounds earlier this week. They have outperformed rival Pernod by 7 percent in 2009.

The French group, No 2 in the spirits market with brands such as Absolut vodka and Chivas Regal whisky, said in July it expected flat sales in its year to June 2009, with operating profits at the lower end of its 3-5 percent growth range. It reports full results next week on Sept. 3. (Editing by Will Waterman and Jon Loades-Carter)

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