By Lea Pachta

Diageo, the producer of Guinness, Smirnoff vodka and Cuervo tequila announced a 10% fall in net-income in its first fiscal half due to lower US sales.

The results were lower than expected but Diageo said there were signs of recovery in the developing markets.

Net profits declined to £1.02 billion ($1.59 billion) from £1.13 billion the previous year. Sales excluding excise duties rose by 3% to £5.21 billion, but underlying organic sales were down by 2%.

Although sales were down by 5% in Europe, Diageo saw growth in the UK and Southern Europe, in particular in Greece and Turkey.

The firm advertised the celebration of 250 years of Guinness, which helped the brand gain market share in Britain and Ireland in the six months to December 31st.

The firm said there has been a change in consumer behaviour in many countries including Russia, with buyers moving towards lower-end, cheaper brands.

Paul Walsh, Chief Executive of Diageo, commenting on the six months ended 31 December 2009 said:

“As we had anticipated this was a challenging six months. The economic and consumer environment remained weak in many markets and we faced a difficult comparison against Q1 last year yet the second quarter did show a return to growth. In addition we reduced stock levels in all regions.

While this had a negative impact on volume growth in the half, it positions us appropriately for the future. While pricing opportunities have been limited and the performance of our standard priced brands has been stronger than that of our premium priced brands, our diversity, through category and brand range and our wide geographic reach, means that overall price/mix has been maintained.

“Our category leading brands, the consistency and scale of our marketing investment, successful innovation and our industry leading sales capabilities have led to share gains for Diageo’s priority brands in key markets.

“We are in the early stages of recovery with more encouraging signs in the emerging and developing markets. However, in a difficult environment this half we have continued to improve the efficiency of our functions, reduced our cost base, strengthened our relationships with our customers and generated significant free cash flow which has again enhanced our financial strength. Focused marketing spend by category and geography continues to build our brand equities.

“We are maintaining our guidance for low single digit organic operating profit growth for the full year. At a time when future economic and consumer trends continue to be difficult to forecast, the steps we have taken have created a stronger business which will position the company well.”