Aug. 28 (Bloomberg) -- Diageo Plc, the world's largest liquor maker, had an 8.1 percent drop in second-half profit on higher costs for barley and energy and said commodity expenses will increase further in the next year.

Net income for the six months ended June 30 fell to 546 million pounds ($1 billion) from 594 million pounds a year earlier, according to full-year figures from London-based Diageo today that missed analysts' estimates. Profit gained 8.9 percent in the first half.

Chief Executive Officer Paul Walsh said in a Bloomberg Television interview that the maker of Smirnoff vodka would keep raising prices to cover expenses and build on African and Latin American expansion. Diageo, which also brews Guinness stout, raised its marketing spending 5 percent last year to maintain demand as European and U.S. consumers retrench.

``The ongoing rise in commodity costs could yet erode some of its operating margins,'' Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers, wrote in an e-mail. ``The company's outlook for 2009 is rather less bullish.''

Diageo rose 2.1 percent in London trading, as a U.S. government report showed economic growth rose faster than previously estimated, lifting markets. The distiller faces ``more challenging global economic trends,'' Walsh said in Diageo's statement today.

Business in the U.S. is ``robust,'' Chief Financial Officer Nick Rose said, adding that there was some slowing, though nothing ``catastrophic.'' He said he's more focused on ``challenges'' in Europe, particularly Spain and Ireland.

Sales Accelerate

Operating profit in fiscal 2009 will rise 7 percent to 9 percent, excluding acquisitions and currency movements, after 9 percent growth in the year ended June 30, and Diageo still expects ``double-digit'' earnings-per-share growth, Walsh said.

Full-year profit increased 2.1 percent to 1.52 billion pounds, or 58.9 pence a share, from 1.49 billion pounds, or 55 pence, a year earlier. That missed the 1.56 billion-pound average estimate of eight analysts compiled by Bloomberg. The annual results include one-time costs of 78 million pounds related to restructuring in Ireland.

Sales rose 9.9 percent in the second half to 3.8 billion pounds. That was more than 7 percent growth in the first six months. Bloomberg calculated second-half earnings by subtracting first-half profit from today's full-year results.

Input Costs

The stock gained 20.5 pence to 1,000 pence. The shares have declined 7.4 percent in 2008 after five straight years of gains. Competitor Pernod Ricard SA, which outbid Diageo in an auction for Sweden's Absolut vodka earlier this year, has fallen 21 percent in 2008.

Input costs rose by 90 million pounds last year and will increase to 150 million pounds in fiscal 2009, CFO Nick Rose said on a conference call today. The price of oil has jumped 63 percent in the past year, and wheat has increased 16 percent.

Rose said the distiller assumes that commodities won't return to the levels of the past five years as the increasing world population requires more food and energy.

Volumes rose 2 percent in North America, Europe and Asia, and increased 5 percent in so-called international markets including Latin America, according to the statement. Net sales rose 5 percent in North America, 3 percent in Europe, and 16 percent in international markets.

Heineken Speculation

Rose, the CFO, said in a phone interview that Diageo will look at potential acquisitions, though he wouldn't comment on press speculation the company may merge with Dutch brewer Heineken NV. He said the distiller isn't interested in buying a stake in India's Cobra Beer Ltd.

In March, Diageo, Heineken and Namibia Breweries Ltd. signed a joint venture to produce beer and cider in South Africa, an arrangement CEO Walsh said was ``very positive'' to date and may lead to more ventures.

Diageo expanded its premium brands this year by agreeing to pay $900 million for a half stake in Ketel One vodka. The company will continue to look at expanding brands such as Guinness and Captain Morgan rum to more markets, Rose said.

The distiller plans a final dividend of 21.15 pence a share, raising the total for the year 5 percent to 34.35 pence.

To contact the reporter on this story: Meera Bhatia in Oslo at mbhatia2@bloomberg.net.

Last Updated: August 28, 2008 12:10 EDT