DIAGEO, the drinks giant which produces Smirnoff Vodka and Gordons Gin, yesterday said second-half profits will be higher as margins improved and sales of its main brands rose.

The group, which was formed two years ago by the merger of Guinness and Grand Metropolitan, has been consolidating and expects to see savings of pounds 135m for the year just ended and pounds 210m in the year to June 2000.

The trading statement also revealed that despite strong demand in Spain, in Europe overall performance was impacted by adverse trading conditions in other markets such as Germany. Nonetheless, the top five brands in North America and Europe generated 5 per cent volume growth in the year.

Analysts interpreted yesterday's trading statement as a "holding statement" in line with expectations. One said: "It's a bit of a holding announcement. We don't expect to see the next leg of Diageo's profits until next year. That's when the spirits division should pull in top-line growth."

Current trading conditions revealed a mix of "pluses and minuses", he added, with conditions in Germany, Greece, Turkey, Dubai and South Africa worse than expected while the US and Spanish markets remained strong. The statement also revealed a 1 per cent increase in marketing spend in proportion to turnover, which was estimated at about pounds 50m.