Diageo Announces Further Restructuring and Updates on Existing Initiatives

It is now estimated that this restructuring programme will result in a year on year cost reduction totaling £120 million in the year ending 30 June 2010 which will benefit both cost of goods sold and overheads.

02/07/09 Diageo has identified further restructuring opportunities which are expected to give rise to cost savings of approximately £40 million per annum in the year ending 30 June 2012. In addition the cost of production of maturing stocks will be reduced by about £10 million per annum in the year ending 30 June 2011. This will initially be reflected in the value of inventory and will not be reflected in reduced cost of goods sold until future years. Related restructuring costs of approximately £120 million will be taken as an exceptional charge in the year ending 30 June 2010. The cash cost of this exceptional charge is estimated to be £90 million which will largely be incurred in the year ending 30 June 2010.

As part of these restructuring projects, changes to supply operations in Scotland have been announced including:
• The consolidation of packaging operations from three sites, at Kilmarnock, Glasgow and Fife, to two sites and the closure of the packaging plant at Kilmarnock.
• The closure of the Port Dundas distillery and the adjacent cooperage.
• The outsourcing of certain warehousing operations.

The resulting plans – backed by a £100 million investment – will mean an overall reduction of up to 500 jobs in Scotland. The closure of Diageo sites in Kilmarnock and at Port Dundas in Glasgow will lead to the loss of up to 900 jobs over the next two years while around 400 new jobs will be created through the expansion of a packaging plant in Fife. A new coopering centre will be created in Clackmannanshire. There would be no compulsory redundancies at impacted sites for 12 months.

In February 2009 Diageo announced a restructuring programme which was estimated to reduce costs by £100 million in the year ending 30 June 2010. The related restructuring charge was estimated to be £200 million. It is now estimated that this restructuring programme will result in a year on year cost reduction totaling £120 million in the year ending 30 June 2010 which will benefit both cost of goods sold and overheads. The associated cost will result in an exceptional charge of approximately £180 million in the year ended 30 June 2009 and a further exceptional charge of £90 million in the year ending 30 June 2010.

As previously announced Diageo is carrying out a review of its plans for the restructuring of brewing operations in Ireland. The revised proposal will have substantially the same scope as the original proposal, namely the restructuring of all three Diageo breweries in Ireland and is expected to yield cost savings at least equal to the original proposal. An exceptional charge of £78 million was made in respect of the restructuring of brewing operations in Ireland in the year ended 30 June 2008. There will be further exceptional charges of approximately £20 million in the year ended 30 June 2009 and a similar amount in the year ending 30 June 2010.

In summary Diageo expects to generate cost savings from restructuring of £120 million in the financial year ending 30 June 2010 and an additional £40 million in the financial year ending 30 June 2012. Additional cost savings will accrue from the financial year ending 30 June 2014 in respect of the restructuring of brewing operations in Ireland. Lower inventory costs for maturing stocks will provide additional cost savings but over a longer timescale.

In respect of these cost saving programmes Diageo expects exceptional charges in respect of restructuring of £200 million in the year ended 30 June 2009 (being £180 million in respect of the restructuring programme announced in February 2009 and £20 million in respect of the restructuring of brewing operations in Ireland) and of £210 million in the year ending 30 June 2010 (being £120 million in respect of the restructuring programme announced and £90 million in respect of the restructuring programme announced in February 2009).