Final results for year ended 31 March 2012

24 May 2012

Dairy Crest Group plc ("Dairy Crest")

Final results for year ended 31 March 2012

* Before exceptional items, amortisation of acquired intangibles and pension interest.

Financial Highlights

·; Total Revenue up 2%

o Strong growth in Foods (revenue +10%), supported by continued progress from key brands

o More focused Dairies business (revenue -2%), as action taken to improve customer mix

·; Adjusted profit before tax maintained in challenging trading conditions

·; Exceptional non-cash impairment charges in Dairies of £81.7 million leads to a reported loss

·; Key net debt to EBITDA ratio at 2.2 well within covenant of 3.5

·; Proposed final dividend up 4% at 14.7p per share, demonstrating a commitment to progressive dividend policy

Operating Highlights

·; Sales of five key brands up 11%

o Record market shares for Cathedral City and St Hubert in fourth quarter

·; Innovation driving added value sales and efficiencies

o 10% of sales now derived from products and services developed in the last three years, such as Chedds and Frijj the Incredible

o Milk&more weekly sales up to £1.2 million

·; Input cost increases of around £80 million recovered through cost savings and selling price increases

·; £22 million annualised cost savings delivered during the year, with a further £20 million identified for 2012/13

·; Business In The Community gold award reflects strong commitment to Corporate Responsibility

Strategic highlights

·; Strategic review of French Spreads business progressing

·; Decisive steps taken since year end to return Dairies business to a satisfactory level of profitability in the medium term

·; Branded food acquisition, MH Foods, widened product portfolio

Commenting on the results, Mark Allen, Chief Executive, Dairy Crest Group plc said:

"Dairy Crest's results for the year demonstrate the continued benefit of being a broadly based business. Double digit growth in our branded Spreads and Cheese businesses has offset unsatisfactory results in Dairies.

We have maintained adjusted Group profits despite facing inflationary cost pressures of around £80 million this year by making annualised cost savings of around £22 million and achieving selling price increases. This has been made possible by a programme of consistent investment in developing our key brands and building a modern, efficient supply chain.

Going forward, we will continue to take decisive strategic action and proactively shape Dairy Crest for the long-term. In March 2012 we announced a strategic review of our French spreads business, St Hubert, which is progressing and since the year end we have also announced a series of actions to restore our Dairies business to a satisfactory level of profitability in the medium term.

In the current financial year, we are seeing continued strong momentum in our Foods businesses and we expect Dairies to benefit from the decisive action we are taking and our continued discipline on costs."

For further information:

A video interview with senior Dairy Crest personnel will be available from 07:00 (UK time) from the investor section of the Group's website investor.dairycrest.co.uk. There will be an analyst and investor meeting at 10:30 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED. An audiocast of the presentation will be available from the investor section of the Group's website investor.dairycrest.co.uk later today.

Chairman's statement

In a challenging trading environment the Board is pleased that Dairy Crest's broadly based business has delivered stable pre-exceptional profits. The quality of Dairy Crest's earnings has also improved as a higher proportion of total sales and profits has been generated by the Group's branded Foods businesses.

Strategy

The Board remains determined to take proactive action to position Dairy Crest for the future, in line with our well established strategy of growing brands, driving efficiencies, improving the quality of earnings and making acquisitions and disposals which generate value for shareholders.

The strategic review of the Group's French spreads business and the proposed restructuring of the Dairies business are in line with this strategy and are right for the long term future of the Group.

The review of our French branded spreads business is evaluating all options including a potential divestment of St Hubert. A disposal would reduce Dairy Crest's debt and provide us with a number of alternatives including releasing some proceeds to shareholders, investing in our core business and making strategic acquisitions of branded dairy and chilled foods businesses in the UK.

Vision and Values

The Group's long-standing Vision and Values continue to underpin how the business is run. The Board has had to make some difficult decisions in response to the challenging environment the business faces, and our Vision and Values have provided a reliable framework within which these can be made and implemented.

Consumers come first for Dairy Crest, and understanding our consumers has ensured that we have continued to drive added value sales. We know that bringing exciting new products to market is important to both retailers and consumers and we are pleased that the investment we have made in new product development and marketing in recent years is starting to deliver accelerated results.

We also have responsibilities towards our employees and franchisees; to the dairy farmers who commit to our business by selling us all the milk from their farms; to our shareholders; and to many other individuals and groups. Balancing the interests of these is never easy, but remains a key priority for the Board.

We have recently received the results of our latest employee survey and are encouraged by the progress we have made, although there is always more to do. We have had to take some difficult decisions on staffing levels this year, and since the year end we have announced a proposal to consult on the closure of two dairies. We will do all we can to help the almost 500 employees who are affected by these proposals.

Our relationship with the dairy farmers who supply their milk to us is very important. Without them we would not have a business. During the year we have paid record prices to our dairy farmers and despite a recent reduction they remain at historically high levels - as they have to be to reflect high on-farm costs. This has encouraged many of the farmers who supply us to invest in their businesses to provide a growing milk supply and contribute to a more stable UK dairy sector. We remain committed to paying fair, market-related milk prices.

On behalf of the Board I would like to thank all of the people who work for Dairy Crest directly or indirectly for their important contribution over the past year.

Corporate responsibility

Dairy Crest is a responsible business and we aim to ensure that we align commercial and corporate responsibility strategies for the benefit of all our stakeholders. This year we are pleased to have been awarded a gold Corporate Responsibility Index rating by Business in the Community and to have been the leading new entrant into their public rating. We take a practical approach to Corporate Responsibility. For example, as part of our plan to create a more diverse workforce, rather than setting quotas for the number of women we employ at different levels in the business, we have committed to a stretching target that 90% of employees return to work for us after maternity leave.

Board changes

The Board is responsible for the long term success of the Group. To achieve this it requires the best possible mix of skills and experience.

During the year Sue Farr was appointed as a Non-executive Director and since the year end Howard Mann, our longest-serving Non-executive Director, has stepped down, having served nine years. I would like to take this opportunity to thank Howard for his important contribution and to welcome Sue to the Board.

Increased dividend recommended

The Board is recommending a final dividend of 14.7 pence per share, making a full year dividend of 20.4 pence, an increase of 4% over the previous year. This dividend is covered 2.4 times by adjusted basic earnings per share in line with our policy for dividend cover of 2.0 to 2.5 times.

Summary

We have made progress this year by sticking to our strategy and continuing to invest in our leading brands and our factories. Our willingness to reshape our business to cope with new challenges will result in long-term value creation for everyone with an interest in Dairy Crest.

Anthony Fry

Chairman

23 May 2012

Chief Executive's review

Dairy Crest's results for the year demonstrate the continued benefit of being a broadly based business. Double digit growth from our branded Spreads and Cheese businesses has offset unsatisfactory results in Dairies.

We have maintained adjusted Group profits despite facing inflationary cost pressures of around £80 million this year by making annualised cost savings of around £22 million and achieving selling price increases. This has been made possible by a programme of consistent investment in developing our key brands and building a modern, efficient supply chain. 

We are also proactively shaping our business for the future and in March 2012 announced a strategic review of our French spreads business, St Hubert, which is progressing. Since the year end we have also announced a series of actions to restore our Dairies business to a satisfactory level of profitability in the medium term.

Market background

The start of the year saw significant cost price inflation in both the UK and France. We had to achieve a balance between recovering this through higher selling prices and continuing to grow sales volumes. I am pleased that we were successful in driving further efficiencies throughout our business, which allowed us to minimise the cost increases we needed to pass onto our customers. Our success is evidenced by our maintained profitability and increased sales of our key brands.

In the final quarter of the year dairy commodity markets fell sharply and this added to the downward pressure on the profitability of our Dairies business, which had faced difficult trading conditions throughout the year. We have responded decisively to the challenges facing this business by consulting on the closure of two of our dairies, increasing some selling prices and reducing some of our raw milk purchase prices.

Consumer confidence remains fragile and we expect the markets in which we operate to remain challenging.

Trading performance

We increased sales and markedly improved our sales mix as we grew our key brands. Sales of our five key brands slowed in the first half as we obtained selling price increases that were necessary to offset inflationary input costs, but a strong second half resulted in both volume and value growth for the year as a whole.

* Dairy Crest sales 12 months to 31 March 2012 v 12 months to 31 March 2011

** Nielsen, IRI data to 31 March 2012

We have continued to invest strongly behind all of our key brands and are committed to their ongoing growth. Cathedral City and St Hubert both achieved record market shares in the fourth quarter and Cathedral City was short listed to be Marketing Week's brand of the year against five other brands including Heinz, John Lewis and the BBC. We were also delighted to win the Grocer magazine's branded dairy supplier of the year award.

Innovation remains hugely important to Dairy Crest and we have an ongoing focus to develop new products, services and ways of working. During 2011 we launched four new ranges, two in France (St Hubert 5 Cereales and St Hubert Specialite Culinaire) and two in the UK (Chedds and Frijj The Incredible). A good performance by all four has contributed to an increase in sales derived from products and services developed in the last three years to 10% of overall sales, ahead of last year and in line with our ambitious long-term target.

During the year we also widened our product base with the purchase of the branded food business M H Foods. This business manufactures healthy 'one calorie' spray cooking oils under the Frylight brand and we are making good progress with our plans to develop its sales and profits.

We have already commenced initiatives in the current financial year that will again deliver over £20 million of annualised cost savings, equivalent to around 2.5% of our cost base excluding milk and commodity ingredients. We achieved the same target in the year ended 31 March 2012.

Dairies review

In a very challenging trading environment, our Dairies business did not achieve an acceptable level of profitability. On top of downward pressure on selling prices in a tough consumer environment and an extremely competitive 'middle-ground', the whole sector suffered from steeply falling dairy commodity markets.

Lower returns from these dairy commodity markets offset an improved second half performance, which was supported by the actions we took in the business during the year. These included increased sales of innovative new products including milk&more, Frijj the Incredible, milk bags and 1% fat milk, as well as efficiency improvements generated in part by the three year, £75 million investment in our core liquid dairies.

Since the year end we have continued to act decisively to protect the future of our Dairies business and have announced a series of initiatives to restore this business to a satisfactory level of profitability, including the difficult decisions to consult on the closures of two dairies, reduce some of our milk purchase prices make further depot closures and cut a number of head office jobs.

We are now the only UK listed dairy business and the only major liquid milk processor predominantly in British ownership. From a strong core of three modern and well invested liquid milk dairies we will continue to review all elements of this business to ensure its ongoing strength.

Financial summary

Adjusted Group profit before tax was essentially flat at £87.4 million (2011: £87.6 million). Adjusted basic earnings per share increased by 5% to 49.4 pence (2011: 47.1 pence). However exceptional, non-cash impairment charges associated with our Dairies business led to a reported loss before tax of £10.1 million and a basic loss per share of 12.8 pence (2011: reported profit £77.8 million, basic earnings per share 43.2 pence).

Group net debt at 31 March 2012 was £336.4 million (2011: £311.6 million), principally reflecting higher cheese stocks, which are necessary to fuel the growth in Cathedral City, offset by strong quarter four cash collection.

Current trading

In the current financial year, we are seeing continued strong momentum in our Foods businesses and we expect Dairies to benefit from the decisive action we are taking and our continued discipline on costs.

Mark Allen

Chief Executive

23 May 2012

Operating Review

Spreads

We manufacture butter and spreads in the UK, and spreads in France and have strong market positions in both these countries as well as in Italy.

Consumption of spreads in the markets in which we operate has continued to edge back (year on year volumes are down 2%) but higher prices, reflecting higher input costs, have led to value growth in both UK (+12%) and France (+6%). Both these markets remain strongly branded.

We have broadly maintained our market share in the UK, with a good performance by Clover being offset by lower sales of Country Life, and have increased our market share in France, benefiting from strong growth in our market-leading brand St Hubert Omega 3. We continue to increase expenditure on advertising and promotions and to drive innovation.

For the year ended 31 March 2012, revenue of £328.7 million is up 15% from last year, segment profit of £63.0 million is up 18% and a segment margin of 19% is the same as last year.

St Hubert

St Hubert increases market share to a record 39%.

St Hubert manufactures spreads at Ludres in North Eastern France, for distribution across France and to Italy. It was acquired in January 2007 from Uniq plc, and under Dairy Crest's ownership the business has prospered and has consistently grown market share and profits. In March 2012 we announced that we had commenced a strategic review of this business which could lead to a potential divestment.

During the year the total non-butter French Spreads market grew to €397 million. St Hubert increased its market share to a record 39%, reflecting the growth of St Hubert Omega 3, St Hubert Bio and the successful launch of two new innovative products, St Hubert 5 Cereales and St Hubert Specialite Culinaire. The business also benefited from the temporary delisting of competitors' products by some customers.

In Italy our market-leading Valle brand has performed well and has maintained its market share at 62%.

UK Spreads

Another strong performance, led by Clover, our largest spreads brand.

We manufacture butters and spreads in two factories in the UK, at Kirkby near Liverpool and at Crudgington in Shropshire using cream from our Dairies business and distribute them to UK retailers through our national distribution centre in Nuneaton.

The UK butter, spreads and margarine market grew 12% in the year to £1.3 billion, reflecting a small reduction in volume being more than offset by significant price increases. Input costs, most notably cream and vegetable oils, continued to rise in the first half of the year and we had to increase our selling prices as a result.

We broadly maintained our market share. Our largest brand, Clover, grew ahead of the market. However Country Life sales have fallen back slightly. These two key brands were well supported by Utterly Butterly, which also grew ahead of the market.

Clover remains the UK's leading dairy spread and has grown market share again this year. Total sales are up 16%. Sales of Clover Lighter are now 17% of total Clover sales and grew by 27% in the year. We have advertised Clover and Clover Lighter separately this year in order to continue to appeal to both health and taste conscious consumers.

Country Life is the only major British butter brand and we have continued to highlight this in our advertising. Country Life Spreadable outperformed the market, albeit from a relatively small base. However Country Life block butter sales fell back as we reflected higher input costs in our selling prices sooner than our competitors and chose to improve our overall margins.

Higher levels of promotional activity have supported both Country Life and Clover as we and our retail customers react to offset the economic pressure on consumers.

We will grow profits in our UK Spread business by making it more efficient and are in the process of consolidating Clover production at our Kirkby site. During the year we also completed the rationalisation of our packaging across all our brands to a single shape. As well as reducing costs this also makes our supply chain more robust.

Cheese

The 'virtuous circle' of market leading brands and facilities has delivered strong profit growth and record high milk prices to our farmers.

Dairy Crest has the leading cheese brand in the UK, Cathedral City, and a world class supply chain. Cathedral City is made at our Davidstow creamery in Cornwall from milk supplied by around 400 local dairy farmers. The cheese is matured, cut and wrapped at our state of the art facility in Nuneaton from where it is despatched to retailers.

We also make Davidstow branded cheddar and supply a small quantity of high quality retailer branded cheddar. This year we have entered a new market with Chedds, the first 100% cheddar snack for kids.

Reported revenue for the year ended 31 March 2012 grew on a like for like basis by 7% to £229.6 million after adjusting for the sale of our majority stake in Wexford Creamery in June 2010. Segment profits increased by 27% to £35.5 million resulting in a segment margin of 15% (2011: profit of £28.0 million and 13% margin).

UK retail cheese market volumes were broadly flat in the year with values increasing by 4% to £2.5 billion. The market has been predominantly retailer own label, but Cathedral City has again increased its market share and is now approaching 10% of the total market following a 12% sales increase in the year. We have continued to advertise and promote Cathedral City strongly using our successful advertising campaign, 'the nation's favourite', which reflects the brand's strength.

Cathedral City now dominates the branded everyday cheese category and achieved a market share of over 50% of the category in March 2012. It has outperformed its rivals in this category and its sales now exceed those of the next four brands combined. In line with our strategy to widen the appeal of Cathedral City to account for all tastes, all the brand's variants including Lighter, Mild and Extra Mature have grown faster than the largest selling Mature variant.

In addition to Cathedral City's strong performance, we have also made good progress with our Davidstow brand. In the past this was positioned as a 'sub-brand', carrying both the Davidstow name and that of the retailer, but last year we replaced the sub-brand in Sainsbury's and Tesco with a new Davidstow cheddar and we now have firm plans to continue to widen its distribution with other major retailers.

We want to widen our consumer base and during the year we launched Chedds, a new snack brand for children. Chedds aims to solve the dilemma facing parents who want their children to benefit from the calcium and other nutrients cheese provides from a product they don't see as artificial. Made from 100% Cathedral City cheddar, Chedds balances being tasty and fun for kids with a vote of approval from their parents. Chedds has already gained good penetration and has a strong repeat rate - we plan to advertise on television later this year to continue to drive growth.

Profits in our cheese business have been supported by strong returns from whey and by efficiency measures across the supply chain. At Davidstow we have been able to improve further the 'hit rate' by consistently producing the highest quality cheese, which reduces 'downgrade' and improves average realisations. At Nuneaton we have continued to increase the speed of the packing machines and delivered improved efficiencies.

Improved profitability has allowed us to increase the price we pay our dairy farmers for the milk they supply to Davidstow to record highs of nearly 29 pence per litre, reinforcing the 'virtuous circle' of market leading brands, facilities and milk prices.

Looking forward we have a great opportunity to deliver growth in revenue and profits in this business through a combination of consumer-led innovation and marketing. Further new products are planned which will target different consumer groups. We have made more cheese at Davidstow to meet demand, which, together with higher milk prices, has resulted in an increase in cheese stocks. Planned capacity improvements will allow us to continue to grow in the future.

Dairies

The Dairies division processes and delivers fresh conventional, organic and flavoured milk to major retailers, 'middle ground' customers (including, for example, smaller retailers, coffee shops and hospitals) and residential customers.

We also manufacture and sell Frijj, the leading fresh flavoured milk brand, cream and milk powders.

Reported revenue fell by 2% to £1,069.0 million and in a tough trading environment, segment profit fell to £10.2 million (2011: £ 27.1 million), resulting in an unsatisfactory segment margin of 1% (2011: 2.5%).

A tough year for Dairies

Along with the rest of the sector 2011/12 has been a tough year for our Dairies business. Average selling prices remained flat year on year, reflecting the full year impact of last year's intense competition in the middle ground and major tender negotiations, improved by mid-year selling price increases. Reduced retail selling prices in supermarkets have also put pressure on our residential sales volumes. In the last four months of the year cream realisations fell away while milk purchase prices remained at historic highs.

We have embarked on a series of actions designed to restore our Dairies business to an acceptable level of profitability over the medium term. We also have a continuous programme of innovation which has led to increased sales of new products including milk&more, Frijj the Incredible, milk bags and 1% fat milk.

Our focus remains on cost, quality and service and our ongoing three year, £75 million investment programme is contributing to improved efficiencies. We have a programme across Dairy Crest as a whole to deliver £20 million of annualised savings each year, and the bulk of this has been achieved in our Dairies business, much of it by increasing manufacturing efficiencies and reducing administration costs associated with our depot network.

In addition, since the year-end we have announced further depot closures and head office job losses and the proposed closure of two dairies. We have also cut some of our milk purchase prices, principally reflecting lower cream returns.

We will continue to review the geographic and customer mix of this business to ensure its ongoing strength.

A more efficient business with less exposure to the middle ground

Our proposals to close Aintree and Fenstanton dairies would concentrate our milk business into three modern dairies which have benefited from our ongoing £75 million investment programme and one glass bottling site. All four of the dairies would be operating at or around optimum throughput with fewer sales to the middle ground. In addition we continue to operate our milk balancing creamery at Severnside and our small, specialist creamery at Chard.

A strong performance from Frijj

We have grown sales of our branded milkshake, Frijj by 7% compared to last year. The market for flavoured milk remains buoyant and we have invested in production capacity to enable us to continue to grow sales. Frijj is the largest fresh flavoured milk brand and has nearly half of that market and we expect to see ongoing growth.

Market growth has been driven by premium products and during the year we launched a new premium range, "Frijj The Incredible" to participate in this sector of the market. This is proving popular and is widening the appeal of Frijj to a larger consumer group.

We have completed a trial to produce longer life Frijj using UHT milk and this will allow us to increase penetration in convenience outlets.

Residential deliveries

Delivering milk to customers' doorsteps remains a key part of our business. We have around 1 million residential customers and have a network of over 2,100 milkmen including around 1,500 franchisees. Reduced selling prices in supermarkets have put pressure on our residential sales volumes which were down 12% at the half year stage and 10% over the year. Since the year end the rate of decline has fallen to around 9%.

Our internet doorstep delivery proposition, milk&more, continues to make progress and we now have 210,000 active customers. Weekly sales are now £1.2 million. We remain committed to making milk&more a success, although pressure from lower retail selling prices has slowed down the growth of milk&more in the short term.

Ingredients

Our ingredients operation provides us with a valuable balancing solution for seasonal raw milk supplies and cream. We minimise throughput in this business to reduce our exposure as far as possible to dairy commodity markets. However our Dairies business does generate substantial volumes of cream, not all of which is used by our Spreads business. Prices for dairy ingredients increased in the first half of the year but fell back sharply in the last quarter and since the year end.

Financial Review

Overview

We continue to make progress against our strategy of growing branded sales, delivering cost savings and controlling cash. In doing so, we have benefited again this year from being a broadly based business with strong performances from our branded Spreads and Cheese divisions compensating for more challenging trading in Dairies.

Delivery against our strategy

Sales of our five key brands have increased by 11% in the year and we continue to invest more in marketing and new product development to drive future brand growth. We have delivered on our cost saving targets across the business to help mitigate inflationary cost pressures. Furthermore we have invested in our core Dairies processing sites in order to drive efficiencies and increase capacity, which will facilitate the planned closure of two non-core sites in 2012/13. Net debt has increased over the year, however a strong focus on cash has limited the increase to £24.8 million despite the acquisition of MH Foods, the Office of Fair Trading ("OFT") settlement, continued capital investment in our core Dairies business and a cheese stock build driven by increased production and milk cost rises.

Group revenue increased by 1.7% to £1,632.1 million. Cheese revenue increased by £6.5 million despite the comparative number including Wexford Creamery Limited until June 2010, after which point its results were no longer consolidated into the Group following the disposal of our controlling interest. Spreads revenues have grown in both the UK and France, benefiting from volume growth in our key brands and price increases achieved. Dairies revenues have declined by 1.9% as growth with major retail and milk&more have been more than offset by volume declines in the residential channel. Other revenue represents third party distribution undertaken by our national distribution centre in Nuneaton.

Segment profit is quoted before the impact of exceptional items and amortisation of acquired intangibles and includes our share of associates' loss after tax. On this basis, total segment profit was up £0.2 million or 0.2%.

Our cheese business has performed well in the year reflecting the strength of our Cathedral City brand, the benefit of improved whey realisations, improved supply chain efficiencies and the delayed profit and loss impact of higher milk costs due to cheese maturation times. We successfully implemented a reduced pack size for Cathedral City in the first half despite which full year tonnage grew by 5%.

Spreads profits have increased helped by strong performances from St Hubert Omega 3 and Clover. Furthermore, St Hubert benefited from the temporary delisting of competitors' products by some customers for part of the year.

Dairies profitability has been impacted by an increasingly tough trading environment and a marked fall in cream realisations in the final quarter of the year. This had led to a £16.9 million reduction in profits to £10.2 million despite higher property profits of £4.6 million (2011: £1.8 million). We are proactively reducing the cost base within our Dairies segment through depot closures, supply chain efficiency savings, head office job losses and the proposed closures of two processing sites at Aintree in Liverpool and Fenstanton in Cambridgeshire. These actions are designed to restore the segment to an acceptable level of profit in the medium term.

Reported pre-exceptional Group profit on operations decreased by 0.1% to £99.6 million; a result that demonstrates the benefits of being a broadly based dairy business with a strong performance in Cheese and Spreads offsetting lower margins in Dairies.

Exceptional items

There are a number of exceptional items recorded in the year albeit these comprise principally non-cash asset impairments. They are analysed below.

The tough trading conditions experienced by our Dairies segment have reduced profits and cash flows in the year ended 31 March 2012. Although actions are underway to reduce the cost base and restore acceptable profitability in the medium term, the outlook for the segment is weaker than it was in 2011. This, combined with the volatility of assumptions in forecasting due to the commoditised nature of the business and the competitive environment, has led management to conclude that the carrying value of Dairies goodwill cannot be supported based on value in use. We have therefore decided to fully impair the carrying value of Dairies goodwill resulting in an exceptional charge of £70.7 million in the year ended 31 March 2012.

Furthermore, we have announced a major restructuring of our Dairies operations with the expected closure of processing sites at Aintree and Fenstanton, subject to consultation. These closures are expected to be completed during 2012/13 and as a result property, plant and equipment at these sites can no longer be supported by their value in use. As a consequence we have written down the carrying value of assets at the two sites along with certain intangibles and stocks with a resultant exceptional charge of £11.0 million.

We continue a major restructuring of depot administration activities in our Dairies segment. This restructure is delivering more streamlined and centralised back office support functions and generating significant cost savings. Exceptional cash costs in the year amount to £5.3 million of which the majority comprises redundancy costs. We expect to incur a final £7 million in 2012/13.

We announced in February 2012 that a customer, Quadra Foods Limited, had gone into administration. As a result, a bad debt provision of £4.3 million has been charged as an exceptional item. In addition, we previously purchased products from Farmright Limited, a member of the same group as Quadra, which has also gone into administration. Under IFRS the recognition criteria for assets is higher than that for liabilities therefore, despite that in the opinion of management set-off arrangements were in place for these companies, only the provision for bad debt has been charged as exceptional as the outcome with regard to Farmright Limited is not virtually certain. We remain in communication with the administrator.

In May 2011 we announced the consolidation of Clover manufacture into one site at Kirkby. As a result we have charged an exceptional cost of £2.6 million in the year ended 31 March 2012 representing the write down of certain assets that are made obsolete as a result of the move in production and redundancy costs at our site in Crudgington. A further £2-3 million is expected to be incurred in the first half of 2012/13 at which point all Clover manufacture will have been transferred.

Interest

Finance charges have increased by £0.4 million (2%) to £21.0 million. Margins on the new revolving credit facility signed in October 2011 are slightly higher than the facilities that were replaced and borrowing levels have been somewhat higher this year. At 31 March 2012, all borrowings under the revolving credit facilities are at floating rates of interest based on LIBOR plus a margin of 135 basis points, however most of our borrowings are loan notes at fixed coupons. A further $85 million of loan notes (£54.5 million) were issued to investors in November 2011.

Other finance income of £5.5 million (2011: nil) comprises the net expected return on pension scheme assets after deducting the interest cost of the defined benefit obligation. This is based on assumptions made at the start of the financial year. This amount can be highly volatile year on year as it comprises the net of expected returns and interest costs, both of which are dependent upon financial market conditions at 31 March each year. We therefore exclude this item from headline adjusted profit before tax.

Interest cover excluding pension interest, calculated on total segment profit, remains comfortable, at 5.2 times (2011: 5.3 times).

The Group's adjusted profit before tax (before exceptional items and amortisation of acquired intangibles) was broadly flat at £87.4 million (2011: £87.6 million). This is management's key Group profit measure. The reported loss before tax was £10.1 million (2011: £77.8 million profit) due to exceptional items and in particular the impairment of Dairies goodwill of £70.7 million.

Taxation

The Group's effective tax rate on profits excluding exceptional items and including associate's tax was 24.1% (2011: 27.9%). The decrease in effective rate of tax compared to last year is due to a number of factors including: the 2% reduction in the rate of UK corporation tax to 26%; the enactment in March 2012 of a further 2% reduction in the UK corporation tax rate in 2012/13 (which impact deferred tax balances at March 2012); the higher level of property profits in 2011/12 which do not attract tax; and some other one-off items. We expect the effective rate to increase in 2012/13 as some of these factors do not repeat.

Group result for the year

The reported Group loss for the year amounted to £17.1 million (2011: £57.5 million profit).

(Loss) / earnings per share

The Group's adjusted basic earnings per share increased by 5% to 49.4 pence per share (2011: 47.1 pence per share). Adjusted profit before tax is broadly flat and this increase reflects the lower effective tax rate in the year.

Basic earnings per share, which includes the impact of exceptional items, pension interest income and the amortisation of acquired intangibles, amounted to a loss of 12.8 pence per share (2011: 43.2 pence earnings per share).

Dividends

The proposed final dividend of 14.7 pence per share represents an increase of 3.5% on last year's final dividend of 14.2 pence. Together with the interim dividend of 5.7 pence per share this gives a total dividend of 20.4 pence per share for the full year. This represents an increase of 3.6% on the dividend declared for 2010/11. The final dividend will be paid on 2 August 2012 to shareholders on the register on 22 June 2012.

Pensions

In June 2011, the final Schedule of Contributions was agreed with the Trustee and this results in cash payments of £20 million per annum into the defined benefit pension scheme which, from April 2010, has been closed to future service accrual. We continue to proactively seek ways of reducing pension scheme risks and during the year ended 31 March 2012, £14.6 million of liabilities (based on the IAS 19 valuation basis) were extinguished by way of an enhanced transfer value exercise.

The reported IAS 19 pension deficit at 31 March 2012 was £79.8 million compared to £60.1 million at 31 March 2011 and £109.9 million at 30 September 2011. Asset returns were relatively strong in the year however bond yields have decreased and the discounted level of pension liabilities has therefore increased. The actuarial loss reported in other comprehensive income for the year is £46.2 million (2011: £60.6 million gain).

Cash flow

We continue to focus on cash and although net debt has increased during the year from £311.6 million to £336.4 million, this includes the effect of the acquisition of MH Foods (£12.3 million) and the OFT settlement (£7.3 million). Cash generated from operations was £84.5 million in the year (2011: £128.1 million). This includes a working capital outflow of £20.6 million (2011: £11.7 million inflow) caused by the higher value of cheese stocks compared to March 2011 - £129.8 million in March 2012 versus £113.9 million last year. Stock value increases are a result of increased manufacturing to support future volume growth and milk cost increases effected during 2011. As was the case last year, we received some early settlement of invoices from customers at March 2012.

Capital expenditure of £53.3 million was marginally higher than last year (2011: £49.3 million). Significant investment continues across our core milk processing infrastructure, principally the sites at Severnside, Chadwell Heath and Foston. This investment improves efficiencies and importantly, increases capacity, which will facilitate the planned closure of two other Dairies sites in 2012/13, subject to consultation. The result going forward will be a smaller, well-invested Dairies manufacturing base with improved efficiencies and higher levels of capacity utilisation. Cash receipts from the disposal of fixed assets amounted to £12.6 million comprising £5.8 million from the sale of closed depots and £6.8 million relating to the sale and operating leaseback of certain plant and equipment at our Severnside site (2011: £2.5 million total receipts from disposal of fixed assets).

Cash interest and tax payments amounted to £23.6 million and £14.1 million respectively (2011: £19.8 million and £16.1 million). Interest payments are £3.8 million higher than last year mainly reflecting upfront fees of £3.0 million paid in relation to the new revolving credit facility and the issuance of loan notes during 2011. Tax payments are predominantly incurred in relation to the St Hubert business as UK corporation tax payments are reduced by relief on the ongoing levels of cash contributions into the pension scheme.

Cash paid for the acquisition of MH Foods amounted to £12.3 million (net of cash acquired with the business) (2011: £0.1 million of acquisitions). There were no proceeds from the sale of businesses, however in 2010/11 inflows of £4.0 million comprised proceeds from the sale of the Group's controlling interest in Wexford Creamery Limited less fees and cash in the business disposed.

Net debt

Net debt increased by £24.8 million to £336.4 million at the end of the year. Net debt is defined such that, where cross currency swaps are used as cash flow hedges to fix the interest and principal payments on currency debt, the swapped Sterling liability is included rather than the retranslated foreign currency debt. It excludes any unamortised up front facility fees. At 31 March 2012, gearing (being the ratio of net debt to shareholders' funds) was 123% (2011: 85%).

Borrowing Facilities

Group borrowing facilities comprise: £345.5 million of loan notes maturing between April 2013 and November 2021; and a £170 million plus €150 million multi-currency revolving credit facility expiring in October 2016. At 31 March 2012 there was £303.2 million effective headroom against committed facilities (2011: £324.3 million).

On 12 October 2011 the Group agreed a new five-year revolving credit facility of £170 million plus €150 million with a syndicate of five banks. Additionally, in November 2011, the Group raised a further $85 million (£54.5 million) by way of a debt private placement with US investors comprising a mix of 7-year and 10-year notes.

The new facility was used to refinance the previously existing bank facilities of: £100 million which was due to mature on 8 November 2011; and £85 million plus €175 million which was due to mature on 16 July 2013. These actions together leave overall Group facilities broadly unchanged but, importantly, deliver security of funding for the Group in the medium term, which we believe is especially important given current conditions in financial markets.

Key financial covenants under the new facility are unchanged but margins have increased slightly, reflecting current market conditions.

Borrowing facilities are subject to covenants which specify a maximum ratio of net debt to EBITDA of 3.5 times and a minimum interest cover ratio of 3.0 times. The Group remains comfortably within its covenants with a net debt to EBITDA ratio at 31 March 2012 of 2.2 times (March 2011: 2.2 times).

Treasury policies

The Group operates a centralised treasury function, which controls cash management and borrowings and the Group's financial risks. The main treasury risks faced by the Group are liquidity, interest rates and foreign currency. The Group only uses derivatives to manage its foreign currency and interest rate risks arising from underlying business and financing activities. Transactions of a speculative nature are prohibited. The Group's treasury activities are governed by policies approved and monitored by the Board.

Net Assets

Net assets at 31 March 2012 totalled £274.3 million (2011: £365.5 million). This reduction principally reflects the impairment of goodwill in the Dairies segment. Combined goodwill, intangible assets and property, plant and equipment total £713.4 million (2011: £799.6 million). Inventories of £187.8 million are £23.3 million higher than prior year mainly reflecting increases in maturing cheese stock values.

Going concern

The financial statements have been prepared on a going concern basis as the Directors are satisfied that the Group has adequate financial resources to continue its operations for the foreseeable future. In making this statement, the Group's Directors have: reviewed the Group budget, strategic plans and available facilities; have made such other enquiries as they considered appropriate; and have taken into account 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' published by the Financial Reporting Council in October 2009.

Alastair Murray, Finance Director

23 May 2012

Consolidated income statement

Year ended 31 March 2012

The consolidated income statement relates to continuing operations.

* Adjusted earnings per share calculations are presented to give an indication of the underlying operational performance of the Group. The calculations exclude exceptional items, amortisation of acquired intangibles and pension interest in relation to the Group's defined benefit pension scheme, the latter being highly dependent upon market assumptions at 31 March each year.

Consolidated statement of comprehensive income

Year ended 31 March 2012

Consolidated balance sheet

At 31 March 2012

Consolidated statement of changes in equity

Year ended 31 March 2012

* Further details as provided in Note 15.

Consolidated statement of cash flows

Year ended 31 March 2012

Notes to the preliminary announcement

1 Basis of preparation

The consolidated financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority, International Financial Reporting Standards ("IFRS") and International Financial reporting Interpretation Committee ("IFRIC") interpretations as endorsed by the European Union, and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2011, as described in those financial statements.

The following accounting standards and interpretations became effective for the current reporting period:

International Accounting Standards (IAS/IFRSs)

IAS 24 - Related Party Disclosures (Revised)

Improvements to IFRS (issued April 2010)

International Financial Reporting Interpretations Committee (IFRIC)

IFRIC 14 (Amended) - Prepayments of a Minimum Funding Requirement.

IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments

The application of these standards and interpretations has had no impact on the net assets, result and disclosures of the Group in the year ended 31 March 2012.

The financial information set out in this document does not constitute the statutory accounts of the Group for the years ended 31 March 2012 or 31 March 2011 but is derived from the 2012 Annual Report and Financial Statements. The Group Annual Report and Financial Statements for 2012 will be delivered to the Registrar of Companies in due course. The auditors have reported on those accounts and have given an unqualified report, which does not contain a statement under Section 498 of the Companies Act 2006.

2 Segmental analysis

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Company's Board members as they are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

The CODM uses trading profit, as reviewed at monthly business review meetings, as the key measure of the segment's results as it reflects the segment's underlying trading performance for the period under evaluation. Trading profit is a consistent measure within the Group and the reporting of this measure at the monthly business review meetings, which are organised according to the product types, has been used to identify and determine the Group's operating segments. Trading profit is defined as profit on operations before exceptional items and amortisation of acquired intangible assets, but includes the Group share of post-tax profit of associates and joint ventures. 

The Group’s operating segments at 31 March 2012 were ‘Cheese’, ‘UK Spreads’, 'MH Foods', ‘St Hubert’, ‘Dairies' (previously 'Liquid Products' and 'Customer Direct'), ‘Share of Associates and Joint Ventures’ and ‘Other’. Certain of these operating segments have been aggregated and the Group reports on five continuing segments within the business: ‘Cheese’, ‘Spreads’, ‘Dairies’, ‘Share of Associates and Joint Ventures’ and ‘Other’

The Cheese segment has not been aggregated with any other segment. This business manufactures predominantly branded cheese in the UK and sells mainly to retail customers.

Share of Associates and Joint Ventures forms a separate segment whose results are reviewed on a post-tax basis consistent with IFRS.

The Other segment comprises revenue earned from distributing product for third parties and certain central costs net of recharges to the operating segments. Generally, all central costs less external other revenue are recharged to the operating segments such that their result reflects the total cost base of the Group. Other segment profit therefore is nil. 

The segment results for the year ended 31 March 2012 and for the year ended 31 March 2011 and the reconciliation of segment measures to the respective statutory items included in the financial statements are as follows:

Notes to the preliminary announcement

2 Segmental analysis (continued)