25th May 2005 07:01
Dairy Crest Group PLC25 May 2005 25 May 2005 Dairy Crest Group plc ("Dairy Crest") Preliminary Results Announcement Encouraging brand performance and strong cash generation Dairy Crest today announces its audited results for the year ended 31 March2005: Financial Highlights: 2004/05 2003/04 change Turnover (including share of jointventures): £1,349 million £1,362 million -1%Profit before tax: £66.7 million £45.6 million +46%Adjusted profit before tax*: £84.2 million £85.1 million -1%Earnings per share: 38.2 pence 28.1 pence +36%Adjusted earnings per share*: 49.3 pence 50.0 pence -1%Year-end net debt: £228 million £280 millionReduction in net debt £52 million £66 millionTotal dividend for the year: 20.2 pence 18.9 pence +7%* before exceptional items and goodwill amortisation Business Highlights and Recent Developments: • Encouraging progress from brand portfolio with particularly strong performance from Cathedral City • Acquired 100% ownership of Country Life brand with new marketing campaign planned • Own label cheese contract gains with ASDA and Morrisons • Own label fresh milk supply gains with Morrisons and Sainsbury's following loss of other retail business • Strategic acquisitions of Midlands Co-op Dairies and Starcross Foods to strengthen Dairies business • Launch of "St. Ivel advance" - an innovative branded fresh milk enriched with Omega-3 • Strong cash generation resulting in £52 million reduction in year-end net debt Drummond Hall, Chief Executive, Dairy Crest Group plc said: "Dairy Crest has traded well in the year with our portfolio of brands makingencouraging progress. Whilst it has been a particularly challenging year infresh milk with unprecedented changes in supply arrangements to major foodretailers, we have continued to invest in the long-term development of ourbrands and we have made sound strategic moves to strengthen our Dairies businessfor the future. Trading at the start of the new financial year is in line withour expectations. " For further information: Dairy Crest Group plc Tel: 01372 472200Drummond Hall, Chief ExecutiveAlastair Murray, Finance Director Will Shaw, Investor RelationsSinead Noble, Corporate Communications Brunswick Tel: 020 7404 5959William Cullum / Laura Cummings Chairman's statement Dairy Crest has delivered a solid performance in the year ended March 2005despite the competitive retail environment with reported adjusted profit beforetaxation of £84.2 million on turnover of £1.35 billion and adjusted earnings pershare of 49.3 pence. The Group's strategy continues to be to focus on the development of profitablebranded and added value dairy products and to invest in low cost operations tomaintain competitive advantage. Our Foods business has made good progressbenefiting from an encouraging performance across our portfolio of brands. Theyear has seen unprecedented changes to the supply of fresh milk to the major UKfood retailers resulting in a significant impact on the future profitability ofour Dairies business. We have taken actions to strengthen the strategic positionof our Dairies business which leave us well placed to improve its futureperformance albeit from a lower base. The UK dairy industry must continue to take account of the potential impact ofthe Common Agricultural Policy (CAP) reforms that are currently beingimplemented. We are active through Dairy UK and other industry bodies inpromoting the long-term future of the UK dairy industry. We have alsostrengthened our working relationship with Dairy Crest Direct, our direct milksupply association, which supplies over two thirds of our milk volumes, as webelieve that this is beneficial both to the Group and our milk producers inplanning for the future. The Board is recommending an increase in the final dividend of 7% to 14.3 penceper share. This together with the interim dividend of 5.9 pence makes a totaldividend for the year of 20.2 pence per share, an increase of 7%. The Boardremains committed to a progressive dividend policy. Board changesAs previously announced, Paul Lewis will retire from the Board at the AnnualGeneral Meeting in July after almost twelve years service as a Non-executiveDirector. I should like to thank Paul for his valuable counsel during his yearson the Board, particularly since the Group's flotation in 1996. I am pleased towelcome David Richardson, previously Finance Director of Whitbread PLC, whojoined the Dairy Crest Board as a Non-executive Director in December 2004. I amsure that the Board will benefit from his extensive experience in finance and inconsumer facing industries. Simon Oliver, Chairman24 May 2005 Chief Executive's review OverviewDairy Crest has traded well in the year and continues to be strongly cashgenerative. We have increased investment in our branded and added valuebusinesses, which have again made encouraging progress. It has been aparticularly challenging year in fresh milk with unprecedented changes in supplyarrangements by major food retailers. Whilst these changes will adversely impactthe Group in 2005/06 we have taken actions to strengthen the Dairies businessfor the future. Financial resultsGroup turnover (including our share of joint ventures' turnover) was £1.35billion (2004 - £1.36 billion). Group operating profit, before operatingexceptional items and goodwill amortisation, decreased to £100.6 million (2004 -£104.8 million) after absorbing increased pension costs of approximately £4.3million. Adjusted profit before tax was down slightly at £84.2 million (2004 -£85.1 million). After taking account of £13.1 million of goodwill amortisationand £4.4 million (2004 - £27.3 million) of net exceptional charges, profitbefore tax was up 46% at £66.7 million (2004 - £45.6 million). Adjusted earningsper share decreased to 49.3 pence per share (2004 - 50.0 pence). Group net debt as at 31 March 2005 was £52.2 million lower at £227.5 million(2004 - £279.7 million) reflecting the Group's strong operational cashgeneration. Investing in brand developmentWe continue to focus on innovation with a number of new product developmentinitiatives being launched. The key area of recent activity has been our entryinto the growing market for "functional" products within the dairy category. Wehave just launched "St. Ivel advance", a branded fresh milk enriched withOmega-3. A number of studies have shown that Omega-3 may have learning andconcentration benefits for some children as well as being good for the heart.This functional product gives us a position in the growing branded fresh milkmarket and is expected to appeal, in particular, to parents with young children.Elsewhere we have continued to extend the range of Cathedral City with newformats focused on convenience such as Cathedral City Grated. We have alsoextended our "Health" offering in spreads with the launch of Gold Lowest, thelowest fat branded spread in the UK market. Yoplait Dairy Crest has alsolaunched a yogurt under the Petits Filous brand aimed at extending the brand'susage by older children. The Group puts strong emphasis on a continuous programme of cost reduction whichnot only ensures that we remain competitive in the market place but alsosupports increasing levels of marketing spend. Over the last three years thismarketing investment has strengthened the position of our key brands.Increasingly, marketing spend has moved from promotional activity to mediainvestment with our brands Clover, Utterly Butterly, St Ivel Gold and CathedralCity as well as the Yoplait brands all being advertised on television during theyear. Cathedral City, our market leading branded cheddar, has had a particularlystrong year with value growth well over 20%. The brand is now worthapproximately £90 million at retail value. The acquisition of 100% ownership ofthe Country Life brand during the year represents a significant opportunity forus to accelerate the development of this brand, particularly in the fast growingspreadable butter category. We will be supporting Country Life with asignificant television advertising campaign in late summer. Retail milk strategic developmentsIn a challenging market we have taken action to strengthen the Dairies business.In May 2005 we announced the acquisitions of both Midlands Co-op Dairies andStarcross Foods Limited. Midlands Co-op Dairies is the largest regional dairyoperator in the UK. It processes approximately 200 million litres of milk perannum at its dairy in Birmingham and distributes milk, via 16 distributioncentres to a range of retail, wholesale and doorstep customers across theMidlands. Starcross is a modern dairy in Foston, Derbyshire, opened in May 2002with current capacity to process up to 100 million litres of milk per annum.Starcross will significantly extend our existing geographical footprint acrossEngland and Wales to cover most of the major northern conurbations. These twoacquisitions will strengthen our competitive position, improve the profitabilityof the Dairies business and better align our operations to our major customers'requirements. The last twelve months have seen an unprecedented period of change in fresh milksupply arrangements by major food retailers. By October 2005 Dairy Crest will besupplying approximately 50% of fresh milk volumes to both Sainsbury's andMorrisons. In addition, we have retained our sole supply positions with Waitroseand Marks & Spencer. However, as previously announced, we have lost our freshmilk supply positions to both Tesco and ASDA. Overall, taking into account thesechanges and the volume gained through the Midlands Co-op Dairies acquisition, weexpect to increase fresh milk volumes in our Dairies business. New organisational structureA new organisational structure was put in place from 1 November 2004. Theprevious five business units were consolidated into two operating divisions:Foods, comprising spreads and cheese, headed by Peter Thornton, who also retainsresponsibility for Yoplait Dairy Crest, and Dairies, comprising liquid products,household and ingredients and headed by Mark Allen. The restructuringstreamlined the roles and responsibilities of the senior management team,reduced duplication between the business units and our overhead costs. This costsaving has helped to offset the higher energy and packaging costs that have beenexperienced across the industry. PeopleOur people have responded particularly well to the challenges of the last twelvemonths. Our results have been achieved through the skills and efforts of all ourpeople, in whom we continue to invest. During the year we have significantlyincreased our investment in sales and marketing training in particular. Wecontinue to make progress in improving our communication and engagement with ourworkforce. OutlookWe have continued to invest in the long-term development of our brands and wehave made sound strategic moves to strengthen our Dairies business for thefuture. Trading at the start of the new financial year is in line with ourexpectations. Drummond Hall, Chief Executive24 May 2005 Operational review This operational review reflects the reporting divisions of Consumer Foods andFood Services in line with the segmental reporting analysis of these results. Consumer FoodsThe Consumer Foods division comprises the spreads, cheese and liquid productsbusinesses, including our share of the Yoplait Dairy Crest joint venture.Turnover increased to £887.3 million (2004 - £880.3 million). Operating profit,before operating exceptional items and goodwill amortisation, was flat at £72.0million (2004 - £72.2 million) with operating margin marginally down from 8.2%to 8.1% reflecting the competitive environment and cost inflation in retailmilk. SpreadsThe spreads business, the Group's biggest profit centre, has continued to makegood progress with increased profitability during the year. The butter andspreads market grew by 3% in value to approximately £845 million but declined by1% in volume. The growth in value reflects the impact of price increasesachieved across the market last summer and the general trend towards highervalue products such as spreadable butter. As expected, volumes were impacted bythe retailer moves towards "Every Day Low Pricing" which has reduced theopportunity for promotional activity. Against this market background, our spreads business has made progress due to asuccessful portfolio approach towards managing the brands and the increasedmarketing expenditure primarily directed at additional investment in media. Ourmarket-leading dairy spreads brands Clover and Utterly Butterly were supportedby television advertising campaigns. Whilst the dairy spreads category showedslight decline in both volume and value both Clover and Utterly Butterlydelivered sales value growth of 2% and 1% respectively despite a small declinein volumes. In September 2004 we acquired 100% ownership of the Country Life brand throughthe acquisition of the 44% minority interests in the English Butter MarketingCompany for a consideration of £4.6 million. Country Life packet butter andspreadable have performed strongly achieving sales value growth of 26% and 27%respectively. Whilst Country Life has a strong and growing market share inpacket butter, it is relatively small in spreadable. This is a real opportunityfor growth with the spreadable butter segment up by 10% in value in the year. Wewill be supporting the Country Life brand this summer with a major new marketingcampaign. Our health spread St. Ivel Gold has continued to make progress following itsrelaunch in the autumn of 2003 and we are seeing continued good underlying "offpromotion" growth. In January we launched Gold Lowest, the lowest fat brandedspread on the market and so far performance has been encouraging. CheeseThe UK cheese market grew by 1% in volume and 4% in value during the year and isnow worth over £1.8 billion. The mature and extra mature cheddar segment was thestrongest performing of the market, growing by 5% in both volume and value.Having risen in the second half of 2003/04 market prices remained stablethroughout the year reflecting the lower levels of industry cheese stocks. Up tothe end of March 2005, on a seasonally adjusted basis, we saw 29 successivemonths of decline in industry stocks. Dairy Crest significantly reduced its owncheese stocks during the year by approximately 11% or £18 million. Cathedral City had another year of strong growth, with both volume and value upby over 20%, reinforcing its position as the UK's leading branded cheddar. Thebrand is now worth approximately £90 million at retail prices. We have againincreased the level of marketing and promotional support behind the brand withnew television advertising. In addition we have extended the range with thelaunches of Cathedral City in grated form, a second version of Dip & Go! and anew "Lunch Pack" format. The Davidstow sub-brand also performed well with sales value growth of 8%. Thenew creamery at Davidstow was successfully commissioned last summer. The cheddarnow being manufactured at Davidstow has met all of our high quality and tastecriteria. The investment has increased capacity from 33,000 tonnes to 55,000tonnes per annum and this will support future growth of Cathedral City. The retailer own brand cheese market remained extremely competitive. However, wewere pleased to win a major agreement to supply ASDA with all of its own labelcheddar and other British cheeses. These arrangements commence in June 2005 andcover an annual volume of around 30,000 tonnes which will be made for ASDA atour creamery in Aspatria. The new arrangements will underpin the long-termfuture of this creamery and of our supplying dairy farmers in Cumbria. We were also pleased recently to win a significant new agreement to supply themajority of own label cheddar to Morrisons which will increase our annualisedvolume by approximately 8,000 tonnes. This volume will be supplied principallyfrom the Haverfordwest creamery. As a result of these business wins we will increase our cheese stocks. We are continuing to discuss cost related cheese price increases with ourcustomers. However we remain cautious over market prices in the medium term inthe context of the continued reduction in intervention prices under the EuropeanUnion CAP reform. Fresh dairy productsThe chilled yogurts and desserts market has again been a strong area of growthin the dairy sector with volumes up by 8% and value up by over 10%. The marketis now worth nearly £1.7 billion per annum. Our Yoplait Dairy Crest joint venture has continued to make good progress. TheYoplait Dairy Crest brands are now worth approximately £170 million at retailvalue and have delivered double-digit sales growth. All the key brands haveperformed well with Petits Filous up 14%, Frubes up 11%, Wildlife up 21%, YOP up35% and Weight Watchers up 14% by value during the year. Yoplait Dairy Crest hascontinued to grow market share in a very competitive market. Yoplait Dairy Crest has recently extended its market leading Petits Filous brandwith a smooth fruity yogurt. This is aimed at widening the brand's usage amongstolder children thereby reinforcing Yoplait's number one position in theimportant children's sector. The launch is being supported by a new televisioncampaign during May and June 2005. During the year the performance of the brands continued to be somewhat offset bythe difficulties in retailer own brand yogurts and desserts where marketsremained challenging. Consequently, Yoplait Dairy Crest decided to focus itsfuture development on branded products and, as previously announced, both theEnfield and Yeovil sites are expected to close by the end of June 2005. Theseactions will improve Yoplait Dairy Crest's profitability in 2005/06. Liquid productsThe retail milk market continued to grow during the year with volumes up byalmost 2%. The retail milk market is now worth over £2 billion per annum. Whilstour overall fresh milk volumes to major retailers were up 5% year on year,profitability in our liquid products business was impacted by the competitiveretail environment and higher fuel and plastics costs, particularly in thesecond half. During the financial year major food retailers reviewed their milk supplyarrangements. We were pleased to increase our share of Sainsbury's volume toapproximately 50% and to maintain our sole supply positions with Waitrose andMarks & Spencer. We will increase our share of Morrisons fresh milk supply fromapproximately 30% to approximately 50% from October 2005. However we lost oursupply positions with both Asda and Tesco with effect from November 2004 andApril 2005 respectively. We recently announced the acquisitions of both Starcross Foods Limited for £16.9million and Midlands Co-op Dairies for £20 million. Starcross is an advancedmodern facility, capable of processing up to 100 million litres of milk perannum. This will significantly extend our geographical footprint across Englandand Wales to cover most of the major northern conurbations. Midlands Co-opDairies processes approximately 200 million litres of milk per annum anddistributes fresh milk to a range of retail, wholesale and doorstep customersacross the Midlands region. This business will be consolidated into DairyCrest's existing dairy operations and it is anticipated that the Midlands Co-opBirmingham dairy will be closed in due course. Milk processing will betransferred to Dairy Crest's existing dairies including the Starcross site. Theacquisitions of Midlands Co-op Dairies and Starcross Foods and the recentbusiness wins are expected to have a broadly neutral effect on earnings in thefinancial year 2005/06 and benefit group profitability by approximately £4million per annum thereafter. These acquisitions better align our business tocustomers' requirements and have strengthened Dairy Crest's competitiveposition. The business achieved price increases on fresh milk sales in March and April2005. A significant element of this price increase was used to increase theprice we pay to our milk suppliers, whose costs have increased during the year.On average, taking into account customer specific milk pools, Dairy Crest hadincreased its prices for its liquid milk by 0.75 pence per litre by April 2005. We continue to work towards adding value to fresh milk in a number of ways. Theorganic milk business made good progress, benefiting from a strong market andthe continued improvement in managing the demand and supply balance. Retailerown label organic milk sales value grew by 38% and the Rachel's organic milkbrand (under licence from Horizon Organic Dairies) sales value grew by 22%. Frijj, our flavoured fresh milk drink, has maintained its position as theleading brand in the flavoured fresh milk sector with sales up 1% by value. Wehave improved our added value mix of potted cream business even though overallvolumes are slightly down. Our potted cream business will benefit in the currentfinancial year from the completion of the investment in a new speciality creamfacility at our Chard site. In May 2005 we launched "St. Ivel advance", a newbranded fresh milk enriched with Omega-3. Food ServicesThe Food Services division comprises Dairy Crest's household and ingredientsoperations. Turnover decreased by 4% to £461.5 million (2004 - £481.5 million),reflecting the downsizing of our commodity ingredients business in 2003/04.Operating profit, before operating exceptional items and goodwill amortisation,decreased by 12% to £28.6 million (2004 - £32.6 million), reflecting the ongoingdecline in our household business, partially offset by a good performance fromour ingredients operations. The Food Services margin decreased from 6.8% to6.2%. HouseholdThe household business has performed well with an overall increase in volumesfollowing business gains with wholesalers and smaller retailers. As a result,together with a doorstep price increase of one penny per pint from October 2004,overall turnover for the household business was slightly up. Our increasedcanvassing activity and "first class service" initiatives have helped reduce theunderlying annual decline rate in doorstep, which is now at around 8%. An area of focus during the year has been on non-milk products such as juice,organic fruit and vegetables. Non-milk product sales on the doorstep grew byover 8% year on year despite the underlying decline in doorstep customers. Weagain had a successful Christmas which is a key trading period for non-milkproducts. We have continued the successful programme of infill acquisitions. We expectthat doorstep operations will benefit from the acquisition of Midlands Co-opDairies which has a sizeable doorstep business with sixteen distribution depotsacross the Midlands region. This will provide an extended network increasing theopportunity for future infill acquisitions. IngredientsIngredients markets have remained relatively strong for most of the year leadingto a good performance. The impact of the initial implementation of CAP reformwas delayed until the last quarter of the year. We expect CAP reform to havegreater influence in 2005/06 through reduced commodity prices. A furtherreduction in intervention prices of 7% on butter and 5% on skimmed milk powderwill take place in July 2005. Financial review TurnoverGroup turnover, including our share of joint ventures' turnover, reduced by 1%to £1,349 million principally reflecting the full year impact of the closure ofour ingredients facility at Chard in July 2003. Operating profitIn this review, except where otherwise referred to, operating profit is statedbefore exceptional items and goodwill amortisation. Operating profit reduced by4% to £100.6 million after absorbing an increase in pension costs of £4.3million. After operating exceptional items and goodwill amortisation, operatingprofit increased by 20% to £82.1 million. Consumer Foods operating profit, including our share of joint ventures' profit,was flat at £72.0 million reflecting a good performance by spreads and YoplaitDairy Crest offset by margin pressure in liquid products. Consumer Foods margindecreased by 0.1% to 8.1%. Food Services operating profit decreased by 12% to£28.6 million reflecting the on-going decline in the household businesspartially offset by a strong performance from the ingredients operation. TheFood Services margin decreased by 0.6% to 6.2%. Exceptional items and goodwill amortisationExceptional costs of £5.4 million have been charged against operating profit, ofwhich £4.3 million represents our share of Yoplait Dairy Crest's closure costsof its factories at Enfield and Yeovil. In addition, operating exceptional costsof £1.1 million have been incurred in the commissioning of our Davidstowcreamery which is now completed. Goodwill amortisation amounts to £13.1 million (2004 - £12.2 million) of which£7.1 million relates to the acquisition of the St Ivel Spreads business. We have also recognised non-operating exceptional profits of £1.0 millionrepresenting profits on disposal of closed dairy sites and receipt of contingentconsideration relating to the sale of the juice business. InterestThe Group's interest charge has decreased by 17% to £16.4 million. This decreasereflects the impact of lower debt levels and the benefit from reduced marginsand fees following the refinancing of our facilities in June 2004. The interestcharge includes £0.1 million (2004 - £0.4 million) in respect of our share ofYoplait Dairy Crest's interest charge and is stated after capitalising interestof £0.1 million (2004 - £2.4 million) on our capital investment at Davidstow.Interest cover calculated before operating exceptional items and goodwillamortisation was 6.1 times (2004 - 5.3 times). TaxationThe Group's effective tax rate on profits excluding exceptional items andgoodwill amortisation was 27.1% (2004 - 27.0%). This reflects a benefit of 0.8%(2004 - 2.9%) from adjustments to tax liabilities in respect of prior years. Thetax credit on the operating exceptional items of £5.4 million was £1.6 million,a rate of 29.6% and the tax charge on the non-operating exceptional items of£1.0 million was £0.3 million. Overall, excluding goodwill amortisation, theGroup's effective tax rate was 26.9% (2004 - 22.0%). Earnings per shareThe Group's adjusted earnings per share reduced by 1% to 49.3 pence per share.Basic earnings per share which includes the impact of exceptional items andgoodwill amortisation, increased by 36% to 38.2 pence per share. The weighted average number of shares increased by approximately 0.8 million to123.4 million, following the exercise of sharesave and long term incentive shareplan options. DividendsThe proposed final dividend of 14.3 pence per share, together with the interimdividend of 5.9 pence per share, gives a total dividend of 20.2 pence per sharefor the full year. This represents an increase of 7% on the dividend declaredfor 2003/04. The final dividend will be paid on 9 August 2005 to shareholders onthe register on 8 July 2005. Dividend cover, calculated as profit for the year after minority interests,excluding exceptional items and goodwill amortisation, divided by dividendspayable, was 2.4 times (2004 - 2.6 times). PensionsDuring the year, the actuary completed the triennial valuation of the DairyCrest Group Pension Fund as at 31 March 2004. This indicated that there was asurplus of £30 million of the funds' assets over the value of the membersaccrued benefits. This compared with a deficit under Financial ReportingStandard No. 17 on Retirement Benefits (FRS 17) of £95.2 million at this date.The difference between the two assessments arises because the actuarial basisunder Statement of Standard Accounting Practice No. 24 - Accounting for PensionCosts (SSAP 24) uses the weighted average return on investments to discount theliabilities whereas FRS 17 uses the AA Corporate Bond yield. At 31 March 2004,the respective discount rates were 7.2% and 5.6% for SSAP 24 and FRS 17. The Group increased its contributions from 4% to 7.9% of pensionable salarieswith effect from April 2004 and it has increased its contributions by a further3.5% to 11.4% from April 2005. We continue to apply the transitional arrangements of FRS 17 and will movedirectly to the International Accounting Standard (IAS) equivalent for thefinancial year ending 31 March 2006. The actuary has estimated that on an FRS 17 basis the gross deficit in the fundat 31 March 2005 was £104.4 million compared with a deficit of £95.2 million at31 March 2004. The movement largely reflects a gain of £20.4 million as a resultof the actual return on investments being above the expected return offset by anincrease in the present value of liabilities of £20.3 million, principally dueto an increase in the market expectation of future inflation of 0.1% per annumand a reduction of 0.1% in the yield on AA corporate bonds and a difference of£8 million between the FRS 17 current service cost and the employers' pensioncontributions paid into the fund. At 31 March 2005 the fund was invested inequities (76%) and Index Linked Gilts (24%). Cash flowThe cash inflow from operating activities was £143.0 million (2004 - £136.6million). This included a working capital inflow of £20.6 million (2004 - £10.2million). Stocks decreased by £16.8 million principally reflecting reductions inmaturing cheese stocks. Depreciation amounted to £34.4 million (2004 - £36.0 million) and goodwillamortisation amounted to £13.1 million (2004 - £12.2 million). Interest payments amounted to £17.7 million including fees relating to therefinancing of facilities in June 2004. The Group currently borrows at a marginof 47.5 - 75 basis points over the relevant interbank rate. Tax payments were £12.6 million (2004 - £8.7 million) reflecting lowerexceptional costs and the continuedbenefit of capital allowances on capital expenditure on major projects. Capital expenditure, net of grants of £1.6 million, was £37.7 million withsignificant amounts being invested at Chard, Somerset on our new cream facilityand at Davidstow, Cornwall and Hartington, Derbyshire. The Group's cash flowbenefited by £8.2 million resulting from the disposal of fixed assets. Inaddition, the Group undertook a sale and leaseback of £18.7 million ofprocessing equipment at Davidstow. Net borrowingsNet debt decreased by £52.2 million to £227.5 million at the end of the yearwhich reflects profits, improved working capital and reduced capitalexpenditure. At 31 March 2005, gearing was 83% (2004 - 113%). Shareholders' fundsShareholders' funds at 31 March 2005 were £262.5 million including goodwill of£97.3 million, £16.9 million of which related to the Unigate dairy and cheeseacquisition and £53.8 million to the St Ivel Spreads acquisition. The Group'sbalance sheet is strong with stocks of £172.7 million and tangible fixed assetsof £322.7 million. Treasury policiesThe Group operates a centralised treasury function which controls cashmanagement and borrowings and the Group's financial risks. The main treasuryrisks faced by the Group are liquidity, interest rates and foreign currency. TheGroup uses derivatives only to manage its foreign currency and interest raterisks arising from underlying business activities. Transactions of a speculativenature are prohibited. The Group's treasury activities are governed by policiesapproved and monitored by the Board. These policies are summarised below. Liquidity riskThe Group's objective is to ensure that forecast net borrowings plus areasonable operating headroom are covered by committed facilities which matureat least 12 months after the year end. At 31 March 2005 the Group's total credit facilities amounted to £470 million.The facility consists of a five year term loan of £80 million repayable in foursemi-annual instalments from December 2008 to June 2010, a £270 million fiveyear multi-currency revolving credit facility repayable at maturity in June 2010and a five year term loan facility of £120 million repayable in four semi-annualinstalments from March 2006 to September 2007. Short-term funding requirements are met through uncommitted overdraft andshort-term facilities amounting to over £20 million. All borrowings are through banks with strong long-term credit ratings. Fundstemporarily surplus to business requirements are invested overnight throughdeposit accounts with commercial banks with a credit rating of AA or better. TheGroup currently has no requirement to place deposits for a longer period,accordingly counterparty risk is considered to be low. Foreign currency riskTranslation exposures arise on the earnings and net assets of our overseassubsidiary, Wexford Creamery Limited. Our policy is to hedge the net assetexposure through borrowings in the relevant foreign currency. At present, ouronly translation exposure is in euros. The majority of the Group's transactions are carried out in sterling and sotransaction exposures are limited. The Group trades skimmed milk products andbulk butter mainly to customers in Europe and Central and South America. TheGroup also exports its own skimmed milk products, bulk butter, Stilton and otherbranded products. The Group's policy requires foreign currency sales andpurchases to be hedged by foreign exchange contracts once the transaction iscommitted so that the margin on the transaction can be fixed. In addition asubstantial part of Yoplait Dairy Crest's purchases are denominated in euros. Currency exposures on other transactions, such as capital expendituredenominated in a foreign currency, are hedged following approval of the projectusing forward foreign exchange contracts. Interest rate riskThe Group's policy is to reduce the exposure of the business to changes ininterest rates. The Group borrows at floating rates of interest and usesinterest rate swaps or forward rate agreements to limit the exposure tomovements in sterling LIBOR, although interest rate caps may also be used. Thepolicy is to fix or cap the interest cost on between one third and threequarters of floating rate borrowings, although a higher percentage may be fixedwithin a 12 month horizon. £170 million, 75% of net debt, was fixed at 31 March2005 for remaining terms of up to five years. International financial reporting standardsInternational Financial Reporting Standards (IFRS) have come into force forlisted companies in all member countries of the European Union from January2005. Thus Dairy Crest will be required to prepare its accounts in accordancewith IFRS for the year ending 31 March 2006. The Company has completed its initial assessment of the adjustments required torestate the accounts from UK GAAP to IFRS for the year ended 31 March 2005. Thisassessment has been based on all IFRS and interpretations issued by theInternational Accounting Standards Board (IASB) and its committees. These aresubject to ongoing amendment by the IASB and industry interpretation. They areunaudited and are subject to possible change. Dairy Crest estimates that under IFRS, the Group's net assets at 31 March 2005will be reduced by around £51 million. The largest adjustment relates to thechange in accounting for pensions under IFRS where the net deficit in the DairyCrest Group Pension Fund of £73.1 million (after deferred taxation of £31.3million) is included as a liability in the balance sheet. In addition thepension prepayment of £3.7 million (net of deferred tax) has to be reversed.Offsetting this the accrual for the final dividend of £17.7 million is reversedand reflected as a liability when declared in 2005/06 and goodwill amortisationof £10.6 million (after deferred taxation of £2.5 million) is also reversed. Itis also estimated that, under IFRS, the profit before tax excluding exceptionalitems and goodwill amortisation for the year ended 31 March 2005, will reduce byaround £9 million. This principally relates to increased charges for pensions ofaround £7 million and for share based payments of around £2 million. Theintroduction of IFRS will have no impact on the reported cash flows of theGroup. A detailed presentation on the impact of restating the accounts from UKGAAP to IFRS is available on the Dairy Crest website www.dairycrest.co.uk. Going concernThe financial statements have been prepared on a going concern basis as thedirectors are satisfied that the Group has adequate financial resources tocontinue its operations for the foreseeable future. In making this statement,the directors have reviewed the Group's budget and available facilities and havemade such other enquiries as they considered appropriate. Alastair Murray, Finance Director24 May 2005 Consolidated profit and loss account Year ended 31 March 2005 Year ended 31 Year ended March 2005 31 March 2004 Note £m £m £m £m --------- --------- --------- -------- Before Exceptional Total Total exceptional items and items and goodwill goodwill amortisation amortisation --------- --------- --------- --------Turnover Group andshare ofjoint ventures 3 1,348.8 - 1,348.8 1,361.8 Less: Share ofjoint ventures 3 (88.2) - (88.2) (90.6) --------- --------- --------- -------- Group turnover 2, 3 1,260.6 - 1,260.6 1,271.2 Operatingcosts beforeexceptionalitems andgoodwillamortisation 4 (1,167.5) - (1,167.5) (1,172.0) Operatingexceptionalitems 4, 5 - (1.1) (1.1) (20.8) Goodwillamortisation 4 - (13.1) (13.1) (12.2) --------- --------- --------- --------Operatingcosts (1,167.5) (14.2) (1,181.7) (1,205.0) --------- --------- --------- --------Groupoperatingprofit 93.1 (14.2) 78.9 66.2 Share ofprofits ofjoint ventures 3, 5 7.5 (4.3) 3.2 2.2 --------- --------- --------- -------- Totaloperatingprofit Group andshare ofjoint ventures 3 100.6 (18.5) 82.1 68.4 Profits/(loss)on disposalof business andproperties 5 - 1.0 1.0 (3.1) Net interestpayable - Group (16.3) - (16.3) (19.3) - Share ofjoint ventures (0.1) - (0.1) (0.4) --------- --------- --------- -------- Profit onordinaryactivitiesbeforetaxation 84.2 (17.5) 66.7 45.6 Tax onprofiton ordinary activities 6 (22.8) 3.8 (19.0) (10.4) --------- --------- --------- -------- Profit fortheyear beforeminority interests 61.4 (13.7) 47.7 35.2 Equityminorityinterests (0.5) - (0.5) (0.8) --------- --------- --------- --------Profit fortheyear afterminority interests 60.9 (13.7) 47.2 34.4 Dividends 7 (24.9) - (24.9) (23.4) --------- --------- --------- --------Transfer toreserves 10 36.0 (13.7) 22.3 11.0 --------- --------- --------- -------- Basicearnings per share(p) 8 38.2 28.1 Adjustedearnings pershare (p) 8 49.3 50.0 Dilutedearnings pershare (p) 8 37.8 27.5 The profit and loss accountrelates to continuingoperations. Statement of Group total recognised gains andlosses Year ended Year ended 31 March 2005 31 March 2004 £m £m --------- --------Profit for the year after minority interests 47.2 34.4 Translation differences on foreign currency 0.1 0.2investments --------- --------Total recognised gains for the year 47.3 34.6 --------- -------- Net assets at 31 March 2004 were originally £237.7 million before deducting aprior year adjustment of £0.9 million for the change in accounting policy forowned shares as set out in Note 1. Consolidated balance sheetas at 31 March 2005 --------- --------- Note 2005 2004 £m *Restated £m --------- ---------Fixed assets Intangible assets 97.3 99.8 Tangible assets 322.7 321.2 Investments in joint ventures Share of gross assets 22.6 21.4 Share of gross liabilities (16.2) (17.3) --------- --------- 6.4 4.1 --------- --------- 426.4 425.1 --------- ---------Current assets Stocks 172.7 188.5 Debtors 129.3 130.6 Cash at bank and in hand 27.2 16.6 --------- --------- 329.2 335.7 --------- ---------Creditors: amounts falling due within one year Borrowings (0.3) (3.5) Other creditors (182.8) (175.2) --------- --------- (183.1) (178.7) --------- ---------Net current assets 146.1 157.0 --------- --------- Total assets less current liabilities 572.5 582.1 Creditors: amounts falling due after more than oneyear Borrowings (254.4) (292.8) Other creditors (10.7) (10.3)Provisions for liabilities and charges (34.7) (32.4) --------- --------- Net assets 272.7 246.6 --------- --------- Capital and reserves Called up equity share capital 9 31.2 31.0 Equity reserves Share premium account 10 28.2 24.8 Merger reserve 10 55.9 55.9 Owned shares 10 (1.6) (3.8) Profit and loss account 10 148.8 128.9 --------- --------- Equity shareholders' funds 11 262.5 236.8 Equity minority interests 10.2 9.8 --------- --------- 272.7 246.6 --------- --------- *Restated for the change in accounting policy for owned shares as set out innote 1. Consolidated cash flow statement Year ended 31 March 2005 Year ended Year ended 31 March 2005 31 March 2004 Note £m £m ---------- ----------Net cash inflow from operatingactivities 12(a) 143.0 136.6 ---------- ----------Dividends from joint ventures - 0.6 ---------- ---------- Returns on investments and servicingof finance Interest paid (17.7) (20.6) ---------- ----------Net cash outflow from returns oninvestments and servicing of finance (17.7) (20.6) ---------- ----------Taxation paid (12.6) (8.7) ---------- ----------Capital expenditure Payments to acquire fixed assets (netof grants) (37.7) (41.7) Proceeds from disposals of fixed assets 12(c) 8.2 12.0 ---------- ---------- Net cash outflow for capital (29.5) (29.7)expenditure ---------- ---------- Acquisitions and disposals Purchase of businesses 13 (9.9) (3.7) Receipt from sale of business 12(c) 0.2 10.3 ---------- ----------Net cash (outflow)/inflow fromacquisitions and disposals (9.7) 6.6 ---------- ----------Equity dividends paid (23.9) (20.5) ---------- ----------Net cash inflow before financing 49.6 64.3 ---------- ----------Financing Decrease in long-term borrowings (57.2) (37.0) Decrease in short-term borrowings (3.5) (18.6) Decrease in loan notes - (1.4) Proceeds from exercise of options byemployees 3.6 0.2 Proceeds from sale and leaseback 18.7 - Finance lease repayments (0.6) (0.7) ---------- ----------Net cash outflow from financing (39.0) (57.5) ---------- ----------Increase in cash in the year 10.6 6.8 ---------- ---------- Reconciliation of net cash flow to movement innet debt Net debt at beginning of the year (279.7) (345.2) Increase in cash in the year 10.6 6.8 Decrease in short-term borrowings 3.5 18.6 Decrease in long-term borrowings 57.2 37.0 Decrease in loan notes - 1.4 Proceeds from sale and leaseback (18.7) - Cash outflow from decrease in leasefinancing 0.6 0.7 Exchange differences on long-termborrowings (1.0) 1.0 ---------- ----------Net debt at end of the year 12(b) (227.5) (279.7) ---------- ---------- Notes to the Consolidated Financial Information 1 Basis of preparationThe preliminary announcement has been prepared using the accounting policies setout in the Group's 2004 statutory accounts except as noted below. The Group has adopted Urgent Issues Task Force Abstract 38 - Accounting for ESOPtrusts which required the net book value of shares held by the Dairy CrestEmployees' Share Ownership Plan (ESOP) Trust to be deducted from Shareholders'Funds instead of being shown as Fixed Assets-Investments. The comparativebalance sheet and reserves at 31 March 2004 have been restated to reflect thisadjustment. There is no impact on results for the current or prior year. 2 TurnoverTurnover originates principally in the United Kingdom. Analysis of turnover bydestination which all relates to continuing operations: --------- --------- Year ended Year ended 31 March 2005 31 March 2004 £m £m --------- --------- United Kingdom 1,176.0 1,184.2 Other EU countries 26.5 24.7 Rest of the world 58.1 62.3 --------- --------- Group 1,260.6 1,271.2 --------- --------- 3 Segmental informationAnalysis of turnover, operating profit and net operating assets of continuingoperations by business segment: --------- --------- Year ended Year ended 31 March 2005 31 March 2004 £m £m --------- --------- Turnover Consumer Foods 887.3 880.3 Food Services 461.5 481.5 --------- --------- Group and share of joint ventures 1,348.8 1,361.8 Less: Share of joint ventures - Consumer Foods (88.2) (90.6) --------- --------- Group turnover 1,260.6 1,271.2 --------- --------- Year ended 31 Year ended 31 March 2005 March 2004 £m £m £m £m £m £m -------- -------- ------ -------- -------- ------ Before Operating Total Before Operating Total operating exceptional operating exceptional exceptional items and exceptional items and items and goodwill items and goodwill goodwill amortisation goodwill amortisation amortisation amortisation -------- -------- - ----- -------- -------- ------ Operatingprofit ConsumerFoods 64.5 (12.4) 52.1 66.6 (15.0) 51.6- Group- Share ofjoint ventures 7.5 (4.3) 3.2 5.6 (3.4) 2.2Food 28.6 (1.8) 26.8 32.6 (18.0) 14.6Services -------- -------- ------ -------- -------- ------ Group andshare ofjoint ventures 100.6 (18.5) 82.1 104.8 (36.4) 68.4 -------- -------- ------ -------- -------- ------ At At 31 March 2005 31 March 2004 £m £m --------- -------- Net operating assets Consumer Foods 498.3 526.6 Food Services 70.6 61.8 --------- -------- Group and share of joint ventures 568.9 588.4 --------- -------- Net operating assets comprise net assets excluding cash, borrowings, tax anddividend creditors. 4 Operating costs Year ended 31 March 2005 Year ended 31 March 2004 £m £m £m £m £m £m £m £m ------- ------- ------- ------ ------- ------- ------- ------ Before Operating Goodwill Total Before Operating Goodwill Total operating exceptional amortisation operating exceptional amortisation exceptional Items exceptional items items and items and goodwill goodwill amortisation amortisation ------- ------- ------- ------ ------- ------- ------- ------ Cost of sales 926.9 1.1 - 928.0 940.0 19.9 - 959.9 Distributioncosts 190.8 - - 190.8 185.0 - - 185.0 Administrationcosts 49.8 - 13.1 62.9 47.0 0.9 12.2 60.1 ------- ------- ------- ------ ------- ------- ------- ------ 1,167.5 1.1 13.1 1,181.7 1,172.0 20.8 12.2 1,205.0 ------- ------- ------- ------ ------- ------- ------- ------ 5 Exceptional items Year ended Year ended 31 March 2005 31 March 2004 £m £m --------- --------- Operating exceptional items Fixed asset write-downs (net of grant release) (0.2) 16.2 Redundancy costs - 1.6 Consumable and engineering stock write-offs - 0.7 Other rationalisation costs 1.3 2.3 --------- --------- 1.1 20.8 Share of joint venture's write-down of fixed assets and consumables 1.2 3.4 Share of joint venture's net loss on closure of site and related rationalisation costs 3.1 - --------- --------- 5.4 24.2 --------- --------- Non-operating exceptional items Profit on disposal of properties (0.4) (0.1) (Profit)/loss on disposal of juice business (0.3) 3.2 Share of joint venture's profit on disposal of property (0.3) - --------- --------- (1.0) 3.1Related Shares:
Dairy Crest