Financial review

 

Revenue

Reported Group revenue from continuing activities increased by 5% to £1,647.6 million, principally reflecting the impact of price increases in the prior year, increased volumes across our key brands and the translation impact of Sterling weakness on St Hubert revenues. Group revenue, including our share of joint ventures, increased by 5% to £1,717.9 million.

Profit on operations

In this review, except where otherwise indicated, profit on operations is from continuing operations, includes our share of joint ventures’ pre-exceptional post-tax profit and is stated before exceptional items and amortisation of acquired intangibles. On this basis, Group profit on operations decreased by 2.9% to £109.0 million, generating an operating margin of 6.3%. Reported profit on operations from continuing operations after exceptional items was £68.1 million (2008: £74.4 million) a decrease of 8.5%.

The Foods division’s profit on operations increased by 25.4% to £101.1 million reflecting a strong Spreads performance compared to last year when results were adversely affected by the Clover recall in May 2007. Furthermore, Sterling weakness in 2008/09 has improved reported St Hubert profits when translated into Sterling. Operating margins in the Foods division increased from 14.2% to 16.6%.

The Dairies division has been impacted by losses in our Ingredients operations due to sharp falls in realisations in the second half. Additionally, the doorstep decline rate increased in the Autumn although this has since improved. Finally, property profits of £4.3 million are £2.3 million lower than last year reflecting the weak UK property market. Profit on operations fell to £7.9 million as a result of these factors however the closure of the Nottingham dairy further improved the liquids operational cost efficiencies and fresh milk volumes have increased in the year. Dairies margins decreased from 3.0% to 0.7%.

Exceptional items

Exceptional gains of £26.4 million represent the profit on disposal of our share in Yoplait Dairy Crest Limited (‘YDC’), the loss on disposal of our Stilton and speciality cheese business, the closure of the Nottingham dairy (and associated distribution changes), the extra costs of dual running of our new cheese cutting and packing facility at Nuneaton with the existing packing agreement, a non-cash asset impairment in relation to our business in Wexford and final amounts in relation to exceptional costs charged in 2007/08, namely the onerous contract provision and the closure of a dairy in Totnes, Devon.

On 26 March 2009 we sold our 49% investment in YDC to Yoplait SAS for gross consideration of £63.5 million resulting in a Group profit on disposal of £50.4 million.

On 23 August 2008 we sold the property, plant and equipment and inventories of our Stilton and speciality cheese business based in Hartington, Derbyshire to Long Clawson Dairies Limited for gross consideration of £3.8 million resulting in a Group loss on disposal of £4.5 million.

During the second half of the year, we closed our dairy processing plant in Nottingham and reconfigured our milk distribution arrangements by moving to regional distribution centres (‘RDCs’). As previously announced, this restructuring cost has been treated as exceptional and amounted to £7.2 million, of which £2.1 million related to asset impairments and £5.1 million were cash costs being principally costs of redundancy.

Since the sale of our commodity cheese business in October 2006 to First Milk Limited, the purchaser has been cutting and packing our product under a transitional agreement. During the year to 31 March 2009 we have completed the building of a new cheese cutting and packing facility at our National Distribution Centre at Nuneaton. This will reduce the physical movement of cheese between sites in the future and allow us to exit the transitional arrangements with First Milk Limited. The plant and equipment was commissioned in early 2009 and volumes have been increasing since that time. We expect to reach the required volumes by July 2009. During this period of volume transferral from First Milk to Nuneaton there are cost inefficiencies at both sites leading to dual running costs until full exit from First Milk is completed. In the year to 31 March 2009 these amounted to £3.7 million and a further £1.0 million is expected to be incurred during the first half of 2009/10.

Weakening realisations from commodity cheese have adversely impacted the performance of our business in Wexford, Ireland. As a result, an impairment of £5.6 million has been charged against the carrying value of plant and equipment in the year ended 31 March 2009.

The unprecedented increase in milk costs in 2007/08 resulted in a long-term supply contract with a middle ground customer becoming onerous in that year. A provision of £4.4 million was charged last year which represented the present value of future cash outflows estimated to result from this contract. The negotiation to exit this contract took more time than anticipated last year however resolution is now expected in the first half of 2009/10 and the contract should cease to be onerous from that time. A final exceptional amount of £1.0 million has been charged in the year to March 2009 reflecting additional cash outflows under this contract versus those anticipated last year and some minor asset impairments.

In September 2007, we closed our Totnes site and an exceptional cost of £4.8 million was charged last year. Delays in the planning process and the very weak UK property market has caused significant delays to the final sale of the Totnes site and in the light of this a further £2.0 million has been charged as exceptional in the year ended 31 March 2009 in order for the carrying value of the property to reflect our revised best estimate of fair value less costs to sell.

Interest

Finance charges have increased by 12.6% to £29.5 million principally as a result of the translation effect on Euro-denominated interest costs. The decision to reduce Euro-denominated debt in the second half will reduce the exposure of interest costs to exchange movements in the future. Currently, approximately 70% of Group debt is at fixed rates of interest through fixed coupon loan note issues or interest rate swaps.

Other finance income comprises the net expected return on pension scheme assets after deducting the interest cost of the defined benefit obligation. This resulted in a credit of £6.9 million in the year ended 31 March 2009, a decrease of £3.2 million compared to the previous year. This amount can be highly volatile year on year as it is dependent upon financial market conditions on a specific day, namely 31 March. This volatility and the fact that the amount bears no relation to the underlying operational performance of the business have led us to exclude this item from ‘adjusted profit before tax’ - see below.

Interest cover excluding the pension interest credit, calculated on adjusted profit from operations, remains comfortable, at 3.7 times (2008: 4.3 times).

Non-GAAP profit before tax measure
Year ended 31 March 2009
						2009						2008
		Before exceptional items £m		exceptional items £m		Total £m		Before exceptional items £m		exceptional items £m		Total £m
Profit from continuing operations before tax		76.8		26.4		103.2		87.1		(21.1)		66.0
Amortisation of acquired intangibles		9.6		–		9.6		9.0		–		9.0
Adjusted Group profit before tax		86.4		26.4		112.8		96.1		(21.1)		75.0
Pension interest credit		(6.9)		–		(6.9)		(10.1)		–		(10.1)
Revised adjusted Group profit before tax		79.5		26.4		105.9		86.0		(21.1)		64.9

Adjusted profit before tax

The Group’s adjusted profit before tax on a historic basis (calculated on continuing operations, before exceptional items and amortisation of acquired intangibles) was £86.4 million (2008: £96.1 million). This definition has been revised to exclude other finance income relating to pensions. Under this measure, the Group’s adjusted profit before tax was £79.5 million (2008: £86.0 million). The reconciliation to reported profit before tax is as shown above.

Profit before tax from continuing operations after exceptional items, reported under IFRS, was £103.2 million (2008: £66.0 million).

Taxation

The Group’s effective tax rate on profits excluding exceptional items and including joint ventures’ tax was 26.8% (2008: 23.2%). The effective tax rate is below the mixed UK / France statutory rate of corporation tax due to:

• the profit on depot disposals (£4.3 million) being sheltered by rollover relief and brought forward capital losses; and
• the benefit of certain tax efficient financing structures that were implemented on the acquisition of St Hubert.

The increase in effective rate of tax compared to last year is due to lower property profits (which are tax free), a higher proportion of St Hubert profits and tax due to Sterling weakness (French profits are taxed at higher rate), the lost benefit from the St Hubert financing structures following the March 2008 budget and the extra benefit in 2007/08 of deferred tax balances being reduced as the UK rate of corporation tax reduced from 30% to 28%. The effective rate of tax is expected to increase next year to approximately 28%.

Furthermore, the first half of 2008/09 saw the enactment of the cessation of industrial buildings’ allowances. Under IFRS the Group must recognise a non-cash deferred tax liability which will unwind over 25 years. This deferred tax liability was charged as exceptional tax in the first half and amounted to £14.3 million.

The reported Group effective tax rate from continuing operations is 28.0% (2008: 18.9%)

Group profit for the year

Reported Group profit for the year after discontinued operations increased by 35.8% to £74.3 million (2008: £54.7 million).

Earnings per share

The Group’s adjusted basic earnings per share from continuing operations decreased by 13.0% to 45.0 pence per share (2008: 51.7 pence per share). This measure has been amended to exclude the pension interest credit consistent with our adjusted profit before tax measure going forward. Under the old measure, adjusted earnings per share decreased by 14.5% to 48.8 pence per share (2008: 57.1 pence per share). In the year to 31 March 2009, Yoplait Dairy Crest contributed £7.1 million of profit after tax and 5.4 pence per share.

Basic earnings per share from continuing operations which includes the impact of exceptional items, pension interest income and the amortisation of acquired intangibles, increased by 41.3% to 56.8 pence per share (2008: 40.2 pence per share). This reflects the exceptional profit on disposal of YDC in the year ended 31 March 2009.

A diluted earnings per share calculation, which reflects the impact of potential ordinary shares from unvested share option schemes, is presented for both the basic and adjusted earnings per share amounts.

Dividends

The proposed final dividend of 13.0 pence per share gives a total dividend of 20.1 pence per share for the full year. The proposed final dividend represents a 25% rebasing compared to last year. The final dividend will be paid on 6 August 2009 to shareholders on the register on 26 June 2009. The interim dividend paid on 29 January 2009, was 7.1 pence per share. If this had been subject to the rebasing noted above the payment would have been 5.3 pence per share.

Pensions

The total pension deficit at 31 March 2009 was £63.3 million compared to a £31.6 million surplus at 31 March 2008. The position worsened due to the unprecedented weak performance of equity and bond markets during the year partly mitigated by increased AA corporate bond yields, which under IAS 19 are used to discount pension liabilities. The Group paid an additional £12 million into the main UK scheme during the year. Looking ahead, the Group will resume deficit funding contributions at a rate of £20 million per annum from October 2009.

The reported pension deficit is extremely sensitive to changes in underlying assumptions and will, inevitably, be volatile from year to year. The actuarial loss reported in equity for the year is £118.1 million (2008: £10.7 million gain).

During the year, the Trustee of the pension fund agreed a £150 million transaction with Legal & General to insure around half of the fund’s liability for pensions in payment. This structure provides flexibility for Dairy Crest and the Trustee to explore further similar arrangements in the future. For the liabilities insured, the deal provides protection against both financial and demographic pension risks, in particular members living longer than expected. The Fund will continue to pay pensions and members will not be impacted directly as the policy is an investment of the Fund. Dairy Crest remains committed to working together with the Trustee to meet its pension obligations, through a combination of cash funding and strategic investment of the Fund’s assets.

Cash flow

Cash generated from operations was £129.1 million in the year (2008: £108.4 million). This includes a working capital inflow of £19.1 million (2008: £7.4 million outflow). The increased working capital inflow in 2008/09 was achieved despite an outflow in relation to stocks of £38.3 million.

The stock increase principally relates to cheese stock inflation due to milk cost increases during 2007/08. In the first half of the year, the remaining lower cost cheese was sold through. Stocks of ingredients peaked at the half year, however the volume of milk processed into ingredients was substantially reduced in the second half and ingredients stock levels of below £5 million at 31 March 2009 are back at normal levels.

There has been substantial progress this year in reducing debtors in our Household business, where the level of trade debtors is approximately £20 million less than at 31 March 2008. A further benefit was the timing of receipt of large customer payments around the year end. Several customers pay monthly around the calendar month end and we benefited in March 2009 from certain customer receipts falling before the year end cut-off. This beneficial timing difference will not necessarily repeat in future periods.

Capital expenditure of £49.3 million (net of grants), was £15.3 million higher than last year (2008: £34.0 million). Significant investment was undertaken at our National Distribution Centre in Nuneaton during the year in order to build and commission a new cheese cutting and packing facility. The spend during the year was £17.2 million and the facility commenced operating in the last quarter with target capacity utillisation expected by July 2009. Cash receipts from the disposal of fixed assets amounted to £22.4 million (2008: £13.2 million) and include £15.5 million from sale of certain plant and equipment at Nuneaton which has been leased back under an operating lease.

Cash interest and tax payments amounted to £30.3 million and £9.2 million respectively (2008: £22.9 million and £6.7 million). Interest payments are £7.4 million higher than last year consistent with the higher interest cost in the profit and loss account. Tax payments remain low in the UK due to additional pension deficit contributions of £12 million on which we receive a tax deduction.

Cash inflows from the sale of businesses of £63.1 million comprise £59.9 million from the sale of our 49% share of Yoplait Dairy Crest in March 2009 and £3.2 million from the sale of our Stilton and speciality cheese business in August 2008. There was minimal expenditure of £0.3 million on infill acquisitions in the Household business during the year.

The Group received £2.9 million in dividends from YDC in the year (2008: £7.3 million) and paid dividends to shareholders of £32.3 million (2008: £30.8 million).

Net debt

Net debt decreased by £59.0 million to £415.8 million at the end of the year as strong operating cash flows and receipts from the sale of businesses more than offset the £36.1 million increase in reported net debt due to the translation effect of weaker Sterling. 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.

In July 2008 the Group successfully agreed a new 5-year revolving credit facility of £85 million and €175 million which replaced the 2004 facility that was due to expire in June 2009. Despite difficult credit markets the Group succeeded in agreeing unchanged financial covenants in the new facility and had good support from the existing syndicate of banks. The Group remains comfortably within its covenants with the net debt to EBITDA ratio (for covenant purposes) at 31 March 2009 just below 3.0 times.

During the year, the Group reduced its net debt / EBITDA exposure to fluctuations in the Sterling / Euro exchange rate by reducing Euro-denominated borrowings by €225 million. This limits the impact on our banking covenant should Sterling depreciate further in the future.

At 31 March 2009, gearing (being the ratio of net debt to shareholders’ funds) was 116% (2008: 122%).

Borrowing facilities

Group borrowing facilities comprise £321.5 million of loan notes maturing between April 2013 and April 2017, a £100 million multi-currency revolving credit facility expiring in November 2011 and a £85 million plus €175 million multi-currency revolving credit facility expiring in July 2013. At 31 March 2009 there was £234.5 million effective headroom against committed facilities (2008: £191 million).

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.

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 uses derivatives only 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 and further details are provided in Note 31 to the financial statements.

Net assets

The Group’s balance sheet remains robust with net assets of £357.0 million (2008: £387.7 million). Goodwill, intangible assets and property, plant and equipment total £834.2 million (2008: £812.5 million). Inventories of £197.8 million are £38.3 million higher than prior year reflecting the increased cheese stocks referred to above.

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 and available facilities and have made such other enquiries as they considered appropriate.

Alastair Murray Finance Director
18 May 2009