Director's report
The Directors of Dairy Crest Group plc (the ‘Company’) present their thirteenth Annual Report to shareholders together with the audited Financial Statements of the Company and its subsidiaries for the year ended 31 March 2009. The purpose of the Annual Report is to provide information to members of the Company. The Company, its Directors, employees, agents and advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. It contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and except to the extent required by applicable regulations or by law, the Group undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report should be construed as a profit forecast.
Except where required by subsequent legislation, this report has been prepared in accordance with the requirements of the Companies Act 1985 s234 and the Companies Act 2006 s417. It has been compiled for a year in which the Company was a parent company. As the Company’s accounts are prepared as group accounts, this report is a consolidated report or “group directors’ report”. It relates to the Company and its subsidiary undertakings, which are included in the Company’s consolidation. As permitted by Companies Act 1985 s234 (3), where appropriate, this report gives greater emphasis to the matters that are significant to the Company and its subsidiary undertakings included in the consolidation, taken as a whole.
As the 2008/09 financial year commenced after November 2006 but prior to 29 June 2008, references to the Combined Code in this report are to the Combined Code on Corporate Governance of June 2006 (‘Code’). This report has been prepared following the main principles of the Code. Those not referred to in this statement are dealt with elsewhere in the Annual Report. In accordance with Listing Rule 9.8.10, the relevant parts of this report have been reviewed by Ernst & Young LLP and their opinion is set out on page 106.
Principal activities
The principal activities of the Group are the manufacture and trading of milk and dairy products.
Principal risks and uncertainties
In addition to the opportunities we have to grow and develop our business, the Company faces a range of risks and uncertainties as part of both its day-to-day operations and its corporate activities. The processes that the Board has established to safeguard both shareholder value and the assets of the Company are described in the corporate governance statement.
The narrative which follows describes those specific risks and uncertainties that the Directors believe could have the most significant impact on the Company’s long-term value generation. The risks and uncertainties described below are not intended to be an exhaustive list.
Marketplace risks
Consumer trends
It is possible that changing consumer trends may reduce the appeal of some of the Company’s businesses if those trends are not properly anticipated and action is not taken to address potential issues at an early stage.
Dairy Crest mitigates this risk in a number of ways. First, the Company carries out market research and analyses consumer trends. This research is used to anticipate future customer trends and, through new product development, to position itself to benefit from those trends. An example of this has been the continuing development of products focused on health described in the Chief Executive’s review on page 8.
Our household business operates in a declining market but the Company delivers market-leading productivity ratios, has invested in new customer propositions, including its innovative milk&more internet proposition, and invests in targeted marketing and canvassing activity to address the overall decline rate. It is also trialling new business models.
Competition
The foods sector is highly competitive. The Company’s future financial performance would be at risk if it failed to compete strongly and lost market share to its competitors.
Dairy Crest has a portfolio of leading brands which it consistently supports by marketing and promotional investment such as the TV advertisements for Country Life spreadable brand focussing on its British heritage, designed to build long-term shareholder value.
Within the liquid milk business, the Company has strong relationships with certain major retailers and there is full involvement of Executive Directors in negotiations with these retailers and significant focus in delivering high levels of quality and service.
Consumer spending
The current recession in Western economies is having an impact on consumer spending. As the majority of the Company’s revenue is generated in the UK, the general health of the UK economy and its influence on consumer spending in particular is important to the Company’s success. This poses a risk to the Group’s financial performance.
The Company’s product base consists of dairy-based consumables which form part of the staple purchases of the majority of households. This mitigates the impact on our business of any decrease in general consumer spending. The Company also continues to invest in its business, particularly in the form of targeted marketing spend and in the development of its operating facilities while maintaining focus on operating efficiencies and cost control.
Inflation
The Group has experienced high levels of inflation with respect to certain non-milk input costs during 2008/09 namely, diesel, vegetable oils, energy, gas and plastics. There is a risk that this could impair future profitability.
Non-milk costs are monitored regularly and appropriate levels of forward cover are maintained. Where necessary, prices are increased to offset input cost increases. In addition, the cost base of the business continues to be rationalised so that we can absorb more inflationary costs and minimise price increases to our customers while investment has been focussed on the Company’s non-milk purchasing function.
The risk of continued increases in raw milk prices identified in last year’s report has not materialised, as commodity dairy prices have declined dramatically in 2008/09 as increased production outpaced demand. These are discussed in more detail in the Operating review on page 21.
Credit market weakness
Weakness in the international credit markets could pose risks to
the cost of financing borrowings, the ability of the Group to renegotiate banking facilities and the financial position of our customers and suppliers.
The Group regularly reviews its funding arrangements and has a high proportion of fixed interest long-term debt which mitigates risks to the cost of borrowing. More details concerning financial risk management are described in Note 31 to the accounts on pages 93 to 96.
The Group has had a long-term relationship with a group of banks that participate in its syndicated loan facility. There is regular contact with all of our relationship banks from the Chief Executive and Finance Director and other senior management. As a result the banks understand the business and requirements of the Group and have provided support for a number of years. Additionally, there is enough depth in the syndicate to mitigate the risks of any one bank experiencing difficulties.
In July 2008 we successfully renegotiated our 2004 facility and agreed a new five year multi-currency revolving credit facility expiring in July 2013. This gives us security in facilities and comfortable facility headroom. The earliest facility to expire is the £100 million revolving credit facility in November 2011. Further details are included in the Financial review on pages 26 to 29 and Note 31 to the accounts on pages 93 to 96.
Customers with whom the Group trades are subject to credit checks and there is very close review of trade debtors, days outstanding and overdue amounts. The Group is focusing particularly closely on smaller customers who are considered to be more financially vulnerable during the current recession. Appropriate provisions are made when specific customers are deemed to be a risk. A large proportion of debt is with major UK multiple retailers which are considered to be of above average financial strength. Wherever possible, legal proceedings are taken to recover monies due. There is regular review of our supplier base for key inputs to ensure that wherever possible there is not over-reliance on one supplier and therefore a risk to the Group.
Operational risks
Milk supply
There is a risk that the future volume produced in the UK of the
key ingredient in the Company’s products, raw milk, will not be sufficient to cover forecast demand. In order to mitigate this risk,
the Company obtains its milk under contract from a wide supplier base, more than half of which are farmers (rather than third-party commodity traders). The Company has paid a premium over commodity dairy prices for much of 2008/09 to the farmers supplying it with milk. The Company’s Milk Committee regularly reviews the strategy for milk supply. There is full involvement of the Company’s Milk Purchasing Director and its Executive Directors in negotiations with these milk suppliers.
Health and safety
A major incident resulting from a health and safety failure would be a significant reputational and financial risk to the Company.
The Company takes health and safety very seriously. It has robust management processes focused on quality control risk management and has established major incident procedures that are in place and have been tested successfully during and since the recall of Clover in May 2007. Dairy Crest continues to set increasingly high standards for food safety throughout its supply chain and has recently enhanced its ‘Good Manufacturing Practice’ review and audit processes.
The Company has recently undertaken a project, expected to complete during the course of 2009/10, to ensure its crisis management and business continuity processes remain appropriate.
Dairy Crest works closely with Government Agencies and dairy organisations to ensure it is able to respond effectively to the specific risk of raw milk supplies being impacted by an outbreak of diseases affecting cattle.
The Company carries insurance against the risk of property damage and business interruption.
More information on Dairy Crest’s approach to health and safety can be found on page 25 of the Corporate Responsibility review.
Equipment
A failure of the Company’s principal equipment including its manufacturing control systems could lead to a halting of production and consequent loss of product. In order to mitigate this risk, the Company has trained engineering resources at its production sites which are supported by major equipment suppliers. The Company’s engineers undertake a continuous programme of preventative maintenance and they hold a supply of key spare parts on site. A project has been initiated to identify any additional support required for control systems used within the business in order to ensure company wide standards are maintained.
Utilities
Maintaining a reliable supply of gas, electricity and water to its production sites is key for the Company’s manufacturing processes. Without this, there would be a risk of disruption to production, and spoilage of both finished product and raw materials. In order to mitigate this risk, the Company has contracts with major utility suppliers; it has its own generators at a number of its sites; and the Company adopts a layering approach to securing the supply of services. The Company is regularly audited by the responsible Government Agency and each manufacturing site is IS accredited.
People
The successful delivery of service to the Company’s customers relies on Dairy Crest recruiting and retaining people of a high quality. The failure to employ appropriate people would put the Company’s reputation at risk and could lead to the loss of market share.
Dairy Crest is proud of its people. The Company believes that by taking care of its people, its people will take care of its customers and financial performance will follow. Dairy Crest listens to the views of its employees, has a range of employment policies designed to make Dairy Crest a rewarding place to work and emphasises the importance it attaches to its people. Dairy Crest carries out a rigorous selection process and benchmarks the pay and benefits that it offers to its employees in order to recruit and retain the best people for the role. Talent planning is carried out on an annual basis.
More information on Dairy Crest’s people can be found on page 25 of the Corporate Responsibility review.
External financial risks
The Company’s financial risk management objectives and policies and risk exposures are described in detail in Note 31 to the accounts on pages 93 to 96.
Pension funding
Dairy Crest operates a defined benefit pension scheme. At 31 March 2009, there was a gross pension fund deficit of £63.3 million (under IAS 19). There is a risk that this deficit could deteriorate further in the event, for example, of poor investment performance or increasing mortality rates and a corresponding risk that an increase to the level of funding already agreed to address the deficit, may be required. Recent legislation means that, on occasions, it may be necessary to approach the Pensions Regulator for pre-clearance of agreements reached with the Pension Trustee at the time of significant corporate transactions. Such clearance could include a requirement to increase the level of funding.
Dairy Crest’s pension risks have been mitigated by the closure of its defined benefit scheme to new entrants on 1 July 2006. As an alternative, a defined contribution pension scheme is available to eligible new employees.
The Company continues to maintain a close dialogue with the pension scheme’s Trustee Board. The Company’s pension risks have been mitigated through the purchase in December 2008 of a bulk annuity policy with Legal & General Assurance Society Limited (‘L&G’). The policy sees L&G insuring part of the fund’s pension liabilities to the value of £150 million (equating to approximately half the fund’s liability for pensions in payment).
Legal and compliance risks
The business sector in which the Company operates is subject to a number of complex demanding Legal regulatory requirements. The Company has an in-house legal function and retains external advisors to ensure rigorous compliance with those existing regulations while it monitors and responds to new legal and regulatory developments.
Going concern
As highlighted in the Financial review and Note 31 to the accounts, the Group meets its day-to-day working capital requirements through committed long-term bank facilities. A tranche of these facilities was renegotiated in July 2008 and the earliest to expire is the £100 million revolving credit facility expiring in November 2011. The recent economic conditions have increased risks and uncertainties faced by the Group particularly over: (a) the future direction of milk and other input prices and ingredients realisations; (b) the availability of future bank finance; (c) the competitive landscape with regard to branded products; and (d) the exchange rate between Sterling and the Euro and impact on net debt.
The Group has recently performed forecasts and projections both for 2009/10 and for the three years ending March 2012. These projections have taken account of reasonably possible changes in trading performance and have been stress tested to consider the impact of changes in key assumptions. These forecasts show that the Group should be able to operate within the level of its current facilities. A €175m tranche of the Group’s facility flexes with movements in the Sterling/Euro exchange rate and there is currently adequate facility headroom. Should the £100 million facility expiring in November 2011 not be renegotiated and fall away, forecasts show that headroom would remain adequate. The level of Euro borrowings, having been reduced in the year ended 31 March 2009, are now such that exchange rate fluctuations no longer materially impact our bank covenant tests. There were no breaches of bank covenants in the year ended 31 March 2009 and projections do not indicate any breaches in the foreseeable future.
It should be recognised that any consideration of the foreseeable future involves making a judgement, at a particular point in time, about future events, which are inherently uncertain. Nevertheless, at the time of preparation of these accounts and after making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue operating for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
Business review
S417 of the Companies Act 2006 requires that the Company sets out in this report a fair review of the business of the Group during the 2008/09 financial year, including balanced and comprehensive analysis of the development and performance of the Group during the financial year and the position of the Group at the end of the year; together with information relating to environmental, employee, social and community matters. In addition, the Company is required to provide a description of the principal risks and uncertainties facing the Group as described above and, to the extent necessary for an understanding of the business, the main trends and factors likely to affect the future development, performance and position of the Company’s business. The information satisfying the business review requirements is set out in this report; the Chairman’s statement on page 6; Chief Executive’s review on pages 7 to 9; Operating review on pages 10 to 21; the Corporate Responsibility review on pages 22 to 25 and Financial review on pages 26 to 29; all of which are incorporated into this report by reference.
Group results
The Group’s consolidated income statement set out on page 51 shows a profit for the 2008/09 financial year of £74.3 million compared with £54.7 million in 2007/08.
Dividends
The Directors are recommending a final dividend of 13.0 pence (2007/08: 17.3 pence) per ordinary share, which, if approved, will be paid to members on the register at the close of business on 26 June 2009. Together, the final dividend and interim dividend (7.1 pence per ordinary share paid on 31 January 2009) make total dividends for the year of 20.1 pence per ordinary share (2007/08: 24.4 pence).
Share capital
The authorised and issued share capital of the Company together with details of movements in the Company’s issued share capital during 2008/09 are shown in Note 25 to the Financial Statements on page 87. As at the date of this report, 133.3 million ordinary 25p shares were in issue and fully paid with an aggregate nominal value of £33.3 million. The Company has only one class of shares, details of which are set out in its articles of association.
Issue of shares
At the Annual General Meeting (‘AGM’) on 17 July 2008, shareholders renewed the authority for the Board under the Company’s articles of association to exercise all powers of the Company to allot relevant securities up to an aggregate nominal amount equal to the ‘section 80 amount’ until the conclusion of this year’s AGM. A ‘section 80 amount’ of £10,976,999 was declared at last year’s AGM. The Directors believe it advisable to seek renewal of this authority or replacement of it with a suitable alternative, annually at the AGM. Approval will be sought from the shareholders at this year’s AGM to renew the authority for a further year.
Purchase of own shares
At the AGM on 17 July 2008 shareholders granted the Company authority to make market purchases of up to 13,305,454 of its issued ordinary shares of 25 pence each, provided that: the minimum price which may be paid for any such ordinary share is 25 pence (exclusive of expenses and appropriate taxes); the maximum price (exclusive of expenses and appropriate taxes) which may be paid for any such ordinary share shall be not more than 5% above the average of the middle market values for an ordinary share in the Company as taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the date of purchase. The Company did not exercise this authority during the year and made no market purchases.
Except in relation to a purchase of ordinary shares, the contract for which was concluded before the authority expires and which will or may be executed wholly or partly after such expiry, the authority granted shall expire at the conclusion of this year’s AGM. The Directors believe it advisable to seek renewal of this authority or replacement of it with a suitable alternative, annually at the AGM. Approval will be sought from the shareholders at the AGM to renew the authority for a further year.
Pensions
The Group’s defined benefit pension fund is controlled by a corporate trustee, Dairy Crest Pension Trustees Limited, the Board of which comprises four nominees from Dairy Crest Limited (including an independent professional trustee organisation) and two employee members elected by all members whether active, deferred or pensioners. The pension funds’ assets are held separately from those of the Group and can only be used in accordance with the rules of the scheme. In 2006, the defined benefit scheme was closed to new employees and a defined contribution scheme was established for new employees.
Significant agreements – change of control
A change of control of the Company following a takeover bid may cause a number of agreements to which the Company or its subsidiaries are party to take effect, alter or terminate. The agreements that are considered significant are as follows:
Borrowing facilities
Non-compliance with the change of control clauses in the Group’s funding arrangements, or failure to reach agreement with the parties
on revised terms, would require any acquirer to put in place replacement facilities.
Essential Contracts
It is imperative that Dairy Crest is able to source high quality raw milk at the most competitive prices. To this end the Company has numerous contracts for its supply. While these contracts are collectively essential to the business, no single contract nor any single supplier of raw milk is critical to the Company’s business.
The Company also has strong relationships with certain major retailers to supply them with liquid milk. Individually these contracts are important to the business but not essential.
Substantial shareholdings
The Company has been notified pursuant to DTR5 of the following interests in 3% or more of its issued share capital as at 15 May 2009:
| Notified percentage issued share capital (%) | |
| Standard Life Investments Ltd | 4.995 |
| Legal & General Group Plc | 3.99 |
Directors
The names and biographical details of the current Directors of the Company are given on page 30. The names of those persons who were Directors during the year but have retired or resigned from the Board are set out at page 31 together with the dates on which they left the Board.
Further information about the Company’s rules on the appointment and replacement of its Directors is given in the Corporate governance statement on pages 32 to 33.
In accordance with the articles of association, Mark Allen and Howard Mann retire by rotation. Both offer themselves for re-election at this year’s AGM. In addition, in compliance with the spirit of the Code, Simon Oliver will retire from the Board at the 2009 AGM and offers himself for re-election.
Directors’ interests
Details of the interests in the shares of the Company of the Directors holding office as at the date of this report along with those of the Directors who held office during the year but retired or resigned from office and their immediate families appear in the Remuneration report on pages 43 to 44.
Details of the Directors’ service contracts and letters of appointment appear in the Remuneration report on page 42.
No Director had a material interest in any significant contract with the Company or any of its subsidiaries during the year.
Directors’ and officers indemnities and insurance
The Company maintains liability insurance for its Directors and officers. At its AGM held on 14 July 2005 shareholder approval was given for the amendment of the Company’s articles of association giving Directors and officers the benefit of an indemnity to the extent permitted by law.
Environment, social and community issues
Information on Dairy Crest’s approach to the environmental, social and community issues can be found in the Corporate Responsibility Review on pages 22 to 25.
Employees
The Group employs approximately 7,800 people throughout the United Kingdom, Republic of Ireland, France and Italy and depends on the skills and commitment of its employees in order to achieve its objectives. Personnel at every level are encouraged to make their fullest possible contribution to Dairy Crest’s success.
Employees are kept regularly informed on matters affecting them and on issues affecting the Group’s performance through a variety of communication tools, including the Group intranet, which has been completely redesigned during the year ended 31 March 2009, and the in-house magazine, ‘People’.
In 2009, an employee and franchisee survey has again been conducted in order to research their views. Results are encouraging with the overall engagement score improving by 6%. Detailed results for each site are scheduled to be issued by June 2009. Thereafter further consultation is planned to develop action plans, addressing feedback from the survey which shows that further improvements are possible.
The Group has well-established consultation and negotiating arrangements with established trade unions.
Employees are encouraged to acquire shares in the Group through participation in the savings-related share option scheme (‘Sharesave Scheme’). Details of this scheme are set out on page 40 of the Directors’ remuneration report.
The Board is committed to ensuring a culture free from discrimination and harassment remains embedded within the Group and discrimination of any sort is not tolerated. Proper consideration is given to applications for employment from disabled people who are employed whenever suitable vacancies arise. Wherever practicable, staff who become disabled during employment are retained. The Group practices equality of opportunity for all employees, irrespective of ethnic origin, religion, political opinion, gender, marital status, disability, age or sexual orientation.
Research and development
The Group has adopted a target of delivering part of its annual turnover through new product development and has implemented a new project management process aimed at achieving this. In line with the Company’s strategy to offer consumers a wide product mix, it has continued to develop during the year ended 31 March 2009 lower fat variants of its existing products. Through innovation, Dairy Crest has also remained at the forefront of dairy industry developments to reduce packaging waste.
Land and buildings
The Directors have obtained an informal valuation of the Group’s land and buildings and believe that the current market value in existing use of these properties slightly exceeds their book value.
Supplier payment policy
Payment dates are established according to the agreed date of delivery of goods or provision of services and the receipt of a correct invoice. The Group agrees the length of payment terms with each of its suppliers as part of the overall purchasing agreement. It is the Group’s policy to abide by these agreed terms of payment. The number of days’ purchases in the Group’s creditors at 31 March 2009 was 24.8 days (2007/08: 23 days). The Company has no trade creditors and therefore the number of days purchases in creditors is not relevant.
Charitable and political donations
Charitable donations amounted to £0.1 million (2007/08: £0.1 million) in the year. Small contributions, mainly of product, were also made to local charities. No political donations or expenditures were made or incurred during the year.
Disclosure of information to the auditors
So far as each Director in office at the date of approval of this report is aware, there is no relevant audit information of which the Company’s auditors are unaware.
Each of the Directors has taken all steps that they ought to have taken in performing their roles as directors to exercise due care, skill and diligence in order to make themselves aware (i) of any relevant audit information and (ii) to establish that the Company’s auditors are aware of such information.
For the purposes of this statement on disclosure of information to the auditors, ‘relevant audit information’ is the information needed by the Company’s auditors in connection with the preparation of their report at page 106.
Directors’ responsibility statements
The responsibility statements required under Disclosure and Transparency Rule 4.1 are set out on page 50.
Annual general meeting
The AGM will be held at Eversheds, 1 Wood Street, London EC2V 7WS on Thursday 16 July 2009 at 11.00 am. Details of the resolutions to be proposed, including items of special business, are given in the Notice of Annual General Meeting and Explanatory Notes which has been dispatched. The notice of this year’s AGM has been posted on the Company’s website. The Directors believe that the resolutions set out in the notice of meeting are in the best interests of the Company and its shareholders and unanimously recommend that shareholders should vote in favour of all resolutions.
Auditors
The Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
Ernst & Young LLP have expressed their willingness to continue as auditors of the Company. A resolution to reappoint Ernst & Young LLP as the Company’s auditors will be put to the forthcoming Annual General Meeting.
By order of the Board
Robin Miller
Company Secretary
18 May 2009