Dairy Crest Regulatory News (DCG)

22 May 2014

Dairy Crest Group plc ("Dairy Crest")

Final results for year ended 31 March 2014

1 From continuing operations

2 Before exceptional items, amortisation of acquired intangibles and pension interest

3 2012/13 comparatives have been restated to reflect amendments to IAS 19R: Employee Benefits. See Note 14 to the accounts

Financial Highlights

· Adjusted profit before tax up 31% to £65.3 million, including higher profits from sale of surplus properties

· Year end net debt at £142 million leaves net debt to EBITDA within targeted range at 1.3 x

· Proposed final dividend payment of 15.4p taking full year to 21.3p, up 3%

Strategic Highlights

· Reorganised into one business structure

· Demineralised whey project on track to enhance annual profits by £5 million from 2015/16 - in exclusive talks with one customer

· Move to a single spreads manufacturing facility nearing completion

· Reduced cash contribution to defined benefit pension scheme from 2014/15

Operating Highlights

· Ongoing growth for Cathedral City ahead of market

· Continued focus on costs: £25 million annualised cost savings delivered in 2013/14, with a further £20 million identified for 2014/15

· Strong Corporate Responsibility commitment: highest UK ranked business by BITC

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

"The year ended 31 March 2014 was one of consolidation for Dairy Crest. Following the transformational sale of our French spreads business last year we have completed our reorganisation into one business structure. This has helped in our constant drive to reduce costs. Our largest brand, Cathedral City continues to grow strongly.

The current trading environment is challenging. However, the strength of our key brands and our proven ability to cut costs and drive efficiencies mean that we remain confident that we can generate profit growth in all three of our product groups over the medium term. Additional profit growth will come from our project to add value to the whey stream at Davidstow, which is on track.

Our net debt is comfortably within our targeted range and we expect to be able to reduce it further in the future as capital expenditure on our existing business falls back towards depreciation and we continue to sell surplus properties. Debt reduction will also be supported by the agreement we are announcing today to reduce our annual contributions to the Dairy Crest Group Pension Fund from £20 million to £13 million for the next two years.

Taking account of today's challenging environment, we anticipate that trading in the current financial year will be in line with our expectations."

For further information:

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

Acting Chairman's statement

It is with sadness that, in my current role of Acting Chairman, I am delivering this year's statement on behalf of our Chairman, Anthony Fry, who is currently away from the business for health reasons.

Anthony has led Dairy Crest's transformation with great skill over the last four years and our thoughts are with him and his family at this time. We wish him a full and fast recovery.

Living by our Vision and Values

The Board fully recognises the importance of corporate governance in underpinning the integrity and performance of the business. It is acutely aware of Dairy Crest's responsibilities to the farmers who supply us with milk, our employees and franchisees, our pensioners, the communities in which we operate and our shareholders. We use the framework provided by our Vision and Values to balance the different interests of these groups. This has served us well in the past and continues to underpin everything we do today.

A simpler, more financially robust business

Last year's transformational sale of our French spreads business, St Hubert, made Dairy Crest a simpler, more financially robust business and provided a strong base for future growth. By continuing to execute our long term strategy of growing our key brands and other added value sales and of reducing our costs we have continued to strengthen our business.

The pleasing financial results for the year ended 31 March 2014, delivered against the backdrop of a trading environment that remains challenging, demonstrate that the transformed business can deliver improving returns for shareholders.

We have not chosen to make any significant acquisitions since the disposal of St Hubert. We gave thorough consideration to doing so but to date we have not identified any opportunities which could provide the attractive returns which we can achieve by continuing to invest for growth in our existing business. The Board believes that choosing to invest in projects such as demineralised whey production provides a better route to profitable growth and has lower execution risk. Entering the demineralised whey powder market will also allow us to access new markets and should contribute to increased stability.

Corporate responsibility

Dairy Crest is a responsible business that demonstrates its commitment to corporate responsibility in many ways. This has been recognised by Business in the Community and we came second in its Company of the Year competition last year. This year we have been awarded 4.5 stars by BITC and are its highest ranked business in the UK.

A stable Board

Other than the appointment of Tom Atherton as Group Finance Director from 23 May 2013, there have been no Board changes or Management Board changes during the year.

Increased dividend recommended

The board is recommending a final dividend of 15.4 pence per share, making a full year dividend of 21.3 pence per share, up 2.9% from last year. This dividend is covered 1.9 times by adjusted basic earnings per share, up from 1.4 last year. Looking beyond this year we propose to maintain our progressive dividend policy within a target cover range of 1.5 to 2.5 times.

Summary

The year ended 31 March 2014 was a good one for Dairy Crest. We have consolidated the significant changes we made last year and are benefiting from operating as one business. Good progress is being made with our demineralised whey project which will provide increased stability and profit growth.

Richard Macdonald

Acting Chairman

21 May 2014

Chief Executive's review

I start my review by echoing the thoughts of Richard Macdonald, our Acting Chairman, regarding Anthony Fry, our Chairman. Everyone at Dairy Crest wishes Anthony a successful recovery. His guidance and inspiration are missed.

Summary

The year ended 31 March 2014 was one of consolidation for Dairy Crest. Following the transformational sale of our French spreads business, St Hubert, last year we have completed our reorganisation into one business structure and are seeing the benefit of this project in the form of greater focus on consumers and a more integrated supply chain. This has also helped in our constant drive to reduce costs. Our largest brand, Cathedral City continues to grow strongly.

The rationalisation of our butter and spreads manufacturing into one well-invested site at Kirkby, Merseyside is nearing completion and our plan to close our factory in Crudgington is progressing.

In parallel to the continued strengthening of our existing operations we have initiated a major project to add value to the whey we produce as a by-product of cheese manufacturing. In total we are investing £45 million at our cheese creamery at Davidstow in Cornwall to allow us to manufacture demineralised whey powder which we expect to boost annual profits by around £5 million from 2015/16. We are in the process of agreeing a contract with an exclusive customer which is already well established in the appropriate markets. The customer will also provide technical advice as the project moves forward.

Adjusted Group profit before tax increased by 31% to £65.3 million (2013: £49.7 million). Adjusted basic earnings per share increased by 39% to 40.8 pence (2013: 29.4 pence). Key factors behind the increase in adjusted Group profit were higher profits from selling surplus properties, which increased by £10.5 million, and lower interest costs which reduced by £8.8 million.

Exceptional costs fell sharply in the year from £56.5 million in the year ended 31 March 2013 to £10.4 million in the year ended 31 March 2014 reflecting the reduced level of restructuring across the business.

Group net debt at 31 March 2014 was £142 million, up from £60 million at 31 March 2013, but significantly lower than at 31 March 2012, prior to the sale of St Hubert, when it was £336 million. Net debt fell significantly in the second half of the year. Significant factors in the increase from 31 March 2013 were one-off payments resulting from the sale of St Hubert to the pension scheme and bondholders which together totalled £49 million. As noted above, we also invested significantly at Kirkby and Davidstow.

Market background

The year has seen an ongoing decline in food sales by the major retailers, our principal customers. They continue to be intensely competitive and liquid milk in particular remains a key product where they are seeking to offer value to consumers. In this environment it has been difficult to pass higher input costs onto our customers and this emphasises the importance of our own cost reduction initiatives.

Towards the end of the year most major retailers chose to reduce the price at which they sell milk to consumers. This had the effect of further increasing the gap between these prices and those which we charge our residential customers. We expect this to accelerate the downward trend in our residential sales.

The background on the supply side is very different. UK milk production is buoyant and dairy farmer confidence high. We remain committed to paying fair, market related prices to the dairy farmers who supply us with milk. The milk prices we pay our farmers increased by 8% over the year ended 31 March 2014 and we continue to work with our direct suppliers to offer them a choice of milk supply contracts. These include those with prices determined by formulas, which allow them to optimise their production. We have broadly maintained our milk purchase prices since the year end although market prices are now starting to fall.

Looking ahead, European milk supply is likely to increase after the abolition of production quotas from April 2015. UK production, which has been below the available quota for over a decade, is unlikely to be affected by this change. Consumer preferences and the economics of milk transportation make it unlikely that liquid milk will be imported into the UK. It is possible that some additional cheese produced in Ireland, for example, may be exported to the UK but other global markets may well be more attractive. If more cheese was to be imported into the UK it could put downward pressure on commodity cheese prices and farmgate milk prices. However we anticipate that our market-leading Cathedral City brand will continue to perform strongly.

Branded sales

We have continued to support our four key brands, Cathedral City, Clover, Country Life and FRijj. As the table shows, total sales of these brands have grown by 4% this year. Cathedral City continued its strong performance and again significantly outperformed the market. It is now Britain's 18th largest grocery brand. (Source: The Grocer, March 2014).

In the butters and spreads market, which is declining, Clover's market share reduced slightly. However Country Life spreadable grew share and outperformed its major spreadable rivals. Country Life block butter sales fell as we reduced promotions due to higher cream input costs.

Over the year as a whole FRijj sales fell by 4%. However FRijj sales rebounded strongly in the second half following the upgrade of our production facilities in the first half.

*Dairy Crest value sales 12 months to 31 March 2014 v 12 months to 31 March 2013

** IRI data 52 weeks to 29 March 2014

Innovation is key to the success of these brands. We have an ambitious target that 10% of our sales will come from products introduced in the last three years. This year around 4% of our total revenue and 7% of our key brand revenue has come from such sales. This is a key target as we continue to move our focus to a consumer driven, demand led business. To support this we are building a new innovation centre in partnership with Harper Adams University, Shropshire.

Cost cutting

Cost reduction remains an important part of our strategy. We have made good progress to improve efficiency across the business. Cost reduction projects initiated in the year have delivered annual benefits of £25 million, ahead of our £20 million target. We have also continued to benefit from work done in previous years. The greatest cost savings this year have arisen from the reorganisation of the business into 'One Dairy Crest'. Next year we expect to benefit from lower spreads manufacturing costs as a result of the consolidation of our spreads manufacturing into Kirkby as well as lower milk distribution costs.

Future prospects

The current trading environment is challenging. However, the strength of our key brands and our proven ability to cut costs and drive efficiencies mean that we remain confident that we can generate profit growth in all three of our product groups over the medium term. Additional profit growth will come from our project to add value to the whey stream at Davidstow, which is on track.

Our net debt is comfortably within our targeted range and we expect to be able to reduce it further in the future as capital expenditure on our existing business falls back towards depreciation and we continue to sell surplus properties. Debt reduction will also be supported by the reduction in our annual contributions to the Dairy Crest Group Pension Fund from £20 million to £13 million for the next two years.

Mark Allen

Chief Executive

21 May 2014

Operating Review

Cheese and Whey

Dairy Crest produces and markets the UK's leading cheese brand, Cathedral City, as well as the premium Davidstow cheddar brand.

The short supply chain starts with milk from around 400 dairy farms in Cornwall and Devon. This is made into cheese at our Davidstow creamery in Cornwall. The cheese is then matured for on average 11 months at our purpose-built Nuneaton facility before being cut, packed and distributed to customers. We also operate a highly flexible packing site in Frome, Somerset. The whey produced as a by-product of cheese making is also processed at Davidstow.

Since the year end we have further simplified the business by selling our remaining 30% stake in Wexford Creamery Limited for €3.4 million.

Reported revenue for the year ended 31 March 2014 grew by 14% to £264.6 million and profits from the Cheese and Whey product group grew by 19% to £39.3 million, resulting in a margin of 14.9% (2013: profit £33.1 million, margin 14.3%).

Total retail cheese market sales remained unchanged in the year although volumes fell back by 3%. Cathedral City sales strongly outperformed the market, growing 12% by value and 9% by volume. As a result Cathedral City now has an 11% share of retail cheese sales, up from 10% last year. Retailer own label cheese sales account for nearly 55% of this sector. Cathedral City sales continue to comfortably exceed the sales of the next three cheddar brands added together and it is now Britain's 18th largest grocery brand. (Source: The Grocer, March 2014).

Innovation driving Cathedral City's success

New product development remains key to the success of Cathedral City. Grated mini-bags, spreadable cheese and Selections have all widened the appeal of the brand, as have new launches under the children's brand, Cathedral City Chedds. For the first time we extended the Cathedral City brand outside of cheese with Baked Bites - Cathedral City cheese biscuits - which are manufactured by Burton's Biscuit Company. Cathedral City also continues to lead the way with innovative packing and has recently responded to consumer demand by introducing new 'easy-tear' packaging across its range.

Advertising and promotions are also important and Dairy Crest has continued to invest in Cathedral City's award winning advertising campaign.

Alongside Cathedral City, Dairy Crest's premium cheddar brand, Davidstow, has performed strongly in the year. Sales of this brand, supported by new varieties and improved packaging, have grown 3% by value.

Although nearly all of its sales are branded, Dairy Crest does supply cheese to two premium retailers for their own label products. One of these customers, Marks & Spencer, has awarded Dairy Crest sole supply of its entire cheddar range from April 2014.

Dairy Crest's cheese operations are highly efficient and profits from this product group continue to be boosted by improved efficiencies at all three of its manufacturing locations.

Demineralised whey powder project on track to grow future profits

Profits have also been supported by strong returns from whey. At present this is dried into powder and sold to food manufacturers. Dairy Crest has initiated a project to invest in the manufacture of demineralised whey powder, a base ingredient of infant formula. We plan to spend around £45 million on new manufacturing assets at Davidstow before May 2015. We expect production of demineralised whey powder to commence in mid 2015. We anticipate that the project will have a five year cash payback and enhance annual Cheese and whey product group profits by over £5 million from 2015/16. We are in the process of agreeing a contract with an exclusive customer who is already well established in the appropriate markets and who will provide technical advice as we move the project forward.

Looking forward - well positioned for growth

Looking forward our strong cheese brands and efficient production facilities, together with the exciting whey project leave us well positioned to increase the already strong returns from this product category.

Spreads and Butters

We make butter at our Severnside dairy in Gloucestershire and pack butter and make spreads in Kirkby, Merseyside. We have two key brands, Clover (a dairy spread) and Country Life (spreadable and block butter). We also have several secondary brands in the spreads category and we produce and sell Frylight one-calorie cooking spray through MH Foods.

Reported revenue for the year ended 31 March 2014 fell by 9% to £177.4 million. Profits from the Spreads and butters product group declined by 34% to £16.8 million, resulting in a margin of 9.5% (2013: profit £25.5 million, margin 13.1%)

Although the year was a difficult one overall, lower cream prices in the last few months of the year and strong results from MH Foods meant the second half performance was better than the first. Looking forward, the action we have taken to reduce our cost base will make us more efficient and allow us to continue to compete strongly. Spreads and butters remains a high margin product group.

Mixed performance of key brands in a difficult market

The butter and spreads market continued to decline during the year. Market volumes fell by around 5% and values by 4%. Own label sales grew at the expense of brands and butter sales declined less than those of spreads. Both butters and spreads were heavily promoted but this failed to reverse the downward trend in consumption.

Clover grew volume but lost a little value market share. During the year we introduced a new range of healthy spreads into the Clover range and supported them and the other products in the range with TV advertising.

Country Life spreadable grew sales and volumes, outperforming the market and other spreadable brands. However higher cream prices for most of the year increased the cost of Country Life block butter and we chose to promote it less. This led to significantly lower sales and market share. For the first time Country Life spreadable sales were higher than those of Country Life block butter.

In addition, the declining spreads market has led to some retailers reducing the amount of space they allocate to butters and spreads in their store and one of our secondary brands, Utterly Butterly, was particularly adversely affected.

Good performance by Frylight one-calorie cooking spray

We purchased MH Foods in 2011/12 and have grown sales and profits consistently. Following a significant rationalisation of the product range last year we have cut production costs and reinvested some of the savings in higher marketing expenditure. The brand has responded well and sales and profits have grown.

Looking forward - a more efficient business

We will shortly complete the rationalisation of our butter and spreads manufacturing onto one well-invested site in Kirkby, Merseyside, where we have spent over £30 million to create a modern, efficient facility. As previously announced, we expect to close our factory in Crudgington, Shropshire, in the year ending 31 March 2015. We expect this to generate significant cost savings that will benefit the future profitability of our butter and spreads operations.

Dairies

Dairy Crest processes and delivers fresh conventional, organic and flavoured milk to major retailers, 'middle ground' customers (including, for example, smaller retailers, coffee shops and hospitals) and residential customers. The Dairies product group analysis includes revenues and profits from these operations. It also takes in revenues and profits from one of our four key brands, FRijj, the country's leading fresh flavoured milk brand, and cream and milk powders.

We operate 3 modern dairies at Severnside, Chadwell Heath and Foston where we pack milk into polybottles; Hanworth, another dairy where we pack milk into glass bottles for residential customers; and a specialist cream potting facility at Chard. In addition we have around 70 operational depots from which we deliver milk to middle ground and residential customers.

We also run an ingredients operation that helps balance seasonal milk supplies by drying surplus milk and selling skimmed milk powder. We aim to minimise throughput in this business to reduce our exposure to commodity markets as far as possible.

The raw milk that we purchase from farms contains more cream than the milk sold to customers does. We use some of the surplus cream generated during the bottling process to make butter with cream being transferred into our Spreads operation at market prices. The balance of this surplus cream that is not used to make butter is sold by our ingredients operations either as bulk butter or cream.

Reported revenue was broadly flat in the year at £944.8 million (2013: £951.6 million) with higher selling prices offsetting lower volumes. Profits from the Dairies product group increased to £18.8 million (2013: £ 9.8 million).

Medium term target to achieve 3% return on sales

We have set ourselves the target of achieving a 3% return on sales from our Dairies operations and in the year ended 31 March 2014 the margin increased from 1% to 2%.

There are 4 elements to our plan:

· Growing FRijj

· Reducing costs and becoming more efficient

· Getting the right returns from fresh milk sales

· Maximising profits from the sale of surplus properties

Increased profits from these actions are offset by cost inflation and reduced residential sales which command an above average margin.

The improvement in margins in the year came about from higher profits from the sale of redundant properties. For the year ended 31 March 2014 these were £18.2 million against £7.7 million in the prior year. The uplift was partially off-set by higher employee bonuses which would not have been paid had the higher level of property profits not been achieved. Margins excluding property profits declined partly as a result of these higher bonuses and partly because of lower cream prices in the last part of the year, which were not reflected in lower milk purchase prices. We anticipate profits from the sale of surplus properties to continue at a more normal level of between £5 million and £10 million in future years.

FRijj - on track for growth after upgrade of production facilities

Over the year as a whole FRijj sales declined by 4% by value and 5% by volume. FRijj sales were down 17% by value in the first half as we scaled back promotions while we increased our production capacity and capability. Second half sales were much stronger following the upgrade of our production facilities in the first half. We also introduced new flavours and new pack sizes and configurations into the market. Sales in the second half of the year ended 31 March 2014 grew by 11% compared to the second half of the year ended 31 March 2013.

The ready to drink flavoured milk market, in which FRijj is the leading brand, has continued to grow strongly during the year. Total market sales are up by 16% in value and 9% by volume.

The upgrade of our production facilities also delayed the full launch of our new long life product which we now expect to take place in the year ending 31 March 2015. This will allow us to grow FRijj sales into convenience and other outlets where less refrigerated storage is available.

Cost saving initiatives underpin improved profitability

Across Dairy Crest as a whole we implemented annual cost saving initiatives during the year of £25 million, ahead of our established target of £20 million. Our Dairies operations benefitted most from these. Key elements of the savings were the ongoing closure of depots, increased use of lighter bottles which contain less plastic and reduced distribution costs.

The total annual cost of moving milk from the farms that supply us to our customers via our dairies exceeds £200 million. We use a combination of our own transport and that of third parties. We collect milk for our dairies from over 1,000 farms across England and Wales and deliver daily to many of our customers including around 700,000 residential customers and the individual stores of most of our major retail customers. More efficient vehicles, improved routing software and better driver utilisation and training can all make a significant difference to the cost of this operation. We expect to make further savings in our distribution costs in the future.

Recovering higher milk costs

The prices we paid our farmers for milk increased by around 8% during the year. This resulted in additional raw material costs for our Dairies operations of over £40 million. For most of the year these higher costs have been recovered from higher cream selling and transfer prices (from our Spreads operations), and higher selling prices to our customers. In a tough consumer environment increasing selling prices was not easy and we chose to stop supplying some smaller customers who were not prepared to pay higher prices.

Higher prices to farmers also meant that we had to increase the price we charged our residential customers. Delivering milk to these customers remains important to us but sales continue to fall as more customers choose to buy their milk from shops rather than having it delivered by their milkman. Overall residential sales fell by 10% compared to the previous year. We continue to support our internet proposition for residential customers, milk&more, and we believe this has reduced the decline in residential sales.

As a result of lower milk sales to middle ground and residential customers we sold our depot based business in the North West of England and we also closed a small dairy in Wales, Proper Welsh Milk. We are also carrying out a strategic review of FoodTec UK Limited, a small subsidiary which manufactures food ingredients.

Towards the end of the year cream prices fell and this adversely impacted revenues and profits from the Dairies operations - with some benefit being seen in our Spreads operations.

At the same time most major retailers chose to reduce the price at which they sell milk to consumers. This had the effect of further increasing the gap between these prices and those which we charge our residential customers. We expect this to have an adverse effect on our residential sales and the profits we make from this delivery channel.

Property profits exceed expectations

As residential and middle ground sales reduce we close distribution depots. Sales of these surplus properties generate cash and the profits from them contribute to our targeted 3% margin. In January 2014 we completed the sale of one such depot, Nine Elms, in London. The sale of this particularly valuable property for £17.6 million generated a profit of £15.3 million and contributed to total property profits of £18.2 million in the year. Looking forward we anticipate profits from the sale of depots we no longer require are likely to return to a more normal £5 million to £10 million in future years.

Financial review

Overview

The sale of our French spreads business, St Hubert, in August 2012 significantly reduced levels of Group borrowings and has enabled us to increase investment in our core UK business this year. This investment, targeted at areas of growth opportunity and cost efficiency will help drive growth in future years. The three main areas of capital investment are:

· a new demineralised whey capability at Davidstow to take advantage of high global growth in added value whey protein products;

· increased FRijj capacity and capability at Severnside to drive the brand in a growing category; and

· expansion of our spreads site at Kirkby to enable the closure of Crudgington in 2014.

Group profits have benefited this year from reduced interest charges following the St Hubert sale and the early repayment of loan notes in April 2013. Furthermore, we had higher than usual profits from the sale of surplus depots due to the gain of £15.3 million on the sale of a site in Nine Elms, Battersea. The trading environment remains challenging as milk input costs have increased by over £40 million in the year and consumers' real incomes remain under pressure, however we have continued to focus on cost reduction and on our key brands in order to maintain margins.

Product group revenue

Following our major reorganisation at the start of the financial year which removed the divisional structure, we have assessed that the Group has only one reporting segment in accordance with the requirements of IFRS 8. However, we have chosen to provide product group analysis consistent with prior years to assist the users of the accounts.

Group revenue increased by 0.7% to £1,391.0 million, predominantly as a result of increased revenues in the Cheese business as volumes rose and selling prices increased reflecting higher milk costs. Spreads revenue decreased by 8.8% as we promoted less butter for much of the year in an environment where cream prices were high and Utterly Butterly volumes reduced. Dairies revenues decreased slightly reflecting levels of decline in our residential doorstep business.

Product group profit

Product group profit increased by £6.8 million to £75.2 million driven by a strong performance in Cheese and a higher than usual level of property profits in Dairies. Our Spreads business had a challenging year as the category declined overall and we promoted less butter. However, our plans to close Crudgington in 2014 are on track and this will deliver cost savings in 2014/15.

Following changes to IAS 19 that took effect from 1 April 2013, the Group recognises pension scheme administrative expenses within operating costs. All prior year amounts have been restated accordingly and further details are set out in Note 14 to the accounts. The table above quotes profit after pension scheme administrative expenses of £1.0 million (2013: £0.9 million).

Exceptional Items

Pre-tax exceptional charges of £10.4 million have been recorded in the year (2013: £56.5 million).

In September 2012 we announced the closure of the Crudgington site with production moving to Kirkby. This project, now nearing completion, will generate significant savings in future years. Exceptional costs of £3.8 million have been recorded in the year, the majority of which are non-cash asset write-downs. Cash expenditure in the year was £2.4 million. We expect further exceptional costs of approximately £8 million in 2014/15 as this project comes to an end.

In February 2013 the company announced a major reorganisation, removing divisional structures and resulting in one unified business. Exceptional costs of £4.4 million have been charged in the year being redundancy and restructuring costs. No further exceptional costs will be incurred in 2014/15.

In December 2013 we announced the closure of Proper Welsh Milk, a processing facility in Wales. In March 2014, we announced a strategic review of Foodtec UK Limited, an ingredients plant near Crewe. In line with Group policy, the costs of closure of these sites, which are predominantly non-cash write downs, have been classified as exceptional. In total, the exceptional costs in relation to the closure of these peripheral elements of the Dairies manufacturing base amounted to £2.0 million.

A small £0.2 million adjustment to the exceptional finance charges accrued in 2012/13 was made during the year. This relates to the early repayment of loan notes completed in April 2014.

Finance costs

Finance costs have reduced by £8.8 million to £9.9 million. This primarily reflects the reduction in net debt following the sale of St Hubert in August 2012 and the further benefit from the early repayment of loan notes in April 2013 which removed the inefficiency of holding excess levels of cash on the balance sheet.

Other finance expenses of £0.3 million (2013: £3.5 million) comprise the net expected return on pension scheme assets after deducting the interest cost on the defined benefit obligation. Following changes to IAS 19 that took effect from 1 April 2013, the expected return on assets is calculated by reference to the discount rate applied to scheme liabilities rather than assumed rates of return on asset classes held by the pension scheme. Prior year amounts have been restated and further details are set out in Note 14 to the accounts.

Other finance expenses are dependent upon the pension scheme position at 31 March each year and are volatile, being subject to market conditions. We therefore exclude this item from headline adjusted profit before tax.

Interest cover excluding pension interest, calculated on total product group profit, remains comfortable, at 7.6 times (2013: 3.7 times).

Profit before tax

Adjusted profit before tax (before exceptional items and amortisation of acquired intangibles) increased by 31% to £65.3million. This is one of management's key Group profit measures. The reported profit before tax of £54.2 million represents a significant improvement from 2013 (£10.7 million loss) reflecting improved profit before tax and significantly lower levels of exceptional charges in 2013/14.

Taxation

The Group's effective tax rate on profits from continuing operations (excluding exceptional items) was 14.6% (2013: 20.1%). The effective tax rate continues to be below the headline rate of UK corporation tax due to the property profit income stream, on which the tax charges are sheltered by brought forward capital losses or roll over relief. The higher level of property profits this year has reduced the effective rate of tax but we expect the effective tax rate to increase next year to approximately 18%.

Future decreases in the rate of UK corporation tax to 20% were enacted in 2013 and the one-off impact that this has on deferred tax balances has been classified as exceptional. This resulted in an exceptional tax credit of £1.9 million in the year ended 31 March 2014.

Group result for year

The reported Group profit for the year amounted to £50.2 million (2013: £46.6 million). The 2013 result included discontinued operations in relation to St Hubert; both profits for the period to August 2012 and the gain on disposal of the business.

Earnings per share

The Group's adjusted basic earnings per share from continuing operations increased by 39% to 40.8 pence per share (2013: 29.4 pence per share). This reflects improved operating profits and reduced interest costs benefitting from the loan note repayments made in April 2013.

Basic earnings per share from continuing operations, which includes the impact of exceptional items, pension interest expense and the amortisation of acquired intangibles, amounted to 35.8 pence per share (2013: 5.9 pence loss per share).

Dividends

We are committed to a progressive dividend policy and have delivered against that policy in the year ended March 2014. The proposed final dividend of 15.4 pence per share represents a 0.4 pence per share increase compared to last year. Together with the interim dividend of 5.9 pence per share this brings the total dividend to 21.3 pence per share for the full year, 2.9% higher than last year (2013: 20.7 pence per share).The final dividend will be paid on 7 August 2014 to shareholders on the register on 4 July 2014.

Dividend cover of 1.9 times is within the target range of 1.5 to 2.5 times (2013: 1.4 times).

Pensions

Following the sale of St Hubert, the Group entered into discussions with the Pension Fund Trustee about the impact of early loan note repayments. Consequently, on 18 April 2013 the Group made an additional one-off cash contribution to the Fund of £40 million. At the same time the Group granted the Trustee a floating charge over maturing cheese inventories, with a maximum realisable value of £60 million. This charge was put in place to protect the Fund in the unlikely event of an insolvency of Dairy Crest Limited.

During the year, the Group paid £20 million cash contributions into the closed defined benefit pension scheme in line with the schedule of contributions agreed in June 2011. The latest full actuarial valuation was performed at 31 March 2013 and resulted in an actuarial deficit of £145 million (£105 million after taking account of the £40 million one-off contribution paid in April 2013).

Following discussions with the Trustee a new schedule of contributions was signed in March 2014. The Trustee has recognised that investments we are making in the business are expected to improve the covenant strength in future years and as a consequence the level of cash contributions has been reduced over the next three years. For 2014/15 and 2015/16 cash contributions will total £13 million per annum and in 2016/17 will total £16 million. No further security has been granted to the Trustee to support this position.

The biggest threat to future levels of cash contribution is the relatively high proportion of risk assets held by the scheme (predominantly equities). Excluding insurance policies, approximately 75% of scheme assets are currently held in equities or other risk asset classes. The main focus of both the Trustee and the Group over the coming years is to further reduce pension risk by reducing the proportion of equities to which the scheme is exposed. The latest funding plan assumes a full funding position within six years, based on company contributions reverting to £20 million per annum from 2017/18 and the proportion of risk assets reducing from 75% to 20%. However, the level of contribution for 2017/18 and beyond and the recovery period will be reassessed at the next triennial actuarial valuation in March 2016 and changes to this plan will be made accordingly based on actual performance of the scheme.

The reported IAS19 pension liability at 31 March 2014 was £57.7 million comprising an IAS 19 deficit of £47.6 million and a £10.1 million additional liability reflecting an unrecoverable notional surplus that is required to be recognised under IFRIC 14. The reported deficit at 31 March 2013 was £67.2 million. Asset returns were strong during the year, however, corporate bond yields declined as investor demand for corporate bonds picked up as the global economic outlook improved.

Cash Flow

Cash used in operations was £13.8 million in the year (2013: cash generated £19.1 million). This includes a working capital outflow of £22.6 million (2013: £40.0 million outflow) due mainly to the higher value of cheese stocks compared to March 2013 - £167.2 million in March 2014 versus £155.5 million last year. Stock value increases are a result of increased manufacturing to support future volume growth and milk cost increases during 2013. Furthermore, the cash outflow from operations includes £20.8 million of exceptional items (2013: £29.9 million) and the £40 million one-off cash contribution to the pension scheme.

Capital expenditure of £58.8 million was £7.9 million higher than last year (2013: £50.9 million). Significant investment has been made at our spreads manufacturing site, Kirkby, to accommodate production of spreads following the closure of Crudgington planned for 2014. We invested in our FRijj capacity and capability at Severnside to support future brand growth and substantial investment has already been incurred at our cheese creamery in Davidstow in relation to the demineralised whey production, albeit we have spent less in the year to March 2014 than was originally anticipated.

Proceeds from the sale of depots amounted to £25.1 million including £17.6 million from the sale of our Nine Elms depot in Battersea. In addition, certain FRijj capital expenditure was funded through equipment finance resulting in a cash inflow of £7.4 million. Financing was for six years at fixed rates of interest and allowed us to take advantage of attractive longer term funding rates in the absence of any required refinancing in the next 12 months.

Cash interest amounted to £14.0 million (2013: £18.0 million) and tax refunds totalled £2.1 million resulting from high levels of restructuring charges, pension contributions and capital expenditure in previous years (2013: tax payments £4.7 million).

Looking ahead, our ambition is to generate strong free cash flows. Higher conversion of profits into cash will be helped in the future by: lower levels of cash exceptionals; reduced capital expenditure in our existing business; lower pension contributions; and lower working capital requirements following two years of milk cost inflation.

Capital expenditure in our core business will reduce in 2014/15 to approximately £35 million and we expect to spend a further £35 million completing our investment in demineralised whey capability.

Net Debt

Net debt increased by £82 million to £142 million at the end of the year albeit it reduced by £50 million in the second half of the year. The opening net debt of £60 million did not include the costs of the April 2013 one-off pension contribution (£40 million) or the cost of loan note repayments (£9 million).

Net debt as defined includes the fixed Sterling equivalent of foreign currency loan notes subject to swaps and excludes unamortised facility fees. At 31 March 2014, gearing (being the ratio of net debt to shareholders' funds) was 49% (2013: 19%).

Borrowing Facilities

At the start of the financial year, the group's borrowing facilities comprised: £330 million of loan notes (at the effective swapped exchange rate) maturing between April 2013 and November 2021, and a £170 million plus €150 million revolving credit facility expiring in October 2016.

On 4 April 2013, £60 million of notes from the 2006 series which had reached their maturity were repaid.

On 18 April 2013, a further £100 million of loan notes were repaid from the 2007 series. Of these notes, the majority (£69 million) were due for repayment in April 2014 with the balance due in April 2017. This has reduced the Group's future interest payments. The repayment was effected by exercising the Group's right to early redemption on payment of a make-whole premium.

Following these repayments, the Group has £170 million of notes outstanding which mature between 2014 and 2021. A further £25 million of notes matured in April 2014 funded from the revolving credit facility.

In 2013 the Group also reduced its revolving credit facility by €60 million to £170 million plus €90 million (approximately £244 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. The Group remains very comfortably within its covenants with a net debt to EBITDA ratio of 1.3 times as of 31 March 2014 (March 2013: 0.6 times).

Post balance sheet events

On 16 May 2014, we completed the sale of our 30% shareholding in Wexford Creamery Limited for €3.4 million (£2.8 million). At 31 March 2014, the net carrying value totalled £2.1 million comprising share of associates, deferred consideration and valuation of options net of contract provisions.

On 14 April 2014, we completed the sale of a depot in Surbiton, Surrey for proceeds of £5.4 million resulting in a profit on disposal of £4.9 million.

Treasury Policies

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

Going concern

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

Tom Atherton, Finance Director

21 May 2014

Consolidated income statement

Year ended 31 March 2014

The prior year comparatives have been restated to reflect the amendment to IAS 19R: Employee Benefits (see note 14).

The prior year comparatives and current year information include discontinued operations that were a result of the disposal of the St Hubert business in August 2012. The post-tax profit relating to discontinued activities is further analysed in Note 17.

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

Consolidated statement of comprehensive income

Year ended 31 March 2014

Consolidated balance sheet

At 31 March 2014

Consolidated statement of changes in equity

Year ended 31 March 2014

Consolidated statement of cash flows

Year ended 31 March 2014

Notes to the preliminary announcement

1 Basis of preparation

The consolidated financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority, International Financial Reporting Standards ("IFRS") and International Financial reporting Interpretation Committee ("IFRIC") interpretations as endorsed by the European Union, and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2013, as described in those financial statements.

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

IFRS 1 - Amendment to IFRS 1 - First Time Adoption of IFRS (effective 1 January 2013)

IFRS 13 - Fair Value Measurement (effective from 1 January 2013)

IFRS 7 - Amendments to IFRS 7 - Financial Instruments: Disclosures (effective 1 January 2013)

IFRS 9 - Financial Instruments (effective 1 January 2015)

IFRS 10 - Consolidated Financial Statements (effective 1 January 2014)

IFRS 11 - Joint Arrangements (effective 1 January 2014)

IFRS 12 - Disclosure of Interest in Other Entities (effective 1 January 2014)

IAS 1 - Amendments to IAS 1: Presentation of Financial Statements (effective from 1 July 2012)

IAS 19R - Amendments to IAS 19: Employee Benefits (effective from 1 January 2013)

IAS 32 - Amendments to IAS 32: Financial Instruments (effective from 1 January 2014)

IAS 27 - Separate Financial Statements (effective 1 January 2014)

IAS 28R - Investments in Associates and Joint Ventures (effective 1 January 2014)

IAS 32 - Improvement to IAS 32: Financial Instruments (effective 1 July 2013)

IFRS 3 - Improvement to IFRS 3: Business Combinations (effective 1 January 2013)

IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine (effective from 1 January 2013)

The application of these standards has had no material impact on the net assets, results and disclosures of the Group in the year ended 31 March 2014 with the exception of the amendments to IAS19R - Employee Benefits. The principal impact on the Group of the application of this standard is the requirement to use the discount rate when calculating expected returns on the asset component of pension cost. This change has resulted in higher charges to the Consolidated Income Statement for the pension interest cost. There is no material impact on the reported pension liabilities each year end as the impact in the Consolidated Income Statement is mitigated by an offsetting change in the calculation of actuarial gains and losses in the Statement of Comprehensive Income - namely the difference between actual and expected asset returns will increase.

The impact of IAS 1 - Amendment to IAS 1: Presentation of Financial Statements has resulted in a presentation change to the consolidated statement of comprehensive income that requires the 'other comprehensive income' to be grouped into one of the following:

- To be reclassified to profit and loss in subsequent years; or

- Not to be reclassified to the profit and loss in subsequent years

The financial information set out in this document does not constitute the statutory accounts of the Group for the years ended 31 March 2014 or 31 March 2013 but is derived from the 2014 Group Annual Report and Financial Statements. The Group Annual Report and Financial Statements for 2014 will be delivered to the Registrar of Companies in due course. The auditors have reported on those accounts and have given an unqualified report, which does not contain a statement under Section 498 of the Companies Act 2006.

2 Segmental analysis

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

The CODM uses product group profit, as reviewed at monthly business review meetings, as the key measure of the Group's results as it reflects the Group's underlying trading performance for the period under evaluation. Trading profit is defined as profit on operations before exceptional items and amortisation of acquired intangible assets but includes the Group share of post-tax profit of associate.

In April 2013, the Group reorganised from a divisional structure to a functional structure to become 'One Dairy Crest'. Prior to the reorganisation, the business was structured into divisions according to product types and this was used to identify and determine the Group's operating segments as 'Cheese', 'Spreads', 'MH Foods', 'Dairies', 'Share of Associate' and 'Other'. Certain of these operating segments were aggregated and the Group reported on five continuing segments within the business: 'Cheese', 'Spreads', 'Dairies', 'Share of Associate' and 'Other'.

Following the reorganisation, the CODM's primary focus for review and resource allocation is the Group as a whole and no longer any component part of the business. All revenue streams for the business are managed centrally by functional teams (Demand, Supply, Procurement and Finance) that have responsibility for the whole of the Group's product portfolio. Although some discrete financial information is available to provide insight to the management team of the key performance drivers, the product group profit is not part of the CODM's review.

Having considered these factors, management has judged that following the implementation of the new structure, the Group comprises one operating segment under IFRS 8. As such, disclosure required under IFRS 8 for the financial statements is shown on the face of the consolidated income statement and consolidated balance sheet.

Voluntary disclosure

To assist the readers of the financial statements, management considers it appropriate to provide voluntary disclosure on a basis consistent with historic reporting of the product groups. In disclosing the product group profit for the year, certain assumptions have been made when allocating resources which are now centralised at a group level.

Associate forms a separate product group whose results are reviewed on a post-tax basis.

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

Notes to the preliminary announcement

2 Segmental analysis (continued)

The results under the historic segmentation basis for the year ended 31 March 2014 and for the year ended 31 March 2013 and the reconciliation of product group measures to the respective line items included in the financial information are as follows: