Dairy Crest Regulatory News (DCG)

19 May 2011

Dairy Crest Group plc ("Dairy Crest")

Final results for year ended 31 March 2011

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

Financial Highlights

·; 5% increase in adjusted profit before tax in challenging trading conditions

·; Good cash generation with £25 million reduction in year end net debt

·; Final dividend increased 4% to 14.2 pence per share making a total dividend payment of 19.7 pence per share

Operating Highlights

·; Sales of five key brands up 7%

·; St Hubert brand reaches 30% market share

·; Volume of milk to major retailers up 9%

·; milk&more weekly sales over £1 million

·; £20 million annualised cost reduction initiatives delivered during the year and a further £20 million identified for 2011/12

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

"Dairy Crest's results for the year demonstrate the benefit of being a broadly based business. A strong performance from our branded Spreads and Cheese businesses has more than offset tougher trading in Dairies.

We have again increased added value sales. Our five key brands have all performed well. We have also grown sales of milk to major retailers, started to supply liquid milk to Tesco and made considerable progress with our milk&more internet doorstep delivery service.

We have also been successful in making cost savings across the business to reduce the effect that commodity inflation is having on our customers and consumers, and have lowered net debt again this year.

Looking forward, trading in the new financial year is in line with our expectations.

Against a background of higher input costs and increasingly cash-constrained consumers we will continue to focus on doing the right things for long-term benefit, including making efficiency improvements and investing in the long-term health of our brands and facilities. We are soundly positioned to deal with the challenges ahead."

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 9:30 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED. An audiocast of the presentation will be available from the investor section of the Group's website investor.dairycrest.co.uk later today.

Chairman's statement

In a challenging environment the Board is pleased that our broadly based business has delivered increased pre- exceptional profits and reduced borrowings. We are encouraged by the progress we have made executing our strategy, in particular the growth of our key brands.

Our people and our dairy farmers

At the end of my first full year as Chairman I would like to thank all of the people who work with us for their important contribution over the past year. I include all the efforts made by the 1,330 dairy farmers who supply their milk to us. The long-term commitment of our employees, franchisee milkmen and dairy farmers has allowed us to successfully move our business to a broadly based, added value dairy food company with a significant profit stream from continental Europe. This leaves us well positioned for the future.

Market background

The markets in which we operate remain challenging and consumers are coming under increasing financial pressure. Although we produce staple foods we have been very conscious of the need to provide consumers with good value and great quality at the right cost. We have also spent more on advertising to promote the benefits of our key brands.

At the same time we have seen higher input prices for milk, ingredients, packaging and distribution. By driving efficiencies throughout our business we have successfully reduced the cost increases we have needed to pass onto our customers.

Increased dividend recommended

Adjusted profit before tax was up 5% and as a result the Board is recommending a final dividend of 14.2 pence per share, making a full year dividend of 19.7 pence, an increase of 4.2% over the previous year. This dividend is covered 2.4 times by adjusted basic earnings per share in line with our policy for dividend cover of 2.0 to 2.5 times.

Strategy

Our strategy has four parts:

·; To build market-leading positions in branded and added value markets;

·; To focus on cost reduction and efficiency improvements;

·; To improve quality of earnings and reduce risk;

·; To generate organic growth and to make acquisitions and disposals where they will generate value.

As shown throughout this statement we have made progress in all these areas over the year.

Innovation plays a key role in building added value sales and driving efficiencies. We have increased our focus on innovation in recent years by adapting our culture, improving systems and increasing resources. I am pleased that this focus has started to make a real difference to the business.

We believe this strategy remains appropriate for today's economic environment.

Corporate responsibility

Dairy Crest is a responsible business. We have made significant progress in this area over recent years and will continue to do so going forward. Looking forward our aim is to ensure that we align commercial and corporate responsibility strategies for the benefit of all our stakeholders.

Board changes

During the year Richard Macdonald and Stephen Alexander have been appointed as Non-executive Directors, replacing Neil Monnery and Carole Piwnica. I would like to take this opportunity to thank Neil and Carole for their important contributions and to welcome Richard and Stephen to the Board.

Summary

While we expect that the market environment will remain challenging, Dairy Crest is an increasingly robust business. We have a good customer base, strong brands and a wide portfolio of products. We believe the strategy to develop our leading brands and our continued focus on efficiency remains the best way forward.

Anthony Fry, Chairman

18 May 2011

Chief Executive's review

Dairy Crest's results for the year demonstrate the benefit of being a broadly based business. A strong performance from our branded Spreads and Cheese businesses has more than offset tougher trading in Dairies.

We have again increased added value sales. Our five key brands have all performed well. We have grown sales of milk to major retailers, started to supply liquid milk to Tesco and made considerable progress with our milk&more internet doorstep delivery service. We expect increased investment in advertising our key brands and milk&more to bring benefits in the future.

We have also been successful in making cost savings across the business to reduce the effect that commodity inflation is having on our customers and consumers, and have lowered net debt again this year.

Vision and values

Our vision and values are at the heart of our business and we have made real progress in making them come alive this year.

For us, consumers come first and by understanding our consumers we have continued to drive the sales of our key brands. We have also increased the turnover from our milk&more proposition. In the fourth quarter milk&more weekly sales passed the £1 million milestone and have continued to grow since the year end.

Consumer innovation developed in the last three years is becoming an increasing part of our annual turnover. We have set ourselves the challenging objective for this to reach 10% although we are still slightly below that figure at the moment. We are particularly pleased by the performance of our healthy 'lighter' cheese and spreads brands, 1% fat milk and environmentally-friendly milk in bags. We have a strong pipeline of innovative products that will benefit future years.

We act responsibly and asked Business in the Community to benchmark our progress using their Corporate Responsibility index. We were pleased to be awarded a silver rating. We also carried out an employee survey which demonstrated some improvements and highlighted areas we can improve further.

Our relationship with the dairy farmers who supply their milk to us is very important. Although UK milk production grew during the year for the first time since 2004, increases in on-farm costs during the second half of the year has put pressure on our dairy farmers. We have responded by increasing our milk prices and continue to support our suppliers in many different ways.

Financial summary

Adjusted Group profit before tax was up 5% at £87.6 million (2010: £83.5 million). Adjusted basic earnings per share increased by 6% to 47.1 pence (2010: 44.5 pence). Reported profit before tax of £77.8 million was unchanged from last year despite the benefit of £4 million of exceptional income in the prior year.

Group net debt at 31 March 2011 was £311.6 million (2010: £337.2 million).

Trading performance

Dairy Crest's sales mix continues to improve as we grow sales of our key brands and reduce our middle ground milk sales.

Our five key brands have all grown ahead of the market with the exception of Frijj where, as previously reported, manufacturing capacity was constrained for part of the year.

* Dairy Crest sales 12 months to 31 March 2011 v 12 months to 31 March 2010

** ACN, IRI data to 19 March 2011 

In a difficult marketplace we have again delivered increased pre-exceptional profits. This is due to our focus on quality, service and cost. Over recent years we have invested heavily in our cheese business and are one year into a three year capital investment programme for our liquid dairies. This is on track to deliver the anticipated efficiency improvements, reducing production costs and wastage.

We are also reducing costs in our depot network and have worked with our non-milk suppliers to take costs out of all areas of the supply chain.

Taken together we have commenced initiatives in the year that will deliver over £20 million of annualised cost savings. We achieved the same target in the previous year and have well advanced plans to do so again in the year ending 31 March 2012. Our cost base excluding milk and commodity ingredients is around £800 million and we believe that cost initiatives of 2.5% of this each year is a reasonable target for the next few years.

Our focus on efficiency has allowed us to invest more in marketing and innovation and limit the increase in input costs that we have had to pass on to customers and consumers.

Increased staff training has also contributed to improved service and quality.

In addition we have benefited from the work we have done in recent years to reduce risk. We now have a far simpler business which allows greater focus.

Looking forward

In Spreads and Cheese our strong innovation pipeline will help build on our current momentum and further grow sales of our key brands.

Our Dairies business is facing an increasingly tough operating environment. A very competitive market has put pressure on this side of the business.

Input costs have risen during the fourth quarter of 2010/11 and dealing with them is a key priority for the year ahead. We will do this by continuing to make efficiency savings and agreeing selling price increases with customers. In total milk costs have increased by over £40 million per annum, although, in the case of dedicated milk pools, this has been immediately offset by higher selling prices. Other commodity input costs such as vegetable oil, fuel and packaging are forecast to be around £25 million higher in 2011/12 than in 2010/11.

We will also continue to focus on cash generation, however we expect that net borrowings will increase in the year ending 31 March 2012, reflecting higher cheese stocks and increased capital investment.

Trading in the new financial year has started in line with our expectations.

Against a background of higher input costs and increasingly cash-constrained consumers we will continue to focus on doing the right things for long term benefit, including making efficiency improvements and investing in our brands and facilities. We are soundly positioned to deal with the challenges ahead.

18 May 2011

Operating Review

Spreads

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

Consumption of spreads has fallen during the year, but higher prices, reflecting higher input costs, have led to value growth in the UK and an unchanged market in France. Both these markets are strongly branded.

We have broadly maintained our market share with a good performance by our three key brands, Clover and Country Life in the UK and St Hubert Omega 3 in France being offset by lower sales of secondary brands. The current tough economic environment has led us to increase expenditure on advertising and promotions and to drive innovation.

For the year ended 31 March 2011, revenue of £285.5 million, segment profit of £53.3 million and a segment margin of 19% are all similar to last year.

St Hubert

St Hubert brand market share increases to 30%

St Hubert was acquired in January 2007 from Uniq plc, and is an important part of the Dairy Crest Group. We manufacture spreads at Ludres in North Eastern France, for distribution across France and to Italy. Under Dairy Crest's ownership the business has prospered and has consistently grown market share and profits.

The total non-butter French Spreads market remained steady at €375 million. Market shares of the three major suppliers also remained unchanged. The St Hubert brand increased its market share to 30%, reflecting the growth of St Hubert Omega 3 and St Hubert Bio, which was launched last year.

St Hubert has a track record of investing in both innovation and marketing activity and has well developed plans for more new product launches in the next few months. At the same time the business will continue to seek efficiencies to underpin its performance and offset higher input costs.

In Italy our market-leading Valle brand has performed well and has again increased its market share to 62%.

UK Spreads

Another strong performance by our two key brands Clover and Country Life

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

The UK butter, spreads and margarine market grew 8% in the year to £1.2 billion, reflecting a small reduction in volumes offset by significant price increases. Input costs, most notably cream and vegetable oils, have risen and we have had to increase our selling prices as a result.

Both of our two key UK spreads brands, Country Life and Clover have grown ahead of the market. However Utterly Butterly sales have fallen as we have focused marketing support on our key brands.

After a difficult first quarter Country Life has performed well and sales are up 9% compared to last year. Country Life is the only major British butter brand and we have continued to highlight this in our advertising.

Clover remains the UK's leading dairy spread and has grown market share again this year. Total sales are also up 9%. Sales of Clover Lighter are now 15% of total Clover sales and grew by 26% in the year. We have advertised Clover as being 'in the middle' reflecting its appeal to both health and taste conscious consumers. 

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

We have an ongoing project to make our UK Spreads business more efficient and have recently announced plans to consolidate Clover production at our Kirkby site with the net loss of around 45 jobs.

Cheese

A 'virtuous circle' of market leading brands, facilities and milk prices

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

We also make Davidstow branded cheddar and supply a small quantity of high quality retailer branded cheddar.

Although reported revenue fell by 14% to £223.1 million, this was due to the sale of our majority stake in Wexford Creamery in June 2010. Revenue excluding Wexford has increased slightly in the year. Segment profits increased by 66% to £28.0 million resulting in a segment margin of 13% (2010: profit of £16.9 million and 7% margin).

UK retail cheese market volumes were broadly flat in the year with values increasing by 2% to £2.4 billion. The market is predominantly retailer own label, but increased marketing investment and a strong promotional programme have led to a 6% increase in Cathedral City sales in the year. Within this, Lighter (which now accounts for 13% of total brand sales) and Extra Mature variants have both grown strongly.

Cathedral City now has a 9% share of the total retail cheese market and remains larger than the next three cheddar brands added together. Our successful advertising campaign, 'the nation's favourite' reflects this strong position.

Although Cathedral City remains by far our largest cheese brand, we believe our Davidstow brand has great potential. In the past this has been positioned as a 'sub-brand', carrying both the Davidstow name and that of the retailer. During the year we have replaced the sub-brand in Sainsbury's and Tesco with a new Davidstow cheddar. This will allow us to develop this brand further in the future.

Profits in our cheese business have been supported by higher returns from whey and by efficiency measures across the supply chain. At Davidstow we have installed two new biomass boilers on time and to budget and these will deliver savings in 2011/12. Further renewable energy projects are being considered.

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

Looking forward we have a great opportunity to deliver growth in revenue and profits in this business through a combination of consumer-led innovation and marketing. We now plan to make more cheese at Davidstow to meet demand, which, together with higher milk prices, will result in an increase in cheese stocks during 2011/12.

Dairies

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

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

Reported revenue increased by 1% to £1,089.8 million. However, in an increasingly tough trading environment, segment profit fell to £27.1 million (2010: £34.9 million), resulting in a segment margin of 2.5%.

An increasingly efficient supply chain

Our focus is on cost, quality and service and we are one year into a three year, £75 million, capital expenditure programme for our liquid dairies. We have made significant improvements at all four of our dairies where we pack milk into polybottles in the year, with particular emphasis on Severnside. Here we have increased capacity for conventional polybottles and for Frijj and have installed and commissioned a new line which produces milk in bags.

We have improved operating efficiencies by around 5% this year, have reduced wastage and are getting close to operating all our dairies with zero waste to landfill. Service and quality have remained high.

Looking forward, we expect to make further capacity and efficiency improvements by installing a new milk packing line at Severnside and extending the cold stores at Foston and Severnside. Further work will be done to allow us to expand the Frijj range and increase milk bag capacity. We will also increase our focus on reducing distribution costs including through the implementation of some new planning tools.

Sales to major retailers

We have significantly increased our sales of milk to our major retail customers in the year and milk sales to these customers are now greater than to the middle ground. This reflects the improvements we have made over recent years to cost, quality and service and we expect to continue this trend. As well as obtaining new business from Tesco we have established long-term agreements with Sainsbury's and Morrisons and have confirmed long-standing supply arrangements with Waitrose and M&S. 

However we have not renewed our contract to supply the Cooperative Group and our fresh milk supply to them will end in August 2011.

We continue to innovate and have seen significant uplifts in our sales of 1% fat milk and milk in bags.

We have also grown sales of our branded milkshake, Frijj by 3% compared to last year. The market for flavoured milk remains buoyant but our growth was constrained by capacity. We have now addressed this and expect Frijj, supported by innovative marketing campaigns, to grow strongly in the year ending 31 March 2012.

Residential deliveries

Delivering milk to customers' doorsteps remains a key part of our business. We have 1.2 million residential customers and have a network of over 2,200 milkmen including around 1,700 franchisees.

Our internet doorstep delivery proposition, milk&more continues to make progress. Having launched milk&more nationally in September 2009 we started 2010/11 with over 250,000 registered customers. We spent the first half of the year improving systems so that we could provide an even better service to our customers. The enhancements also increased capacity and allowed us to understand how our customers were using milk&more. Weekly turnover reached £800k by September 2010.

The growth encouraged us to advertise on national television in February and March 2011 which led to more new customers signing up and using milk&more. In March 2011 we moved through the £1 million weekly sales barrier. Completely new customers spend more with us, in particular on products other than milk. In the last four weeks these customers' weekly spend has averaged over £10, compared to around £5 for our traditional customers. We are pleased that three of our depots have increased turnover compared to the previous year and a further nine had sales within 2% of last year. We have resumed television advertising in the first quarter of the current financial year and we are also carrying out a number of different trials to further improve milk&more.

Away from milk&more we have recently started to sell milk bags to our residential customers and these are proving extremely popular. Cost control remains important and we are progressing well with projects that will significantly reduce our supply chain costs.

However higher commodity input costs have led us to implement two selling price increases during the year and this has resulted in total residential milk sales falling 5% by value and 8% by volume compared to a year ago.

Looking forward, our current projections show that growth in milk&more sales has the potential to stabilise margins in our residential delivery business and that milk&more margins will account for around 40% of total residential margins by the end of 2012/13.

Middle ground

This sector of our business has been challenging during the year. Although some parts of the middle ground remain attractive, others have become increasingly commoditised and prices and margins have been adversely affected. We have reduced middle ground sales in the year and have significantly cut back on the number of depots from which we operate our middle ground business. We intend to be increasingly selective in this sector.

Ingredients

Our ingredients operation provides us with a flexible balancing solution for seasonal raw milk supplies and cream. Despite dairy commodity markets remaining strong for most of the year, we have reduced the amount of milk processed into commodity ingredients. We carry only minimum stocks and negotiate longer term selling contracts wherever possible in order to reduce our exposure to commodity markets. However we have benefited from stronger markets for by-products such as buttermilk powder.

Financial Review

Overview

The Group has made further progress this year. We have delivered increased pre-exceptional profits, strengthened our key brands and once again reduced net debt. Furthermore, we have made good progress with milk&more, our internet delivery proposition, and secured fresh milk supply agreements for the medium term with key retailers. We continue to invest in innovation, focus on cost reduction and drive our key brands in order to underpin future profitability.

Group revenue decreased by 1.5% to £1,604.5 million. Cheese revenue was impacted by the sale of 50% of the share capital of Wexford Creamery Limited in June 2010, from which point its results were no longer consolidated into the Group. We achieved 7% growth in our key brands and robust retail milk volumes and ingredients realisations offset reduced volumes in our Customer Direct business. Other revenue represents third party distribution undertaken by our national distribution centre in Nuneaton.

Segment operating profit is quoted before the impact of exceptional items and amortisation of acquired intangibles and includes our share of associates' and joint ventures' profit after tax. On this basis, total segment profit was up £2.3 million or 2.2%.

Our cheese business has performed well in the year reflecting the strength of our Cathedral City brand and the benefit of improved whey realisations. Prior year Cheese profits were adversely impacted by milk price increases during 2008/09 that resulted in a higher cost of sales in 2009/10.

Our Spreads profits have declined only marginally despite strong inflation in key cost inputs, namely vegetable oils and cream. The reported result also incorporates a negative translation impact of approximately £1 million on the results of the St Hubert business.

Dairies profitability has been impacted by an increasingly tough trading environment and reduced property profits compared to 2009/10. However, we continue to improve supply chain efficiencies, make progress with milk&more and have secured extended agreements with key major retailers.

Reported pre-exceptional Group profit on operations increased by 3.2% to £99.7 million. We have benefited from being a broadly based dairy business and a strong recovery in Cheese profits has offset lower margins in our Dairies segment.

Exceptional items

Two exceptional items have been recorded in the year.

In June 2010 we sold 50% of the share capital of Wexford Creamery Limited reducing our holding to 30%. A profit on disposal of £1.9 million has been recorded as exceptional. The assets of this business had previously been impaired at 31 March 2010 to reflect their fair value less costs to sell.

We have commenced a major restructuring of depot administration activities in our Customer Direct business. This restructure will deliver more streamlined and centralised back office support functions and generate significant cost savings. Exceptional costs in the year amount to £3.0 million of which the majority comprises redundancy costs. We expect to incur a further £4 million in 2011/12.

Interest

Finance charges have decreased by £1.8 million (8%) to £20.6 million principally as a result of reduced levels of borrowings. At 31 March 2011, all borrowings were at fixed rates of interest through fixed coupon loan notes or interest rate swaps. During the year, short term borrowing requirements were met by utilisation of the November 2006 and July 2008 revolving credit facilities which are at floating rates of interest based on LIBOR plus margin.

Other finance expense comprises the net expected return on pension scheme assets after deducting the interest cost of the defined benefit obligation. This resulted in no net cost in the year ended 31 March 2011 (2010: cost of £0.5 million). This amount can be highly volatile year on year as it comprises the net of expected returns and interest costs, both of which are dependent upon financial market conditions at 31 March each year. We therefore exclude this item from headline adjusted profit before tax.

Interest cover excluding pension interest, calculated on total segment profit, remains comfortable, at 5.3 times (2010: 4.7 times).

The Group's adjusted profit before tax (before exceptional items and amortisation of acquired intangibles) was £87.6 million (2010: £83.5 million), representing a 5% increase. This is management's key Group profit measure. Reported profit before tax was unchanged at £77.8 million due to exceptional items in 2009/10 contributing £4.0 million income versus a £1.1 million cost in 2010/11.

Taxation

The Group's effective tax rate on profits excluding exceptional items and including associate's tax was 27.9% (2010: 28.3%). The small decrease in effective rate of tax compared to last year is primarily due to a lower tax rate being applied to deferred tax balances. The rate applied to deferred tax balances of 26% reflects the reduction in the UK corporation tax rate effective from April 2011. This change was enacted before 31 March 2011. The rate applied at 31 March 2010 was 28%.

Group profit for the year

Reported Group profit for the year increased by £5.0 million to £57.5 million (2010: £52.5 million).

Earnings per share

The Group's adjusted basic earnings per share increased by 6% to 47.1 pence per share (2010: 44.5 pence per share). This reflects both the increase in adjusted profit before tax and a slightly lower effective tax rate for the year.

Basic earnings per share, which includes the impact of exceptional items, pension interest expense and the amortisation of acquired intangibles, increased by 6% to 43.2 pence per share (2010: 40.6 pence per share).

Dividends

The proposed final dividend of 14.2 pence per share represents an increase of 4% on last year's final dividend of 13.6 pence. Together with the interim dividend of 5.5 pence per share this gives a total dividend of 19.7 pence per share for the full year. This represents an increase of 4% on the dividend declared for 2009/10. The final dividend will be paid on 4 August 2011 to shareholders on the register on 24 June 2011.

Pensions

On 1 April 2010, our defined benefit scheme closed to future service accrual and active members were invited to join our stakeholder pension scheme. This closure significantly reduces future funding risks. The full actuarial valuation for March 2010 resulted in a deficit of £137 million compared to the reported IAS 19 deficit of £142.4 million at that date. The final schedule of contributions have not yet been formally signed off, however, we expect no change to the existing level of cash funding of £20 million per annum.

The reported IAS 19 pension deficit at 31 March 2011 was £60.1 million compared to £142.4 million at 31 March 2010 and £137.2 million at 30 September 2010. This significant improvement is a result of strong asset returns over the year, the payment of £20 million funding contributions and reduced pension liabilities. The increase in liabilities resulting from the use of more prudent mortality assumptions, which were reviewed as part of the full actuarial valuation, has been more than offset by a reduced inflation assumption for deferred members where CPI rather than RPI is now assumed following changes to the calculation of statutory increases announced by the Government. The actuarial gain reported in other comprehensive income for the year is £60.6 million (2010: £117.7 million loss).

Cash flow

We continue to focus on cash and have reduced net debt again in the year ended 31 March 2011. Cash generated from operations was £128.1 million in the year (2010: £145.9 million). This includes a working capital inflow of £11.7 million (2010: £25.7 million). Cheese stock levels increased during the year and will continue to do so in 2011/12 as the increases in milk costs seen over the last 12 months feed into stock valuation. However, the impact of this was offset in 2010/11 by a strong focus on debtor levels (despite absolute rises resulting from price increases) and increased creditors. The working capital position at 31 March 2011 was approximately £10 million better than anticipated as a result of some early receipts from certain customers.

Capital expenditure of £49.3 million was £22.4 million higher than last year (2010: £26.9 million). As announced last year, significant investment has commenced across our milk processing infrastructure and we expect this to continue for the next two years. Furthermore we have invested in the milk&more website and supported the depot administration project in Customer Direct. Cash receipts from the disposal of fixed assets amounted to £2.5 million (2010: £10.2 million).

Cash interest and tax payments amounted to £19.8 million and £16.1 million respectively (2010: £22.1 million and £10.5 million). Interest payments are £2.3 million lower than last year consistent with the lower interest cost in the profit and loss account. Tax payments increased in the year mainly reflecting the timing of UK and French payments on account.

Cash inflows from the sale of businesses of £4.0 million comprise proceeds from the sale of the Group's controlling interest in Wexford Creamery Limited less fees and cash in the business disposed. In 2009/10 we received net £1.2 million in relation to the sale of the Yoplait Dairy Crest joint venture.

Net debt

Net debt decreased by £25.6 million to £311.6 million at the end of the year despite increased capital expenditure in the year. Net debt is defined such that, where cross currency swaps are used as cash flow hedges to fix the interest and principal payments on currency debt, the swapped Sterling liability is included rather than the retranslated foreign currency debt. At 31 March 2011, gearing (being the ratio of net debt to shareholders' funds) was 85% (2010: 115%).

Borrowing Facilities

Group borrowing facilities comprise £298.2 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 2011 there was £324.3 million effective headroom against committed facilities (2010: £295.1 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 comfortably within its covenants with a net debt to EBITDA ratio at 31 March 2011 of 2.2 times (March 2010: 2.4 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.

Net Assets

The Group's balance sheet has strengthened with net assets of £365.5 million (2010: £292.8 million). Goodwill, intangible assets and property, plant and equipment total £799.6 million (2010: £794.4 million). Inventories of £164.5 million are £10.8 million higher than prior year reflecting increases in maturing cheese stocks and the impact of cost inflation on raw materials and consumables.

Going concern

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

Alastair Murray, Finance Director

18 May 2011

Consolidated income statement

Year ended 31 March 2011

The consolidated income statement relates to continuing operations.

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

Consolidated statement of comprehensive income

Year ended 31 March 2011

Consolidated balance sheet

As at 31 March 2011

Consolidated statement of changes in equity

Year ended 31 March 2011

* Further details are provided in Note 16.

Consolidated statement of cash flows

Year ended 31 March 2011