6 Nov 2014 07:00
Dairy Crest Group plc ("Dairy Crest")
Interim Results Announcement
| Half year ended 30 September | |||
| Financial Highlights: | 2014 | 2013 | Change |
Revenue 1 : | £682.1m | £672.2m | +1% |
Adjusted profit before tax 1, 2 : | £21.3m | £21.9m | -3% |
Profit before tax 1 : | £0.9m | £19.7m | -95% |
Adjusted basic earnings per share1, 2 : | 13.0p | 13.1p | -1% |
Basic earnings per share 1 : | 0.5p | 13.1p | -96% |
Half year net debt: | £209.6m | £192.3m | +9% |
Interim dividend: | 6.0p | 5.9p | +2% |
1 From continuing operations
2 Before exceptional items, amortisation of acquired intangibles and pension interest
First half profitability maintained despite challenging trading environment
- All four key brands grow retail market share
- Annual cost reductions on target to deliver £20 million
- Strong contributions from Spreads and Cheese and lower interest charges offset Dairies losses
- Whey investment on track to boost profits in 2015/16
- Interim dividend up 2%
Disposal of Dairies operations also announced
- Cash consideration of £80 million on completion
- Conditional on the approval of shareholders, relevant competition authorities and employee consultation
Mark Allen, Chief Executive, said:
"Dairy Crest has delivered adjusted first half profits broadly in line with last year and we have continued to grow our key brands and reduce our cost base. In an environment which remains particularly difficult to predict our immediate focus is on delivering the second half.
"The investments we are making to add value to whey are on track to grow future profits. In addition the proposed disposal of our Dairies operations, which we are also announcing today, is another positive development for Dairy Crest and the wider UK dairy industry."
For further information:
Dairy Crest Group plc | ||||||||
Arthur Reeves | 01372 472236 | |||||||
Brunswick | ||||||||
Tim Danaher / Max McGahan | 020 7404 5959 | |||||||
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 8.30 (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.
Operating review
In line with our well-established strategy, Dairy Crest continues to focus on growing added value sales and reducing our cost base.
Key brand sales up
In aggregate, sales of our four key brands (Cathedral City, Country Life, Clover and FRijj) were up 2% compared to the first half of 2013/14.
Brand | Market | Dairy Crest sales growth* | Retail market statistics** | |
Brand growth | Market growth | |||
Cathedral City | Cheese | +2% | +3% | - |
Country Life | Butter | +4% | +6% | +3% |
Clover | Spreads | -12% | -4% | -8% |
FRijj | Ready to drink flavoured milk | +27% | +12% | +6% |
Total | +2% | +3% | ||
* Dairy Crest value sales 6 months to 30 September 2014 v 6 months to 30 September 2013
** IRI data 26 weeks to 11 October 2014
We use IRI data to monitor the performance of our brands in retail markets and monitor their share of these markets. Differences between our sales and IRI data can be explained by sales we make to non-retail markets that are not reflected in IRI data and changes in the relationship of our selling prices to retail prices. There are also timing differences because the IRI data is for 26 weeks to 11 October 2014 rather than to the end of our accounting period.
IRI data for the 26 weeks ended 11 October 2014 show that our four key brands grew their retail sales by 3% compared to the same period last year. They further indicate that all four brands grew their market shares. This is a strong performance in an environment where consumer expenditure on food is falling and reflects ongoing support for these brands in the form of advertising and innovation.
Investing in innovation
Looking to the future, we have recently confirmed that we will be investing £4 million to build a dedicated Food Innovation Centre on the Harper Adams University campus. Planning permission has been granted and building will start imminently. The partnership between Dairy Crest and Harper Adams provides us with a link into leading research within the agriculture and food sectors and demonstrates Dairy Crest's continuing support for British agriculture.
Annual cost reductions on target to deliver £20 million
Cost reduction remains an important part of our strategy and we are on track to meet our annual £20 million target. We have also previously announced proposals to close two dairies, at Hanworth in West London and Chard in Somerset and the savings arising from these will contribute towards our annual £20 million target in future years.
Another strong performance from Cheese, with Cathedral City again outperforming
Sales of Cathedral City, the UK's leading cheese brand, grew by 2% compared to the six months ended 30 September 2013. However Cheese product group profits fell slightly as a result of the higher cheese costs arising from last year's high milk purchase prices and lower whey realisations.
Cathedral City strongly outperformed the market, both private label and competitor brands, and increased its overall market leadership. Behind this is a continuous programme of innovation. New products introduced in recent years include Chedds, Selections and Spreadable Cathedral City, all of which have contributed to Cathedral City's overall outperformance. In the first half we have launched easy open packaging and this will be followed in the second half by a new range of Cathedral City flavoured cheeses comprising caramelised onion, sweet chilli and smoked varieties. We will also introduce different cheese types into our Selections packs.
Increased profits from Butters and Spreads
Butters and Spreads product group profits increased in the six months ended 30 September 2014 compared to the same period last year when profits were adversely impacted by high cream input costs. This year input costs have fallen and margins have improved.
IRI data indicates that both of our key brands in this product group, Country Life (butter) and Clover (spread) have increased their respective market share. Their performance reflects consumers' increasing preference for butter. Country Life sales grew by 4% in the period compared to the first half of 2013/14 on the back of strong Spreadable sales. Clover sales fell by 12% in the same period.
We are completing the consolidation of butter and spreads production onto our site at Kirkby in the second half and this will reduce our manufacturing costs in future years.
Dairies records a first-half loss in volatile environment
Despite the strong growth of our flavoured milk brand, FRijj, increased property sales and cost reductions, lower commodity realisations and a significant divergence between cream revenues and Farmgate milk prices have resulted in losses in our Dairies operations in the six months ended 30 September 2014.
The lower commodity realisations have now led to difficult milk price cuts for British dairy farmers. Although dairy markets remain volatile and unpredictable we expect a stronger second half.
In the first half of 2013/14 we scaled back FRijj promotions while we increased our production capacity and capability. These improvements are now complete. FRijj had a strong first half and sales grew by 27% compared to the first half of last year. Cost savings included the benefit from lighter plastic bottles and reduced distribution costs.
Whey
Our demineralised whey and galacto-oligosaccharide projects, which will enable us to manufacture products for the growing, global infant formula market for the first time, are on track to contribute to profits in the year ending 31 March 2016. We currently process our whey into whey powder and, although whey powder realisations have fallen in the first half, the premium that we expect to receive for our new products over the price of whey powder and the resultant paybacks on these projects remain broadly unchanged.
In total we expect to invest £65 million in these projects. £8 million was spent last year and a further £16 million in the first half of this year. The balance will be spent mainly in the second half of the year.
We announced in July that we had chosen to partner with Fonterra to maximise returns from our investment in these projects and we are pleased with the way our relationship with Fonterra is developing.
Financial review
Group revenue of £682.1 million represents a 1% increase from last year. Higher cheese and milk sales have been offset by lower spreads sales.
Total product group profit from continuing operations fell 8% to £25.0 million (2013: £27.3 million). Improved Spreads product group profits and broadly maintained Cheese product group profits were outweighed by a deterioration in Dairies profitability despite an increase in property profits, arising from an ongoing programme of sales of delivery depots that we no longer require, to £7.5 million in the six months ended 30 September 2014 (2013: £2.5 million).
Product group analysis consistent with prior periods can be found in note 4 to the interim financial statements.
Finance costs of £3.7 million are lower than last year and reflect lower interest charges since the repayment and maturity of loan notes in April 2013 and some capitalised interest on major capital projects at Davidstow and Kirkby.
Group adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was £21.3 million, down 3% versus £21.9 million in 2013.
Exceptional costs of £19.3 million were incurred during the six months ended 30 September 2014, including £9.3 million associated with the closure of Hanworth and Chard dairies announced in September 2014, £8.8 million in relation to the consolidation of spreads and butter manufacturing onto one site, and £1.1 million associated with the significant investment on whey projects at Davidstow.
The total cash cost of exceptional items in the first half was £7.1 million including £0.6 million associated with the closure of Hanworth dairy, £4.9 million in relation to the consolidation of spreads and butter manufacturing, and £1.0 million associated with the Davidstow whey projects.
Further exceptional charges of approximately £6 million are expected in the second half associated with the consolidation of spreads and butter manufacturing, the Davidstow whey projects and the future closure of Hanworth and Chard.
The pension interest charge of £0.9 million was £0.7 million higher than last year.
The pre-exceptional tax expense of £3.3 million represents an effective tax rate of 16.3% based on expectations for the full year. This effective tax rate benefits from property profits which do not attract tax due to rollover relief and significant brought forward capital losses. The equivalent full year effective tax rate for 2013/14 was 14.6%.
Basic earnings per share on continuing operations are 0.5 pence, down from 13.1 pence in 2013. Adjusted basic earnings per share of 13.0 pence represents a 1% decrease in the half, consistent with the decrease in adjusted profit before tax and the slightly lower normalised effective tax rate.
The directors have declared an increased interim dividend of 6.0 pence per share, (2013: 5.9 pence per share). We remain committed to a progressive dividend policy with a target cover range of between 1.5 and 2.5 times.
Group net debt amounted to £209.6 million at 30 September 2014, an increase of £67.4 million since 31 March 2014. This reflects capital expenditure of £33.3 million (2013: £29.8 million) and the normal working capital increase in the first half of the year.
As usual we expect year end net debt to be lower than at 30 September, although it will be higher than at 31 March 2014, reflecting the significant investment we are making on the whey projects at Davidstow.
Looking further forward we continue to expect net debt reductions in future years as a result of lower capital expenditure and reduced stock holdings as milk prices fall.
The defined benefit pension scheme deficit reported under IAS 19 increased in the first half to £68.7 million (31 March 2014: £57.7 million), as corporate bond yields (being the benchmark used to discount scheme liabilities) fell to 3.8% at 30 September 2014 from 4.3% at 31 March 2014.
The principal risks and uncertainties affecting the Group are set out below the statement of directors' responsibilities and further details are disclosed on pages 14 and 15 of the 2014 Annual Report and Accounts. Related party transactions are given in note 12 to the interim financial statements.
Summary and outlook
Dairy Crest has delivered adjusted first half profits broadly in line with last year and we have continued to grow our key brands and reduce our cost base. In an environment which remains particularly difficult to predict our immediate focus is on delivering the second half.
Mark Allen
Chief Executive
6 November 2014
Consolidated income statement
(Unaudited)
Year ended 31 March 2014 | Half year ended 30 September 2014 | Half year ended 30 September 2013 | ||||||||||||||||||||
Before | Before | Before | ||||||||||||||||||||
exceptional | Exceptional | exceptional | Exceptional | exceptional | Exceptional | |||||||||||||||||
items | items | Total | items | items | Total | items | items | Total | ||||||||||||||
£m | £m | £m | Note | £m | £m | £m | £m | £m | £m | |||||||||||||
1,391.0 | - | 1,391.0 | Group revenue | 4 | 682.1 | - | 682.1 | 672.2 | - | 672.2 | ||||||||||||
(1,334.7) | (10.2) | (1,344.9) | Operating costs | (664.7) | (19.3) | (684.0) | (647.7) | (1.8) | (649.5) | |||||||||||||
18.2 | - | 18.2 | Other income - property | 9 | 7.5 | - | 7.5 | 2.5 | - | 2.5 | ||||||||||||
74.5 | (10.2) | 64.3 | Profit on operations | 24.9 | (19.3) | 5.6 | 27.0 | (1.8) | 25.2 | |||||||||||||
(9.9) | (0.2) | (10.1) | Finance costs | (3.7) | - | (3.7) | (5.4) | - | (5.4) | |||||||||||||
(0.3) | - | (0.3) | Other finance expense - pensions | (0.9) | - | (0.9) | (0.2) | - | (0.2) | |||||||||||||
0.3 | - | 0.3 | Share of associate's net (loss) / profit | (0.1) | - | (0.1) | 0.1 | - | 0.1 | |||||||||||||
64.6 | (10.4) | 54.2 | Profit before tax | 4 | 20.2 | (19.3) | 0.9 | 21.5 | (1.8) | 19.7 | ||||||||||||
(9.4) | 4.0 | (5.4) | Tax (expense) / credit | 6 | (3.3) | 3.1 | (0.2) | (4.0) | 2.2 | (1.8) | ||||||||||||
55.2 | (6.4) | 48.8 | Profit for the period from continuing operations | 16.9 | (16.2) | 0.7 | 17.5 | 0.4 | 17.9 | |||||||||||||
- | 1.4 | 1.4 | Profit for the period from discontinued operations | 9 | - | - | - | - | - | - | ||||||||||||
55.2 | (5.0) | 50.2 | Profit for the period | 16.9 | (16.2) | 0.7 | 17.5 | 0.4 | 17.9 | |||||||||||||
| All amounts are attributable to owners of the parent. | |||||||||||||||||||||
The prior year comparatives include discontinued operations that were a result of the disposal of the St Hubert business in August 2012.
Year ended | Half year ended | Half year ended | |||||||
31 March 2014 | Earnings per share | 30 September 2014 | 30 September 2013 | ||||||
36.8 | Basic earnings per share on profit for the period (pence) | 8 | 0.5 | 13.1 | |||||
36.4 | Diluted earnings per share on profit for the period (pence) | 8 | 0.5 | 12.8 | |||||
35.8 | Basic earnings per share from continuing operations (pence) | 8 | 0.5 | 13.1 | |||||
35.3 | Diluted earnings per share from continuing operations (pence) | 8 | 0.5 | 12.8 | |||||
40.8 | Adjusted basic earnings per share from continuing operations (pence) * | 8 | 13.0 | 13.1 | |||||
40.3 | Adjusted diluted earnings per share from continuing operations (pence) * | 8 | 12.9 | 12.8 | |||||
1.0 | Basic earnings per share from discontinued operations (pence) | 8 | - | - | |||||
1.0 | Diluted earnings per share from discontinued operations (pence) | 8 | - | - | |||||
*Adjusted earnings per share calculations exclude exceptional items, amortisation of acquired intangibles and the pension interest in relation to the defined benefit pension scheme.
A final dividend of £21.0 million (15.4 pence per share) was paid in the period to 30 September 2014 (2013: £20.5 million; 15.0 pence per share). A dividend of £8.2 million (6.0 pence per share) was approved by the Board on 5 November 2014 for payment on 29 January 2015 (2013: £8.1 million; 5.9 pence per share). See Note 7.
Consolidated statement of comprehensive income
(Unaudited)
Year ended | Half year ended | |||||||||||||||||
31 March | 30 September | |||||||||||||||||
2014 | 2014 | 2013 | ||||||||||||||||
£m | Note | £m | £m | |||||||||||||||
50.2 | Profit for the period | 0.7 | 17.9 | |||||||||||||||
Other comprehensive income to be reclassified to profit and loss in subsequent periods: | ||||||||||||||||||
20.0 | Cash flow hedges - reclassification adjustment for (losses) / gains in income statement | (5.0) | 16.0 | |||||||||||||||
(18.8) | Cash flow hedges - gains / (losses) recognised in other comprehensive income | 4.6 | (15.5) | |||||||||||||||
(0.3) | Tax credit / (expense) relating to components of other comprehensive income | 0.1 | (0.1) | |||||||||||||||
0.9 | (0.3) | 0.4 | ||||||||||||||||
Other comprehensive income not to be reclassified to profit and loss in subsequent periods: | ||||||||||||||||||
(49.6) | Remeasurements of defined benefit pension plans | 11 | (15.9) | (31.2) | ||||||||||||||
8.7 | Tax credit relating to components of other comprehensive income | 0.8 | 7.4 | |||||||||||||||
(40.9) | (15.1) | (23.8) | ||||||||||||||||
(40.0) | Other comprehensive loss for the period, net of tax | (15.4) | (23.4) | |||||||||||||||
10.2 | Total comprehensive (loss) / gain for the period, net of tax | (14.7) | (5.5) | |||||||||||||||
All amounts are attributable to owners of the parent. | ||||||||||||||||||
Consolidated balance sheet
(Unaudited)
31 March | 30 September | |||||||||
2014 | 2014 | 2013 | ||||||||
£m | Note | £m | £m | |||||||
Assets | ||||||||||
Non-current assets | ||||||||||
288.6 | Property, plant and equipment | 292.4 | 278.4 | |||||||
74.3 | Goodwill | 74.3 | 74.3 | |||||||
27.9 | Intangible assets | 26.0 | 29.7 | |||||||
0.3 | Investments | 0.4 | 0.3 | |||||||
0.8 | Investment in associate using equity method | - | 0.6 | |||||||
1.4 | Deferred consideration | - | 1.4 | |||||||
7.0 | Financial assets - Derivative financial instruments | 7.2 | 9.0 | |||||||
400.3 | 400.3 | 393.7 | ||||||||
Current assets | ||||||||||
219.6 | Inventories | 227.7 | 226.8 | |||||||
118.4 | Trade and other receivables | 117.5 | 133.5 | |||||||
0.4 | Financial assets - Derivative financial instruments | - | 0.5 | |||||||
67.3 | Cash and short-term deposits | 10 | 54.7 | 32.7 | ||||||
405.7 | 399.9 | 393.5 | ||||||||
806.0 | Total assets | 4 | 800.2 | 787.2 | ||||||
Equity and liabilities | ||||||||||
Non-current liabilities | ||||||||||
(179.7) | Financial liabilities | - Long-term borrowings | 10 | (266.9) | (147.1) | |||||
(6.2) | - Derivative financial instruments | (4.6) | (5.3) | |||||||
(57.7) | Retirement benefit obligations | 11 | (68.7) | (49.0) | ||||||
(11.4) | Deferred tax liability | (10.8) | (9.0) | |||||||
(7.8) | Deferred income | (7.0) | (8.7) | |||||||
(262.8) | (358.0) | (219.1) | ||||||||
Current liabilities | ||||||||||
(218.3) | Trade and other payables | (182.2) | (198.3) | |||||||
(26.5) | Financial liabilities | - Short-term borrowings | 10 | - | (78.3) | |||||
(2.0) | - Derivative financial instruments | (0.4) | (1.8) | |||||||
(3.6) | Current tax liability | (3.4) | (5.4) | |||||||
(1.7) | Deferred income | (1.7) | (1.7) | |||||||
(1.7) | Provisions | - | (1.7) | |||||||
(253.8) | (187.7) | (287.2) | ||||||||
(516.6) | Total liabilities | (545.7) | (506.3) | |||||||
Shareholders' equity | ||||||||||
(34.2) | Ordinary shares | (34.2) | (34.1) | |||||||
(77.6) | Share premium | (77.7) | (77.6) | |||||||
0.6 | Interest in ESOP | 0.6 | 0.6 | |||||||
(52.3) | Other reserves | (52.0) | (51.8) | |||||||
(125.9) | Retained earnings | (91.2) | (118.0) | |||||||
(289.4) | Total shareholders' equity | (254.5) | (280.9) | |||||||
(806.0) | Total equity and liabilities | (800.2) | (787.2) | |||||||
The interim results were approved by the directors on 5 November 2014.
Consolidated statement of changes in equity
(Unaudited)
Ordinary | Share | Interest | Other | Retained | |||||||||||
shares | premium | in ESOP | reserves | earnings | Total | ||||||||||
Half year ended 30 September 2014 | £m | £m | £m | £m | £m | £m | |||||||||
At 31 March 2014 | 34.2 | 77.6 | (0.6) | 52.3 | 125.9 | 289.4 | |||||||||
Profit for the period | - | - | - | - | 0.7 | 0.7 | |||||||||
Other comprehensive gain / (loss): | |||||||||||||||
Cash flow hedges | - | - | - | (0.4) | - | (0.4) | |||||||||
Remeasurement of defined benefit pension plan | - | - | - | - | (15.9) | (15.9) | |||||||||
Tax on components of other comprehensive income | - | - | - | 0.1 | 0.8 | 0.9 | |||||||||
Other comprehensive loss | - | - | - | (0.3) | (15.1) | (15.4) | |||||||||
Total comprehensive loss | - | - | - | (0.3) | (14.4) | (14.7) | |||||||||
Issue of share capital | - | 0.1 | - | - | - | 0.1 | |||||||||
Share-based payments | - | - | - | - | 0.7 | 0.7 | |||||||||
Equity dividends | - | - | - | - | (21.0) | (21.0) | |||||||||
At 30 September 2014 | 34.2 | 77.7 | (0.6) | 52.0 | 91.2 | 254.5 | |||||||||
Half year ended 30 September 2013 | |||||||||||||||
At 31 March 2013 | 34.1 | 77.5 | (0.6) | 51.4 | 145.0 | 307.4 | |||||||||
Profit for the period | - | - | - | - | 17.9 | 17.9 | |||||||||
Other comprehensive gain / (loss): | |||||||||||||||
Cash flow hedges | - | - | - | 0.5 | - | 0.5 | |||||||||
Remeasurement of defined benefit pension plan | - | - | - | - | (31.2) | (31.2) | |||||||||
Tax on components of other comprehensive income | - | - | - | (0.1) | 7.4 | 7.3 | |||||||||
Other comprehensive gain / (loss) | - | - | - | 0.4 | (23.8) | (23.4) | |||||||||
Total comprehensive gain / (loss) | - | - | - | 0.4 | (5.9) | (5.5) | |||||||||
Issue of share capital | - | 0.1 | - | - | - | 0.1 | |||||||||
Shares acquired by ESOP | - | - | (1.1) | - | - | (1.1) | |||||||||
Exercise of options | - | - | 1.1 | - | (1.4) | (0.3) | |||||||||
Share-based payments | - | - | - | - | 0.8 | 0.8 | |||||||||
Equity dividends | - | - | - | - | (20.5) | (20.5) | |||||||||
At 30 September 2013 | 34.1 | 77.6 | (0.6) | 51.8 | 118.0 | 280.9 | |||||||||
Year ended 31 March 2014 | |||||||||||||||
At 31 March 2013 | 34.1 | 77.5 | (0.6) | 51.4 | 145.0 | 307.4 | |||||||||
Profit for the year | - | - | - | - | 50.2 | 50.2 | |||||||||
Other comprehensive gain / (loss): | |||||||||||||||
Cash flow hedges | - | - | - | 1.2 | - | 1.2 | |||||||||
Remeasurement of defined benefit pension plan | - | - | - | - | (49.6) | (49.6) | |||||||||
Tax on components of other comprehensive income | - | - | - | (0.3) | 8.7 | 8.4 | |||||||||
Other comprehensive gain / (loss) | - | - | - | 0.9 | (40.9) | (40.0) | |||||||||
Total comprehensive gain | - | - | - | 0.9 | 9.3 | 10.2 | |||||||||
Issue of share capital | 0.1 | 0.1 | - | - | - | 0.2 | |||||||||
Shares acquired by ESOP | - | - | (1.1) | - | - | (1.1) | |||||||||
Exercise of options | - | - | 1.1 | - | (1.4) | (0.3) | |||||||||
Share-based payments | - | - | - | - | 1.5 | 1.5 | |||||||||
Equity dividends | - | - | - | - | (28.5) | (28.5) | |||||||||
At 31 March 2014 | 34.2 | 77.6 | (0.6) | 52.3 | 125.9 | 289.4 | |||||||||
All amounts are attributable to owners of the parent.
Consolidated cash flow statement
(Unaudited)
Year ended | Half year ended | ||||||||||
31 March | 30 September | ||||||||||
2014 | 2014 | 2013 | |||||||||
£m | Note | £m | £m | ||||||||
Cash flow from operating activities | |||||||||||
54.2 | Profit before taxation - continuing operations | 0.9 | 19.7 | ||||||||
10.4 | Finance costs and other finance income - continuing operations | 4.6 | 5.6 | ||||||||
(0.3) | Share of associate's net loss / (profit) | 0.1 | (0.1) | ||||||||
64.3 | Profit on operations | 5.6 | 25.2 | ||||||||
28.6 | Depreciation | 13.7 | 13.9 | ||||||||
3.3 | Amortisation of internally generated intangible assets | 1.6 | 2.0 | ||||||||
0.4 | Amortisation of acquired intangible assets | 0.2 | 0.2 | ||||||||
(10.6) | Difference between cash outflow on exceptional items and amounts recognised in the | 12.2 | (3.5) | ||||||||
income statement | |||||||||||
(1.7) | Release of grants | (0.8) | (0.9) | ||||||||
1.5 | Share-based payments | 0.7 | 0.8 | ||||||||
(18.2) | Profit on disposal of depots | (7.5) | (2.5) | ||||||||
(59.4) | Difference between pension contributions paid and amounts recognised in the | (5.8) | (49.8) | ||||||||
income statement | |||||||||||
(0.2) | R&D tax credits | (0.2) | - | ||||||||
0.8 | Realised exchange loss on early loan note repayment and foreign currency deposits | 0.3 | 0.8 | ||||||||
(22.6) | Increase in working capital | (40.6) | (56.7) | ||||||||
(13.8) | Cash used in operations | (20.6) | (70.5) | ||||||||
(14.0) | Interest paid | (5.3) | (8.9) | ||||||||
2.1 | Taxation repaid | - | 2.5 | ||||||||
(25.7) | Net cash outflow from operating activities | (25.9) | (76.9) | ||||||||
Cash flow from investing activities | |||||||||||
(58.8) | Capital expenditure | (33.3) | (29.8) | ||||||||
- | Purchase of businesses and investments (net of cash and debt acquired) | (0.1) | - | ||||||||
32.5 | Proceeds from disposal of property, plant and equipment | 9.1 | 5.4 | ||||||||
- | Sale of business (net of cash disposed of and fees) | 9 | 4.0 | - | |||||||
(26.3) | Net cash used in investing activities | (20.3) | (24.4) | ||||||||
Cash flow from financing activities | |||||||||||
(159.4) | Repayment and cancellation of loan notes | (27.4) | (168.1) | ||||||||
36.0 | Net drawdown of borrowings under revolving credit facilities | 84.0 | 50.0 | ||||||||
(28.5) | Dividends paid | (21.0) | (20.5) | ||||||||
0.2 | Proceeds from issue of shares (net of issue costs) | 0.1 | 0.1 | ||||||||
(1.4) | Purchase of shares by ESOP | - | (1.4) | ||||||||
(3.7) | Finance lease repayments | 10 | (1.8) | (2.2) | |||||||
(156.8) | Net cash generated from / (used in) financing activities | 33.9 | (142.1) | ||||||||
(208.8) | Net decrease in cash and cash equivalents | (12.3) | (243.4) | ||||||||
276.1 | Cash and cash equivalents at beginning of period | 67.3 | 276.1 | ||||||||
- | Exchange impact on cash and cash equivalents | 10 | (0.3) | - | |||||||
67.3 | Cash and cash equivalents at end of period | 10 | 54.7 | 32.7 | |||||||
(142.2) | Memo: Net debt at end of period | 10 | (209.6) | (192.3) | |||||||
Notes to the interim financial statements
(Unaudited)
1 General information
Dairy Crest Group plc (the "Company") is a public limited company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office and principal place of business is Claygate House, Littleworth Road, Esher, Surrey, KT10 9PN. The principal activity of the Company and its subsidiaries (the "Group") is the processing, manufacture and sale of fresh milk and branded dairy products in the UK and Europe as described in the Group's annual financial statements for the year ended 31 March 2014. .
2 Basis of preparation, accounting policies and approval of interim statement
These condensed interim financial statements comprise the consolidated balance sheet as at 30 September 2014 and related income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and supporting notes (hereinafter referred to as "financial information").
The financial information is not audited and does not constitute statutory financial statements as defined in section 435 of the Companies Act 2006. Comparative figures for the year ended 31 March 2014 have been extracted from the Group's 2014 statutory accounts, on which the auditors gave an unqualified opinion, did not include an emphasis of matter reference and did not include a statement under section 498(2) or (3) of the Companies Act 2006. These sections address whether adequate accounting records have been kept, whether the Company's financial statements are in agreement with those records and whether the auditors have obtained all the information and explanations necessary for the purposes of the audit. The Group financial statements for the year ended 31 March 2014 have been filed with the Registrar of Companies and can be found on our corporate website, www.dairycrest.co.uk.
The financial information for the period ended 30 September 2014 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union. The financial information should be read in conjunction with the Group's financial statements for the year ended 31 March 2014, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The accounting policies and methods of computation used to prepare the financial information for the period ended 30 September 2014 are the same as those used for the Group's financial statements for the year ended 31 March 2014 except for the adoption of the new standards and interpretations that came into effect in the half year (see below). Having made appropriate enquiries, the Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial information.
The results for operations for the half year are not necessarily indicative of the results expected for the full year.
This financial information was approved for issue on 5 November 2014.
The following accounting standards and interpretations became effective for the current reporting period:
IFRIC 21 - Levies (effective 13 June 2014)
The adoption of these standards and interpretations do not have a material impact on the Group's interim financial statements in the period.
Taxes on income in the interim periods are accrued using the tax rate that is expected to be applicable to total annual earnings for the full year in each tax jurisdiction based on substantively enacted or enacted tax rates at the interim date.
3 Critical accounting estimates and judgements
The areas of particular significance to the Group's financial information which include the application of judgement, which is fundamental to the completion of a set of condensed consolidated interim financial statements, are detailed below. These are consistent with the year ended 31 March 2014.
Pensions
The present value of the Group's pension obligations and the pension interest charge in each period depends on a number of actuarial assumptions. The primary assumptions used include the expected long-term rate of return on invested funds, the discount rate applicable to scheme liabilities, the long-term rate of inflation and estimates of the mortality applicable to scheme members.
At each reporting date, and on a continuing basis, the Group reviews the macro-economic and scheme specific factors influencing each of these assumptions, using professional advice, in order to record the Group's ongoing commitment and obligation to its defined benefit pension scheme in accordance with IFRS. Further details of the underlying assumptions are set out in Note 11.
Carrying value of property, plant and equipment, goodwill and other intangible assets
Impairment reviews in respect of goodwill are performed annually unless an event indicates that an impairment review is necessary. Impairment reviews in respect of property, plant and equipment and intangible assets are performed when an event indicates that an impairment review is necessary. Examples of such triggering events include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses, or a significant reduction in cash flows. The recoverable amounts of cash-generating units are determined based on the higher of realisable value and value-in-use calculations. These calculations require the use of estimates of future cash flows and are sensitive to the discount rate used.
Promotional accruals
Accruing for customer claims against agreed promotional funding is an area of judgement that management consider to be significant due to the potential size of the claims. Accruals are calculated based on an estimated redemption rate of the promotion. The redemption rate used is dependent on the promotional mechanic and considers known historic data on the performance of that promotional mechanic.
Exceptional items
Exceptional items are not explicitly defined under IFRS. Accordingly, the Group has defined exceptional items as those of a material, one-off nature which result from a restructuring of the business or some other event or circumstance and are disclosed in this manner in order to give a better understanding of the underlying operational performance of the Group. The profits arising on disposal of closed sites, other than as a result of depot rationalisation, are reported within exceptional items.
Taxation
The sale of the St Hubert business resulted in tax payable in France both on the chargeable gain on disposal and on dividend payments made to UK parent between 31 March 2012 and the date of disposal in August 2012. An estimate has been made of the likely tax costs resulting from these transactions. However, the final assessment has yet to be agreed with the French tax authorities which may result in a change to the level of tax provisioning.
4 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's primary focus for review and resource allocation is the Group as a whole. 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. Management has judged that the Group comprises one operating segment under IFRS 8. As such, disclosures required under IFRS 8 for the financial statements is shown on the face of the consolidated income statement and consolidated balance sheet.
To assist the readers of the financial statements, management considers it appropriate to provide voluntary disclosure on a basis consistent with historical reporting of the product groups. In disclosing the product group profit for the period, certain assumptions have been made when allocating resources which are now centralised at a group level.
4 Segmental analysis (continued)
The Other product group comprises revenue earned from distributing products 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.
The results under the historical segmentation basis included in the financial information are as follows:
Year ended | Half year ended | ||||||||
31 March | 30 September | ||||||||
2014 | 2014 | 2013 | |||||||
£m | £m | £m | |||||||
External revenue | |||||||||
264.6 | Cheese | 131.4 | 124.9 | ||||||
177.4 | Spreads | 81.9 | 85.5 | ||||||
944.8 | Dairies | 466.8 | 459.8 | ||||||
4.2 | Other | 2.0 | 2.0 | ||||||
1,391.0 | Total product group external revenue | 682.1 | 672.2 | ||||||
Product group profit * | |||||||||
39.3 | Cheese | 16.8 | 17.5 | ||||||
16.8 | Spreads | 12.7 | 7.1 | ||||||
18.8 | Dairies | (4.4) | 2.6 | ||||||
0.3 | Share of associate's net (loss) / profit | (0.1) | 0.1 | ||||||
75.2 | Total product group profit | 25.0 | 27.3 | ||||||
(9.9) | Finance costs | (3.7) | (5.4) | ||||||
65.3 | Adjusted profit before tax | 21.3 | 21.9 | ||||||
(0.4) | Acquired intangible amortisation | (0.2) | (0.2) | ||||||
(10.4) | Exceptional items (see Note 5) | (19.3) | (1.8) | ||||||
(0.3) | Other finance expense - pensions | (0.9) | (0.2) | ||||||
54.2 | Group profit before tax | 0.9 | 19.7 | ||||||
Total assets | |||||||||
266.2 | Cheese | 282.4 | 253.0 | ||||||
156.7 | Spreads | 158.6 | 154.6 | ||||||
268.5 | Dairies | 252.2 | 300.5 | ||||||
2.5 | Investments and Share of associate | 0.4 | 2.3 | ||||||
37.4 | Other | 44.7 | 34.6 | ||||||
731.3 | Total product group | 738.3 | 745.0 | ||||||
74.7 | Un-allocated assets | 61.9 | 42.2 | ||||||
806.0 | Total assets | 800.2 | 787.2 | ||||||
Inter-product group revenue | |||||||||
11.2 | Cheese | 4.8 | 4.9 | ||||||
3.1 | Spreads | 1.8 | 1.2 | ||||||
(14.3) | Elimination | (6.6) | (6.1) | ||||||
- | Total | - | - | ||||||
* Before exceptional items, amortisation of acquired intangibles and pension interest.
Product group assets comprise property, plant and equipment, goodwill, intangible assets, inventories, receivables, investments in associates using the equity method and deferred consideration but exclude cash and cash equivalents, derivative financial assets and deferred tax assets. Other product group assets comprise certain property, plant and equipment that is not reported in the principal groups.
Inter-product group revenue comprises the sale of finished Cheese and Spreads products to the Dairies product group on a cost plus basis and is included in the product group result. Other inter-product group transactions principally comprise the transfer of cream from the Dairies product group to the Spreads product group for the manufacture of butters. Cream transferred into Spreads is charged by reference to external commodity markets and is adjusted regularly so as to reflect the costs that the Spreads product group would incur if it was a stand alone entity. Revenue from inter-product group cream sales is not reported as revenue within the Dairies product group but as a reduction to the Dairies product group's input costs.
4 Segmental analysis (continued)
Seasonality of results
Consumer demand for our products tends to be lower during the summer months as it is impacted by warm weather and school holidays. Certain cream and non-milk products experience increased sales in the run up to Christmas. Working capital normally increases in the first six months of the year as milk production is higher during the spring and summer, however this impact can be offset by other factors including levels of cheese sales volumes, promotional activity and milk cost movements.
5 Exceptional items
Exceptional items comprise those items that are material and one-off in nature that the Group believes should be separately disclosed to assist in the understanding of the underlying financial performance of the Group.
Year ended | Half year ended | |||||||||||
31 March | 30 September | |||||||||||
2014 | 2014 | 2013 | ||||||||||
£m | Note | £m | £m | |||||||||
Operating costs | ||||||||||||
(2.0) | Rationalisation of operating sites | (9.3) | - | |||||||||
(3.8) | Spreads restructuring costs | (8.8) | (1.5) | |||||||||
- | Demineralised whey powder and GOS projects | (1.1) | - | |||||||||
(4.4) | Business reorganisation | (0.3) | (0.3) | |||||||||
- | Disposal of the business and assets of Foodtec UK Limited | (0.4) | - | |||||||||
- | Disposal of remaining interest in Wexford Creamery Limited | 0.6 | - | |||||||||
(10.2) | (19.3) | (1.8) | ||||||||||
Finance costs | ||||||||||||
(0.2) | Repayment of loan notes and associated costs | - | - | |||||||||
(10.4) | (19.3) | (1.8) | ||||||||||
2.1 | Tax relief on exceptional items | 3.1 | 0.3 | |||||||||
1.9 | Deferred tax adjustment for change in UK corporation tax rate | 6 | - | 1.9 | ||||||||
(6.4) | (16.2) | 0.4 | ||||||||||
1.4 | Tax credit on disposal of St Hubert (Discontinued operations) | - | - | |||||||||
(5.0) | (16.2) | 0.4 | ||||||||||
Rationalisation of operating sites
In September 2014, the Group announced it was starting consultation with employees and their representatives regarding the closure of its glass bottling dairy in Hanworth, West London and its specialist cream potting facility in Chard, Somerset. The Hanworth site is expected to remain operational for a further two years. An exceptional charge of £1.6 million has been incurred in the period, primarily comprising accelerated depreciation of assets following the reassessment of their useful economic lives. The Chard site is to be closed on economic grounds in 2015 and as a result a £7.7 million impairment charge has been recognised to write the assets down to nil being their net realisable value after selling costs which is lower than their value in use. The tax credit on these exceptional costs in the period was £1.1 million.
The exceptional charge for the year ended 31 March 2014 related to the January 2014 closure of the Proper Welsh Milk dairy (£0.6 million) and the impairment of the plant and equipment and working capital of Foodtec UK Limited, a subsidiary whose business and assets were sold on 29 July 2014 (£1.4 million). The tax credit on this exceptional charge in the year ended 31 March 2014 was £0.3 million.
Spreads restructuring costs
In September 2012, the Group announced that it would consult with employees on plans to consolidate spreads production into a one well-invested site in Kirkby, Liverpool. As a result of this consolidation, the site at Crudgington, Shropshire is expected to close in the second half of the year. The exceptional costs incurred in the period ended 30 September 2014 were £8.8 million (year ended 31 March 2014: £3.8 million), including duplicate running, commissioning and redundancy costs. The tax credit on this exceptional charge in the period was £1.7 million (year ended 31 March 2014: £0.8 million).
5 Exceptional items (continued)
Demineralised whey powder and GOS projects
The Group has initiated projects to significantly invest in its cheese creamery at Davidstow, Cornwall to enable the Group to commence the manufacture of demineralised whey powder, a base ingredient of infant formula, and galacto-oligosaccharide (GOS), widely used in infant formula. The Group is planning to invest around £65 million on new manufacturing assets at Davidstow over financial years ending 31 March 2015 and 31 March 2016. During the period, £1.1 million of exceptional costs were incurred relating to project initiation and set up. The tax credit on this exceptional charge in the period has £0.2 million.
Business reorganisation
In February 2013, the Group announced plans to reorganise the business into a single management and operational structure from 1 April 2013. This reorganisation has resulted in exceptional redundancy costs in the period of £0.3 million. In the year ended 31 March 2014, a £4.4 million exceptional charge was taken comprising redundancy costs and the write-down of an intangible asset. The tax credit in the period on this exceptional charge was £0.1 million (year ended 31 March 2014: £0.8 million).
Disposal of business and assets of Foodtec UK Limited
On 29 July 2014, the Group completed the sale of the business and assets of Foodtec UK Limited for consideration of £1.2 million, realising a loss on disposal of £0.4 million (see Note 9).
Disposal of remaining interest in Wexford Creamery Limited
On 16 May 2014, the Group completed the sale of its 30% shareholding in Wexford Creamery Limited for €3.4 million (£2.8 million) realising a gain on disposal of £0.6 million (see Note 9).
Repayment of loan notes and associated costs
Exceptional costs of £0.2 million relating to bank charges and professional fees were incurred in the year ended 31 March 2014 as a result of the early repayment of private placement loan notes in April 2013. A further £8.7 million exceptional charge was accrued at 31 March 2013, primarily relating to make whole penalties. The tax effect of this exceptional charge was nil.
Deferred tax adjustment for change in UK corporation tax rate
With effect from 1 April 2015, the corporation tax rate (which was enacted on 2 July 2013) was reduced to 20% (see note 6). The deferred tax calculations based on the lower rate resulted in a deferred tax benefit of £1.9 million in the year ended 31 March 2014. Due to the size and one-off nature of this significant amendment in the enacted rate, it was classified as an exceptional deferred tax credit in the year.
6 Tax expense
The tax expense for the half year ended 30 September 2014 has been calculated on the basis of the estimated effective tax rate on pre-exceptional profit for the full year of 16.3% (September 2013: 18.6%; March 2014: 14.6%). Tax relief on exceptional costs for the half year ended 30 September 2014 was £3.1 million (September 2013: £0.3 million; year ended 31 March 2014: £2.1 million).
The staged reduction in the UK corporation tax rate from 23% to 20% by April 2015 has been enacted in the 2013 Finance Act. Consequently, UK deferred tax balances that reverse after 31 March 2015 have been calculated using a corporation tax rate of 20%. The impact of this change was a £1.9 million credit to the income statement for the year ended 31 March 2014 and this was classified as exceptional in line with Group policy. There is no impact of this change on the income statement for the half year ended 30 September 2014.
7 Dividends
A dividend of £8.2 million (6.0 pence per share) (2013: £8.1 million; 5.9 pence per share) will be payable on 29 January 2015 to shareholders on the register on 9 January 2015. This dividend is not recorded in the balance sheet as a liability at 30 September 2014 because it had not been committed to at the balance sheet date.
8 Earnings per share
Basic earnings per share on profit for the period has been calculated on the basis of profit attributable to equity shareholders of £0.7 million (September 2013: £17.9 million; March 2014: £50.2 million) and the weighted average number of shares in issue during the period, excluding those held by the Dairy Crest Employees' Share Ownership Plan Trust and held as treasury shares which are treated as cancelled, totalling 136.599 million (September 2013: 136.407 million; March 2014: 136.472 million).
8 Earnings per share (continued)
Diluted earnings per share has been calculated on the basis of a diluted number of shares of 138.299 million (September 2013: 139.324 million; March 2014: 138.070 million). This reflects the dilutive impact of share options exercisable under the Group's Share Option Schemes.
To show earnings per share on a consistent basis, which in the directors' opinion reflects the underlying performance of the Group more appropriately, adjusted earnings per share has been calculated as follows:
Year ended | Half year ended | ||||||||||||
31 March | 30 September | ||||||||||||
2014 | 2014 | 2013 | |||||||||||
£m | £m | £m | |||||||||||
50.2 | Profit attributable to equity shareholders | 0.7 | 17.9 | ||||||||||
(1.4) | Discontinued operations after exceptional items (net of tax) | - | - | ||||||||||
48.8 | Profit from continuing operations | 0.7 | 17.9 | ||||||||||
6.4 | Exceptional items (net of tax) | 16.2 | (0.4) | ||||||||||
0.3 | Amortisation of acquired intangible assets (net of tax) | 0.2 | 0.2 | ||||||||||
0.2 | Pension interest expense (net of tax) | 0.7 | 0.2 | ||||||||||
55.7 | Adjusted earnings | 17.8 | 17.9 | ||||||||||
36.8 | Basic earnings per share (pence) | 0.5 | 13.1 | ||||||||||
36.4 | Diluted earnings per share (pence) | 0.5 | 12.8 | ||||||||||
1.0 | Basic earnings per share from discontinued operations (pence) | - | - | ||||||||||
1.0 | Diluted earnings per share from discontinued operations (pence) | - | - | ||||||||||
35.8 | Basic earnings per share from continuing operations (pence) | 0.5 | 13.1 | ||||||||||
35.3 | Diluted earnings per share from continuing operations (pence) | 0.5 | 12.8 | ||||||||||
40.8 | Adjusted basic earnings per share from continuing operations (pence) | 13.0 | 13.1 | ||||||||||
40.3 | Adjusted diluted earnings per share from continuing operations (pence) | 12.9 | 12.8 | ||||||||||
9 Disposals and business combinations Half year ended 30 September 2014 Other income - property The Group continues to rationalise its Dairies operations, which includes the closure of certain depots. During the period, the profit on disposal of depots was £7.5 million (September 2013: £2.5 million; March 2014: £18.2 million). The gain on disposal has been included in other income - property in the consolidated income statement and any associated closure costs have been included in operating costs before exceptional items. Exceptional items Disposal of business and assets of Foodtec UK LimitedOn 29 July 2014, the Group completed the sale of the business and assets of Foodtec UK Limited for the cash consideration of £1.2 million, realising a loss on disposal of £0.4 million. The carrying value of the assets sold was £1.6 million including net working capital (£1.5 million) and tangible fixed assets (£0.1 million). Disposal of remaining interest in Wexford Creamery Limited On 16 May 2014 the Group completed the sale of its 30% shareholding in Wexford Creamery Limited for €3.4 million (£2.8 million) realising a gain on disposal of £0.6 million. The net carrying value at disposal was £2.2 million comprising share of associates, deferred consideration and valuation of options net of contract provisions. Year ended 31 March 2014 Disposal of Northern Depots As part of the ongoing rationalisation of the depot network, on 27 July 2013, the Group completed the disposal of seven depots located in the north-west of England for a cash consideration of £1.2 million. The carrying value of assets sold was £0.8 million including net working capital and fees of £0.1 million resulting in a profit on disposal of £0.3 million. The gain on disposal of these depots has been included in other income - property in the consolidated income statement.
9 Disposals and business combinations (continued) Disposal of Discontinued Operations £1.4 million of the original tax provision resulting from the trading of St Hubert SAS ('St Hubert') up to its disposal in August 2012 was released back to the income statement as discontinued operations.
Year ended | |||||||||||||
31 March | |||||||||||||
2014 | |||||||||||||
£m | |||||||||||||
Revenue | - | ||||||||||||
Operating costs before amortisation of acquired intangibles | - | ||||||||||||
Trading profit | - | ||||||||||||
Amortisation of acquired intangibles | - | ||||||||||||
Profit on operations | - | ||||||||||||
Finance income | - | ||||||||||||
Profit before tax | - | ||||||||||||
Tax credit | 1.4 | ||||||||||||
Profit for the year from Discontinued Operations | 1.4 | ||||||||||||
Year ended | Closing net debt | Half year ended | |||||||
31 March | 30 September | ||||||||
2014 | 2014 | 2013 | |||||||
£m | £m | £m | |||||||
25.3 | Loans repayable in less than one year | - | 75.6 | ||||||
1.8 | Finance leases repayable within one year | - | 3.3 | ||||||
(0.6) | Debt issuance costs | - | (0.6) | ||||||
26.5 | Short-term borrowings | - | 78.3 | ||||||
180.2 | Loans repayable in greater than one year | 267.1 | 147.9 | ||||||
- | Finance leases repayable in greater than one year | - | - | ||||||
(0.5) | Debt issuance costs | (0.2) | (0.8) | ||||||
179.7 | Long-term borrowings | 266.9 | 147.1 | ||||||
(67.3) | Cash and short-term deposits | (54.7) | (32.7) | ||||||
138.9 | Borrowings and cash - before impact of cross-currency swaps | 212.2 | 192.7 | ||||||
1.1 | Debt issuance costs excluded | 0.2 | 1.4 | ||||||
2.2 | Impact of cross-currency swaps * | (2.8) | (1.8) | ||||||
142.2 | Net Debt | 209.6 | 192.3 | ||||||
* The Group has $204.4 million and €10.7 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (September 2013: $204.4 million and €41.3 million; March 2014: $204.4 million and €41.3 million). Under IFRS, currency borrowings are retranslated into Sterling at year end exchange rates. The cross-currency swaps are recorded at fair value and incorporate movements in both market exchange rates and interest rates. The Group defines net debt so as to include the effective Sterling liability where cross-currency swaps have been used to convert foreign currency borrowings into Sterling. The £2.8 million adjustment included above (September 2013: £1.8 million; March 2014: £2.2 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£134.4 million (September 2013: £160.8 million; March 2014: £156.8 million)) to the fixed Sterling liability of £131.5 million (September 2013: £159.0 million; March 2014: £158.9 million).
On 4 April 2014 there was a natural maturity of loan notes of £27.4 million (€30.6 million).
10 Analysis of net debt (continued)
Movement in net debt | Opening | Cash | Exchange | Closing | |||||||
balances | flow | movement | balances | ||||||||
Six months ended 30 September 2014 | £m | £m | £m | £m | |||||||
Cash and short-term deposits | 67.3 | (12.3) | (0.3) | 54.7 | |||||||
Borrowings | (205.5) | (58.7) | (2.9) | (267.1) | |||||||
Finance leases | (1.8) | 1.8 | - | - | |||||||
Cross-currency swaps | (2.2) | 2.1 | 2.9 | 2.8 | |||||||
(142.2) | (67.1) | (0.3) | (209.6) | ||||||||
Six months ended 30 September 2013 | |||||||||||
Cash and short-term deposits | 276.1 | (243.4) | - | 32.7 | |||||||
Borrowings | (348.1) | 109.4 | 15.2 | (223.5) | |||||||
Finance leases | (5.5) | 2.2 | - | (3.3) | |||||||
Cross-currency swaps | 17.8 | - | (16.0) | 1.8 | |||||||
(59.7) | (131.8) | (0.8) | (192.3) | ||||||||
Year ended 31 March 2014 | |||||||||||
Cash and short-term deposits | 276.1 | (208.8) | - | 67.3 | |||||||
Borrowings | (348.1) | 123.4 | 19.2 | (205.5) | |||||||
Finance leases | (5.5) | 3.7 | - | (1.8) | |||||||
Cross-currency swaps | 17.8 | - | (20.0) | (2.2) | |||||||
(59.7) | (81.7) | (0.8) | (142.2) | ||||||||
11 Retirement benefit obligations
The Group's defined benefit pension scheme is accounted for in accordance with the requirements of IAS 19R Employee Benefits'. The net pension liability of the Group pension scheme at 30 September 2014 can be analysed as follows:
31 March | 30 September |
| ||||||||||||||||||
2014 | 2014 | 2013 |
| |||||||||||||||||
£m | £m | £m |
| |||||||||||||||||
45.5 | Equities | 47.4 | 81.2 |
| ||||||||||||||||
523.6 | Bonds and cash | 558.8 | 489.9 |
| ||||||||||||||||
3.3 | Equity return swaps valuation | (1.2) | (6.3) |
| ||||||||||||||||
299.4 | Insured retirement obligations | 305.0 | 288.1 |
| ||||||||||||||||
92.3 | Property and other | 98.0 | 64.4 |
| ||||||||||||||||
964.1 | 1,008.0 | 917.3 |
| |||||||||||||||||
(714.3) | Defined benefit obligation: | Uninsured retirement obligations | (767.9) | (661.4) | ||||||||||||||||
(297.4) | Insured retirement obligations | (305.0) | (288.1) | |||||||||||||||||
(1,011.7) | Total defined benefit obligation | (1,072.9) | (949.5) | |||||||||||||||||
(10.1) | Recognition of liability for unrecoverable notional surplus | (3.8) | (16.8) | |||||||||||||||||
(1,021.8) | (1,076.7) | (966.3) | ||||||||||||||||||
(57.7) | Net liability recognised in the balance sheet | (68.7) | (49.0) | |||||||||||||||||
17.9 | Related deferred tax asset | 17.0 | 20.1 | |||||||||||||||||
(39.8) | Net pension liability | (51.7) | (28.9) | |||||||||||||||||
Analysis of movements in the Group pension deficit during the period: | ||||||||||||||||||||
(56.3) | Opening deficit before recognition of liability for unrecoverable notional surplus | (47.6) | (56.3) | |||||||||||||||||
(0.3) | Net finance cost | (0.9) | (0.2) | |||||||||||||||||
(1.0) | Administration cost of scheme | (0.4) | (0.4) | |||||||||||||||||
(50.4) | Actuarial loss | (22.2) | (25.3) | |||||||||||||||||
60.4 | Contributions by employer | 6.2 | 50.0 | |||||||||||||||||
(47.6) | Closing liability (excluding liability for unrecoverable notional surplus) | (64.9) | (32.2) | |||||||||||||||||
11 Retirement benefit obligations (continued)
The principal assumptions used in determining the retirement benefit obligations for the Group's pension scheme are as follows:
Mar 14 | Sep 14 | Sep 13 | ||||
3.6 | Price inflation - RPI (%) | 3.4 | 3.4 | |||
2.6 | Price inflation - CPI (%) | 2.4 | 2.4 | |||
23.8 | Average expected remaining life expectancy for a non-retired 65 year old male (years) | 23.8 | 22.6 | |||
22.3 | Average expected remaining life expectancy for a retired 65 year old male (years) | 22.3 | 21.7 | |||
26.7 | Average expected remaining life expectancy for a non-retired 65 year old female (years) | 26.7 | 25.3 | |||
24.5 | Average expected remaining life expectancy for a retired 65 year old female (years) | 24.5 | 24.1 | |||
4.3 | Discount rate (%) | 3.8 | 4.4 |
In December 2008, certain obligations relating to retired members were hedged by the purchase of an insurance contract. A further insurance contract for retired members was purchased in June 2009 resulting in coverage for all members who retired up to August 2008. These contracts are included within scheme assets and their value will always be equal to the obligation as calculated under IAS 19 for those members covered.
From October 2009, the Company has been making additional funding contributions to the scheme of £20 million per annum. Under the latest schedule of contributions agreed with the Trustees in March 2014 , the contributions will be £13.0 million per annum for 2014/15 and 2015/16 , increasing to £16.0 million per annum in 2016/17 reverting to £20.0 million per annum for 2017/18 through to 2019/20.These contributions include £2.8 million per annum of rental payments for land and buildings that were subject to a sale and leaseback agreement between the Group and the Scheme as part of the final schedule of contributions. The land and buildings included in these arrangements are subject to long term leases and the Group will continue to benefit from substantially all of the risks and rewards of ownership. On this basis, under IFRS these land and buildings continue to be recognised in property, plant and equipment and rental payments of £2.8 million per annum are treated as cash contributions, reflecting the substance of the arrangements.
The purchase of the second insurance contract in June 2009 was funded by the sale of equities. Subsequently, in order to re-establish an appropriate equity weighting of scheme assets, the Scheme purchased equity total return swaps (synthetic equity). These instruments comprise an asset leg and a liability leg. The asset leg generates a return based on UK and overseas equity indices and the liability leg incurs a cost based on LIBOR plus margin. The positive valuation of synthetic equity reflects the underlying strength in equities subsequent to the swap purchase. Credit risk is minimised since collateral is provided by the counterparties to the benefit of the Scheme when the instruments are in the money.
In addition to these contributions the company has granted the Trustee a floating charge over the maturing cheese inventories with a maximum realisable value of £60 million.
Discount rate assumptions for each reporting period are based upon quoted AA-rated corporate bond indices, excluding collateralised bonds, with maturities matching the scheme's expected benefit payments.
The consolidated statement of comprehensive income reports a figure of £15.9 million for the remeasurement of the Group's pension scheme. The difference of £6.3 million to the £22.2 million actuarial loss figure is the movement in the value of the unrecoverable notional surplus calculated under IFRIC 14.
12 Related party transactions
The Group's only significant related party was its associate, Wexford Creamery Limited ("WCL"). During the period to disposal on 16 May 2014, the Group purchased cheese at a cost of £0.5 million from WCL (September 2013: £4.0 million; March 2014: £6.4 million).
13 Financial Instruments
The following table provides a comparison of the carrying amounts and fair values of the Group's financial instruments at 30 September 2014.
Carrying | Fair | |||||||||
amount | value | |||||||||
Financial Assets
| £m | £m | ||||||||
Forward exchange contracts | - | - | ||||||||
Cross currency swaps | 7.2 | 7.2 | ||||||||
7.2 | 7.2 | |||||||||
Financial Liabilities | ||||||||||
Cross currency swaps | (5.0) | (5.0) | ||||||||
Revolving credit facility | (120.0) | (120.0) | ||||||||
Loan notes | (147.2) | (145.2) | ||||||||
Obligations under finance leases | - | - |
| |||||||
(272.2) | (270.2) |
| ||||||||
Management judge that the fair value of the financial instruments is equal to the carrying value. The fair value has been determined allowing for any counterparty risk or company credit risk albeit these amounts are immaterial.
Fair value hierarchy
The fair value measurements at the reporting date are classified according to the significance of the inputs used in making the measurements. The level in the hierarchy within which the fair value is categorised is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (e.g. prices) or indirectly (e.g. derived from prices).
Level 3: Inputs for the assets or liabilities that are not based on observable market data.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at the end of each reporting period.
At 30 September 2014, the Group held the following classes of financial instruments measured at fair value.
30-Sep-14 | Level 1 | Level 2 | Level 3 | ||||||||
Financial assets at fair value | £m | £m | £m | £m | |||||||
Forward exchange contracts | - | - | |||||||||
Cross currency swaps | 7.2 | 7.2 | |||||||||
Financial Liabilities at fair value | |||||||||||
Cross currency swaps | (5.0) | (5.0) | |||||||||
Revolving credit facility | (120.0) | (120.0) | |||||||||
Loan notes | (145.2) | (145.2) | |||||||||
Obligations under finance leases | - | - | |||||||||
During the six months ended 30 September 2014 there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 measurements. There were no movements in Level 3 measurements reported in other comprehensive income.
There were no movements in Level 3 fair value measurements in the half year ended 30 September 2014.
Valuation techniques
The fair values of cross currency swaps and forward exchange contracts are measured by the external counterparties to the contracts and verified using present value of future cash flows at discount rates implied by the forward curve. These valuation techniques maximise the use of observable market data where it is available.
The fair value of the loan notes has been measured by reference to yields of publicly quoted debt of equivalent duration, coupon and credit-worthiness.
14 Commitments and contingencies
Capital expenditure contracted for but not provided for in the interim financial statements amounts to £50.1 million (September 2013: £19.9 million; March 2014: £70.9 million).
15 Post balance sheet event
On 5 November 2014, the Group entered into an agreement to dispose of its Dairies operations to Muller UK & Ireland Group LLP for cash proceeds of £80 million. Completion of this transaction is dependent on shareholder approval and clearance from the relevant competition authorities. The assets and liabilities of the Dairies operations have not been classified as held for sale at the balance sheet date because of the uncertainty with respect to regulatory clearance such that the IFRS 5 requirement that the disposal is "highly probable" is not, at this stage, met.
Statement of directors' responsibilities
The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules. The Board of Directors that served during the six months ended 30 September 2014, and their respective responsibilities, can be found on pages 32 and 33 of the 2014 Annual Report and Accounts.
By order of the Board
M Allen | T Atherton |
Chief Executive | Finance Director |
5 November 2014 | 5 November 2014 |
Principal risks and uncertainties
The Board considers risk assessment, identification of mitigating actions and internal controls to be fundamental to achieving Dairy Crest's strategic corporate objectives. The principal factors considered when assessing Dairy Crest's ability to achieve its short-term and long-term objectives are:
- Economic, cultural and market conditions which influence consumer and customer behaviour and in particular the current weak economic conditions resulting from the global financial crisis and weak consumer demand;
- Relationships with dairy farmers and future milk sourcing;
- The impact of increased milk costs and the volatility of ingredients and other commodity markets;
- investing in our brand portfolio and innovative new product development;
- Attracting and retaining the best people;
- Maintaining high levels of food safety standards and operational performance across the manufacturing base;
- Impact of financial market turmoil on pension scheme assets and future funding requirements;
- Regulatory and legal risks; and
- Environmental trends and risks.
There have been no significant changes in the material risks faced by the Group since publication of the 2014 Annual Report. The processes by which the Board safeguards shareholder value and the assets of the Group and risks and uncertainties that would have a significant impact on long-term value generation are set out in the 2014 Annual Report and Accounts on pages 14 to 15.
Independent Review Report to Dairy Crest Group plc
Introduction
We have been engaged by Dairy Crest Group Plc ("the Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2014 which comprises Consolidated income statement, Consolidated statement of comprehensive income, Consolidated balance sheet, Consolidated statement of changes in equity, Consolidated cash flow statement and the related notes 1 to 15. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
5 November 2014