10 Nov 2011 07:00
Dairy Crest Group plc ("Dairy Crest")
Interim Results Announcement
Dairy Crest, the UK's leading dairy company, today announces its unaudited results for the six months ended 30 September 2011:
| Half year ended 30 September | |||
| Financial Highlights: | 2011 | 2010 | Change |
Revenue: | £796.2m | £776.9m | +2% |
Profit before tax: | £39.2m | £36.1m | +9% |
Adjusted profit before tax *: | £43.7m | £40.1m | +9% |
Basic earnings per share: | 22.4p | 19.8 p | +13% |
Adjusted basic earnings per share *: | 24.8p | 21.4p | +16% |
Half year net debt: | £365.3m | £335.5m | +9% |
Interim dividend: | 5.7p | 5.5p | +4% |
* before exceptional items, amortisation of acquired intangibles and pension interest.
·; Increased first half profits from broadly based business
- adjusted profit before tax up 9% benefiting from increased property profits of £4.6 million from continued rationalisation of depot network
- higher profits in Spreads and Cheese offsetting lower Dairies profits
- adjusted basic earnings per share up 16% helped by lower effective tax rate
·; On track with efficiency savings
- Annual efficiency savings of £20 million help offset higher input costs
·; Continuing growth in branded sales
- sales of five key brands up 5% in aggregate
- strong performance from St Hubert in France
- increased selling prices also helped offset higher input costs
- four new branded ranges launched
- milk&more weekly sales up to £1.2 million
- branded food business MH Foods acquired for £12.3 million (net of cash)
·; Debt refinancing complete
- bank funding in place through to 2016
Mark Allen, Chief Executive, said:
"Dairy Crest has delivered a robust performance during the first half of the year. In line with our strategy, we have continued to grow our key brands, reduce our costs and control our debt.
We are concentrating on implementing initiatives that will deliver long term value for everyone involved with our business - providing consumers with high quality and great value, paying a fair milk price to farmers and continuing to invest in marketing, innovation and facilities.
Looking forward, the consumer environment is challenging and increasingly difficult to predict. Despite this, we remain confident that we will deliver profits for the year in line with our expectations."
For further information:
Dairy Crest Group plc | ||||||||
Arthur Reeves | 01372 472236 | |||||||
Brunswick | ||||||||
Simon Sporborg | 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 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.
Overview
In a challenging consumer environment Dairy Crest has performed robustly during the first six months of the year.
The Group has delivered a 2% increase in turnover (4% excluding the effect of the disposal of our majority stake in Wexford Creamery Limited in June 2010) led by higher sales of our five key brands (Cathedral City, Country Life, St Hubert Omega 3, Clover and FRijj) and milk to major retailers. The Group's five key brands have grown sales by 5% compared to the first half of last year, and profits from these brands have also increased despite lower volumes. Further growth is expected from the recent launch of four innovative new ranges supported by strong advertising.
We continue to grow milk&more sales and sales of liquid milk to major retailers.
As previously announced, we have also acquired the branded foods business MH Foods for £12.3 million (net of cash acquired).
Our focus has been on driving efficiencies to minimise the price increases required to recover higher input costs. We are pleased with the balance we have struck, with higher property profits leading to an overall increase in profit before tax and operating profits excluding property profits falling only slightly in a challenging consumer environment.
As anticipated at the start of the year, strong performances in our Cheese and Spreads divisions has offset reduced Dairies profits. Cheese profits in the period have benefited from higher selling prices and strong whey realisations and have increased from £12.5 million to £16.5 million. Spreads profits have increased from £27.2 million to £31.7 million, boosted by another strong performance from St Hubert, our French spreads business.
However, in line with the rest of the sector, it has been an extremely challenging period for our Dairies division. The need to pay farmers a higher price, coupled with fierce retail price competition has put pressure on margins throughout the liquid milk supply chain and profits excluding property profits in this business have fallen from £10.9 million to £1.2 million. We have a clear plan to increase profits from this division in the second half of the year by reducing costs and growing added value sales.
Adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was up 9% to £43.7 million from £40.1 million in the comparable period last year. Reported profit before tax was up 9% to £39.2 million from £36.1 million. Property profits, arising from an ongoing programme of sales of delivery depots that we no longer require, included in the above figures, were £4.6 million in the 6 months ended 30 September 2011 (6 months ended 30 September 2010: £nil).
As expected half year net debt increased by 9% to £365.3 million compared to 30 September 2010, reflecting the financing of higher cheese stocks and the purchase of MH Foods. Despite this our key Net Debt: EBITDA ratio remains less than 2.5 times against a covenant of 3.5 times. We expect debt to reduce during the next six months in line with seasonal trends.
We are pleased to have recently completed the successful refinancing of our borrowing facilities, securing bank funding through to 2016 and providing valuable certainty in volatile financial markets.
Operating review
Vision and strategy
Dairy Crest is a broadly based dairy business. We have a strategy based on a vision of pride in our heritage and links to the countryside; understanding the consumer; innovation; and a commitment to act responsibly. Our aim is to build leading positions in added value markets, reduce our costs, reduce risk and generate growth through appropriate acquisitions and disposals.
Underpinning performance by driving efficiencies
These are increasingly hard times for consumers and we recognise that we need to do all we can to help. Cost reduction has always been an important part of our strategy, and in the six months ended 30 September 2011 we have continued to focus on reducing costs and improving efficiency across the business. This has helped minimise the effect that higher input costs have on our customers and consumers and allowed us to continue to invest behind our brands and drive innovation. We are on track to deliver our targeted annual cost savings of £20 million this year and remain committed to reducing our costs going forward.
Developing our five key brands
In total our five key brands (Cathedral City, Country Life, St Hubert Omega 3, Clover and FRijj) have grown sales in the period by 5%, boosted by a strong performance from St Hubert Omega 3 in France.
Profits from these brands have also increased and we have continued to support them with increased advertising spend compared to the first half of last year.
The challenge at the start of the year was to increase selling prices to recover higher input costs that we could not offset by efficiency savings. We have been largely successful in this. However, with the exception of St Hubert Omega 3 and FRijj this has adversely affected volumes in the period, with overall key brand volumes falling by 7%. We anticipate that volumes will recover in the second half of the year. Our ongoing commitment to television advertising and strong promotional programmes will underpin growth.
Cathedral City
Cathedral City remains larger than the next three cheddar brands combined and has by far the highest loyalty and strongest image with consumers. During the period we increased selling prices and introduced a new pack size. This resulted in fewer promotions, which adversely affected sales in the short term. Sales were down 1%1 in a market which grew by 2%2. We expect sales to grow in the second half as we return to more normal levels of promotions.
Clover and Country Life
During the period we agreed higher selling prices for these brands with our customers to cover higher vegetable oil and cream costs. Some retail prices of our brands increased before the rest of the market and this affected our short-term market share. Sales of Clover were up by 10%1 and those of Country Life down 4%1 in a spreads and butter market that grew at 15%2. Volumes of both brands fell back, with Country Life block butter volumes particularly hard hit. We expect a more stable environment for both brands in the second half.
St Hubert Omega 3
St Hubert increased market share significantly partly because major French retailers delisted both its major competitors for part of the period. Sales of St Hubert Omega 3 grew by 27%1 in a market that fell by 1%3, with volumes also buoyant and we anticipate a strong full year performance.
FRijj
FRijj grew both value (+4% 1) and volume in a market that has grown mainly due to the success of retailers' own brands and is up 13% 2. The investment in capacity at Severnside has allowed us to increase production and the recent launch of the new range, "FRijj The Incredible", is also growing sales. As a result we expect to make further progress in the second half.
1. Dairy Crest value sales 6 months to 30 September 2011 compared to 6 months to 30 September 2010
2. AC Nielsen data for 26 weeks to 1 October 2011 v 26 weeks to 2 October 2010
3. IRI data 26 weeks to 18 September 2011 v 26 weeks to 19 September 2010
Focus on innovation
A strong focus on innovation is at the heart of our business model and we have set ourselves the challenging objective of generating 10% of our turnover from sales of products and services launched in the previous three years. In the 6 months ended 30 September 2011 9% of our turnover came from products and services launched in the previous three years, maintaining the 2010/11 achievement of 9%.
We have launched four new ranges during the period. In the UK we have launched "Chedds", a range of three new children's cheese snacks and "FRijj The Incredible", three new premium flavours of our branded milk shake. In France, where St Hubert is perceived by consumers to supply healthier alternatives, we have launched two new St Hubert non-dairy creams and a spread, "St Hubert 5 Cereales", which is the first spread to contain whole seeds. Initial signs from all four launches are promising.
Looking forward we have a strong pipeline of product and packaging innovation to drive sales and are also using innovation to help drive efficiencies.
Dairies - responding to tough market conditions
In line with the rest of the sector, it has been an extremely challenging period for our Dairies division and, as expected, margins have fallen. The business has responded to the tough market conditions by focusing on quality, service and cost.
We are half way through and are on track with our three-year, £75 million capital expenditure programme for our liquid milk dairies. This programme is driving down our operating costs and allowing us to build on good service and quality performance. We are also focusing on reducing milk collection, distribution and depot costs.
We have continued to innovate and make progress with FRijj, milk&more and Jugit.
milk&more sales have continued to grow and weekly sales are now £1.2 million, up around 50% from a year ago. At the end of the period over 10% of our depots had higher weekly sales than the year before and we remain confident that we can grow these sales further in the second half of the year. However our overall residential milk volumes have been impacted by lower supermarket milk prices and have fallen 12% in the six months ended 30 September 2011 compared to a year ago. We have a strong customer recruitment programme planned for the rest of the year and there are already indications that this decline rate will lessen in the second half.
Sales of milk in bags which are environmentally friendly because they use less packaging, have grown by 7% and we anticipate further growth in the second half. We continue to seek solutions to improve the presentation of milk bags in supermarkets which we think is holding sales back.
Paying fair and higher milk prices to our farmers
Dairy farmers have faced a period of higher costs and, in line with our commitment to pay fair market-related prices we have responded by increasing the price we pay for their milk. Prices are up by an average of 15% in November 2011 compared to November 2010. We continue to enjoy a strong relationship with DCD, our supplier organisation, and are working with them to deliver greater stability for farmers and ourselves.
Acting responsibly
Dairy Crest is a responsible business and we continue to demonstrate our commitment to Corporate Responsibility.
Building on our Business in the Community silver rating we have made significant progress during the period.
One of our key objectives is to improve the health and safety of our employees - we want everyone who works for us and with us to return home safe and well every day. It is therefore pleasing to report that accidents involving our employees are down significantly year on year.
At our creamery in Davidstow our new biomass boilers are operational and are reducing our carbon footprint.
We started working with a new charity partner, British Heart Foundation, earlier this year and our relationship is off to a flying start.
Financial review
Group revenue of £796.2 million is 2% up on the comparable period last year despite the sale of our controlling interest in Wexford Creamery Limited in June 2010.
Group profit on operations (before exceptional items) increased 7% to £49.5 million (2010: £46.3 million). This result benefited from £4.6 million of property profits in the current year against nil last year. Exceptional costs of £2.7 million are higher than the £1.6 million recorded last year and post-exceptional profit on operations increased by 5% to £46.8 million.
Summarised segmental performance
6 months ended 30 September | 2011 Revenue £million | 2010 Revenue £million | 2011 Profit * £million | 2010 Profit * £million |
Cheese | 101.8 | 108.9 | 16.5 | 12.5 |
Spreads | 158.1 | 134.7 | 31.7 | 27.2 |
Dairies | 533.8 | 529.7 | 5.8 | 10.9 |
Other/Associates | 2.5 | 3.6 | (0.3) | - |
Total | 796.2 | 776.9 | 53.7 | 50.6 |
*Profit on operations and share of associates before amortisation of acquired intangibles of £4.5 million (2010: £4.3 million) and exceptional items of £2.7 million (2010: £1.6 million).
Cheese
Revenues of £101.8 million are £7.1 million below last year which included Wexford revenue for the first three months. Adjusting for this, revenues are broadly flat. The impact of price increases achieved during the first half has been offset by reduced Cathedral City volumes reflecting a lower level of promotions while we introduced new pack sizes. Profits increased from £12.5 million to £16.5 million helped by selling price increases and strong whey realisations.
Spreads
Revenue of £158.1 million represents a 17% increase on 2010. Profits have increased from £27.2 million to £31.7 million despite higher input costs for vegetable oils and cream, boosted by a strong performance from St Hubert, our French spreads business.
Dairies
Revenue has increased by 1% to £533.8 million as higher volumes to major retailers and milk&more growth have offset traditional doorstep volume declines. Profits of £5.8 million have decreased from £10.9 million in 2010 and include property profits of £4.6 million (2010: nil). Margins have reduced as average selling prices have fallen following major tender negotiations last year and the price we pay farmers for milk has risen.
Other items
Finance costs of £10.0 million are marginally below last year as fees from previous refinancings have been fully amortised. Cash interest costs of £10.3 million are £0.4 million higher than last year reflecting slightly higher levels of borrowings in the half.
Group adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was £43.7 million, up 9% versus £40.1 million in 2010.
Exceptional costs of £2.7 million comprise: £1.7 million of costs associated with the ongoing rationalisation of administration functions across our depot network; and a £1.0 million impairment of property, plant and equipment resulting from the decision to rationalise the manufacture of Clover from two locations to one.
The pre-exceptional tax expense of £9.9 million represents an effective tax rate of 23.6% (H1 2010/11: 28.5%) based on expectations for the full year. The reduced effective rate this year reflects increased property profits, which do not attract tax due to rollover relief and significant brought forward capital losses, and lower levels of UK corporation tax.
Basic earnings per share were up 13% at 22.4 pence (2010: 19.8 pence) and adjusted basic earnings per share were up 16% to 24.8 pence compared to 21.4 pence last year.
The directors have declared an interim dividend of 5.7 pence per share (2010: 5.5 pence per share), a 4% increase.
Balance sheet
Group net debt amounted to £365.3 million as at 30 September 2011, an increase of £53.7 million from 31 March 2011 and £29.8 million from 30 September 2010. The increase in net debt from 31 March 2011 is driven principally by financing an increase of around £30 million in stock levels reflecting milk cost increases, normal seasonal patterns of increased milk during the first half and a higher volume of cheese production to support future branded sales. We also purchased MH Foods in June 2011 at a cash cost of £10.7 million (with a further £1.6 million paid in October 2011) and have incurred £24.5 million of capital expenditure during the period.
We expect net debt to decrease in the second half in line with normal seasonal trends despite continued strong capital investment and the payment of a previously provided for fine of £7.1 million following an investigation by the Office of Fair Trading.
On 12 October 2011 the Group agreed a new £300 million, five-year revolving credit facility of £170 million plus €150 million with a syndicate of five banks. Furthermore, the Group has raised a further $85 million (£54.5 million) by way of a debt private placement with US investors. The funds will be drawn on 30 November 2011 and comprise a mix of 7-year and 10-year notes.
The new facility was used to refinance the existing bank facilities of: £100 million which was due to mature on 8 November 2011; and £85 million plus €175 million which was due to mature on 16 July 2013. These actions leave overall Group facilities broadly unchanged but, importantly, deliver security of funding for the Group in the medium term, which we believe is especially important given current conditions in financial markets.
Key financial covenants under the new facility are unchanged but margins have increased slightly, reflecting current market conditions.
The pension deficit reported under IAS 19 increased in the half from £60.1 million at 31 March 2011 to £109.9 million at 30 September 2011. This increase principally reflects weaker equity returns in the period. The deficit reported at 30 September 2010 was £137.2 million. The ongoing schedule of contributions was formalised in June 2011 and will result in continued cash payments of £20 million per annum by the Group into the pension scheme going forward.
Other information
The principal risks and uncertainties affecting the Group are set out below the statement of directors' responsibilities and further details are disclosed on pages 16-17 of the 2011 Annual Report and Accounts. Related party disclosures are given in note 12 to the consolidated financial information.
Summary and outlook
Dairy Crest has delivered a robust performance during the first half of the year. In line with our strategy, we have continued to grow our key brands, reduce our costs and control our debt.
We are concentrating on implementing initiatives that will deliver long term value for everyone involved with our business - providing consumers with high quality and great value, paying a fair milk price to farmers and continuing to invest in marketing, innovation and facilities.
Looking forward, the consumer environment is challenging and increasingly difficult to predict. Despite this, we remain confident that we will deliver profits for the year in line with our expectations.
Mark Allen
Chief Executive
10 November 2011
Consolidated income statement
(unaudited)
Half year ended 30 September 2011 | Half year ended 30 September 2010 | |||||||||||||||||
Before | Before | |||||||||||||||||
Year ended | exceptional | Exceptional | Exceptional | Exceptional | ||||||||||||||
31 March 2011 | items | items | Total | items | items | Total | ||||||||||||
£m | Note | £m | £m | £m | £m | £m | £m | |||||||||||
1,604.5 | Group revenue | 4 | 796.2 | - | 796.2 | 776.9 | - | 776.9 | ||||||||||
(1,509.6) | Operating costs | (751.3) | (2.7) | (754.0) | (730.6) | (1.6) | (732.2) | |||||||||||
1.8 | Other income - property | 4.6 | - | 4.6 | - | - | - | |||||||||||
96.7 | Profit on operations | 49.5 | (2.7) | 46.8 | 46.3 | (1.6) | 44.7 | |||||||||||
(20.6) | Finance costs | (10.0) | - | (10.0) | (10.5) | - | (10.5) | |||||||||||
- | Other finance income - pensions | 2.7 | - | 2.7 | - | - | - | |||||||||||
(0.2) | Share of associate's net loss | (0.3) | - | (0.3) | - | - | - | |||||||||||
1.9 | Profit on sale of controlling interest | 5, 9 | - | - | - | - | 1.9 | 1.9 | ||||||||||
77.8 | Profit before tax | 4 | 41.9 | (2.7) | 39.2 | 35.8 | 0.3 | 36.1 | ||||||||||
(20.3) | Tax expense | 6 | (9.9) | 0.6 | (9.3) | (10.2) | 0.4 | (9.8) | ||||||||||
57.5 | Profit for the period attributable to equity shareholders | 32.0 | (2.1) | 29.9 | 25.6 | 0.7 | 26.3 | |||||||||||
The consolidated income statement relates entirely to continuing operations.
Year ended | ||||||||||||||||
31 March 2011 | Earnings per share | Half year ended 30 September 2011 | Half year ended 30 September 2010 | |||||||||||||
43.2 | Basic earnings per share (pence) | 8 | 22.4 | 19.8 | ||||||||||||
42.3 | Diluted earnings per share (pence) | 8 | 21.9 | 19.2 | ||||||||||||
47.1 | Adjusted basic earnings per share (pence) * | 8 | 24.8 | 21.4 | ||||||||||||
46.2 | Adjusted diluted earnings per share (pence) * | 8 | 24.2 | 20.9 | ||||||||||||
* 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 £18.9 million (14.2 pence per share) was paid in the period to 30 September 2011 (2010: £18.1 million; 13.6 pence per share). A dividend of £7.6 million (5.7 pence per share) was approved by the Board on 9 November 2011 for payment on 26 January 2012 (2010: £7.3 million; 5.5 pence per share). See Note 7.
Consolidated statement of comprehensive income
(Unaudited)
Year ended |
| Half year ended | ||||||||||||||||
31 March | 30 September | |||||||||||||||||
2011 | 2011 | 2010 | ||||||||||||||||
£m | Note | £m | £m | |||||||||||||||
57.5 | Profit for the period | 29.9 | 26.3 | |||||||||||||||
Net investment hedges: | ||||||||||||||||||
(3.0) | Exchange differences on foreign currency net investments | (8.5) | (10.3) | |||||||||||||||
Exchange differences on foreign currency borrowings designated as net | ||||||||||||||||||
1.0 | investment hedges | 3.3 | 4.5 | |||||||||||||||
(2.0) | (5.2) | (5.8) | ||||||||||||||||
(1.7) | Amounts reclassified to profit and loss on sale of controlling interest. | - | (1.7) | |||||||||||||||
60.6 | Actuarial (losses) / gains | 11 | (62.8) | (6.2) | ||||||||||||||
9.0 | Cash flow hedges - reclassification adjustment for (losses) / gains in income statement | (2.9) | 7.6 | |||||||||||||||
(7.9) | Cash flow hedges - gains / (losses) recognised in other comprehensive income | 0.7 | (5.4) | |||||||||||||||
0.1 | Exchange differences on investment in associate | (0.1) | - | |||||||||||||||
(15.9) | Tax relating to components of other comprehensive income | 16.0 | 1.2 | |||||||||||||||
42.2 | Other comprehensive (loss) / gain for the period, net of tax | (54.3) | (10.3) | |||||||||||||||
99.7 | Total comprehensive (loss) / gain for the period, net of tax | (24.4) | 16.0 | |||||||||||||||
99.9 | Attributable to owners of the parent | (24.4) | 16.2 | |||||||||||||||
(0.2) | Attributable to non-controlling interest | - | (0.2) | |||||||||||||||
Consolidated balance sheet
(Unaudited)
31 March | 30 September | |||||||||
2011 | 2011 | 2010 | ||||||||
£m | Note | £m | £m | |||||||
Assets | ||||||||||
Non-current assets | ||||||||||
284.3 | Property, plant and equipment | 287.5 | 275.0 | |||||||
335.5 | Goodwill | 336.9 | 331.2 | |||||||
179.8 | Intangible assets | 177.2 | 175.2 | |||||||
1.0 | Investment in associate using equity method | 0.7 | 1.1 | |||||||
1.4 | Deferred consideration | 9 | 1.4 | 1.3 | ||||||
18.0 | Financial assets - Derivative financial instruments | 21.2 | 22.9 | |||||||
820.0 | 824.9 | 806.7 | ||||||||
Current assets | ||||||||||
164.5 | Inventories | 194.9 | 167.1 | |||||||
147.1 | Trade and other receivables | 158.9 | 141.3 | |||||||
1.0 | Financial assets - Derivative financial instruments | 0.1 | 0.3 | |||||||
49.9 | Cash and short-term deposits | 10 | 45.5 | 24.3 | ||||||
362.5 | 399.4 | 333.0 | ||||||||
1,182.5 | Total assets | 4 | 1,224.3 | 1,139.7 | ||||||
Equity and liabilities | ||||||||||
Non-current liabilities | ||||||||||
(305.3) | Financial liabilities | - Long-term borrowings | 10 | (324.7) | (370.4) | |||||
(3.1) | - Derivative financial instruments | (5.3) | (5.3) | |||||||
(60.1) | Retirement benefit obligations | 11 | (109.9) | (137.2) | ||||||
(86.3) | Deferred tax liability | (72.8) | (65.9) | |||||||
(7.5) | Deferred income | (7.2) | (6.9) | |||||||
(462.3) | (519.9) | (585.7) | ||||||||
Current liabilities | ||||||||||
(271.3) | Trade and other payables | (267.6) | (249.1) | |||||||
(68.0) | Financial liabilities | - Short-term borrowings | 10 | (100.3) | (2.3) | |||||
(0.5) | - Derivative financial instruments | (0.3) | (0.2) | |||||||
(4.0) | Current tax liability | (3.1) | (2.6) | |||||||
(0.6) | Deferred income | (0.6) | (0.7) | |||||||
(10.3) | Provisions | (9.8) | (10.7) | |||||||
(354.7) | (381.7) | (265.6) | ||||||||
(817.0) | Total liabilities | (901.6) | (851.3) | |||||||
Shareholders' equity | ||||||||||
(33.3) | Ordinary shares | (33.3) | (33.3) | |||||||
(70.8) | Share premium | (70.8) | (70.7) | |||||||
0.6 | Interest in ESOP | 0.6 | 0.6 | |||||||
(64.1) | Other reserves | (56.9) | (60.8) | |||||||
(197.9) | Retained earnings | (162.3) | (124.2) | |||||||
(365.5) | Total shareholders' equity | (322.7) | (288.4) | |||||||
(1,182.5) | Total equity and liabilities | (1,224.3) | (1,139.7) | |||||||
The interim results were approved by the Board of directors on 9 November 2011.
Consolidated statement of changes in equity
(Unaudited)
Attributable to equity shareholders of the parent | ||||||||||||||||||||
Ordinary | Share | Interest | Other | Retained | Non-controlling | Total | ||||||||||||||
shares | premium | in ESOP | reserves | earnings | Total | interest | Equity | |||||||||||||
Half year ended 30 September 2011 | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||
At 31 March 2011 | 33.3 | 70.8 | (0.6) | 64.1 | 197.9 | 365.5 | - | 365.5 | ||||||||||||
Profit for the period | - | - | - | - | 29.9 | 29.9 | - | 29.9 | ||||||||||||
Other comprehensive gain / (loss): | ||||||||||||||||||||
Net investment hedges | - | - | - | (5.2) | - | (5.2) | - | (5.2) | ||||||||||||
Cash flow hedges | - | - | - | (2.2) | - | (2.2) | - | (2.2) | ||||||||||||
Actuarial losses | - | - | - | - | (62.8) | (62.8) | - | (62.8) | ||||||||||||
Exchange difference on | ||||||||||||||||||||
investment in associate | - | - | - | (0.1) | - | (0.1) | - | (0.1) | ||||||||||||
Tax on components of other | ||||||||||||||||||||
comprehensive income | - | - | - | 0.3 | 15.7 | 16.0 | - | 16.0 | ||||||||||||
Other comprehensive loss | - | - | - | (7.2) | (47.1) | (54.3) | - | (54.3) | ||||||||||||
Total comprehensive loss | - | - | - | (7.2) | (17.2) | (24.4) | - | (24.4) | ||||||||||||
Share based payments | - | - | - | - | 0.5 | 0.5 | - | 0.5 | ||||||||||||
Equity dividends | - | - | - | - | (18.9) | (18.9) | - | (18.9) | ||||||||||||
At 30 September 2011 | 33.3 | 70.8 | (0.6) | 56.9 | 162.3 | 322.7 | - | 322.7 | ||||||||||||
Half year ended 30 September 2010 | ||||||||||||||||||||
At 31 March 2010 | 33.3 | 70.7 | (0.7) | 66.4 | 120.1 | 289.8 | 3.0 | 292.8 | ||||||||||||
Profit for the period | - | - | - | - | 26.3 | 26.3 | - | 26.3 | ||||||||||||
Other comprehensive gain / (loss): | ||||||||||||||||||||
Net investment hedges | - | - | - | (5.6) | - | (5.6) | (0.2) | (5.8) | ||||||||||||
Cash flow hedges | - | - | - | 2.2 | - | 2.2 | - | 2.2 | ||||||||||||
Amounts reclassified to profit and loss | ||||||||||||||||||||
on sale of controlling interest | - | - | - | (1.7) | - | (1.7) | - | (1.7) | ||||||||||||
Actuarial losses | - | - | - | - | (6.2) | (6.2) | - | (6.2) | ||||||||||||
Tax on components of other | ||||||||||||||||||||
comprehensive income | - | - | - | (0.5) | 1.7 | 1.2 | - | 1.2 | ||||||||||||
Other comprehensive loss | - | - | - | (5.6) | (4.5) | (10.1) | (0.2) | (10.3) | ||||||||||||
Total comprehensive (loss) / gain | - | - | - | (5.6) | 21.8 | 16.2 | (0.2) | 16.0 | ||||||||||||
Disposal of non-controlling interest | - | - | - | - | - | - | (2.8) | (2.8) | ||||||||||||
Purchase of shares by ESOP | - | - | (0.2) | - | - | (0.2) | - | (0.2) | ||||||||||||
Exercise of options | - | - | 0.3 | - | (0.3) | - | - | - | ||||||||||||
Share based payments | - | - | - | - | 0.7 | 0.7 | - | 0.7 | ||||||||||||
Equity dividends | - | - | - | - | (18.1) | (18.1) | - | (18.1) | ||||||||||||
At 30 September 2010 | 33.3 | 70.7 | (0.6) | 60.8 | 124.2 | 288.4 | - | 288.4 | ||||||||||||
Year ended 31 March 2011 | ||||||||||||||||||||
At 31 March 2010 | 33.3 | 70.7 | (0.7) | 66.4 | 120.1 | 289.8 | 3.0 | 292.8 | ||||||||||||
Profit for the period | - | - | - | - | 57.5 | 57.5 | - | 57.5 | ||||||||||||
Other comprehensive gain / (loss): | ||||||||||||||||||||
Net investment hedges | - | - | - | (1.8) | - | (1.8) | (0.2) | (2.0) | ||||||||||||
Cash flow hedges | - | - | - | 1.1 | - | 1.1 | - | 1.1 | ||||||||||||
Amounts reclassified to profit and loss | ||||||||||||||||||||
on sale of controlling interest | - | - | - | (1.7) | - | (1.7) | - | (1.7) | ||||||||||||
Actuarial gains | - | - | - | - | 60.6 | 60.6 | - | 60.6 | ||||||||||||
Exchange difference on | ||||||||||||||||||||
investment in associate | - | - | - | 0.1 | - | 0.1 | - | 0.1 | ||||||||||||
Tax on components of other | ||||||||||||||||||||
comprehensive income | - | - | - | - | (15.9) | (15.9) | - | (15.9) | ||||||||||||
Other comprehensive (loss) / gain | - | - | - | (2.3) | 44.7 | 42.4 | (0.2) | 42.2 | ||||||||||||
Total comprehensive (loss) / gain | - | - | - | (2.3) | 102.2 | 99.9 | (0.2) | 99.7 | ||||||||||||
Disposal of non-controlling interest | - | - | - | - | - | - | (2.8) | (2.8) | ||||||||||||
Issue of share capital | - | 0.1 | - | - | - | 0.1 | - | 0.1 | ||||||||||||
Purchase of shares by ESOP | - | - | (0.2) | - | - | (0.2) | - | (0.2) | ||||||||||||
Exercise of options | - | - | 0.3 | - | (0.3) | - | - | - | ||||||||||||
Share based payments | - | - | - | - | 1.3 | 1.3 | - | 1.3 | ||||||||||||
Equity dividends | - | - | - | - | (25.4) | (25.4) | - | (25.4) | ||||||||||||
At 31 March 2011 | 33.3 | 70.8 | (0.6) | 64.1 | 197.9 | 365.5 | - | 365.5 | ||||||||||||
Consolidated cash flow statement
(Unaudited)
Year ended | Half year ended | |||||||||
31 March | 30 September | |||||||||
2011 | 2011 | 2010 | ||||||||
£m | Note | £m | £m | |||||||
Cash flow from operating activities | ||||||||||
77.8 | Profit before taxation | 39.2 | 36.1 | |||||||
20.6 | Finance costs and other finance income | 7.3 | 10.5 | |||||||
0.2 | Share of associate's net loss | 0.3 | - | |||||||
(1.9) | Profit on sale of controlling interest | - | (1.9) | |||||||
96.7 | Profit on operations | 46.8 | 44.7 | |||||||
30.9 | Depreciation | 15.5 | 15.3 | |||||||
3.6 | Amortisation of internally generated intangible assets | 1.7 | 1.8 | |||||||
8.7 | Amortisation of acquired intangible assets | 4.5 | 4.3 | |||||||
(0.7) | Exceptional items | 0.5 | (0.2) | |||||||
(0.6) | Release of grants | (0.3) | (0.3) | |||||||
1.3 | Share based payments | 0.5 | 0.7 | |||||||
(1.8) | Profit on disposal of depots | (4.6) | - | |||||||
Difference between pension contributions paid and current service cost | ||||||||||
(21.7) | recognised in income statement | (10.3) | (11.4) | |||||||
11.7 | (Increase) / decrease in working capital | (42.7) | (3.1) | |||||||
128.1 | Cash generated from operations | 11.6 | 51.8 | |||||||
(19.8) | Interest paid | (10.3) | (9.9) | |||||||
(16.1) | Taxation paid | (8.3) | (8.9) | |||||||
92.2 | Net cash flow from operating activities | (7.0) | 33.0 | |||||||
Cash flow from investing activities | ||||||||||
(49.3) | Capital expenditure | (24.7) | (21.5) | |||||||
0.8 | Grants received | 0.2 | - | |||||||
2.5 | Proceeds from disposal of property, plant and equipment | 4.4 | 0.1 | |||||||
(0.1) | Purchase of businesses (net of cash and debt acquired) | (10.7) | - | |||||||
4.0 | Sale of business (net of fees and costs) | 9 | - | 4.0 | ||||||
(42.1) | Net cash used in investing activities | (30.8) | (17.4) | |||||||
Cash flow from financing activities | ||||||||||
- | Net drawdown under revolving credit facilities | 10 | 53.7 | 0.6 | ||||||
(25.4) | Dividends paid | (18.9) | (18.1) | |||||||
(0.2) | Purchase of shares by ESOP | - | - | |||||||
0.1 | Proceeds from issue of shares (net of issue costs) | - | - | |||||||
(2.2) | Finance lease repayments | 10 | (1.1) | (1.0) | ||||||
(27.7) | Net cash used in financing activities | 33.7 | (18.5) | |||||||
22.4 | Net (decrease) / increase in cash and cash equivalents | (4.1) | (2.9) | |||||||
27.5 | Cash and cash equivalents at beginning of period | 49.9 | 27.5 | |||||||
- | Exchange impact on cash and cash equivalents | 10 | (0.3) | (0.3) | ||||||
49.9 | Cash and cash equivalents at end of period | 10 | 45.5 | 24.3 | ||||||
(311.6) |
Memo: Net debt at end of period |
10 |
(365.3) |
(335.5) | ||||||
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 1985. 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 2011.
2 Significant accounting policies
Basis of preparation
This condensed interim financial information comprises the balance sheet as at 30 September 2011 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 2011 have been extracted from the Group's 2011 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 auditor have obtained all the information and explanations necessary for the purposes of the audit. The Group Financial Statements for the year ended 31 March 2011 have been filed with the Registrar of Companies.
The financial information can be found on our corporate website, www.dairycrest.co.uk
The financial information for the period ended 30 September 2011 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 2011, 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 2011 are the same as those used for the Group's financial statements for the year ended 31 March 2011 except for the adoption of the new standards and interpretations that came into effect in the half year (see below). Having made appropriate inquiries, 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 9 November 2011.
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.
The following accounting standards and interpretations became effective for the current reporting period:
International Accounting Standards (IAS/IFRSs)
IAS 24 - Related Party Disclosures (Revised)
Improvements to IFRS (issued April 2010)
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 14 (Amended) - Prepayments of a Minimum Funding Requirement
IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments
The adoption of these standards and interpretations has had no impact on this interim consolidated financial information.
3 Critical accounting estimates and judgements
The following are areas of particular significance to the Group's financial information and include the application of judgement, which is fundamental to the completion of a set of condensed consolidated interim financial information.
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.
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 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.
Acquired brands and similar assets are considered to have finite lives. The determination of the useful lives takes into account certain quantitative factors such as sales expectations and growth prospects, and also many qualitative factors such as history and heritage, and market positioning, hence the determination of useful lives is subject to estimates and judgement.
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. Exceptional items are not excluded from the basic earnings per share calculation but are excluded from the adjusted basic earnings per share calculation.
Segmental reporting
A key judgement made by management in the process of applying the Group accounting policy for segment reporting is that used to determine whether certain individual operating segments meet all of the aggregation criteria set out in IFRS 8 when aggregated for external reporting purposes. Those segments that have been aggregated and a description of the key judgements made in reaching that conclusion are set out in Note 4.
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 uses trading profit, as reviewed at monthly business review meetings, as the key measure of the segments' results as it reflects the segments' underlying trading performance for the period under evaluation. Trading profit is a consistent measure within the Group and the reporting of this measure at the monthly business review meetings, which are organised according to the product types, has been used to identify and determine the Group's operating segments. Trading profit is defined as profit on operations before exceptional items and amortisation of acquired intangible assets, but includes the Group share of post-tax profit of joint ventures and associates.
The Group's operating segments are 'Cheese', 'UK Spreads', 'St Hubert', 'Liquid Products', 'Customer Direct', 'Share of Joint Ventures and Associates', 'MH Foods' and 'Other'. Certain of these operating segments have been aggregated and the Group reports on five continuing segments within the business: 'Cheese', 'Spreads', 'Dairies', 'Share of Joint Ventures and Associates' and 'Other'.
For Group reporting purposes, the UK Spreads and St Hubert segments have been aggregated into one reportable segment being Spreads. Both of these segments operate within Western Europe where long-term GDP growth rates and spreads market growth rates are similar. Both manufacture predominantly branded dairy spreads, using similar production methods with a significant investment in advertising and promotion. The two businesses have margins consistent with predominantly branded products. The key input risks faced by both businesses are similar (vegetable oil, packaging costs). The majority of sales are to major multiple retailers and distribution methods are similar. Having considered these factors, management have judged that the IFRS 8 aggregation criteria for these businesses have been met and that aggregation is appropriate. The Spreads segment also incorporates the MH Foods business acquired in June 2011. This business is branded, has similar end-customers as UK Spreads and shares the same input cost risks. Therefore management judge that this too meets the IFRS 8 aggregation criteria. Furthermore, its revenue, result and assets do not represent more than 10% of the Group so the quantitative criteria for a reportable segment are not met.
Furthermore, the Liquid Products and Customer Direct segments have been aggregated into one reportable segment being Dairies. The Liquid Products and Customer Direct businesses operate in the UK and both generate the majority of their revenue from selling fresh milk, a commodity product characterised by lower margins than branded products. Many aspects of these businesses are managed on a combined basis, namely milk sourcing, production volumes, demand planning, technical, quality and distribution. Our dairies process and pack milk for both businesses. Both businesses exhibit similar gross margins. The two segments supply milk to a wide range of customers from major multiple retailers through foodservice, bottled milk buyers and doorstep customers. Certain customers are supplied by both businesses and doorstep customers (and resultant bad debt risks) only represent a small proportion of combined revenue. Having considered these factors, management have judged that the IFRS 8 aggregation criteria for these businesses have been met and that aggregation is appropriate.
The Cheese segment has not been aggregated with any other segment. This business manufactures predominantly branded cheese in the UK and sells mainly to retail customers.
Associates and Share of Joint Ventures forms a separate segment whose results are reviewed on a post-tax basis consistent with IFRS.
The Other segment comprises revenue earned from distributing product for third parties and certain central costs net of recharges to the operating segments. Generally, all central costs less external 'other' revenue are recharged back into operating segments such that their result reflects the total cost base of the Group. Other operating profit therefore is nil.
The segment results for the period to 30 September 2011 and 30 September 2010 and for the year ended 31 March 2011 and the reconciliation of segment measures to the respective statutory items included in the interim financial information are as follows:
Year ended | Half year ended | |||||||||
31 March | 30 September | |||||||||
2011 | 2011 | 2010 | ||||||||
£m | £m | £m | ||||||||
Segment external revenue | ||||||||||
223.1 | Cheese | 101.8 | 108.9 | |||||||
285.5 | Spreads | 158.1 | 134.7 | |||||||
1,089.8 | Dairies | 533.8 | 529.7 | |||||||
6.1 | Other | 2.5 | 3.6 | |||||||
1,604.5 | Total segment external revenue | 796.2 | 776.9 | |||||||
Segment profit | ||||||||||
28.0 | Cheese | 16.5 | 12.5 | |||||||
53.3 | Spreads | 31.7 | 27.2 | |||||||
27.1 | Dairies | 5.8 | 10.9 | |||||||
(0.2) | Share of associate net loss | (0.3) | - | |||||||
108.2 | Total segment profit | 53.7 | 50.6 | |||||||
(20.6) | Finance costs | (10.0) | (10.5) | |||||||
87.6 | Adjusted profit before tax | 43.7 | 40.1 | |||||||
(8.7) | Acquired intangible amortisation | (4.5) | (4.3) | |||||||
(1.1) | Exceptional items (see Note 5) | (2.7) | 0.3 | |||||||
- | Other finance income - pensions | 2.7 | - | |||||||
77.8 | Group profit before tax | 39.2 | 36.1 | |||||||
Segment total assets | ||||||||||
199.6 | Cheese | 219.5 | 194.6 | |||||||
507.3 | Spreads | 507.7 | 498.3 | |||||||
370.2 | Dairies | 383.9 | 356.8 | |||||||
2.4 | Share of associate & joint ventures | 2.1 | 2.4 | |||||||
34.1 | Other | 44.3 | 40.1 | |||||||
1,113.6 | Group | 1,157.5 | 1,092.2 | |||||||
68.9 | Unsegmented assets | 66.8 | 47.5 | |||||||
1,182.5 | Total assets | 1,224.3 | 1,139.7 | |||||||
Interest income and expense are not included in the measure of segment profit reviewed by the CODM. Group treasury is centrally managed and external interest income and expense is mostly incurred in the UK and is not allocated to segments. Where interest is reviewed by the CODM it is done so on a net basis.
Tax costs are not included in the measure of segment profit reviewed by the CODM. Group tax is centrally managed and the Group's effective tax rate, not individual segment tax rates, is reported.
Segment assets comprise property, plant and equipment, goodwill, intangible assets, inventories, receivables, assets in disposal group held for sale, investments in joint ventures and associates using the equity method and deferred consideration but exclude cash and cash equivalents, derivative financial assets and deferred tax assets as these items are managed on a Group basis. Other segment assets comprise certain property, plant and equipment that is not reported in the segments. Total segment liabilities have not been presented as this measure is not regularly reviewed by or provided to the CODM.
Inter-segment revenue comprises the sale of finished Cheese and Spreads products to the Dairies segment on a cost plus basis and is included in the segment result. Other inter-segment transactions principally comprise sales of cream from the Dairies segment to the Spreads segment for the manufacture of butters. Cream sold into Spreads is priced by reference to external commodity markets and is adjusted regularly so as to reflect the costs that the Spreads segment would incur if it was a stand alone entity. Revenue from inter-segment cream sales is not reported as revenue to the CODM but as a reduction to the Dairies segment's input costs.
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 | |||||||||||||||
2011 | 2011 | 2010 | ||||||||||||||
£m | £m | £m | ||||||||||||||
(3.0) | Restructuring costs (Dairies) | (1.7) | (1.6) | |||||||||||||
- | Restructuring costs (Spreads) | (1.0) | - | |||||||||||||
1.9 | Profit on disposal of controlling interest in Wexford Creamery Limited | - | 1.9 | |||||||||||||
(1.1) | (2.7) | 0.3 | ||||||||||||||
1.7 | Tax relief on exceptional items | 0.6 | 0.4 | |||||||||||||
0.6 | (2.1) | 0.7 | ||||||||||||||
Exceptional items in the six months ended 30 September 2011 comprise:
- £1.7 million of costs associated with the rationalisation of administration activities in the Customer Direct depot network. This restructure will result in more centralised back office activities supporting the depot network and generate significant savings in current and future years. This includes redundancies (£0.9 million) and incremental costs incurred during implementation (£0.8 million). Exceptional expenditure on this project is expected to total approximately £5 million in the year ending 31 March 2012 at which point the project will be materially complete.
- On 17 May 2011, the Group announced that, subject to a consultation process, production of its leading dairy spread brand, Clover, would be consolidated into its site in Kirkby, Liverpool. The manufacturing process is currently split between Kirkby and Crudgington, Shropshire. This consolidation will result in approximately 90 redundancies at Crudgington and the creation of approximately 45 jobs at Kirkby. The consolidation is not expected to be completed until 2012, however exceptional costs of approximately £4.5 million are expected to be incurred in the year ending 31 March 2012. These will comprise predominantly redundancy costs and the impairment of property, plant and equipment impacted by the restructured operations. In the half year ended 30 September 2011, the Group has impaired property, plant and equipment by £1.0 million as the assets to which this impairment relates had become redundant.
Exceptional items in the year ended 31 March 2011 comprised:
- £3.0 million of costs associated with the rationalisation of administration activities in the Customer Direct depot network. This restructure will result in more centralised back office activities supporting the depot network and generate significant savings. Most of the cost relates to redundancies (£2.5 million), but certain incremental running costs are being incurred (£0.5 million).
- On 12 June 2010 the Group sold 50% of the shares in Wexford Creamery Limited ('WCL') for cash proceeds of €9 million, resulting in a 30% shareholding post-disposal and a loss of controlling interest to Wexford Milk Producers ('WMP'). At 31 March 2010, the assets and liabilities of WCL were disclosed as a disposal group held for sale and the carrying value of assets was impaired to reflect the estimated fair value less costs to sell. The final gain on disposal of £1.9 million includes the reclassification to profit and loss of certain items previously taken to other comprehensive income.
6 Tax expense
The tax expense for the half year ended 30 September 2011 has been calculated on the basis of the estimated effective tax rate on pre-exceptional profit for the full year of 23.6% (September 2010: 28.5%; March 2011: 27.9%). Tax relief on exceptional costs for the half year ended 30 September 2011 was £6 million (September 2010: £0.4 million, year ended 31 March 2011: £1.7 million). The lower effective rate in 2011/12 is a result of higher property profits and a lower UK corporation tax rate.
As a result of the Finance Act in July 2011, the decrease in the UK corporation tax rate from 26% to 25% from April 2012 has been 'enacted' under IFRS. Consequently, UK deferred tax balances that reverse after 31 March 2012 have been calculated using a corporation tax rate of 25%. The impact of this change is insignificant as the large deferred tax creditor in the consolidated Group balance sheet is largely deferred tax on capitalised St Hubert brands, which is calculated by reference to the French rate of corporation tax.
7 Dividends
A dividend of £7.6 million (5.7 pence per share) (2010: £7.3 million; 5.5 pence per share) will be payable on 26 January 2012 to shareholders on the register on 6 January 2012. This dividend is not recorded in the balance sheet as a liability at 30 September 2011.
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 £29.9 million (September 2010: £26.3 million; March 2011: £57.5 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 133.216 million (September 2010: 133.151 million, March 2011: 133.198 million).
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 | |||||||||||||||
2011 | 2011 | 2010 | ||||||||||||||
£m | £m | £m | ||||||||||||||
57.5 | Profit attributable to equity shareholders | 29.9 | 26.3 | |||||||||||||
(0.6) | Exceptional items (excluding non-controlling interests and net of tax) | 2.1 | (0.7) | |||||||||||||
5.8 | Amortisation of acquired intangible assets (net of tax) | 3.0 | 2.9 | |||||||||||||
- | Pension interest income (net of tax) | (2.0) | - | |||||||||||||
62.7 | Adjusted earnings | 33.0 | 28.5 | |||||||||||||
43.2 |
Basic earnings per share (pence) |
22.4 |
19.8 | |||||||||||||
42.3 | Diluted earnings per share (pence) | 21.9 | 19.2 | |||||||||||||
47.1 | Adjusted basic earnings per share (pence) | 24.8 | 21.4 | |||||||||||||
46.2 | Adjusted diluted earnings per share (pence) | 24.2 | 20.9 | |||||||||||||
Diluted earnings per share has been calculated on the basis of a diluted number of shares of 136.449 million (September 2010: 136.642 million; March 2011: 135.689 million). This reflects the dilutive impact of share options exercisable under the Dairy Crest Long Term Incentive Share Plan and Sharesave schemes.
9 Business combinations 2011/12 Acquisition On 30 June 2011, the Group acquired 100% of the issued share capital of Morehands Limited (trading as MH Foods Limited), a manufacturer of branded low calorie spray oils and salad dressings. Initial cash consideration was £11.9 million, with deferred consideration of £1.6 million paid in October 2011. The fair value of the identifiable assets and liabilities of the business at the date of acquisition was:
Fair value | ||||||||||
to Group | ||||||||||
£m | ||||||||||
Property, plant and equipment | 0.5 | |||||||||
Intangible asset - Frylight brand | 6.0 | |||||||||
Inventories | 0.6 | |||||||||
Receivables | 1.5 | |||||||||
Cash | 1.2 | |||||||||
Payables | (0.9) | |||||||||
Current tax | (0.5) | |||||||||
Deferred tax | (1.6) | |||||||||
Net assets | 6.8 | |||||||||
Goodwill | 6.7 | |||||||||
13.5 | ||||||||||
Comprising: | ||||||||||
Cash consideration - June 2011 | 11.9 | |||||||||
Fair value of deferred cash consideration at June 2011 | 1.6 | |||||||||
13.5 | ||||||||||
The Frylight brand is estimated to have a useful economic life of 15 years and the amount capitalised as an intangible asset and related deferred tax will be amortised over this period. This life is consistent with the 15-25 year useful economic lives assumed on the acquisition of St Hubert. Goodwill, being the cost of acquisition less net identifiable assets and liabilities assumed on acquisition, represents anticipated synergy benefits from being in the wider Dairy Crest group. Goodwill arises on consolidation only and there is no amortisation or related tax deduction in the accounts of Dairy Crest Limited, the acquiring entity. Group reported revenue and result would not be materially different had the acquisition occurred on 1 April 2011. Revenue and profit from the date of acquisition to 30 September 2011 were £1.8 million and £0.3 million respectively.
2010/11
Disposal
On 12 June 2010 the Group sold 50% of the shares in Wexford Creamery Limited ('WCL') for cash proceeds of €9 million. This disposal was effected by way of a share repurchase by WCL. At the same time, the Group entered into two option agreements over its remaining 30% ownership.
The first option agreement granted a 5 year call option to the majority shareholder, being Wexford Milk Producers ('WMP'), over 10% of WCL share capital for a fixed price of €1.8 million. After five years post-disposal the Group will have the right to exercise a put option at a fixed price of €1.8 million. The combination of put and call options gives rise to near certainty of exercise and, along with the fixed option price, provides evidence that this option in substance comprises deferred consideration on a further 10% of the ordinary shares of WCL. In substance the Group has effected a disposal of 60% of the shares of WCL with 10% of the consideration being deferred. The balance of deferred consideration at 30 September 2011 was £1.4 million (31 March 2011: £1.4 million; 30 September 2010: £1.3 million).
The second option agreement granted an eight year call option to WMP over 20% of the WCL share capital for a price of €3.6 million adjusted for 20% of post-tax profits, excluding WCL share buy-back financing costs. After eight years post-disposal the Group will have the right to exercise a put option based on the same pricing formula. The swap was initially valued at £1.6 million.
The completion arrangements included a five year cheese supply agreement with the Group agreeing to buy minimum guaranteed cheese volumes based on a cost plus margin formula. Volumes decrease over the five year agreement. At the transaction date, £3.6 million was charged by the Group in order to provide for the cost of the cheese purchase arrangements. The balance of this provision at 30 September 2011 was £2.5 million (March 2011: £3.0 million).
The disposal resulted in the release of non-controlling interests in WCL (£2.8 million) and in the reclassification to profit and loss of net investment hedges previously taken to other comprehensive income (£1.7 million). Furthermore the Group incurred £0.2 million on legal and professional fees in relation to this disposal.
The final gain on disposal can be analysed as follows and is recorded as an exceptional item in the six months ended 30 September 2010 and the year ended 31 March 2011.
£m | |||||||||||||
Sales proceeds - cash consideration | 7.5 | ||||||||||||
Sales proceeds - deferred consideration | 1.3 | ||||||||||||
Book value of assets disposed (see below) | (10.3) | ||||||||||||
Recognition of initial fair value of 20% shareholding - equity accounted associate | 1.1 | ||||||||||||
Recognition of initial fair value of option over 20% shareholding | 1.6 | ||||||||||||
Provision for future cheese costs | (3.6) | ||||||||||||
Derecognition of non-controlling interest | 2.8 | ||||||||||||
Other fees and costs | (0.2) | ||||||||||||
Gain on disposal of controlling interest before recycling | 0.2 | ||||||||||||
Amounts reclassified to profit and loss | 1.7 | ||||||||||||
Final gain on disposal of controlling interest | 1.9 | ||||||||||||
31 March 2010 | 12 June 2010 | ||||||||||||
Book value of assets disposed: | £m | £m | |||||||||||
Investments in joint ventures | 0.6 | 0.5 | |||||||||||
Deferred tax asset | 0.3 | 0.2 | |||||||||||
Inventories | 4.6 | 8.7 | |||||||||||
Trade and other receivables | 5.8 | 8.3 | |||||||||||
Cash and short-term deposits | 7.5 | 3.3 | |||||||||||
Trade and other payables | (4.7) | (8.1) | |||||||||||
Retirement benefit obligations | (2.0) | (1.9) | |||||||||||
Deferred income | (0.6) | (0.5) | |||||||||||
Current tax liability | (0.3) | (0.2) | |||||||||||
11.2 | 10.3 | ||||||||||||
Of the decrease of £0.9 million in net asset value in the period from March 2010 to disposal, £0.7 million was a result of translation differences due to Sterling strengthening against the Euro. The initial equity accounted fair value of our 20% shareholding includes additional share buy-back related borrowings in WCL post disposal.
Cash impact of disposal: | £m | ||||||||||||
Cash proceeds | 7.5 | ||||||||||||
Cash and short-term deposits sold with WCL | (3.3) | ||||||||||||
Other fees and costs | (0.2) | ||||||||||||
4.0 | |||||||||||||
Acquisition
During the year ended 31 March 2011, the Group acquired the goodwill of a bottled milk buyer for cash consideration of £0.1 million resulting in goodwill of £0.1 million.
10 Analysis of net debt
Year ended | Closing net debt | Half year ended | ||||||||||
31 March | 30 September | |||||||||||
2011 | 2011 | 2010 | ||||||||||
£m | £m | £m | ||||||||||
65.5 | Loans repayable in less than one year | 97.7 | - | |||||||||
2.5 | Finance leases repayable within one year | 2.6 | 2.3 | |||||||||
68.0 | Short-term borrowings | 100.3 | 2.3 | |||||||||
298.2 | Loans repayable in greater than one year | 318.8 | 361.9 | |||||||||
7.1 | Finance leases repayable in greater than one year | 5.9 | 8.5 | |||||||||
305.3 | Long-term borrowings | 324.7 | 370.4 | |||||||||
(49.9) | Cash and short-term deposits | (45.5) | (24.3) | |||||||||
323.4 | Borrowings and cash - before impact of cross-currency swaps | 379.5 | 348.4 | |||||||||
(11.8) | Impact of cross-currency swaps * | (14.2) | (12.9) | |||||||||
311.6 | Net Debt | 365.3 | 335.5 | |||||||||
* The Group has $233 million and €75 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (March 2011 and September 2010: $233 million and €75 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 £14.2 million adjustment included above (March 2011: £11.8 million; September 2010: £12.9 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£214.2 million (March 2011: £211.7 million; September 2010: £212.9 million)) to the fixed Sterling liability of £200.0 million.
On 12 October 2011, the Group entered into a new five year revolving credit facility of £170 million plus €150 million with a syndicate of five banks. Further details are provided in Note 13.
Movement in net debt | Opening | Cash | Exchange | Closing | |||||||||
balances | flow | movement | balances | ||||||||||
Six months to 30 September 2011 | £m | £m | £m | £m | |||||||||
Cash and short-tem deposits | 49.9 | (4.1) | (0.3) | 45.5 | |||||||||
Borrowings | (363.7) | (53.7) | 0.9 | (416.5) | |||||||||
Finance leases | (9.6) | 1.1 | - | (8.5) | |||||||||
Cross-currency swaps | 11.8 | - | 2.4 | 14.2 | |||||||||
(311.6) | (56.7) | 3.0 | (365.3) | ||||||||||
Six months to 30 September 2010 | |||||||||||||
Cash and short-tem deposits | 20.0 | 4.6 | (0.3) | 24.3 | |||||||||
Borrowings | (373.4) | (0.6) | 12.1 | (361.9) | |||||||||
Finance leases | (11.8) | 1.0 | - | (10.8) | |||||||||
Cross-currency swaps | 20.5 | - | (7.6) | 12.9 | |||||||||
Cash in disposal group | 7.5 | (7.5) | - | - | |||||||||
(337.2) | (2.5) | 4.2 | (335.5) | ||||||||||
Year to 31 March 2011 | |||||||||||||
Cash and short-tem deposits | 20.0 | 29.9 | - | 49.9 | |||||||||
Borrowings | (373.4) | - | 9.7 | (363.7) | |||||||||
Finance leases | (11.8) | 2.2 | - | (9.6) | |||||||||
Cross-currency swaps | 20.5 | - | (8.7) | 11.8 | |||||||||
Cash in disposal group | 7.5 | (7.5) | - | - | |||||||||
(337.2) | 24.6 | 1.0 | (311.6) | ||||||||||
11 Retirement benefit obligations
The Group's defined benefit pension scheme is accounted for in accordance with the requirements of IAS 19 'Employee Benefits'. The net pension liability of the Group pension scheme at 30 September 2011 can be analysed as follows:
Year ended | Half year ended | ||||||||||||||||
31 March | 30 September | ||||||||||||||||
2011 | 2011 | 2010 | |||||||||||||||
£m | £m | £m | |||||||||||||||
65.7 | Equities | 63.8 | 61.3 | ||||||||||||||
239.0 | Bonds and cash | 262.2 | 240.2 | ||||||||||||||
90.5 | Equity return swaps valuation | 31.9 | 65.3 | ||||||||||||||
268.1 | Insured retirement obligations | 270.0 | 260.7 | ||||||||||||||
55.3 | Property and other | 56.5 | 52.9 | ||||||||||||||
718.6 | Total market value of assets | 684.4 | 680.4 | ||||||||||||||
(510.6) | Defined benefit obligation: | Uninsured retirement obligations | (524.3) | (556.9) | |||||||||||||
(268.1) | Insured retirement obligations | (270.0) | (260.7) | ||||||||||||||
(60.1) | Net liability recognised in the balance sheet | (109.9) | (137.2) | ||||||||||||||
15.6 | Related deferred tax asset | 27.5 | 37.0 | ||||||||||||||
(44.5) | Net pension liability | (82.4) | (100.2) | ||||||||||||||
Analysis of movements in the Group pension deficit during the period: | |||||||||||||||||
(142.4) | Opening deficit | (60.1) | (142.4) | ||||||||||||||
- | Net finance income | 2.7 | - | ||||||||||||||
60.6 | Actuarial (loss) / gain | (62.8) | (6.2) | ||||||||||||||
21.7 | Contributions | 10.3 | 11.4 | ||||||||||||||
(60.1) | Closing liability | (109.9) | (137.2) | ||||||||||||||
The principal assumptions used in determining retirement benefit obligations for the Group's pension funds are as follows:
Mar 11 | Sep 11 | Sep 10 | |||||||||||||
n/a | Rate of increase in salaries (%) | n/a | n/a | ||||||||||||
3.5 | Price inflation - RPI (%) | 3.3 | 3.1 | ||||||||||||
2.8 | Price inflation - CPI (%) | 2.6 | n/a | ||||||||||||
22.6 | Average expected remaining life expectancy for a non-retired 65 year old male (years) | 22.6 | 20.9 | ||||||||||||
21.5 | Average expected remaining life expectancy for a retired 65 year old male (years) | 21.5 | 19.8 | ||||||||||||
25.0 | Average expected remaining life expectancy for a non-retired 65 year old female (years) | 25.0 | 23.2 | ||||||||||||
23.8 | Average expected remaining life expectancy for a retired 65 year old female (years) | 23.8 | 22.1 | ||||||||||||
5.7 | Discount rate (%) | 5.4 | 5.2 | ||||||||||||
8.0 | Expected return (%) | - Equities | 8.0 | 7.8 | |||||||||||
5.2 | - Bonds and cash | 5.2 | 5.1 | ||||||||||||
8.0 | - Synthetic equity exposure on swap contracts | 8.0 | 7.8 | ||||||||||||
4.6 | - LIBOR exposure on swap contracts | 4.7 | 4.6 | ||||||||||||
7.0 | - Property and other | 7.0 | 7.0 | ||||||||||||
5.7 | - Insured retirement obligations | 5.4 | 5.2 | ||||||||||||
On 31 March 2010 the UK defined benefit pension scheme (the 'Scheme') was closed to future service accrual. Scheme members were invited to join the defined contribution scheme from April 2010. The most recent full actuarial valuation of the Scheme was carried out as at 31 March 2010 by an independent actuary using the projected unit credit method. Full actuarial valuations are carried out triennially. This valuation resulted in a deficit of £137 million compared to the IAS 19 deficit of £142.4 million reported at that date. From October 2009, the Company has been making additional funding contributions to the scheme of £20 million per annum. The level of cash contributions will continue at this level until March 2018 based on the latest schedule of contributions which was signed in June 2011. This amount will 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.
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. This action reduces the volatility of the reported defined benefit obligations.
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. At inception, the principal value of each leg was £200 million. The positive valuation of synthetic equity at 31 March 2011 and September 2011 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.
Scheme assets are stated at their market values at the respective balance sheet dates with the exception of the insured retirement obligations which equal the IAS 19 valuation of obligations which they cover. The expected rate of return on equities of 8.0% reflects historic UK equity returns. The equity return assumption represented a reasonable risk premium of c3.5% over gilts at 31 March 2011. It is within the range of assumptions typically used by companies of a similar size. This return assumption is also applied to the equity leg on equity total return swaps. The liability leg cost assumption is based upon medium term LIBOR yields. The expected rate of return on bonds of 5.2% is based upon the gross redemption yields available on a similar profile of gilts and corporate bonds.
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.
In 2010 the Government announced that in future salary increases to deferred pensions (in excess of guaranteed minimum pensions ('GMPs') and to GMPs accrued after 6 April 1988 will be linked to the Consumer Prices Index ('CPI') instead of the Retail Prices Index ('RPI'). In the second half of the year ended 31 March 2011, having reviewed the Scheme rules and previous communications with members, the Trustee and Company concluded that no constructive obligations had been created counter to the Scheme rules and that therefore those rules would apply. Under the Scheme rules RPI continues to be applied for pensions in payment but in future, statutory increases shall be applied for the majority of deferred members (being CPI). The result of this change, which was communicated to members, was to reduce future pension inflation assumptions for deferred members when determining scheme liabilities. The impact was to reduce scheme liabilities by approximately £40 million. The impact of this change, along with other actuarial valuation movements, was taken to other comprehensive income in the year ended 31 March 2011.
12 Related party transactions
The Group's only significant related party is its associate, Wexford Creamery Limited ('WCL'). During the period ended 30 September 2011 the Group purchased cheese at a cost of £4.5 million from WCL (September 2010: £2.7 million; March 2011: £6.1 million).
13 Post balance sheet events
On 11 October 2011, the Group paid the £7.1 million penalty resulting from the Office of Fair Trading's investigation into Dairy Retail Price Initiatives. This final payment was in line with the amount provided at 31 March 2011, which was originally charged in the year ended 31March 2008.
On 12 October 2011, the Group entered into a new five year revolving credit facility of £170 million plus €150 million with a syndicate of five banks. Furthermore, the Group has raised a further $85 million (£54.5 million) by way of a debt private placement with US investors. The placement funds will be drawn on 30 November 2011 and comprise a mix of 7 year and 10 year maturities. All principal and interest cash flows on these loan notes have been swapped into Sterling at an exchange rate of 1.56 and interest rates of 3.87% and 4.52% on the 7 year and 10 year notes respectively. The existing £100 million and £85 million plus €175 million revolving credit facilities were cancelled and repaid on 19 October 2011 using funds drawn under the new facility. Overall facilities after this refinancing are broadly unchanged and key financial covenants are unaffected on both bank facilities and loan notes. Up front fees for the new bank facility total £2.6 million (paid October 2011) and margins at a net debt to EBITDA ratio of 2.0 to 2.5 times are 135 basis points.
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 to 30 September 2011, and their respective responsibilities, can be found on pages 10 and 11 of the 2011 Annual Report and Accounts.
On 10 October 2011, it was announced that Sue Farr would be appointed to the Board as a non-executive director on 1 November 2011.
By order of the Board
M Allen A S N Murray
Chief Executive Finance Director
9 November 2011 9 November 2011
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 behavior 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 2011 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 2011 Annual Report and Accounts on pages 16 to 17.
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 2011 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 13. 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 ISRE 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 Services 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 2011 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 Services Authority.
Ernst & Young LLP
London
9 November 2011