Dairy Crest Regulatory News (DCG)

Dairy Crest Group plc ("Dairy Crest")

Interim Results Announcement

Dairy Crest today announces its unaudited results for the six months ended 30 September 2012:

1 amounts exclude the discontinued St Hubert business, sold in August 2012

2 from continuing operations, before exceptional items, amortisation of acquired intangibles and pension interest

·; Much improved financial position following successful disposal of St Hubert

- St Hubert sold for €430 million, generating a post-tax profit on sale of £47.7 million

- Balance sheet transformed. Net debt: EBITDA ratio 0.7x (2011: 2.4x)

- Well placed to make targeted, value-enhancing acquisitions in the UK

·; Strong performance from key brands and new products

- UK Spreads and Cheese sales jointly up 3%

- Four key brands together recorded double digit volume and value growth

- New products, Chedds and FRijj the Incredible, now firmly established

- Further innovation planned for second half

- Increased A&P investment to maintain momentum - all four brands on television in the period

·; Accelerated efficiency cost savings

- Ongoing costs discipline throughout business

- Annual cost savings ahead of £20 million target

·; Dairies profits lower in continuing difficult trading environment

- Sales down 11% in line with strategy to reduce exposure to this sector

- Milk price support for supplying farmers in challenging times

- On track with clear plan to restore 3% return on sales in the medium term

Mark Allen, Chief Executive, said:

"Dairy Crest has had a busy first six months as we continued to navigate a challenging trading environment. The decisive actions we have taken during the period leave us well placed as we move forward.

The sale of St Hubert has created a more focused business and a much stronger balance sheet. We now have the ability to make UK acquisitions, but we will take time to ensure that any transaction creates value for our shareholders.

Despite the challenging environment we have continued to grow our key brands. We have reduced our cost base and made improvements to our Dairies business. We expect this to benefit future profitability.

We remain confident that full year performance will be in line with our expectations."

For further information:

A video interview with Mark Allen will be available from 07:00 (UK time) from the investor section of the Group's website investor.dairycrest.co.uk. There will be an analyst and investor meeting at 8.45 (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.

Much improved financial position

Earlier in the year we announced our intention to refocus our business on the UK by selling our French Spreads business, St Hubert. The disposal was completed during the period for a consideration of €430 million. The price achieved reflects the increased profits and market share that the business achieved under our ownership. Following the disposal our financial position is much improved and our net debt position at the end of the period was £75.8 million, down from £365.3 million at 30 September 2011. In the normal course of business and in line with seasonal trends we expect net debt to reduce further during the next six months and that net debt at 31 March 2013 will be around £60 million depending on the timing of customer receipts (31 March 2012: £ 336.4 million).

We recorded a post-tax profit on sale of £47.7 million on this transaction. Following the sale, the Financial Statements have been restated to exclude St Hubert from continuing operations and the post-tax St Hubert results have been separately disclosed as discontinued.

Our aim in deploying the cash received from the transaction will be to preserve the Group's capacity to make targeted acquisitions in the UK, while providing appropriate long-term funding for the pension fund and driving towards a more efficient debt structure.

We recognise our shareholders value the income they receive from Dairy Crest and, despite the initial dilution arising from the disposal of St Hubert, we have maintained our interim dividend at 5.7 pence.

Operating review

During the first six months of 2012/13 Dairy Crest has worked hard to balance the needs of consumers who are under ongoing financial pressure, a fiercely competitive retail environment and a difficult summer for our dairy farmers.

In line with our strategy we have continued to focus on growing our key brands, innovation and driving efficiencies across the business. 

Key brands grow strongly and UK sales mix improves

Total sales of our four key brands (Cathedral City, Country Life, Clover and FRijj) were up 11% compared to the same period last year, driven primarily by increased volumes of 10%.

Cathedral City (£250 million), Clover (£100 million) and FRijj (£50 million) have all achieved significant retail sales milestones in the period.

We have continued to support these brands with increased advertising spend compared to the first half of last year. All four, together with milk&more, were advertised on television in the period - the first time that this has happened.

In line with our commitment to innovation we have recently launched two more new products, Cathedral City Selections and Caramel Latte FRijj. Initial sales are promising.

We have seen pleasing growth in the sales of two new products launched last year, Chedds and FRijj the Incredible. We are also encouraged by the performance of FryLight which we acquired last year.

Weekly milk&more sales and customer numbers remain steady at around £1.2 million and 200,000 respectively.

Despite this strong branded sales performance overall Group sales are down 7%, reflecting lower milk and ingredients sales and cream realisations. Sales in the Cheese and UK Spreads businesses together increased by 3% whereas those in our Dairies business fell by 11%. This is in line with our plans to create a smaller, more sustainable, Dairies business.

Annual cost reductions ahead of £20 million target

Cost reduction remains an important part of our strategy, and in the six months ended 30 September 2012 we have made good progress to improve efficiency across the business.

In our Dairies business we have closed two dairies at Aintree, Liverpool and Fenstanton, Cambridgeshire and 23 depots since the start of the financial year. We have also entered the final phase of the rationalisation of administration in the remaining depots and will complete this in the second half of the year and have closed our Sunbury distribution hub, with these operations moving to our National Distribution Centre at Nuneaton.

The rationalisation of our Dairies manufacturing footprint has been facilitated by our three-year, £75 million capital expenditure programme for our liquid milk dairies. This will be completed in the second half on time and on budget. This investment, which includes new high-speed filling lines, increased coldstore capacity and expanded FRijj processing, has improved operating costs, service and quality in our four remaining dairies and will lead to further improvements over time.

Following the successful transfer of all Clover production from Crudgington, Shropshire to Kirkby, Liverpool (which will deliver financial benefits in the second half of the year) we announced in September 2012 our intention to consult with employees at Crudgington on plans to consolidate all of our spreads production into Kirkby. As a result our site in Crudgington will potentially close in 2014.

We continually seek further cost reductions and have achieved savings in milk collection, packaging and vehicle servicing contracts in the period.

As a result we expect to achieve cost savings ahead of our ongoing annual target of £20 million this year.

Building a profitable, sustainable Dairies business

We are committed to creating a sustainable Dairies business. Despite a difficult first half we remain on track to achieve a 3% return on sales in the medium term.

This business will be based around an efficient network of dairies supplying milk to customers who are prepared to pay fair prices; a profitable and growing brand, FRijj; other added value products; and a home delivery business providing great customer service.

We also remain committed to our farmers from whom we need a strong and secure milk supply and to whom we will pay fair prices.

We have backed up our commitments with decisive actions in the period. As noted above we have significantly reduced our cost base and rationalised our milk processing capability on the back of long-term capital investment.

This rationalisation has allowed us to reduce our exposure to less profitable customers and successfully implement milk selling price increases. This is a critical development in restoring margins in the second half of the year.

Since the period end we have also launched a smaller-sized, longer life, FRijj milkshake which will allow us to grow this brand in the convenience market and accelerate the strong growth achieved over recent years.

The increasing financial pressures that consumers are facing have led to a fall in the number of customers to whom our milkmen deliver. Despite this difficult background, our internet-based service, milk&more has maintained customer numbers and sales. We continue to enhance the milk&more service and have updated our website and improved the performance of our customer call centre.

To support our farmers we have adopted a newly introduced industry voluntary code of practice on contracts and are pioneering the development of an agreed transparent formula to determine the price we pay our farmers for their milk. We have also increased the price we pay them for their milk since the period end, reflecting higher selling prices and recent improvements in commodity markets, and are doing more to support them in areas such as herd health and on-farm efficiency.

We expect the actions our Dairies business is taking will lead to increased profits from this business in the second half towards a 3% return on sales in the medium term.

Financial review

Group revenue of £688.2 million excludes revenue from the St Hubert business and is a 7% reduction from last year predominantly reflecting lower milk volumes in our Dairies segment.

Group pre-exceptional profit from continuing operations fell 10% to £29.4 million (2011: £32.7 million).

Property profits, arising from an ongoing programme of sales of delivery depots that we no longer require, were £4.8 million in the six months ended 30 September 2012 (2011: £4.6 million).

Exceptional restructuring costs of £29.7 million are significantly higher than the £2.7 million incurred last year, however we recorded a post-tax profit of £47.7 million on the disposal of St Hubert in August 2012. This gain along with the post-tax results of the St Hubert business have been classified as discontinued operations in the Group consolidated income statement and prior year numbers have been restated accordingly.

Summarised segmental performance

* Profit on operations and share of associates before amortisation of acquired intangibles of £0.2 million (2011: £0.3 million) and exceptional items of £29.7 million (2011: £2.7 million).

Cheese

Revenues have increased by 10% reflecting growth in Cathedral City volumes and higher selling prices. Profits have decreased slightly from £16.5 million in 2011 to £15.6 million in 2012. This was expected following increased milk costs in 2011 and also higher investment in advertising this year.

Spreads

Spreads now comprises only the UK spreads business. Revenue of £97.5 million represents a 3% decline due to lower selling prices and reduced non-key brand volumes. However margins have improved from 10.6% to 12.2% with profits 11% higher at £11.9 million. Clover production was successfully transferred from Crudgington to Kirkby in the half.

Dairies

The 10.7% decline in Dairies revenues reflects the lower fresh milk volumes in this business following the decision to close the dairies at Liverpool and Fenstanton together with reduced ingredients volumes and realisations. We supported our farmers who faced difficult weather and higher animal feed costs by maintaining our milk prices despite lower commodity returns, particularly for cream. This adversely affected profits in this division in the period which, including property profits of £4.8 million, amounted to £2.1 million.

Other items - continuing operations

Finance costs of £10.3 million are marginally higher than last year reflecting higher levels of net debt up until the 28 August when the St Hubert business was sold. The sales proceeds were used to repay amounts drawn under revolving credit facilities but we have a significant level of fixed-term loan note funding and therefore in the short-term have significant cash balances on deposit where returns are low.

Group adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was £19.1 million, down 16% versus £22.7 million in 2011.

Exceptional costs of £29.7 million arise predominantly from the level of restructuring being undertaken in our Dairies business in order to improve future returns. We have incurred £12.6 million in relation to the closures of Liverpool and Fenstanton and a further £4.4 million on the final phase of rationalisation of administration functions across our depot network.

In our Spreads segment we incurred costs of £2.4 million in relation to the consolidation of Clover manufacture into one site at Kirkby. Furthermore, following our announcement in September 2012 to consult with employees on consolidating all UK Spreads manufacture onto one site at Kirkby, we have impaired property, plant and equipment at Crudgington by £10.3 million (a non-cash charge).

The total cash cost of these exceptional items in the first half was £14.7 million.

The pre-exceptional tax expense of £4.2 million represents an effective tax rate of 19% based on expectations for the full year. This UK rate benefits from property profits which do not attract tax due to rollover relief and significant brought forward capital losses. Cash tax payments are considerably lower than this as pension contributions of £20 million per annum are tax deductible but do not impact the effective tax rate. The equivalent full year effective tax rate for 2011/12 was 19.5%.

Discontinued operations

Discontinued operations includes the post-tax results from St Hubert as well as the exceptional gain on disposal of this business. The post-tax results include amortisation of acquired intangibles in relation to St Hubert but do not include any interest costs on the debt used to fund the acquisition as all interest costs were paid in the UK.

Overall performance

The significant gain on disposal of £47.7 million results in an overall Group profit for the period of £49.3 million, up £19.4 million on the same period last year.

Basic earnings per share of 37.0 pence were up 65% in line with the profit for the period. Adjusted basic earnings per share of 11.7 pence represents a 20% reduction in the half, consistent with the reduction in adjusted profit before tax.

The directors have declared an interim dividend of 5.7 pence per share, unchanged from 2011.

Balance sheet

Group net debt amounted to £75.8 million at 30 September 2012 reflecting the disposal proceeds from St Hubert. As normal, we have seen a working capital build in the first half of the year with stocks (adjusted for St Hubert) increasing by £20 million, most of which relates to increased cheese stocks to support future volume growth of Cathedral City. In addition, working capital at March 2012 benefited from the early settlement of invoices by certain customers which did not repeat in September.

The receipt of €430 million from the disposal of St Hubert has been used in part to repay drawdowns from our revolving credit facility, with the balance on short-term deposits.

The carrying values of goodwill (£74.3 million) and intangible assets (£29.3 million) are significantly reduced following the disposal of St Hubert.

The pension deficit reported under IAS 19 increased marginally in the first half to £83.8 million (March 2012: £79.8 million). We continue to make cash contributions of £20 million per annum and are in discussion with the Trustee as to the most appropriate levels of funding following receipt of the proceeds from the sale of St Hubert.

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 and 17 of the 2012 Annual Report and Accounts. Related party transactions are given in note 12 to the consolidated financial information.

Summary and outlook

Dairy Crest has had a busy first six months as we continued to navigate a challenging trading environment. The decisive actions we have taken during the period leave us well placed as we move forward.

The sale of St Hubert has created a more focused business and a much stronger balance sheet. We now have the ability to make UK acquisitions, but we will take time to ensure that any transaction creates value for our shareholders.

Despite the challenging environment we have continued to grow our key brands. We have reduced our cost base and made improvements to our Dairies business. We expect this to benefit future profitability.

We remain confident that full year performance will be in line with our expectations.

Mark Allen

Chief Executive

8 November 2012

Consolidated income statement

(unaudited)

As a result of its disposal, the results of the St Hubert business have been classified as discontinued operations and prior period comparatives have been restated accordingly. The post-tax profit relating to discontinued activities is further analysed in Note 9.

* Adjusted earnings per share calculations exclude exceptional items, amortisation of acquired intangibles, discontinued operations and the pension interest in relation to the defined benefit pension scheme.

A final dividend of £19.6 million (14.7 pence per share) was paid in the period to 30 September 2012 (2011: £18.9 million; 14.2 pence per share). A dividend of £7.8 million (5.7 pence per share) was approved by the Board on 7 November 2012 for payment on 24 January 2013 (2011: £7.6 million; 5.7 pence per share). See Note 7.

Consolidated statement of comprehensive income

(Unaudited)

Consolidated balance sheet

(Unaudited)

The interim results were approved by the Board of directors on 7 November 2012.

Consolidated statement of changes in equity

(Unaudited)

All amounts are attributable to owners of the parent.

Consolidated cash flow statement

(Unaudited)