Dairy Crest Regulatory News (DCG)

10 Nov 2005 07:01

Dairy Crest Group PLC10 November 2005 10 November 2005 Dairy Crest Group plc ("Dairy Crest") Interim Results Announcement Dairy Crest today announces its unaudited results for the six months ended 30September 2005: Half year ended 30 September ---------------------------------- Financial Highlights: 2005 2004----------------------- ------- ------- • Group Revenue: £641.9m £630.5m • Profit before tax: £17.0m £32.0m • Adjusted profit before tax*: £26.1m £35.7m • Earnings per share: 12.3p 20.6p • Adjusted earnings per share*: 14.8p 20.8p • Half year net debt: £301.2m £260.5m • Interim dividend: 6.3p 5.9p * Including share of joint ventures and before special items and amortisation ofintangible assets Business Highlights: • First half results in line with expectations reflecting last year's changes in the fresh milk sector. No change to expectations for the full year • Interim dividend increased by 7% • Strong performance from Cathedral City, Clover and Petits Filous • Cheese business benefiting from strong Cathedral City growth and firmer market prices • New marketing campaigns launched for Country Life and for St. Ivel advance Omega-3 milk ("Clever milk") • Planned launch of Omega-3 enriched St. Ivel Gold early in 2006 • Additional fresh milk volume for Morrisons implemented at end of October 2005 • Strategic acquisitions of Midlands Co-op Dairies and Starcross Foods to strengthen the Dairies division with integration progressing to plan Drummond Hall, Chief Executive, Dairy Crest Group plc said: "Dairy Crest has delivered first half results in line with market expectations.We have had a good first half in the Foods division. The Dairies division hasbeen strengthened by acquisitions and we expect the full benefits to comethrough towards the end of the current financial year. We continue to makeprogress in developing our portfolio of brands in both the Foods and Dairiesdivisions with particular recent focus on new product activity in dairyfunctional foods. Overall, although trading conditions are competitive with oil-related costscontinuing to be high, the Group's expectations for the full year remainunchanged." For further information: Dairy Crest Group plc Tel: 01372 472200Drummond Hall, Chief ExecutiveAlastair Murray, Finance Director Will Shaw, Investor RelationsSinead Noble, Corporate Communications Brunswick Tel: 020 7404 5959William Cullum / Laura Cummings Operating and Financial Review The Group has delivered first half results in line with market expectations withadjusted profit before tax (including share of joint ventures and before specialitems and amortisation of intangible assets) of £26.1 million reflecting theadverse impact on the Dairies division of last year's changes in the fresh milksector. The Group continues to invest in the long-term development of its brandportfolio with increased marketing expenditure, while putting strong emphasis ona continuous programme of cost reduction. During the first half the Group madestrategic acquisitions to strengthen the Dairies division. The Foods divisionhas continued to make good progress with particularly strong brand growth fromCathedral City. We have also made a major investment in a new marketing campaignfor the Country Life brand which we believe represents a significant long termopportunity for the Group. Whilst trading conditions remain competitive, with the recovery of higher oilrelated costs being challenging, performance in the second half is expected tobenefit from the cheese price increases achieved in the first half, continuedbrand progress and the integration of the recent strategic dairy acquisitions. Financial Review For the first time, the results of Dairy Crest have been prepared in accordance with International Financial Reporting Standards ('IFRS') that are expected to be applicable to the Group as at 31 March 2006 (the closing balance sheet date for the financial year). The financial information for the six months ended 30 September 2004 and for the year ended 31 March 2005, reconciled to those previously reported under UK GAAP, together with our accounting policies under IFRS, are available on our website www.dairycrest.co.uk. All comparative financial information included in this interim report has been restated under IFRS. This information may be subject to change if further standards or interpretation are issued before the year end. The impact of conversion to IFRS has had no cash impact. The Group achieved half-year revenue of £641.9 million against £630.5 million inthe comparable period last year. The main movements were the inclusion ofrevenue from Midlands Co-op Dairies following its acquisition in May partiallyoffset, as expected, by lower revenue from major retail fresh milk. Includingshare of joint ventures, Group revenue was flat at £676.2 million (2004: £676.4million). This reflects lower Yoplait Dairy Crest revenue following the closureof its own label operations in June 2005. Adjusted trading profit (including share of joint ventures and before specialitems and amortisation of intangible assets) was £33.1 million (2004: £44.2million). As expected the Dairies division has started the year from a lowerbase level of profitability following changes in retail supply arrangementsacross the industry in 2004/05. Special items represent acquisition integrationcosts of £4.1 million relating to the acquisitions of Midlands Co-op Dairies andStarcross Foods. In the second half, as expected, we will incur furtheracquisition integration cash costs relating to these acquisitions and theacquisition of the London Foodservice business of Arla Foods UK plc in October2005. The net finance costs (interest) of £7.1 million (2004: £8.4 million) reflectsthe benefit of lower net debt at the beginning of the period offset by thefinancing of the acquisitions in May 2005 referred to above. It also includesnet finance income of £1.0 million (2004: £0.2 million) from the Group's pensionschemes following adoption of IAS19. The Group's adjusted profit before tax was £26.1 million (2004: £35.7 million).The income tax expense was £4.5 million and represents an effective tax rate ofjust over 27% on adjusted profit before taxation. Basic earnings per share were12.3 pence (2004: 20.6 pence). Adjusted earnings per share were 14.8 pencecompared to 20.8 pence last year. The directors have declared an interim dividend of 6.3 pence per share, whichrepresents an increase of 7% over the dividend of 5.9 pence per share last year.The dividend will be paid on 31 January 2006 to shareholders on the register at16 December 2005. Group net debt amounted to £301.2 million at September 2005, reflecting a netcash outflow of £73.7 million. Acquisition expenditure in the first halfamounted to £38.9 million and capital expenditure amounted to £21.3 million.There was a net working capital outflow of £26.4 million reflecting the normalseasonal trends of milk flows on cheese stocks and the impact of milk costincreases in the period. We expect some reduction in working capital in thesecond half of this financial year. In July the Group announced that it would be closing its final salary pensionscheme to new employees joining after 1 April 2006. The pension deficit in theDairy Crest Group Pension Fund under IAS19 at the end of the first half was£101.1 million compared to a deficit at 31 March 2005 of £100.4 million. Thisreflects a strong performance from the fund's investments which increased by£57.5 million in the half year offset by an increase in the present value ofliabilities caused by a reduction of 0.4% in the yield on AA corporate bonds. Business Operations Foods We have continued to make progress across our portfolio of key brands in theFoods division which achieved a 3% increase in adjusted trading profit(including share of joint ventures and before special items and amortisation ofintangible assets) of £28.9 million (2004: £28.1 million) on revenue of £288.0million (2004: £304.2 million) producing a trading margin of 10.0% (2004: 9.2%).This strong margin improvement has been achieved whilst continuing to invest inhigher levels of marketing expenditure to further strengthen our brands in thefuture. The butter and spreads market is showing modest value growth of 3% despite asmall volume decline of 1%. The sectors of strongest growth continue to bespreadable butter and specific health, with growth of 11% and 10% respectivelyby value, where we are currently under represented but where we see asignificant future opportunity for the Group Overall, our key spreads brands Clover, Utterly Butterly, Country Life and St.Ivel Gold have maintained market share in the first half. We continue to workwith our customers to move towards a more simplified and focused portfolio andhave removed some smaller brands. Whilst this had some impact on performance inthe short term we would expect to benefit in the longer term as our key brandsgain increased share of shelf space. Clover, our premium spreads brand, has performed well with sales value growth of3% and remains the clear market leader in the dairy spreads sector. Our strategyto reduce the level of promotional support for Clover and invest more in mediahas delivered good margin improvement. Utterly Butterly, whilst declining by 4%in value, has seen sales volume growth of 4% and continues to perform wellagainst its principal competitor increasing its market share of dairy spreads. St. Ivel Gold has been under pressure from some strong competitor activity withsales down 14% by value and 2% by volume. We are focusing our activity in thegrowing specific health sector and in January we will be launching a newfunctional variant of St. Ivel Gold with Omega-3 together with a new marketingcampaign. Country Life Spreadable and packet butter delivered a strongperformance in the first half with sales up 15% and 4% by value respectively. Welaunched the first national TV advertising for the Country Life brand in 20years in August 2005. Initial response to the advertisement has been good and weexpect the strong performance of this brand to accelerate in the second half. The cheese market has continued to grow with value and volume growth of 3% and2% respectively. Within the cheddar market the mature and extra mature sector isgrowing well, up 7% by value, and continuing to gain share. Cathedral City has delivered another strong performance, continuing to growmarket share, with sales growth of 16%. As with Clover we have been reducing thelevel of Cathedral City sold on promotion and increasing the level of mediainvestment, with a new television advertisement. This has led to good marginimprovement. We have also strengthened our own label cheese business and duringthe half we successfully implemented new own label cheese supply arrangementswith both ASDA and Morrisons. This has significantly increased our volumes withboth retailers and reinforced our market leading position in cheddar. Stilton,where Dairy Crest also has a market leading position, continues to be achallenging market. The cheese business achieved price increases on both branded and own labelcheese during the summer. This should lead to a good second half performancefrom the cheese business, particularly as industry stocks continue to berelatively tight. The price increase also enabled us to increase raw milk pricesto producers on cheese contracts by 0.8 pence per litre. The cheese business isalso benefiting from a strong market for whey products. Yoplait Dairy Crest's performance has been strong, resulting from good brandgrowth, up 9% by value, and the benefit from the closure of the own-labeloperations at Enfield and Yeovil in June 2005. Petits Filous and Frubes were thebest performing brands with sales growth of 24% and 30% respectively. YoplaitDairy Crest continues to invest in additional marketing activity and in newproduct development. During the half both a Petits Filous smooth fruity yogurtand Petits Filous Plus, a probiotic drinking yogurt for children, were launched. Dairies Dairies achieved an adjusted trading profit (before special items andamortisation of intangible assets) of £4.2 million (2004: £16.1 million) onrevenue of £388.2 million (2004: £372.2 million) giving an operating margin of1.1% (2004: 4.3%). This margin performance reflects the adverse impact of lastyear's changes in the fresh milk sector and the Group is focused on improvingthe profitability of the Dairies division going forwards. The retail milk market continues to grow modestly, benefiting from priceincreases, with sales up 3%. As expected, Dairy Crest's fresh milk volumes tomajor retailers were down in the first half. Volumes in the second half willbenefit from the additional fresh milk business gained from Morrisons, whichcommenced at the end of October. We took action in May to strengthen the Dairiesdivision through the acquisitions of Midlands Co-op Dairies and Starcross FoodsLimited. The integration of these businesses is progressing to plan with thefull benefits coming through towards the end of the financial year following theplanned closure of the Birmingham dairy at the end of February 2006. We have seen strong growth in our organic milk business with total sales up over50% reflecting the increasing demand in the marketplace for organic products.Rachel's brand (under licence from Horizon Organic Dairies) continues to be themarket leader in organic milk with sales up 38% by value. Frijj, our flavouredfresh milk brand, has maintained its market leading position although salesdeclined by 9% due to a more limited level of promotional activity reflectingcapacity constraints. Potted cream volumes were up by over 30% reflecting thetransfer of own label cream to our new cream operations at Chard from YoplaitDairy Crest's Enfield site, which closed in June. In May 2005 we launched "St. Ivel advance", a branded milk enriched withOmega-3, which has now achieved distribution across all of the major retailers.Whilst it is still too early to evaluate, initial customer reaction to the brandhas been good. We are pleased that Professor Winston has agreed to be aspokesperson for the brand and a television advertising campaign has just beenlaunched promoting the brand as "Clever milk". The household business has performed in line with our expectations. Overallhousehold milk volumes were up 22% benefiting from the Midlands Co-op Dairiesacquisition. The underlying annual decline rate in our doorstep businesscontinues at around 8%. This reflects the ongoing canvassing activity andsuccessful "first class service" initiatives. In September we implemented a costrelated price increase for doorstep customers of 2 pence per pint which willbenefit second half performance. Non-milk product sales were up 17% half onhalf. As part of our ongoing strategy of infill acquisitions we acquired theLondon Foodservice business of Arla in October 2005. In our ingredients business the markets for skimmed milk powder and butterremained strong during the first half although this benefit was offset by highercost prices of raw milk. Milk procurement We continue to work with Dairy Crest Direct and our other milk suppliers todeliver a sustainable long-term future for the industry. Around 70% of our milknow comes from direct suppliers and we are pleased that a large majority of theHeart of England producers who supplied Midlands Co-op Dairies have now joinedas direct producers for Dairy Crest. During the first half raw milk prices wereraised on both liquid and cheese contracts to reflect price rises achieved frommany of our customers. After discussions with Dairy Crest Direct, raw milkprices on liquid contracts were reduced by 0.3 pence per litre from August and afurther 0.275 pence per litre from November to reflect the weakness in commoditymarket prices, particularly for cream. We have agreed to maintain this liquidmilk price until March 2006 to provide greater stability for our producers. Dairy Crest has become subject to an Office of Fair Trading ("OFT") Inquiryunder Chapter 1 of the Competition Act 1998 in relation to so called "retailprice initiatives" for dairy products. We are cooperating fully with the OFT inthis inquiry and will address any concerns they may have. Outlook Dairy Crest has delivered first half results in line with market expectations.We have had a good first half in the Foods division. The Dairies division hasbeen strengthened by acquisitions and we expect the full benefits to comethrough towards the end of the current financial year. We continue to makeprogress in developing our portfolio of brands in both the Foods and Dairiesdivisions with particular recent focus on new product activity in dairyfunctional foods. Whilst trading conditions remain competitive, with the recovery of higher oilrelated costs being challenging, performance in the second half is expected tobenefit from the cheese price increases achieved in the first half, continuedbrand progress and the integration of the recent strategic dairy acquisitions.Overall the Group's expectations for the full year remain unchanged. Dairy Crest Group plcConsolidated income statement(unaudited) Year ended Half year ended 30 September 2005 Half year ended 30 September 2004* 31 March Before Special Total Before Special Total 2005* special items special items items items £m £m £m £m £m £m £m ------- ------ ------ ------ ------ ------ ------ 1,260.6 Group revenue 641.9 - 641.9 630.5 - 630.5 (1,177.3) Operating costs (613.7) (4.1) (617.8) (589.6) (1.1) (590.7) ------- ------ ------ ------ ------ ------ ------ 83.3 Trading profit 28.2 (4.1) 24.1 40.9 (1.1) 39.8 Profit on disposal 0.7 of closed sites - - - - 0.6 0.6 ------- ------ ------ ------ ------ ------ ------ Profit from operations before net finance 84.0 costs and tax 28.2 (4.1) 24.1 40.9 (0.5) 40.4 0.3 Finance income 1.0 - 1.0 0.2 - 0.2 (16.4) Finance costs (8.1) - (8.1) (8.6) - (8.6) ------- ------ ------ ------ ------ ------ ------ 67.9 Profit before tax 21.1 (4.1) 17.0 32.5 (0.5) 32.0 (18.6) Income tax expense (5.6) 1.1 (4.5) (8.7) 0.3 (8.4) ------- ------ ------ ------ ------ ------ ------ 49.3 Profit after tax 15.5 (3.0) 12.5 23.8 (0.2) 23.6 Share of joint 2.3 ventures' net profit 3.2 - 3.2 2.2 - 2.2 ------- ------ ------ ------ ------ ------ ------ Group profit 51.6 for the period 18.7 (3.0) 15.7 26.0 (0.2) 25.8 ======= ====== ====== ====== ====== ====== ====== Profit attributable 0.5 to minority interests 0.4 - 0.4 0.4 - 0.4 Profit attributable to equity 51.1 shareholders 18.3 (3.0) 15.3 25.6 (0.2) 25.4 ------- ------ ------ ------ ------ ------ ------ Group profit 51.6 for the period 18.7 (3.0) 15.7 26.0 (0.2) 25.8 ======= ====== ====== ====== ====== ====== ====== 67.9 Profit before tax 21.1 (4.1) 17.0 32.5 (0.5) 32.0 Amortisation - of intangible assets 0.3 - 0.3 - - - ------- ------ ------ ------ ------ ------ ------ Adjusted profit 67.9 before tax 21.4 (4.1) 17.3 32.5 (0.5) 32.0 Share of joint ventures' profit 3.4 before tax 4.7 - 4.7 3.2 - 3.2 ======= ====== ====== ====== ====== ====== ====== Adjusted Group profit before tax (including share of 71.3 joint ventures) 26.1 (4.1) 22.0 35.7 (0.5) 35.2 ======= ====== ====== ====== ====== ====== ====== Basic earnings per 41.4 share (p) 12.3 20.6 Adjusted earnings per 43.9 share (p) 14.8 20.8 Diluted earnings per 1.0 share (p) 12.2 20.3 *Results are restated for the impact of transition to International FinancialReporting Standards. See note 1. A final dividend of £17.8 million (14.3p per share) was paid in the period to 30September 2005 (2004 - £16.5 million; 13.4p per share). A dividend of 6.3p pershare was approved by the Board on 9 November 2005 for payment on 31 January2006. See note 4. Dairy Crest Group plcConsolidated balance sheet(unaudited) 31 March 30 September 2005* 2005 2004* £m Note £m £m ------- ---------------------------------- -------- ------- ASSETS 110.4 Goodwill 130.3 106.8 - Intangible assets 4.7 - 317.0 Property, plant and equipment 334.6 310.1 36.2 Deferred tax asset 36.4 35.1 Investment in joint ventures using 5.2 equity method 8.4 5.0 ------- ---------------------------------- -------- ------- 468.8 514.4 457.0 ------- ---------------------------------- -------- ------- Current assets 124.0 Trade and other receivables 132.8 120.2 172.7 Inventories 196.2 196.6 - Financial assets 0.1 - 27.2 Cash and cash equivalents 10.5 10.4 ------- ---------------------------------- -------- ------- 323.9 339.6 327.2 ------- ---------------------------------- -------- ------- 792.7 TOTAL ASSETS 854.0 784.2 ======= ---------------------------------- ======== ======= Non-current liabilities (254.4) Borrowings (301.9) (263.3) (102.7) Retirement benefit obligations (103.4) (104.3) (38.2) Deferred tax liability (39.5) (34.3) (11.4) Deferred income (11.2) (10.7) ------- ---------------------------------- -------- ------- (406.7) (456.0) (412.6) ------- ---------------------------------- -------- ------- Current liabilities (147.9) Trade and other payables (157.1) (153.7) - Financial liabilities (1.3) - (16.3) Current tax liabilities (9.1) (15.0) (0.3) Borrowings (9.8) (7.6) (0.9) Deferred income (0.9) (0.7) ------- ---------------------------------- -------- ------- (165.4) (178.2) (177.0) ------- ---------------------------------- -------- ------- (572.1) TOTAL LIABILITIES (634.2) (589.6) ------- ---------------------------------- -------- ------- EQUITY Equity attributable to equity holders of the parent (31.2) Ordinary shares 7 (31.3) (31.0) (28.2) Share premium account 7 (28.7) (24.9) (55.9) Merger reserve 7 (55.9) (55.9) 1.6 Interest in ESOP 7 1.5 2.2 - Hedging and translation reserve 7 1.3 - (97.1) Retained earnings 7 (96.6) (75.0) ------- ---------------------------------- -------- ------- (210.8) Total shareholders' equity (209.7) (184.6) ------- ---------------------------------- -------- ------- (9.8) Minority interests in equity 7 (10.1) (10.0) ------- ---------------------------------- -------- ------- (220.6) TOTAL EQUITY (219.8) (194.6) ------- ---------------------------------- -------- ------- (792.7) TOTAL EQUITY AND LIABILITIES (854.0) (784.2) ======= ---------------------------------- ======== ======= *Balance sheets are restated for the impact of transition to InternationalFinancial Reporting Standards. See note 1. The interim financial statements were approved by the directors on 9 November2005. Dairy Crest Group plcConsolidated cash flow statement(unaudited) Year ended Half year ended 30 September 31 March ------------------------------ 2005* 2005 2004* £m £m £m -------- ---------------------------------- --------- --------- Cash flow from operating activities Profit from operations before net 84.0 finance costs and tax 24.1 40.4 Adjustments for: 7.6 Pensions 3.8 4.1 - Amortisation of intangible assets 0.3 - (0.2) Special items 0.3 (0.1) (0.7) Profit on disposal of closed sites - (0.6) 33.9 Depreciation 18.4 16.6 (0.8) Release of grants (0.4) (0.3) 1.7 Share based payments 0.7 (0.3) Net profit on rationalisation of (3.1) household business (1.8) (2.3) (Increase)/decrease in working 20.6 capital (26.4) 6.6 -------- ---------------------------------- --------- --------- 143.0 Cash generated from operations 19.0 64.1 (17.7) Interest paid (8.4) (9.9) (12.6) Income tax paid (10.8) (4.5) -------- ---------------------------------- --------- --------- Net cash flow (used in)/from 112.7 operating activities (0.2) 49.7 -------- ---------------------------------- --------- --------- Cash flow from investing activities Payments to acquire fixed assets (37.7) (net of grants) (21.3) (13.9) Proceeds from disposal of fixed 8.2 assets 4.1 5.6 (9.9) Purchase of businesses (net of cash (9.9) acquired) (38.9) (5.4) 0.2 Receipt from sale of business - 0.2 -------- ---------------------------------- --------- --------- Net cash used in investing (39.2) activities (56.1) (13.5) -------- ---------------------------------- --------- --------- Cash flow from financing activities Increase/(decrease) in short-term (3.5) borrowings 8.9 4.1 Increase/(decrease) in long-term (57.2) borrowings 48.0 (30.0) (23.9) Dividends paid (17.8) (16.5) Proceeds from exercise of share 3.6 options 0.6 - 18.7 Proceeds from sale and leaseback - - (0.6) Finance lease repayments (0.1) - -------- ---------------------------------- --------- --------- Net cash from/(used in) financing (62.9) activities 39.6 (42.4) -------- ---------------------------------- --------- --------- Net (decrease)/increase in cash and 10.6 cash equivalents (16.7) (6.2) -------- ---------------------------------- --------- --------- Cash and cash equivalents at the 16.6 beginning of the period 27.2 16.6 -------- ---------------------------------- --------- --------- Cash and cash equivalents at the end 27.2 of the period 10.5 10.4 -------- ---------------------------------- --------- --------- *Cash flow statements are restated for the impact of transition to InternationalFinancial Reporting Standards. See note 1. Dairy Crest Group plcConsolidated statement of recognised income and expense(unaudited) Year ended Half year ended 30 September 31 March ----------------------------- 2005* 2005 2004* £m £m £m -------- ------------------------------------ -------- --------- Profit for the period attributable 51.1 to equity shareholders 15.3 25.4 Exchange differences on foreign 0.5 currency net investments (0.3) 0.3 Exchange differences on foreign (0.5) currency borrowings 0.3 (0.3) - Cashflow hedges (net of tax) (1.6) - Deferred tax on share based (0.4) payments - - (2.3) Actuarial gains/(losses) 2.0 (7.6) 0.7 Tax on actuarial (gains)/losses (0.6) 2.2 -------- ------------------------------------ -------- --------- Total recognised income and expense 49.1 for the period 15.1 20.0 ======== ------------------------------------ ======== ========= Segmental analysis(unaudited) Year ended 31 March 2005* Half year ended 30 September -------------- --------------------------Revenue Trading profit 2005 2005 2004 2004* before Revenue Trading profit Revenue Trading profit special before special before items items special items £m £m £m £m £m £m------- ------- ----------------- ------- ------- ------- ------- Analysis by Division 517.3 49.2 Foods 253.7 24.3 258.3 24.8 743.3 35.2 Dairies 388.2 3.9 372.2 16.1------- ------- ----------------- ------- ------- ------- -------1,260.6 84.4 Group 641.9 28.2 630.5 40.9------- ------- ----------------- ------- ------- ------- ------- Segmental analysis including share of joint ventures 517.3 49.2 Foods - Group 253.7 24.3 258.3 24.8 - Share of joint 88.2 7.5 ventures 34.3 4.6 45.9 3.3------- ------- ----------------- ------- ------- ------- ------- Foods including share of joint 605.5 56.7 ventures 288.0 28.9 304.2 28.1 743.3 35.2 Dairies 388.2 3.9 372.2 16.1------- ------- ----------------- ------- ------- ------- ------- Group and share of joint1,348.8 91.9 ventures 676.2 32.8 676.4 44.2 ======= ======= ----------------- ======= ======= ======= ======= In both the above tables trading profit for the half year ended 30 September2005 is stated after charging £0.3 million of amortisation on intangible assetsin Dairies. Trading profit for the year ended 31 March 2005 is stated afteradding back £1.1 million of special items in Foods. See note 2. *Results are restated for the impact of transition to International ReportingStandards. See note 1. Notes to the interim financial statements(unaudited) 1 Basis of preparation Dairy Crest Group plc has been required to adopt International FinancialReporting Standards ("IFRS") with effect from 1 April 2005. The results for thesix months ended 30 September 2005 represent the Group's first interim financialstatements prepared in accordance with its accounting policies under IFRS. TheGroup's first IFRS Annual Report and Accounts will be for the year ending 31March 2006. Previously the Group reported under UK generally accepted accountingprinciples ("UK GAAP"). Detailed UK GAAP to IFRS reconciliations of equity forthe date of transition, 1 April 2004, 30 September 2004 and 31 March 2005 and ofprofit for the six months ended 30 September 2004 and for the year ended 31March 2005 were issued on 7 November 2005 and are available on the Group'swebsite. A revised summary of the Group's accounting policies under IFRS is alsopublished in this document. These interim financial statements have been prepared by the Group using thosestandards it expects to be endorsed and applicable when the IFRS accounts areprepared for the year ending 31 March 2006. In particular the Directors haveassumed that the European Commission will endorse the amendment to IAS 19'Employee Benefits' issued by the International Accounting Standards Board("IASB") in December 2004 allowing actuarial gains and losses to be recognisedin full through reserves. These standards are subject to ongoing review andendorsement by the European Union or possible amendment by interpretive guidancefrom the IASB and the International Financial Reporting InterpretationsCommittee ("IFRIC") and are therefore still subject to change. Under the exemption available in IFRS 1, 'First-time Adoption of IFRS' the Grouphas not restated its results for the six months ended 30 September 2004 or theyear ended 31 March 2005 for the effect of IAS 32, 'Financial Instruments:Disclosure and Presentation' or IAS 39, 'Financial Instruments: Recognition andMeasurement'. Additional financial instruments of £0.3 million (net of deferredtax) have been recognised on the balance sheet from 1 April 2005 as reported inthe Group's IFRS reconciliations as published on 7 November 2005 and availableon the Group's website. The interim results are unaudited but have been reviewed by the auditors. Thefinancial information herein does not amount to full statutory accounts withinthe meaning of Section 240 of the Companies Act 1985. The figures for the yearto 31 March 2005 and 30 September 2004 have been extracted from the IFRSrestatements issued on 7 November 2005 which were themselves based on the AnnualReport and Accounts 2005 which has been filed with the Registrar of Companiesand the Interim Report 2004. The auditors have made a report under Section 235of the Companies Act 1985 on the statutory accounts for the year ended 31 March2005 which was unqualified and did not contain a statement under Section 237(2)or (3) of the Companies Act 1985. 2 Special items The special items are those items that the Group believes should be separatelydisclosed to assist in the understanding of the financial performance of theGroup. Year ended Half year ended 30 September 31 March ------------------------------ 2005 2005 2004 £m £m £m -------- ---------------------------------- ------- ------- Fixed asset write-downs (net of 0.2 grant release) - 0.1 - Redundancy costs (1.1) - (1.3) Other rationalisation costs (3.0) (1.2) -------- ---------------------------------- ------- ------- (1.1) (4.1) (1.1) -------- ---------------------------------- ------- ------- 0.7 Profit on disposal of closed sites - 0.6 -------- ---------------------------------- ------- ------- Share of joint venture's special items Share of joint venture's profit on 0.3 disposal of closed site - - Share of joint venture's write down of fixed assets and (1.2) consumables - - Share of joint venture's net loss on closure of site and related (3.1) rationalisation costs - - -------- ---------------------------------- ------- ------- (4.0) - - -------- ---------------------------------- ------- ------- Special items in 2005/06 relate to the Dairies segment and represent costs ofintegrating the acquisition of the dairy business of the Midlands Co-operativeSociety into the Group. Other rationalisation costs in 2005/06 principallyrelate to duplicate running costs, which will cease following the closure of thedairy at Birmingham. During 2004/05 the special items relate to the Foodssegment and represent commissioning costs of the new creamery at Davidstow. Share of joint venture's special items These special items have been deducted in arriving at the share of jointventures' net profit of £2.3 million for the year ended 31 March 2005. 3 Income tax expense The income tax expense for the half year ended 30 September 2005 has beencalculated on the basis of the estimated effective tax rate on profit for thefull year. The tax credit on the special items for the half year ended 30September 2005 was £1.1 million (2004 - £0.3 million). 4 Dividends The interim dividend of £7.9 million (6.3p per share) (2004 - £7.2 million; 5.9pper share) will be payable on 31 January 2006 to shareholders on the register on16 December 2005. This dividend is not reflected in the balance sheet as aliability at 30 September 2005 under IFRS. 5 Earnings per share Earnings per share for the half year ended 30 September 2005 has been calculatedon the basis of profit attributable to equity shareholders of £15.3 million(2004 - £25.4 million) and the weighted average number of shares in issue duringthe period, excluding those held by the Dairy Crest Employees' Share OwnershipPlan Trust and held as treasury shares which are treated as cancelled, totalling124.766 million (2004 - 123.358 million). To show earnings per share before special items, adjusted earnings per share hasbeen calculated as follows: Year ended Half year ended 30 September 31 March ----------------------------- 2005 2005 2004 £m £m £m --------- ---------------------------------- -------- -------- Profit attributable to equity 51.1 shareholders 15.3 25.4 3.8 Special items (net of tax) 3.0 0.8 Amortisation of intangible assets - (net of tax) 0.2 - Profit on disposal of closed sites (0.7) (net of tax) - (0.6) --------- ---------------------------------- -------- -------- 54.2 Adjusted earnings 18.5 25.6 --------- ---------------------------------- -------- -------- 43.9 Adjusted earnings per share (p) 14.8 20.8 --------- ---------------------------------- -------- -------- Diluted earnings per share has been calculated on the basis of earnings for thehalf year of £15.3 million (2004 - £25.4 million) and diluted number of sharesof 125.251 million (2004 - 124.954 million). 6 Business combinations On 5 May 2005 the Group acquired Starcross Foods Limited, a dairy in Foston,Derbyshire for a consideration of £17.1 million (including debt on acquisitionof £9.1 million). The fair value of the identifiable assets and liabilities ofthe business acquired is £11.6 million resulting in goodwill of £5.5 million. On 14 May 2005 the Group acquired the dairy business and assets of the MidlandsCo-operative Society for a cash consideration of £20.7 million including fees.The fair value of the identifiable assets and liabilities of the businessacquired is £7.9 million, including intangible assets of £3.0 millionrepresenting the value of customer contracts acquired with the business and cashof £0.1 million which, combined with other fair value provisions of £0.3 millionrelating to harmonisation of accounting policies, results in goodwill of £13.1million. The intangible assets will be amortised over the life of the relevantcontracts, which is on average 3 years. During the period ended 30 September 2005 the Group acquired the goodwill of anumber of bottled milk buyers for cash consideration of £1.3 million resultingin goodwill of £1.3 million. 7 Share capital and equity reserves Ordinary Share Merger Interest in Hedging and Retained Minority shares premium reserve ESOP translation earnings interests account reserve in equity £m £m £m £m £m £m £m ------ ------ ------ ------- ------- ------- ------At 31 March2005 (31.2) (28.2) (55.9) 1.6 - (97.1) (9.8)Financialinstrumentsrecognition - - - - (0.3) - - ------ ------ ------ ------- ------- ------- ------At 1 April2005 - asrestated (31.2) (28.2) (55.9) 1.6 (0.3) (97.1) (9.8) Shares issued (0.1) (0.5) - - - - - Actuarialgains (netof deferredtax) - - - - - (1.4) - Share basedpayments(netof deferred tax) - - - - - (0.7) - Hedgemovements(netof deferred tax) - - - - 1.6 - - Dividends - - - - - 17.8 - Profit forthe period - - - - - (15.3) (0.4) Exercise ofoptions - - - (0.1) - 0.1 - Exchangedifferences - - - - - - 0.1 ------ ------ ------ ------- ------- ------- ------ (31.3) (28.7) (55.9) 1.5 1.3 (96.6) (10.1) ------ ------ ------ ------- ------- ------- ------ 8 Movement in net debt Year ended Half year ended 30 September 31 March ----------------------------- 2005 2005 2004 £m £m £m -------- ---------------------------------- -------- -------- Net (decrease)/increase in cash and 10.6 cash equivalents (16.7) (6.2) 60.7 (Increase)/decrease in borrowings (56.9) 25.9 Decrease/(increase) in finance (18.1) leases 0.1 - - Increase in loan notes (0.6) - (1.0) Exchange differences 0.4 (0.5) -------- ---------------------------------- -------- -------- (Increase)/decrease in net 52.2 borrowings (73.7) 19.2 -------- ---------------------------------- -------- -------- (279.7) Opening net borrowings (227.5) (279.7) -------- ---------------------------------- -------- -------- (227.5) Closing net borrowings (301.2) (260.5) -------- ---------------------------------- -------- -------- 9 Pensions The Group's defined benefit pension schemes are accounted for in accordance withthe requirements at IAS19 'Employee Benefits'. The net pension deficit at 30September 2005 of the Dairy Crest Group Pension Fund is derived as follows: Year ended Half year ended 30 September 31 March ----------------------------- 2005 2005 2004 £m £m £m --------- ------------------------------ -------- ------- 375.0 Equities 406.7 344.1 - Property 20.3 - 119.0 Bonds and cash 124.5 115.9 --------- ------------------------------ -------- ------- 494.0 Total market value of assets 551.5 460.0 Present value of scheme (594.4) liabilities (652.6) (562.3) --------- ------------------------------ -------- ------- (100.4) Deficit in the scheme (101.1) (102.3) 30.1 Related deferred tax asset 30.3 30.7 --------- ------------------------------ -------- ------- (70.3) Net pension liability (70.8) (71.6) --------- ------------------------------ -------- ------- Analysis of movements in the pension deficit of the Dairy Crest Group PensionFund during the period: (91.5) Opening deficit (100.4) (91.5) (14.4) Current service costs (8.0) (7.2) 0.3 Net finance income 1.0 0.2 (1.8) Actuarial gain/(loss) 2.0 (7.3) 7.0 Contributions 4.3 3.5 --------- ------------------------------ -------- ------- (100.4) Closing deficit (101.1) (102.3) --------- ------------------------------ -------- ------- The balance relates to the pension deficit in the Wexford Creamery LimitedDefined Benefit Scheme of £2.3 million (2004 - £2.0 million). Independent Review Report to Dairy Crest Group plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 September 2005 which comprises the Consolidated incomestatement, Consolidated balance sheet, Consolidated cash flow statement,Consolidated statement of recognised income and expense, Segmental analysis andthe related notes 1 to 9. We have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept 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 interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the Group willbe prepared in accordance with those IFRSs adopted for use by the EuropeanUnion. The accounting policies are consistent with those that the directors intend touse in the next financial statements. There is, however, a possibility that thedirectors may determine that some changes to these policies are necessary whenpreparing the full annual financial statements for the first time in accordancewith those IFRSs adopted for use by the European Union. This is because, asdisclosed in note 1, the directors have anticipated that the revised IAS 19,which has yet to be formally adopted for use in the EU will be so adopted intime to be applicable to the next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof group management and applying analytical procedures to the financialinformation and underlying financial data, and based thereon, assessing whetherthe accounting policies have been applied. A review excludes audit proceduressuch as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Standards on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005. Ernst & Young LLPLondon9 November 2005 This information is provided by RNS The company news service from the London Stock Exchange