Dairy Crest Regulatory News (DCG)

RNS Number : 9715V

Dairy Crest Group PLC

09 November 2017

 

 9 November 2017

 

Dairy Crest Group plc ("Dairy Crest")

Interim Results Announcement for the six months ended 30 September 2017

Highlights

 

· Revenue up 16% to £220.1m

· Adjusted profit before tax1 up 8% to £20.6m

· Cathedral City volume growth of 10%

· Clover and Frylight growing market share strongly

· Pension deficit eliminated on an accounting basis

· Kirkby restructuring underway to improve flexibility and reduce cost base

· Proposed interim dividend up 2% to 6.3p

· Full year expectations remain unchanged

 

Financial Summary
	Half year ended 30 September
	2017	2016	Change
Revenue	£220.1m	£190.0m	+16%
Adjusted profit before tax1	£20.6m	£19.1m	+8%
Profit before tax2	£151.4m	£15.6m	+871%
Adjusted basic earnings per share1	11.9p	11.1p	+7%
Basic earnings per share2	87.6p	9.3p	+842%
Pension surplus/(deficit)	£39.9m	£(120.5)m	n/a
Net debt3	£281.4m	£262.3m	+7%
Interim dividend	6.3p	6.2p	+2%

1 From continuing operations before exceptional items (material and one-off in nature), amortisation of acquired intangibles and pension interest. This represents management's key profit measure because it excludes exceptional items and therefore gives a better indication of the underlying operational performance of the Group (see note 3 to the interim financial statements)

2 From continuing operations including an exceptional gain of £131.4m (2016: exceptional loss of £2.9m)

3 For a reconciliation of net debt, refer to note 10 of the interim financial statements

 

All comparative figures in the interim results announcement relate to the six months ended 30 September 2016 unless stated otherwise

 

Mark Allen, Chief Executive, said:

 

"We have had an encouraging first half, with Cathedral City, Clover and Frylight delivering good growth in both volumes and value. Cathedral City, the nation's favourite cheese, continues to go from strength to strength and has produced exceptional growth over the period.

 

"We have delivered good profit growth despite a record high cream price, which has a temporary but significant impact on input costs in our butter and spreads business.

 

"We expect to accelerate sales of demineralised whey and GOS in the second half of this year. In conjunction with our partner Fonterra we are making good progress in developing sales channels for our products.

 

"Our strong brands and the quality and efficiency of our operating facilities mean that we are well positioned to grow. While we expect butter input costs to continue to be challenging for the remainder of the year, we are confident in delivering our full year expectations."

 

For further information:

 

Investors/Analysts
Tom Atherton		Dairy Crest	01372 472264
Kate Goode		Dairy Crest	01372 472236
Media
Tim Danaher/Oliver Hughes		Brunswick	020 7404 5959

 

A video interview with Mark Allen, Chief Executive, and Tom Atherton, Group Finance Director, will be available from 07:00 (UK time) from the investor section of the Group's website dairycrest.co.uk/investors.

 

There will be an analyst and investor meeting at 9.00 (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 dairycrest.co.uk/investors later today.

 

This announcement contains inside information. The directors are responsible for arranging release of this announcement on behalf of the Group.

 

Operating review

 

A high quality business

Dairy Crest is a leading British dairy company built on a passion to create exceptional food, loved by every generation.

 

Fundamental to our business is the high quality milk which is supplied by approximately 350 dedicated farmers in Devon and Cornwall who supply exclusively to us and with whom we have a close working relationship. Our exacting standards ensure that we consistently produce exceptional cheese and whey.

 

Our production, packaging and distribution facilities in Davidstow and Nuneaton are two of the most advanced of their kind, enabling us to deliver unrivalled quality and consistency. We have a track record of investing in manufacturing excellence; most recently at our demineralised whey and galacto-oligosaccharide (GOS) facilities at our Davidstow site in Cornwall. We recognise that superior facilities deliver significant operational advantages.

 

Cost advantages achieved through an efficient supply chain and the high quality and consistency achieved by our operating facilities allow us to invest in innovation, marketing and promotions to create leading brands like Cathedral City.

 

The strength of our business model, and the continued growth in Cathedral City in particular, has resulted in an 8% increase in adjusted profit before tax for the six months to 30 September 2017, despite sharp rises in some input costs.

 

Key brand performance

 

Brand	Market	Volume growth*	Value growth*
Cathedral City	Cheese	+10%	+7%
Clover	Spreads	+2%	+2%
Country Life	Butters	-14%	+5%
Frylight	Oil	+10%	+9%
Total		+4%	+6%

* Dairy Crest volume and value sales 6 months to 30 September 2017 vs. 6 months to 30 September 2016

 

In aggregate, volumes of our four key brands (Cathedral City, Clover, Country Life and Frylight) grew by 4% in the first half of 2017/18 versus last year, in spite of the input cost challenges faced by Country Life. Overall value growth of 6% was ahead of volume growth - a trend we expect to continue in the second half of the financial year.

 

Cathedral City - performance accelerates

In the first half of this financial year Cathedral City has delivered a very strong performance, increasing sales volumes by 10%. IRI Kantar data[1] for the 28 weeks ended 7 October 2017 shows that the Everyday Cheese market grew volumes by just 3% compared to the same period last year, highlighting the outperformance of the nation's favourite cheese. Our focus on quality and innovation has been key to our success.

 

Revenue has also increased, rising 7% over the six months to 30 September 2017. We expect revenue growth to exceed volume growth for the full year.

 

Market share by volume has increased by 1% over the past six months and Cathedral City now accounts for 56% of all branded cheddar sold by UK retailers and 20% of the total everyday cheese market. Cathedral City is by far the largest cheddar brand in the UK by retail sales volume and is more than three times the size of the number two brand. However, with more than 65% of the everyday cheese market still private label products, there is plenty of potential for further growth.

 

In the summer we brought out new packaging for the Cathedral City Sliced range to inspire meal ideas. There will be further seasonal updates to the packaging in the second half. We also launched the Cathedral City Snack Bar Multipacks which are targeted at adults as a convenient, naturally nutritious portion-controlled snack. Snacking remains a core focus for our innovation pipeline.

 

Online food sales now represent approximately 7% of total grocery sales in the UK and are growing by around 8-10% annually, according to the British Retail Consortium and KPMG. Dairy Crest has good penetration in this area due to the strong relationships we have built from an early stage with online retailers. Approximately 10% of our total sales are transacted online which is notably higher than the average for the dairy category, according to Kantar Worldpanel[2]. With more than 50% of online purchases now taking place on mobile devices, we have recently started optimising the imagery of some of our Cathedral City products on e-commerce sites to highlight the logo and key wording on packaging so that it can be seen more easily by customers browsing on the go.

 

Spreads grow share; butter input costs remain high

All of Dairy Crest's spreads brands were in growth for the six month period, delivering a combined 8% uplift in volume versus a spreads market which declined by -3%, according to IRI Kantar data. The pace of decline of the spreads market has started to slow, reflecting the impact of increased butter pricing on demand.

 

Clover, with its buttery taste and no artificial ingredients positioning, has performed particularly well. Volumes and retail sales value have both risen by 2% for the six months ended 30 September 2017. It continues to gain market share and now represents almost 20% of the spreads sector based on IRI Kantar data. Building on this success, we plan to launch Clover Lighter with no artificial ingredients in 2018.

 

Willow is the fastest growing brand within our butters and spreads portfolio, increasing by more than 45% in both value and volume terms over the past six months, as consumers look for a more economical alternative to butter. Dairy-free spreads are also increasing in popularity. Vitalite is now the number one dairy-free brand by volume, helped by the launch of Vitalite Coconut in February 2017. Vitalite achieved double digit value and volume growth over the period and Utterly Butterly is also growing volumes strongly.

 

Our butters business continues to face significant cost pressure, with cream prices, which determine input costs, reaching record highs during the period of close to £3.00 per litre. The wholesale cream price rose by 65% over the twelve months to 30 September, although it has fallen in the past weeks. Consequently we have reduced promotional activity on Country Life to protect margins. This has helped to partly mitigate the impact of the high input costs, although it has resulted in a 14% reduction in sales volumes. The packaging for both the block and spreadable ranges is being relaunched in November and continues to emphasise its British heritage which has resonated well with consumers since it was first introduced at the end of 2015.

 

We expect the cream price to remain high for the second half of the year and we will continue to manage our butters business accordingly.

Frylight growth continues

Sales volumes of Frylight, the UK's leading oil brand[3], grew by 10% for the six months to the end of September 2017 while value growth was 9%. Kantar data for the 24 weeks ended 8 October 2017 indicate that the volume and value of the retail oil market increased by 3% and 6% respectively.

 

Frylight's performance is expected to further improve in the second half of the year due to increased distribution and growth from innovations such as the new Coconut and Avocado varieties. Itsu, the Asian-inspired food chain, is also now using Frylight in all of its 70 UK shops.

 

Frylight has achieved a penetration rate of 24% into UK households. The UK cooking spray category as a whole has a 27% penetration while in the US that figure is considerably higher at around 73%. This highlights the potential for Frylight to grow further by raising awareness, building the case amongst healthcare professionals and key influencers to recommend switching from pouring oil, and innovating our range into new areas at home and abroad.

 

Building the customer base for Functional Ingredients

Our functional ingredients business is progressing well and we are successfully building momentum in securing a customer base in the infant formula market for demineralised whey and GOS through our partner, Fonterra. The stringent testing and auditing that potential purchasers undertake, along with the impact of regulatory changes in China, have meant it is taking longer than originally expected to deliver new customers. However, sales and margins will accelerate through the second half of the year.

 

Beyond infant formula markets, we continue to research the impact of GOS in a number of trials. In parallel we are looking at additional sales opportunities in markets where pre-biotics are already established, such as adult nutrition and pet food.

 

Focus on efficiency

We are always looking at ways to improve efficiencies and reduce our cost base. In light of this, and taking into account the challenges currently facing the category, we are undertaking a number of changes at our butters and spreads facility in Kirkby. These actions will deliver annualised cost savings of approximately £2.5 million.

 

In early 2015 we closed our facility in Crudgington and consolidated our butters and spreads production into Kirkby. In the second phase of this improvement plan, we are introducing a 24/7 working schedule and a new site agreement which, along with line improvements and a voluntary leavers' scheme, will significantly improve the site efficiency. In addition, we are planning to sell surplus land on the site for redevelopment. The proceeds are expected to fund the approximate £4 million one-off exceptional costs of the site improvement programme; albeit the restructuring costs will be incurred this financial year but the sale proceeds will be received at a later date.

 

The project to replace and simplify our core IT systems is proceeding on track. This programme is expected to complete in 2018 and will deliver further efficiencies as procedures and support structures are simplified and improved.

 

Financial review

Group revenue from continuing operations of £220.1 million represents a 16% increase against the comparative period, reflecting both strong volume and value growth across most of the brand portfolio. Revenue increased in both of our product groups: cheese and functional ingredients by 17% and butters, spreads and oils by 19%. Revenue from warehousing for third parties fell, as expected, by 35% following the cessation of the distribution agreement with Müller as part of the sale of our Dairies business.

 

Total product group profit[4] from continuing operations increased by 9% to £25.1 million (2016: £23.1 million). Cheese and functional ingredients group profits increased by £10.5 million, or 91%, to £22.1 million. This more than offset the impact of high butter input costs in our butters, spreads and oils product group where profits of £3.0 million represent an £8.5 million reduction compared to last year.

 

Finance costs of £4.5 million are £0.5 million higher than last year, reflecting lower levels of interest capitalisation. Adjusted profit before tax (from continuing operations, before exceptional items, amortisation of acquired intangibles and pension interest) was £20.6 million, up 8% from £19.1 million in 2016. Product group analysis and a reconciliation to both adjusted and reported profit before tax is included in note 3 to the interim financial statements.

 

Net exceptional income on continuing operations amounted to £131.4 million. Exceptional income of £132.4 million was recognised in relation to the reduction in pension scheme liabilities resulting from the change in the indexation benchmark for pensions in payment from RPI to CPI. Exceptional income of £0.7 million has also been recognised on the sale of the closed dairy facility in Fenstanton, Cambridgeshire.

 

Exceptional income was partly offset by £1.7 million of exceptional restructuring costs at the butters and spreads facility in Kirkby where a number of initiatives are being implemented this year in order to improve efficiencies across the site. Total exceptional costs for Kirkby in the current financial year are expected to be approximately £4 million. However, these one-off costs should, in time, be more than offset by proceeds from the sale of surplus land on the site.

 

The pension interest charge of £0.4 million is in line with last year. The £0.2 million amortisation charge for acquired intangible assets is also unchanged. This results in a reported profit before tax of £151.4 million, an increase of £135.8 million compared to last year (2016: £15.6 million).

 

The effective rate of tax for continuing operations is 19% (2016: 18.9%) and is representative of the expected rate for the year ending 31 March 2018.

 

Adjusted basic earnings per share on continuing operations amount to 11.9 pence (2016: 11.1 pence), an increase of 7%, broadly consistent with higher adjusted profit before tax. Basic earnings per share on continuing operations increased to 87.6 pence, reflecting the large exceptional gain.

 

We are on track to reduce net debt[5] in the full year and remain committed to reducing it to below two times EBITDA[6] in the next two to three years. The usual seasonal pattern of debt has been repeated this year, resulting in an increase in net debt in the first half of the year which will be followed by a reduction in the second half of the year. This is due to three principal factors.

 

Firstly, milk supply is higher in the first half of the year compared to the second half which means that we usually build higher levels of cheese stocks during the first half which then reduce in the second half. This normal seasonal pattern has been exacerbated this year by the increasing cost of milk. In addition, demineralised whey stocks are above the future anticipated level as we continue to build sales momentum. However, the second half will see reduced volumes of milk processed and higher sales volumes, especially for demineralised whey and GOS.

 

Secondly, we have paid pension contributions of £8.3 million in the first half of the year out of the total £10 million cost contribution for the full year following the new schedule of contributions agreed with the pension Trustee.

 

Thirdly, we pay the final dividend in the first half of the year. The final dividend normally represents approximately 70% of the full year dividend.

 

Overall, net debt increased by £31.6 million in the first half of the year. This is less than the £33.3 million increase in the first half last year which benefitted from £18.0 million of sale and leaseback proceeds in 2016. Importantly, exceptional cash costs have reduced to £3.5 million (2016: £12.0 million) and there were no further payments resulting from the sale of the Dairies operations (2016: £28.4 million cash outflow).

 

During the six months ended 30 September 2017, the Group exercised an option to extend its three year £80 million revolving credit facility for a further two years. All tranches of the 2015 facility totalling £240 million now expire in October 2020.

 

At 30 September 2017 the Group had a pension surplus of £39.9 million (2016: £120.5 million deficit). The actuarial valuation, which is more relevant in determining cash contributions, was a deficit of £100 million at the time of the last full valuation in March 2016 and approximately £50 million at September 2017.

 

The March 2016 deficit reflects an agreed change to the indexation of pensions in payment. Following detailed negotiations with the Trustee, future annual increases will be linked to CPI rather than RPI. CPI is already used by the Fund for calculating increases in deferred pensions and is becoming more widely used across the UK including for the calculation of increases in public sector pensions. CPI is generally lower than RPI and therefore changing to CPI reduces the estimate of future benefit costs. This change was agreed as part of a broader package to put the Fund on a stronger foundation for the future. This package includes continuing to move to lower-risk investments over time.

 

A new schedule of pension contributions has been agreed and will result in cash contributions by the Group of £10 million in 2017/18 and £15 million in 2018/19. Beyond that, contributions will revert to £20 million per annum, although the new triennial valuation in March 2019 will determine contribution levels beyond then.

 

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 2017 Annual Report and Accounts.

 

There have been no related party transactions in the six months ended 30 September 2017.

 

The financial statements have been prepared on a going concern basis. In determining whether this is appropriate, we have considered current performance and forecasts, the ability of the Group to meet its bank covenants and the Group's borrowings. We remain confident in the Group's ability to operate as a going concern.

 

Summary and outlook

We have had an encouraging first half, with Cathedral City, Clover and Frylight delivering good growth in both volumes and value. Cathedral City, the nation's favourite cheese, continues to go from strength to strength and has produced exceptional growth over the period.

 

We have delivered good profit growth despite a record high cream price, which has a temporary but significant impact on input costs in our butter and spreads business.

 

We expect to accelerate sales of demineralised whey and GOS in the second half of this year. In conjunction with our partner Fonterra we are making good progress in developing sales channels for our products.

 

Our strong brands and the quality and efficiency of our operating facilities mean that we are well positioned to grow. While we expect butter input costs to continue to be challenging for the remainder of the year, we are confident in delivering our full year expectations.

 

Mark Allen

Chief Executive

9 November 2017

 

Consolidated income statement

(Unaudited)

Year ended 31 March 2017									Half year ended 30 September 2017						Half year ended 30 September 2016
Before									Before						Before
exceptional		Exceptional							exceptional		Exceptional				exceptional		Exceptional
items		items		Total					items		items		Total		items		items		Total
£m		£m		£m			Note		£m		£m		£m		£m		£m		£m
416.6		-		416.6		Revenue	3		220.1		-		220.1		190.0 203.8		-		190.0 203.8
(351.7)		(19.1)		(370.8)		Operating costs			(195.7)		131.4		(64.3)		(167.1) (184.4)		(2.9)		(170.0) (186.8)
3.0		-		3.0		Other income - property			0.5		-		0.5		-		-		-
67.9		(19.1)		48.8		Profit on continuing operations			24.9		131.4		156.3		22.9		(2.9)		20.0
(7.7)		-		(7.7)		Finance costs			(4.5)		-		(4.5)		(4.0)		-		(4.0)
(0.8)		-		(0.8)		Other finance expense - pensions			(0.4)		-		(0.4)		(0.4)		-		(0.4)
59.4		(19.1)		40.3		Profit before tax from continuing operations	3,4		20.0		131.4		151.4		18.5		(2.9)		15.6
(10.7)		3.5		(7.2)		Tax (expense) / credit	5		(3.8)		(24.9)		(28.7)		(3.5)		0.9		(2.6)
48.7		(15.6)		33.1		Profit for the period from continuing operations			16.2		106.5		122.7		15.0		(2.0)		13.0
(1.8)		7.0		5.2		Profit / (loss) for the period from discontinued operations	9		-		-		-		(0.8)		(2.0)		(2.8)
46.9		(8.6)   (		38.3		Profit / (loss) for the period			16.2		106.5		122.7		14.2		(4.0) (105.1)		10.2

All amounts are attributable to owners of the parent.

 

Year ended

Half year ended

Half year ended

31 March 2017

Earnings per share

30 September 2017

30 September 2016

23.7p

Basic earnings per share from continuing operations

7

87.6p

9.3p

23.5p

Diluted earnings per share from continuing operations

7

86.8p

9.2p

27.4p

Basic earnings per share

7

87.6p

7.3p

27.1p

Diluted earnings per share

7

86.8p

7.2p

 

A final dividend of £22.8 million (16.3 pence per share) was paid in the period to 30 September 2017 (2016: £22.4 million; 16.0 pence per share). A dividend of £8.8 million (6.3 pence per share) was approved by the Board on 8 November 2017 for payment on 25 January 2018 (2016: £8.7 million; 6.2 pence per share). See Note 6.

 

Consolidated statement of comprehensive income

(Unaudited)

Year ended																		Half year ended
31 March																		30 September
2017																		2017		2016
£m															Note			£m		£m
38.3		Profit for the period																122.7		10.2
		Other comprehensive income to be reclassified to profit and loss in subsequent periods:
(4.8)		Cash flow hedges - reclassification adjustment for gains / (losses) in income statement																6.8		(8.2)
1.6		Cash flow hedges - (losses) / gains recognised in other comprehensive income																(4.9)		5.2
0.9		Tax relating to components of other comprehensive income																(0.7)		0.5
(2.3)																		1.2		(2.5)
		Other comprehensive income not to be reclassified to profit and loss in subsequent periods:
(80.4)		Remeasurements of defined benefit pension plans														11		9.3		(83.5)
10.7		Tax relating to components of other comprehensive income																0.5		11.0
(69.7)																		9.8		(72.5)
(72.0)		Other comprehensive gain / (loss) for the period, net of tax																11.0		(75.0)
(33.7)		Total comprehensive gain / (loss) for the period, net of tax																133.7		(64.8)
		All amounts are attributable to owners of the parent.

 

Consolidated balance sheet

(Unaudited)

 

										30 September
31 March										Restated*
2017								2017		2016
£m						Note		£m		£m
		Assets
		Non-current assets
198.6		Property, plant and equipment						199.9		219.1
86.3		Goodwill						86.3		86.3
14.4		Intangible assets						17.6		10.8
12.3		Financial assets - Derivative financial instruments				12		7.2		9.8
29.6		Deferred tax asset						1.7		29.0
-		Retirement benefits surplus				11		39.9		-
341.2								352.6		355.0
		Current assets
154.2		Inventories						169.5		152.3
33.4		Trade and other receivables						38.8		31.2
-		Financial assets - Derivative financial instruments				12		-		0.1
20.9		Cash and short-term deposits				10		7.6		21.1
208.5								215.9		204.7
7.4		Non-current assets held for sale				8		3.9		-
557.1		Total assets						572.4		559.7
		Equity and liabilities
		Non-current liabilities
(274.2)		Financial liabilities - Long-term borrowings				10		(297.8)		(282.3)
(109.6)		Retirement benefit obligations				11		-		(120.5)
(3.0)		Deferred income						(2.7)		(3.7)
(2.0)		Provisions						(2.0)		(2.0)
(388.8)								(302.5)		(408.5)
		Current liabilities
(79.1)		Trade and other payables						(80.4)		(78.7)
(12.8)		Financial liabilities - Short-term borrowings				10		(0.9)		(13.5)
(0.3)		- Derivative financial instruments				12		-		(1.2)
-		Current tax liability						(0.8)		(3.8)
(1.5)		Deferred income						(0.9)		(1.6)
(2.7)		Provisions						(2.2)		(3.4)
(96.4)								(85.2)		(102.2)
(485.2)		Total liabilities						(387.7)		(510.7)
		Shareholders' equity
(35.3)		Ordinary shares						(35.3)		(35.3)
(85.6)		Share premium						(86.7)		(85.6)
0.5		Interest in ESOP						0.5		0.5
(48.3)		Other reserves						(49.5)		(48.1)
96.8		Retained earnings						(13.7)		119.5
(71.9)		Total shareholders' equity						(184.7)		(49.0)
(557.1)		Total equity and liabilities						(572.4)		(559.7)

 

\* The comparative figures have been restated to reflect the classification of provisions between current and non-current liabilities in line with the annual report for the year ended 31 March 2017.

 

The interim results were approved by the directors on 8 November 2017.

 

Consolidated statement of changes in equity

(Unaudited)

 

					Ordinary		Share		Interest		Other		Retained		Total
					shares		premium		in ESOP		reserves		earnings		Equity
Half year ended 30 September 2017					£m		£m		£m		£m		£m		£m
At 31 March 2017					35.3		85.6		(0.5)		48.3		(96.8)		71.9
Profit for the period					-		-		-		-		122.7		122.7
Other comprehensive gain / (loss):
Cash flow hedges					-		-		-		1.9		-		1.9
Remeasurement of defined benefit pension plan					-		-		-		-		9.3		9.3
Tax on components of other comprehensive income					-		-		-		(0.7)		0.5		(0.2)
Other comprehensive gain / (loss)					-		-		-		1.2		9.8		11.0
Total comprehensive gain					-		-		-		1.2		132.5		133.7
Issue of share capital					-		1.1		-		-		-		1.1
Share-based payments					-		-		-		-		0.8		0.8
Equity dividends					-		-		-		-		(22.8)		(22.8)
At 30 September 2017					35.3		86.7		(0.5)		49.5		13.7		184.7
Half year ended 30 September 2016
At 31 March 2016					35.2		84.3		(0.5)		50.6		(35.4)		134.2
Profit for the period					-		-		-		-		10.2		10.2
Other comprehensive gain / (loss):
Cash flow hedges					-		-		-		(3.0)		-		(3.0)
Remeasurement of defined benefit pension plan					-		-		-		-		(83.5)		(83.5)
Tax on components of other comprehensive income					-		-		-		0.5		11.0		11.5
Other comprehensive loss					-		-		-		(2.5)		(72.5)		(75.0)
Total comprehensive loss					-		-		-		(2.5)		(62.3)		(64.8)
Issue of share capital					0.1		1.3		-		-		-		1.4
Share-based payments					-		-		-		-		0.7		0.7
Tax on share-based payments					-		-		-		-		(0.1)		(0.1)
Equity dividends					-		-		-		-		(22.4)		(22.4)
At 30 September 2016					35.3		85.6		(0.5)		48.1		(119.5)		49.0
Year ended 31 March 2017
At 31 March 2016					35.2		84.3		(0.5)		50.6		(35.4)		134.2
Profit for the period					-		-		-		-		38.3		38.3
Other comprehensive gain / (loss):
Cash flow hedges					-		-		-		(3.2)		-		(3.2)
Remeasurement of defined benefit pension plan					-		-		-		-		(80.4)		(80.4)
Tax on components of other comprehensive income					-		-		-		0.9		10.7		11.6
Other comprehensive loss					-		-		-		(2.3)		(69.7)		(72.0)
Total comprehensive loss					-		-		-		(2.3)		(31.4)		(33.7)
Issue of share capital					0.1		1.3		-		-		-		1.4
Share-based payments					-		-		-		-		1.2		1.2
Tax on share-based payments					-		-		-		-		(0.1)		(0.1)
Equity dividends					-		-		-		-		(31.1)		(31.1)
At 31 March 2017					35.3		85.6		(0.5)		48.3		(96.8)		71.9

 

All amounts are attributable to owners of the parent.

 

Consolidated cash flow statement

(Unaudited)

 

Year ended										Half year ended
31 March										30 September
2017								2017		2016
£m						Note		£m		£m
		Cash flow from operating activities
40.3		Profit before taxation - continuing operations						151.4		15.6
(4.6)		Loss before taxation - discontinued operations						-		(3.5)
8.5		Finance costs and other finance expense - pensions						4.9		4.4
2.5		Loss on disposal of Dairies operation						-		2.5
46.7		Profit on operations						156.3		19.0
14.9		Depreciation						9.2		7.6
0.5		Amortisation of internally generated intangible assets						0.4		0.3
0.4		Amortisation of acquired intangible assets						0.2		0.2
0.5		Impairment of investment						-		0.4
(6.5)		Difference between cash outflow on exceptional items and amounts recognised in the income statement						(134.9)		(9.1)
(1.6)		Release of grants						(0.9)		(0.8)
1.2		Share-based payments						0.8		0.7
(3.0)		Profit on disposal of depots						(0.5)		-
(14.1)		Difference between pension contributions paid and amounts recognised in the income statements						(7.9)		(5.9)
(0.1)		R&D tax credits						(0.3)		0.2
(6.1)		(Increase) / decrease in working capital						(11.6)		3.0
32.8		Cash generated from operations						10.8		15.6
(12.2)		Interest paid						(4.5)		(7.4)
20.6		Net cash inflow from operating activities						6.3		8.2
		Cash flow from investing activities
(25.6)		Capital expenditure						(16.8)		(10.1)
42.4		Proceeds from disposal of property, plant and equipment						0.5		18.0
(28.4)		Repayment relating to sale of business net of fees						-		(28.4)
(11.6)		Net cash used in investing activities						(16.3)		(20.5)
		Cash flow from financing activities
(80.2)		Repayment and cancellation of loan notes						(11.9)		(80.2)
23.0		Net drawdown under revolving credit facilities						31.0		35.0
(31.1)		Dividends paid						(22.8)		(22.4)
1.4		Proceeds from issue of shares (net of issue costs)						1.1		1.4
(1.5)		Finance lease repayments						(0.7)		(0.7)
(88.4)		Net cash used in financing activities						(3.3)		(66.9)
(79.4)		Net decrease in cash and cash equivalents						(13.3)		(79.2)
100.3		Cash and cash equivalents at beginning of period						20.9		100.3
20.9		Cash and cash equivalents at end of period				10		7.6		21.1
(249.8)		Memo: Net debt at end of period				10		(281.4)		(262.3)

 

Notes to the interim financial statements

(Unaudited)

 

 

1 General information

 

Dairy Crest Group plc (the "Company") is a public limited company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office and principal place of business is Claygate House, Littleworth Road, Esher, Surrey, KT10 9PN. The principal activity of the Company and its subsidiaries (the "Group") in the period was the processing, manufacture and sale of branded dairy products as described in the Group's annual financial statements for the year ended 31 March 2017.

 

2 Basis of preparation, accounting policies and approval of interim statement 

 

Basis of preparation and approval of interim statement

 

These condensed interim financial statements comprise the consolidated balance sheet as at 30 September 2017, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated 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 2017 have been extracted from the Group's 2017 statutory accounts, on which the auditors gave an unqualified opinion, did not include an emphasis of matter reference and did not include a statement under section 498(2) or (3) of the Companies Act 2006.

 

These sections address whether adequate accounting records have been kept, whether the Company's financial statements are in agreement with those records and whether the auditors have obtained all the information and explanations necessary for the purposes of the audit. The Group financial statements for the year ended 31 March 2017 have been filed with the Registrar of Companies and can be found on our corporate website, www.dairycrest.co.uk.

 

The financial information for the period ended 30 September 2017 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Conduct 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 2017, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

 

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 8 November 2017.

 

Going concern

 

The Directors have reviewed current performance and forecasts, combined with expenditure commitments, including capital expenditure. After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate financial resources to continue its current operations, including contractual and commercial commitments, for the foreseeable future. For this reason, they have continued to adopt the going concern basis in preparing the interim financial statements.

 

Accounting policies and areas of estimation and judgement

 

The financial information has been prepared in accordance with accounting policies used for the Group's financial statements for the year ended 31 March 2017, with the exception of the adoption of the new standards and interpretations that came into effect in the half year. The Directors' position on the standards and interpretations effective after the date of the interim financial statements remains unchanged from the year ended 31 March 2017. There have been no changes to the areas of estimation and judgement from the year ended 31 March 2017.

 

2 Basis of preparation, accounting policies and approval of interim statement (continued)

 

New standards, interpretations and amendments

 

The following accounting standards and interpretations became effective for the current reporting period:

 

- Amendment to IAS 12: Income Taxes

- Amendment to IAS 7: Statement of cash flows

 

The adoption of these standards and interpretations does not have a material impact on the Group's interim financial statements in the period.

 

Management continues to assess the impact of standards and disclosures that will apply to financial periods after 31 March 2018. To understand the potential impact, refer to the annual report for the year ended 31 March 2017.

 

Taxation

 

Taxes on income before exceptional items in the interim periods are accrued using the tax rate that is expected to be applicable to total earnings before exceptional items for the full year in each tax jurisdiction based on substantively enacted or enacted tax rates at the interim date.

 

3 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 business is managed centrally by functional teams (Demand, Supply, Procurement and Finance) that have responsibility for the whole of the Group's product portfolio. Although some discrete financial information is available to provide insight to the management team of the key performance drivers, the product group profit is not part of the CODM's review. Management has judged that the Group comprises one operating segment under IFRS 8. As such, disclosures required under IFRS 8 for the financial statements are shown on the face of the consolidated income statement and balance sheet.

 

To assist the readers of the financial statements, management considers it appropriate to provide voluntary disclosure on a basis consistent with historical reporting of the cheese and functional ingredients and the butters, spreads and oils product groups results included within the consolidated income statement. In disclosing the product group profit for the period, certain assumptions have been made when allocating resources which are centralised at a group level for the continuing business and property income.

 

The 'Other' product group comprises revenue earned from distributing products for third parties and certain central costs net of recharges to the other product groups. Generally, central costs less external 'Other' revenue is recharged back into the product groups such that their result reflects the total cost base of the Group. 'Other' operating profit therefore is nil.

 

The results under the historical segmentation basis for the continuing business included in the financial information are as follows:

Year ended											Half year ended
31 March											30 September
2017									2017		2016
£m									£m		£m
		External revenue
254.8		Cheese and Functional Ingredients							135.3		115.8
150.7		Butters, Spreads and Oils							80.9		68.2
11.1		Other							3.9		6.0
416.6		Total product group external revenue - continuing operations							220.1		190.0
		Product group profit *
42.8		Cheese and Functional Ingredients							22.1		11.6
25.5		Butters, Spreads and Oils							3.0		11.5
68.3		Total product group profit - continuing operations							25.1		23.1
(7.7)		Finance costs							(4.5)		(4.0)
60.6		Adjusted profit before tax - continuing operations **							20.6		19.1
(0.4)		Acquired intangible amortisation							(0.2)		(0.2)
(19.1)		Exceptional items (see Note 4)							131.4		(2.9)
(0.8)		Other finance expense - pensions							(0.4)		(0.4)
40.3		Group profit before tax - continuing operations							151.4		15.6

 

* Profit on operations before exceptional items and amortisation of acquired intangibles.

**Adjusted profit before tax from continuing operations is presented as management's key Group profit measure because it excludes exceptional items and amortisation of acquired intangibles, therefore providing a better indication of the underlying operation and performance of the Group. The calculation also excludes pension interest in relation to the Group's defined benefit pension scheme which is dependent on market assumptions.

 

Seasonality of results

Certain products experience increased sales around 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. Where required, the Group manages the seasonality of its working capital by drawing cash under the revolving credit facility. 

 

4 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.

 

The exceptional items charged to operating costs are analysed below:

Year ended											Half year ended
31 March											30 September
2017									2017		2016
£m									£m		£m
		Operating costs
-		Kirkby improvement programme							(1.7)		-
(2.3)		Profit on sale / (disposal costs) in relation to closed manufacturing sites							0.7		-
-		Gain on the Group's Pension Fund							132.4		-
(19.0)		Demineralised whey powders and GOS projects							-		(5.1)
2.2		Settlement gain in relation to Farmright Limited and Quadra Foods Limited							-		2.2
(19.1)									131.4		(2.9)
2.8		Tax (charge) / relief on exceptional items							(24.9)		0.9
0.7		Release of deferred tax liability in respect of industrial buildings							-		-
(15.6)									106.5		(2.0)

 

 

Kirkby improvement programme

In April 2017, the Group commenced a restructuring project to improve the flexibility and efficiency of the Butters and Spreads manufacturing facility in Kirkby, Liverpool. In a challenging UK Butters and Spreads market it is important that the Group's facility is as efficient as it can be. In the six months ending 30 September 2017, costs of £1.7 million have been incurred, largely relating to project consultancy and project management costs. The tax credit in respect of this charge is £0.2 million. A further £2-3 million is expected to be incurred in the second half of the year. Management considers the costs to be exceptional due to the materiality of the costs and one-off nature of the project. In the medium term, the costs of restructuring should be offset by the proceeds from the sale of surplus land on the site. Any future sales profits resulting from the sale of land will also be treated as an exceptional item.

 

Profit on sale of closed manufacturing sites

In the six months ended 30 September 2017, the Group disposed of a closed manufacturing facility in Fenstanton, Cambridgshire resulting in a profit on disposal of £1.0 million. In addition, the Group has impaired two leasehold properties for which management has determined there to be no future economic benefit resulting in an impairment of £0.3 million. The net gain has been treated as an exceptional item consistent with the historical closure costs of manufacturing sites which were considered to be exceptional due to the materiality and one-off nature of the costs. The tax in respect of this gain was £nil.

 

In the year ended 31 March 2017 the Group incurred costs of £2.3 million relating to the disposal of closed manufacturing sites that were determined as held for sale as at 31 March 2017. The tax credit in relation to these costs was £0.1 million.

 

Gain on the Group's Pension Fund

On 31 August 2017, the Group and the Trustee of the Group's Pension Fund (the Fund) finalised the 31 March 2016 funding valuation. As part of the overall package of funding, the Group and the Trustee formally agreed to change the measurement of inflation used for Fund pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI). CPI will therefore apply for Fund pension increases from 25 March 2018 onwards. This has been factored into the IAS19 valuation of the retirement benefit obligation as at 30 September 2017 resulting in an exceptional gain, net of costs, of £132.4 million. The tax charge in respect of this gain is £25.2 million. Management considers this gain to be exceptional due to the materiality and one-off nature of the gain.

 

Demineralised whey powder and GOS projects

The Group has completed the investment in its cheese creamery at Davidstow, Cornwall enabling the Group to manufacture demineralised whey powder, a base ingredient of infant formula, and galacto-oligosaccharide ("GOS"), widely used in infant formula. In the six months ended 30 September 2017, £2.9 million of costs were charged to the income statement following completion of the investment. The costs related to the write-down of product that did not meet the required standard to be considered for infant formula, and production costs during the post-commissioning phase. These costs were offset by amounts received in settlement of project related litigation. Management does not expect any further exceptional costs in relation to this investment.

4 Exceptional items (continued)

 

During the year ended 31 March 2017, £19.0 million of costs were charged to the income statement in relation to

 

this project. £12.3 million related to commissioning the facility of which £7.3 million was for the write-down of product produced during the commissioning process which did not meet the required standard to be considered for infant formula. In addition, £5.8 million related to project review costs. A further £0.9 million was charged in respect of a financial liability relating to the project that did not meet the criteria for hedge accounting due to it being an ineffective hedge at 31 March 2017. The tax credit relating to this exceptional charge in the year ended 31 March 2017 was £3.1 million.

 

Management considers the costs relating to this project to be exceptional due to the materiality and one-off nature of the capital project to which they related.

 

Settlement of liability in relation to Farmright Limited

In the prior year, the Group paid £1.0 million in full and final settlement of claims arising out of the debt originally owed to Farmright Limited. Claims between the Group, Farmright Limited and Quadra Foods Limited (and any assignees of the claims) are now resolved. Following settlement, £2.1 million plus a provision for professional fees of £0.1 million which was no longer required, were released as an exceptional credit in the period. Management considered this credit to be exceptional due to it being one-off in nature and in relation to the debt of Quadra Foods, for which £4.3 million was provided for under an exceptional impairment provision in the year ended 31 March 2012. The tax charge relating to this exceptional credit was £0.4 million.

 

5 Taxation

 

The tax expense for continuing operations for the half year ended 30 September 2017 has been calculated on the basis of the estimated effective tax rate on pre-exceptional profit for the full year of 19.0% (September 2016: 18.9%; March 2017: 18.0%). The tax charge on exceptional items in respect of continuing operations for the half year ended 30 September 2017 was £24.9 million (September 2016: tax relief £0.9 million; year ended 31 March 2017: tax relief £2.8 million).

 

The deferred tax asset of £1.7 million as at 30 September 2017 has reduced from £29.6 million at 31 March 2017. This change is due to the movement in the valuation of the Group's pension fund from a liability of £109.6 million at 31 March 2017 to a surplus of £39.9 million at 30 September 2017.

 

To understand the comparative results, refer to the annual report for the year end 31 March 2017 and the interim financial statements for the six months ended 30 September 2016.

 

6 Dividends

 

A dividend of £8.8 million (6.3 pence per share) (2016: £8.7 million; 6.2 pence per share) will be payable on 25 January 2018 to shareholders on the register on 5 January 2018. This dividend is not recorded in the balance sheet as a liability at 30 September 2017 because it had not been committed to at the balance sheet date.

 

7 Earnings per share

 

The basic earnings per share ("EPS") measures for the period have been calculated by dividing the profit attributable to equity shareholders from the relevant operations (continuing, discontinued and total group) by the weighted average shares in issue during the period, excluding those held by the Dairy Crest Employees' Share Ownership Plan Trust which are held as treasury shares and treated as cancelled.

 

The weighted average number of shares used in the calculation of basic EPS is detailed below along with the diluted weighted average number of shares used for the calculation of diluted EPS. The diluted weighted average number of shares reflects the dilutive impact of share options exercisable under the Group's share option schemes. Note that in the circumstances where there is a basic loss per share from continuing operations, share options are anti-dilutive and therefore are not included in the calculation of any other EPS measures.

 

To show earnings per share on a consistent basis, adjusted earnings per share has been calculated. The Directors' consider this measure to be more appropriate in reflecting the underlying performance of the Group because it excludes exceptional items, amortisation of acquired intangibles and pension interest expense.

 

Year ended																			Half year ended
31 March																			30 September
2017																	2017		2016
£m																	£m		£m
		Continuing operations:
33.1		Profit attributable to equity shareholders															122.7		13.0
15.6		Exceptional items (net of tax)															(106.5)		2.0
0.3		Amortisation of acquired intangible assets (net of tax)															0.2		0.2
0.7		Pension interest expense (net of tax)															0.3		0.3
49.7		Adjusted earnings attributable to equity shareholders															16.7		15.5
38.3		Total profit attributable to equity shareholders															122.7		10.2
139.8		Weighted average number of shares (million)															140.0		139.7
141.1		Diluted weighted average number of shares (million)															141.4		141.0

 

Earnings per share

Continuing operations:

23.7p

Basic earnings per share from continuing operations

87.6p

9.3p

23.5p

Diluted earnings per share from continuing operations

86.8p

9.2p

35.6p

Adjusted basic earnings per share from continuing operations

11.9p

11.1p

35.2p

Adjusted diluted earnings per share from continuing operations

11.8p

11.0p

Group:

27.4p

Basic earnings per share

87.6p

7.3p

27.1p

Diluted earnings per share

86.8p

7.2p

 

8 Non-current assets held for sale 

Non-current assets held for sale of £3.9 million (September 2016; £nil, March 2017 £7.4 million) represent properties owned by the Group, comprising closed depots and closed manufacturing sites that management has committed to sell and where completion of the sale within twelve months of the classification date is highly probable. The held for sale value represents the lower of carrying value and fair value less costs to sell. Any future profit on disposal of the closed depots will be recognised as Other Income - property within the income statement. Any future profit on disposal of the closed manufacturing sites will be recognised under exceptional items within the income statement.

 

9 Discontinued operations

On 26 December 2015, the Group completed the disposal of its Dairies operation to Muller UK & Ireland Group LLP for a consideration of £23.5 million. The Dairies operation was a major product group of the business and has been classified as a discontinued operation since the interim financial statements for the six months ended 30 September 2015. There have been no transactions in respect of the Dairies operation in the six months ended 30 September 2017. To understand the comparative results, refer to the annual report for the year ended 31 March 2017 and the interim financial statements for the six months ended 30 September 2016

 

10 Analysis of net debt

 

Year ended		Closing net debt							Half year ended
31 March									30 September
2017							2017		2016
£m							£m		£m
11.9		Loans repayable in less than one year *					-		12.0
1.5		Finance leases repayable within one year					1.5		1.5
(0.6)		Debt issuance costs					(0.6)		-
12.8		Short-term borrowings					0.9		13.5
274.0		Loans repayable in greater than one year**					298.1		282.3
1.0		Finance leases repayable in greater than one year					0.3		1.7
(0.8)		Debt issuance costs					(0.6)		(1.7)
274.2		Long-term borrowings					297.8		282.3
(20.9)		Cash and short-term deposits					(7.6)		(21.1)
266.1		Borrowings and cash - before impact of cross-currency swaps					291.1		274.7
1.4		Debt issuance costs excluded					1.2		1.7
(17.7)		Impact of cross-currency swaps ***					(10.9)		(14.1)
249.8		Net Debt					281.4		262.3

* On 4 April 2017, the Group repaid €10.7 million (£9.2 million) and £2.8 million of 2007 fixed coupon loan notes on maturity.

 

** On 25 September 2017 the Group extended its three year £80 million tranche of the revolving credit facility for a further two years. All tranches of the 2015 revolving credit facility totalling £240 million now expire in October 2020.

 

*** The Group has US$126.3 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (September 2016: US$126.3 million and €10.7 million; March 2017: US$126.3 million and €10.7 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 £10.9 million adjustment included above (September 2016: £14.1 million; March 2017: £17.7 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£94.1 million (September 2016: £106.5 million; March 2017: £110.1 million)) to the fixed Sterling liability of £83.2 million (September 2016: £92.4 million; March 2017: £92.4 million).

 

Movement in net debt									Opening		Cash		Non-cash		Exchange		Closing
									balances		flow		movement*		movement		balances
Six months ended 30 September 2017									£m		£m		£m		£m		£m
Cash and short-term deposits									20.9		(13.3)		-		-		7.6
Borrowings									(285.9)		(19.0)		-		6.8		(298.1)
Finance leases									(2.5)		0.7		-		-		(1.8)
Cross-currency swaps									17.7		-		-		(6.8)		10.9
									(249.8)		(31.6)		-		-		(281.4)
Six months ended 30 September 2016
Cash and short-term deposits									100.3		(79.2)		-		-		21.1
Borrowings									(344.8)		60.6		-		(10.1)		(294.3)
Finance leases									(3.9)		0.7		-		-		(3.2)
Cross-currency swaps									19.4		(15.4)		-		10.1		14.1
									(229.0)		(33.3)		-		-		(262.3)
Year ended 31 March 2017
Cash and short-term deposits									100.3		(79.4)		-		-		20.9
Borrowings									(344.8)		72.6		-		(13.7)		(285.9)
Finance leases									(3.9)		1.5		(0.1)		-		(2.5)
Cross-currency swaps									19.4		(15.4)		-		13.7		17.7
									(229.0)		(20.7)		(0.1)		-		(249.8)

*Non-cash movement relates to the recognition of finance leases on the agreement of a secondary lease term

for assets at Nuneaton.

 

11 Retirement benefit obligations

 

The Group has a defined benefit pension scheme (Dairy Crest Group Pension Fund), which is closed to future service accrual and a defined contribution scheme (Dairy Crest Group Defined Contribution Scheme).

 

The net pension asset of the Group's defined benefit pension scheme at 30 September 2017 can be analysed as follows:

 

31 March												30 September
2017										2017		2016
£m										£m		£m
-		Equities								-		18.9
747.0		Bonds and cash								762.0		740.2
18.6		Equity return swaps valuation								4.2		18.5
115.5		Property and other								116.2		110.9
310.6		Insured retirement obligations								302.1		317.0
1,191.7										1,184.5		1,205.5
(994.0)		Defined benefit obligation:				Uninsured retirement obligations				(869.0)		(1,012.6)
(307.3)						Insured retirement obligations				(275.6)		(313.4)
(1,301.3)		Total defined benefit obligation								(1,144.6)		(1,326.0)
(109.6)		Net assets / (liability) recognised in the balance sheet								39.9		(120.5)
18.6		Related deferred tax (liability) / asset								(6.8)		22.2
(91.0)		Net pension asset / (liability)								33.1		(98.3)
		Analysis of movements in the Group pension fund during the period:
(30.4)		Opening deficit before recognition of liability for unrecoverable notional surplus								(109.6)		(30.4)
(0.8)		Net interest cost								(0.4)		(0.4)
2.0		Settlement gain								-		-
-		Past service cost								132.7		-
(1.0)		Administration costs incurred								(0.4)		(0.4)
(275.6)		Actuarial gain / (loss) arising from changes in financial assumptions								16.7		(278.6)
30.6		Actuarial (loss) / gain arising from experience								(2.9)		26.1
152.5		Remeasurement (loss) / gain on Fund assets								(4.5)		156.9
13.1		Contributions by employer								8.3		6.3
(109.6)		Closing asset / (liability) (excluding liability for unrecoverable notional surplus)								39.9		(120.5)

 

 

The principal assumptions used in determining the retirement benefit obligations for the Group's pension fund are as follows:

Mar 17											Sep 17		Sep 16
3.3		Price inflation - RPI (%)									3.3		3.2
2.2		Price inflation - CPI (%)									2.2		2.1
24.1		Life expectancy at 65 for a male currently aged 50 (years)									24.1		24.0
22.5		Average expected remaining life of a 65 year old retired male (years)									22.5		22.4
27.0		Life expectancy at 65 for a female currently aged 50 (years)									27.0		26.9
24.8		Average expected remaining life of a 65 year old retired female (years)									24.8		24.7
2.4		Discount rate (%)									2.5		2.3

 

 

Funding requirements

UK legislation requires that pension schemes are funded prudently. The last funding valuation of the Fund was carried out by a qualified actuary as at 31 March 2016 and showed a deficit of £100 million.Under the latest schedule of contributions, which was signed in August 2017, the level of contributions payable by the Group to the fund is £10.0 million for 2017/18, £15.0 million for 2018/19 and then £20.0 million per annum until March 2022.

 

11 Retirement benefit obligation (continued)

 

Risk

The Group and Trustee have agreed a long term strategy for reducing investment risk as and where appropriate. This includes an asset-liability matching policy which aims to reduce the volatility of the funding level of the Fund by investing in assets which perform in line with the liabilities of the plan so as to protect against inflation being higher than expected. In December 2008 and June 2009, certain obligations relating to retired members were hedged by the purchase of annuity contracts.

 

Past service cost

On 31 August 2017, the Group and the Trustee of the Group's pension fund finalised the 31 March 2016 funding valuation. As part of the overall package of funding, the Group and the Trustee formally agreed to change the measurement of inflation used for Fund pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI). CPI will therefore apply for Fund pension increases from 25 March 2018 onwards. It was calculated that as at 31 August 2017, the Fund's defined benefit obligation was reduced from £1,323.0 million to £1,190.3 million, a reduction of £132.7 million. This has been factored into the IAS19 valuation of the retirement benefit obligation as at 30 September 2017 and has been treated as a negative past service cost.

 

Surplus

The Group has an unconditional right to receive any surplus on winding up of the Fund. As such, management have judged it appropriate to recognise the full surplus under IAS19.

 

12 Financial Instruments

 

The following table summarises the Group's financial instruments.

 

31 March											30 September
2017									2017		2016
£m									£m		£m
		Financial Assets
12.3		Cross currency swaps (cash flow hedges)							7.2		9.9
12.3									7.2		9.9
		Financial Liabilities
(0.3)		Forward currency contracts							-		(1.2)
(128.0)		Bank loans (at amortised cost)							(159.0)		(140.0)
(157.9)		Loan notes (at amortised cost)							(139.1)		(154.3)
(2.5)		Obligations under finance leases							(1.8)		(3.2)
1.4		Debt issuance costs							1.2		1.7
(287.3)									(298.7)		(297.0)

 

Fair values of financial assets and financial liabilities

The carrying amounts and the fair values of all of the Group's financial instruments that are carried in the financial statements are the same with the exception of the loan notes. The carrying value of the loan notes was £139.1 million and the fair value was £135.9 million. The fair value of the loan notes has been calculated by discounting the expected future cash flows at a prevailing interest rate.

 

Fair value hierarchy

All derivative financial instruments and loan notes are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 13: Fair value measurement, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).

 

Valuation techniques

The fair values of cross currency swaps and forward currency contracts are measured by the external counterparties to the contracts and verified using present value of future cash flows at discount rates implied by the forward curve. These valuation techniques maximise the use of observable market data where it is available.

 

The fair value of loan notes has been measured by reference to yields of publicly quoted debt of equivalent duration, coupon and credit-worthiness.

 

 

 

13 Commitments and contingencies

 

Capital expenditure contracted for but not provided for in the interim financial statements amounts to £3.6 million (September 2016: £10.7 million; March 2017: £13.0 million).

 

Contingent liabilities

 

Dilapidation liability of Chadwell Heath

Under the terms of the sale and purchase agreement of the Dairies operation, the Group has a potential dilapidations liability to 26 December 2015 in relation to the Chadwell Heath site. The lease does not end until July 2032, with break clauses in July 2022 and July 2027. Muller UK & Ireland Group LLP have announced they intend to close the site in 2018, however, any obligations are dependent on the intentions of the landlord in respect of the site. The Directors are not quantifying the potential liability in respect of this obligation because to do so may be prejudicial to the interests of the Group as the matter may be subject to negotiation or judicial proceedings. There has been no change on the Group's position on this contingent liability in the six months to 30 September 2017.

 

Litigation in relation to the capital project at Davidstow

At 31 March 2017, there were a number of contractual disputes outstanding in respect of the demineralised whey and GOS capital project at Davidstow. In a number of instances, claims were made by the Group and in others, claims were made against the Group. In the six months ended 30 September 2017, settlement agreements were put in place in respect of a number of the most significant disputes. At 30 September 2017 there was one outstanding claim against the Group. The Group has rebutted this claim but nonetheless accrued for professional fees in respect of it. The Group is not disclosing detail of either the claims settled or the outstanding claim, due to the legal sensitivity of the matter. It is the opinion of the Directors that there is no significant liability that would require being provided for as at 30 September 2017.

 

Statement of directors' responsibilities

 

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules. The Board of Directors that served during the six months ended 30 September 2017, and their respective responsibilities, can be found on pages 28 and 29 of the 2017 Annual Report and Accounts.

 

 

By order of the Board

M Allen	T Atherton
Chief Executive	Group Finance Director
8 November 2017	8 November 2017

 

Principal risks and uncertainties

 

The Board considers risk assessment, identification of mitigating actions and internal controls to be fundamental to achieving Dairy Crest's strategic corporate objectives. The principal factors considered when assessing Dairy Crest's ability to achieve its short-term and long-term objectives are:

 

- Economic, cultural and market conditions which influence consumer and customer behaviour;

- 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 2017 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 2017 Annual Report and Accounts on pages 16 to 17.

 

INDEPENDENT REVIEW REPORT TO DAIRY CREST GROUP plc

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30th September 2017 which comprises the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and 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 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. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, 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 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 30th September 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

 

Deloitte LLP

Statutory Auditor

London, United Kingdom

8th November 2017