Dairy Crest Regulatory News (DCG)

23 May 2018

Dairy Crest Group plc ("Dairy Crest")

Preliminary Results Announcement for the year ended 31 March 2018

Highlights

• Group revenue up 10% to £456.8m

• Cathedral City revenue grows by 6%

• Spreads brands increase revenue by 10%

• Sales channels developing for GOS beyond infant formula

• Adjusted profit before tax* rises 3% to £62.3m; reported profit before tax (after net exceptional items**) up 345% to £179.2m

• EBITDA* increases 8% to £90.2m

• Pension surplus of £93.9m - an improvement of more than £200m

• Net debt* of £265.7m to fund higher value stock

• Innovation accounts for 14% of total revenue***

*Alternative performance measures:

The Group uses alternative performance measures (APMs) as key financial performance indicators to assess the underlying performance of the Group. The APMs used are widely used industry measures and form the measurement basis of key targets. Definitions of the APMs discussed throughout this document and a reconciliation to the equivalent statutory measure are detailed in Note 22.

** Further detail on exceptional items can be found in Note 5.

*** Revenue from new products launched within the past three years

Commenting on the results, Mark Allen, Chief Executive, said:

"This has been a year of considerable progress for Dairy Crest. We have delivered a strong performance, broadly maintaining our industry-leading margins against a backdrop of unprecedented cost inflation in the butters market. Our brands are in good shape. Cathedral City has had a good year growing value, volume and market share, and we see plenty of room for further growth for this industry-leading brand. We have seen good momentum in revenue growth going into the new financial year.

"With much of the groundwork now complete, we expect sales of demineralised whey at infant formula grade to accelerate further over the coming year. We have already established ourselves as a leading supplier for organic GOS and we are also making good progress in developing a market for GOS beyond infant formula, having carried out research which has shown the meaningful benefits of using this product in animal feed.

"We will continue to invest in our brands, supply chain and infrastructure to ensure that we are well positioned to capitalise on future growth opportunities."

A video interview with Mark Allen and Tom Atherton is available from the investor section of the Group's website www.dairycrest.co.uk/investors. There will be an analyst and investor meeting at10:30 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED, following which an audiocast of the presentation will also be available on the website.

Dairy Crest

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 330 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-oligosaccharides (GOS) facilities at our Davidstow site in Cornwall. We recognise that superior facilities deliver significant operational advantages.

Cost benefits 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 grow leading brands like Cathedral City.

Chief Executive's Review

I am pleased to report that our brands have delivered a strong combined performance this year. Cathedral City has been the key driver but our spreads and oils brands have also produced excellent growth, allowing us to deliver overall Group revenue growth of 10%. Country Life has had a more challenging year due to unprecedented input cost inflation. More infant formula customers for both demineralised whey and GOS have been secured and we are also making progress in selling GOS to the adult and animal nutrition markets under our trade mark brands, Promovita and Nutrabiotic.

Managing fluctuations in input costs is part of the normal course of business at Dairy Crest. Although there has been considerable volatility in the dairy markets during the year, our operating margin has remained comparatively stable which is testament to the resilience of our business model.

We have made significant progress in reducing our pension liabilities so the fund is now in surplus on an accounting basis, due largely to the agreed change to the indexation of pensions in payment. Cheese stocks, which have risen significantly in value due to the increase in the input cost of milk, built up during the year which led to net debt increasing to £265.7 million. The stock will be sold through this year and working capital requirements are starting to ease as milk and cream costs have reduced.

Market background

Following a two year period of extremely low milk prices, they started to rebound in August 2016 and the price increases continued for much of the first half of our financial year. As the milk supply started to increase, we reduced our milk price in the latter part of the year, although it stayed above 30 pence per litre until March 2018 and remains one of the highest in the country.

Milk supplies were affected across the country in the fourth quarter due to the severe weather conditions. Farmers and delivery drivers had to contend with extremely challenging conditions but our team worked hard to minimise any adverse impact.

Cream prices, which determine the input costs for our butter business, rose by 65% between April and August 2017 to reach £2.85 per litre. They fell back to just below £2.00 per litre by the end of the financial year although they have started to firm again. As a comparison, the average cream price over the previous three years was £1.20 per litre. We were able to partially offset the cost impact on our Butters, Spreads & Oils division by selling excess cream and whey butter generated in our Cheese & Functional Ingredients business.

The input cost inflation resulted in considerable increases in the retail price of butter over the period. Spreads, and Clover in particular, were the major beneficiaries as consumers switched to cheaper alternatives. Retail prices also started to increase for cheese in the second half of the year.

Healthy brand revenue growth

In aggregate, revenues of our four key brands (Cathedral City, Clover, Country Life and Frylight) grew by 6% during 2017/18. Positive volume growth for Cathedral City, Clover and Frylight was offset by Country Life which we chose not to promote for most of the year to protect margins.

* Dairy Crest volume and value sales 12 months to 31 March 2018 vs 12 months to 31 March 2017

Cathedral City revenues increase

Cathedral City delivered a strong performance over the year, generating volume growth of 3%, revenue growth of 6% and an increase in market share. In comparison, IRI Kantar data for the 52 weeks ended 24 March 2018 showed that the total everyday cheese market grew by 2% in volume and 5% in value terms.

Cathedral City is a top 20 food grocery brand in the UK. It can be found in more than half of all fridges across the country and represents 55% of branded cheddar sales. It is by far the largest cheddar brand in the UK by retail sales value and is more than three times the size of the number two brand. However, with around 65% of everyday cheese sales still attributed to private label products, there is plenty of room for further growth.

The Cathedral City snack bar was launched at the end of the previous financial year. Sales are accelerating and it is now present in most convenience stores as well as increasingly being stocked in the 'on-the-go' section at the front of supermarkets. Snacking is a core part of the Cathedral City growth strategy and we are developing further innovations in this area, as well as expanding sales channels to include travel hubs, for example.

One of our more recent innovations, Cathedral City Spreadable, won Product of the Year 2018 in the UK cheese category of the world's largest consumer survey award for product innovation. We were also pleased to be the lead sponsor on a new ITV quiz show - Britain's Brightest Family - which attracted an average of almost 4 million viewers in a prime time evening slot for a 15 week period in 2018.

Spreads brands grow strongly; butter contends with considerable price inflation

All four of Dairy Crest's spreads brands grew revenues over the year, delivering a combined uplift of 10% compared to the overall spreads market which was flat, according to IRI Kantar data.

Following on from its success in winning the spreads category Product of the Year 2017 award, Clover delivered another strong year of both volume and revenue growth at 3% and 7% respectively. As the only major spreads brand with no artificial ingredients it has clearly positioned itself as the leading UK dairy spread with 20% of the spreads market by volume. We expect to launch Clover Lighter with no artificial ingredients later this year.

Our other spreads brands also performed extremely well. They all grew revenues and gained market share over the year. Willow and Vitalite, the UK's number one dairy-free spread, both generated high double digit volume and revenue growth. Dairy Crest's overall volume share of the spreads market has now reached 30%.

Country Life revenue was flat this year but volumes fell by 20% as we chose not to promote the brand in light of the considerable input cost inflation. According to IRI Kantar, average butter prices on shelf increased by over 20% during the period, compared with spreads prices which grew by just 2%.

We relaunched the Country Life packaging in November 2017 to further emphasise its British heritage which has resonated well with customers, and promotions were introduced again at the end of the year.

Frylight growth continues

Frylight, the one calorie cooking spray, has delivered double digit volume growth each year since we acquired it in 2011. In 2017/18 volumes increased by 12% and revenues grew by 13%, confirming its position as the UK's leading oil brand. The oils market in the UK grew volumes by 3% and revenues by 6%, according to Kantar data for the 52 weeks ended 25 February 2018.

Frylight represents 9% of total UK oil market sales and 88% of the spray oil market. As the Frylight range has increased, so too has its presence on retailers' shelves. During the year the brand benefitted from an additional 5,000 new distribution points and is now listed in all the major supermarkets and discounters. Itsu, the Asian-inspired food chain, has also started using Frylight in its 70 UK shops.

Establishing customer base for demineralised whey

We manufacture approximately 50,000 tonnes of cheddar at our Davidstow creamery each year which results in a by-product of whey. By removing the water and 90% of the minerals, we produced 24,000 tonnes of demineralised whey (D90) this financial year. Operational stability improved during the year and we focussed our efforts on establishing our credentials as a trusted supplier which has taken longer than expected and also involved some promotional activity. This has resulted in an exceptional item which is described in further detail in the Financial Review. In spite of that, Functional Ingredients revenue increased by 51% over the year.

Quality controls surrounding ingredients for infant formula are rightly demanding. In partnership with Fonterra we welcomed many potential customers to Cornwall during the year to showcase the technical operation, process management and the quality and provenance of the product. Our high quality, traceable milk supply should mean that we can generate a premium price for our product going forward, particularly as customers are placing even greater emphasis on transparency and product traceability.

Demand for dairy products remains strong in China, with overall dairy imports into the country increasing by 20% for the 12 months to January 2018 and infant formula manufacturers reporting strong revenue growth.

In conjunction with our sales partner, Fonterra, we acquired business for D90 from a number of global and regional infant formula manufacturers by the end of the financial year and we expect demand to continue to build in the coming months.

Galacto-oligosaccharides (GOS) research continues

GOS is a prebiotic derived from the lactose in cow's milk and is used in infant formula to help support babies' natural defences, increase mineral absorption and aid digestive comfort. GOS feeds 'friendly' bacteria within the large intestine, encouraging them to thrive and helping to maintain a healthy gut.

As with demineralised whey, it has taken time for the plant to stabilise but through our sales and marketing partner, Fonterra, we have been selling GOS to infant formula manufacturers throughout the year and sales are growing steadily. Volumes are expected to increase in the year ahead. Demand for organic infant formula in particular is growing more rapidly and we have established ourselves as a leading supplier in this area.

Nutrabiotic GOS is the brand we have developed for use in animal feed. There are a number of challenges facing the meat industry currently, including a rise in global meat consumption, growing awareness of quality and safety and regulatory changes such as restrictions on the use of antibiotics. GOS can, through the creation of a healthy gut, help to improve efficiency of animal production and potentially reduce the need for antibiotics.

Over the past year we have conducted a number of academic and commercial trials on chickens and pigs with significant results. The trials have shown that GOS has a positive impact on a number of aspects of the animals' physiology which lead to weight gain and improvements in the feed conversion ratio. We now have a substantial amount of empirical data to illustrate these aspects which is leading to significant interest from potential customers.

Our research on pigs shows that weight gain continued after GOS was withdrawn from the feed, indicating that GOS only needs to be included in the early stages of an animal's diet, and not throughout its lifetime, to obtain the desired results. This helps to reduce the feed cost for the producer which is a key consideration in our conversations with potential customers.

GOS-fed chickens outperformed the control groups in terms of weight gain and were also more efficient in converting feed. In addition, we have research that demonstrates the benefits that GOS brings in supporting the resilience of bird health.

Additional studies on calves and fish have started recently. We are working in conjunction with a number of academic institutions and commercial partners to conduct trials, including Danisco Animal Nutrition - part of DuPont. We also have interest from a number of global feed manufacturers and animal producers, with the level of attention continuing to grow.

Promovita GOS is the brand we use for human nutrition. The global digestive health food market is worth over £44 billion and growing. There are a number of major food companies looking into the potential of including GOS in their products to promote gut health, increase fibre content and replace sugar. Our primary focus at the moment is on yoghurt, dairy beverage and cereal manufacturers which we think are best suited to GOS's dairy foundations.

Focus on innovation

Innovation is at the heart of our business. Our innovation centre is now firmly established on the campus of agricultural university, Harper Adams. 14% of our revenue this year came from innovations developed during the previous three years, driven largely by the success of Clover with no artificial ingredients. We are particularly proud of this product as it is still the only dairy spread with these 'natural' credentials.

In March 2017 we launched the Cathedral City snack bar which significantly enhanced our adult snacking offer. Take up by retailers has been high and we are making firm progress in establishing the snack bar in the 'on-the-go' category. Innovation will continue to drive our business forward.

In 2016, as part of the review of our Corporate Responsibility programme, we committed to deliver annual increases in the percentage of recyclable packaging used across our product groups, with the goal to be 100% recyclable by 2021/22. At present, 80% of all our packaging is recyclable.

As signatories of Courtauld 2025[1] and working members of WRAP[2], we are working to improve packaging, manufacturing efficiencies and reduce consumer food waste. We are also acutely aware of the need to provide responsible packaging with on-pack advice to consumers regarding storage and recycling. With one in three tonnes of food produced globally being wasted, the effect of household food waste is a pressing issue.

Our innovation team is looking at ways in which we can reduce the packaging of our products whilst maintaining freshness, hygiene and food safety, while also increasing the percentage of our packaging that is fully recyclable.

Driving efficiencies

We are a simple, lean and efficient business. We have five well-invested operating sites employing around 1,100 people. At the end of 2017 we moved production at our butters and spreads site in Kirkby onto a 24/7 manufacturing schedule which allows us to be more flexible in the face of changing market conditions. The restructuring has resulted in one-off exceptional costs of approximately £5 million but will reduce the annual cost base by £2.5 million from the next financial year onwards. We intend to sell surplus land on the site for redevelopment which should cover these exceptional costs.

The project to replace our bespoke IT systems with a standardised product is progressing well. We completed the first phase in early 2018 which incorporated our finance and payment systems. Phases two and three are underway and will bring supply chain and receipts onto the new platform. Once the new system has been fully rolled out, we expect to make annualised cost savings of around £5 million from 2019/20.

Looking ahead

This has been a year of considerable progress for Dairy Crest. We have delivered a strong performance, broadly maintaining our industry-leading margins against a backdrop of unprecedented cost inflation in the butters market. Our brands are in good shape. Cathedral City has had a good year growing value, volume and market share, and we see plenty of room for further growth for this industry-leading brand. We have seen good momentum in revenue growth going into the new financial year.

With much of the groundwork now complete, we expect sales of demineralised whey at infant formula grade to accelerate further over the coming year. We have already established ourselves as a leading supplier for organic GOS and we are also making good progress in developing a market for GOS beyond infant formula, having carried out research which has shown the meaningful benefits of using this product in animal feed.

We will continue to invest in our brands, supply chain and infrastructure to ensure that we are well positioned to capitalise on future growth opportunities.

Mark Allen

Chief Executive

22 May 2018

Financial Review

Overview

We have continued to make progress in 2017/18. We have managed the business through a period of high input cost increases and delivered broadly stable margins compared to the prior year. More importantly, we have also continued to invest in the future:

· our functional ingredients business is growing and we are developing opportunities for GOS beyond infant formula markets;

· we have delivered significant operational changes at our butters and spreads site in Kirkby that deliver increased flexibility and efficiency; and

· we have delivered the first phase of an IT transformation project that will allow us to reduce complexity and costs.

These initiatives further develop the business and will support future growth.

Overall, the financial performance of the Group during the year has been robust despite significant price inflation in the first nine months of the year. Revenue increased by 10% and product group profit increased by 5% to £71.8 million. Reported profit before tax increased 345% to £179.2 million due to the exceptional income of £130.9 million recognised in relation to the reduction in pension scheme liabilities.

We continue to tightly manage the balance sheet, although the scale of input cost inflation has temporarily inflated stock valuations and levels of debt at 31 March 2018. Other working capital has generated cash and the pension fund has moved from a £109.6 million deficit at 31 March 2017 to a £93.9 million surplus at 31 March 2018, primarily as a result of moving the basis of indexation for pensions in payment from RPI to CPI. This is a permanent reduction in future scheme liabilities that would otherwise have to be funded by the Group.

Revenue

We continue to provide product group analysis consistent with prior years to assist the users of the Financial Statements, although the Group continued to operate as one segment throughout the year ended 31 March 2018.

Revenue increased by 10% to £456.8 million with increases across all parts of the business except "Other" which comprises third party warehousing revenue.

Cheese revenues were up 4% as we started to recover increases in the cost of milk. In the second half of the year we focussed on pricing in a market where milk input costs were high. We chose not to discount too heavily, especially in the final quarter, as we are confident of selling year end cheese stocks in 2018/19. The Group benefitted from increased sales of our Davidstow by-products, cream and whey butter, as well as D90 and GOS which saw Functional Ingredients revenue increase 51%.

Butter revenue was up 25%, reflecting price increases achieved to mitigate the unprecedented increase in butter input costs across 2016 and 2017. In this environment, Country Life volumes fell as promotional activity was scaled back, however other own-label and bulk butter sales increased. Spreads revenue growth of 10% reflected volume gains across all of our brands and momentum is building - sales in the second half were 13% ahead of last year. Frylight achieved 13% revenue growth and 12% volume growth in the year.

Profit on continuing operations

Overall product group profit increased by £3.5 million to £71.8 million and the margin decreased slightly to 15.7% (2017: 16.4%). This margin is after charging all central corporate costs and includes £2.4 million profit (2017: £3.0 million) on the sale of closed depots that were not disposed of as part of the sale of the Dairies business in 2015 to Müller UK & Ireland Group LLP. These depot sales will not repeat in future years. Their treatment as operating income is consistent with the treatment in previous years of the related closure costs. Future sales of ex-manufacturing sites such as Crudgington, Shropshire will be classified as exceptional, consistent with the historic treatment of the related closure costs.

Cheese & Functional Ingredients product group profits increased by 17.1% and the margin increased to 18.1% (2017: 16.8%). This reflects an improved Functional Ingredients performance and a rising dairy market where selling price increases were achieved. However, the full impact of milk input cost increases will not be felt in cost of sales until 2018/19 given the year-long average maturation cycle of our cheese.

Butters, Spreads & Oils product group profits of £21.7 million (2017: £25.5 million) were £3.8 million lower than 2017 with profit margins of 12.5% (2017: 16.9%) reflecting the competitive butters and spreads market and significantly higher butter input costs. However, margins in the second half increased markedly versus the 3.7% delivered in the first six months of the year as cost pressures abated somewhat.

Exceptional items

Pre-tax exceptional gains from continuing operations amounted to £118.0 million (2017: £19.1 million charge).

Exceptional income of £130.9 million was recognised in relation to the reduction in pension fund 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 a closed dairy facility in Fenstanton, Cambridgeshire.

Exceptional income was partly offset by certain exceptional charges.

Firstly, the Group incurred £5.4 million of restructuring costs at the butters and spreads facility in Kirkby where a number of initiatives have been implemented in order to improve efficiency across the site. These one-off costs should, in time, be broadly offset by the sale of surplus land on the site.

Secondly, we have recognised a net exceptional charge of £5.6 million with respect to the Functional Ingredients facility at Davidstow. This comprises £8.5 million of costs partly offset by £2.9 million received in settlement of project related litigation. Demineralised whey and GOS production stabilised over the course of the year, however £3.8 million of exceptional commissioning production costs were incurred, of which £2.9 million were in the first half of the year. In addition, sales of both demineralised whey and GOS have been underpinned by promotional activity in infant formula markets where complex product formulation results in long lead times for customers switching their ingredients suppliers. We have prudently written down the carrying value of certain formulations recognising these factors. This level of exceptional spend is higher than anticipated at the start of the year, albeit significantly below the £19.0 million incurred in the year ended 31 March 2017. There will not be any further exceptional items in 2018/19 in relation to this project.

Finally, we have recognised a non-cash write down of £2.6 million for certain legacy IT assets that are being replaced as part of a two year programme to replace our core IT infrastructure. This work will enable a significant reduction in the complexity and costs of the Group's core processes and should deliver savings of approximately £5 million per annum following its completion in early 2019.

Exceptional items in the year ended 31 March 2017 related predominantly to the building and commissioning of the demineralised whey and GOS facilities at the Davidstow creamery in Cornwall.

Finance costs

Finance costs of £9.5 million increased by £1.8 million in the year. This reflects lower levels of interest capitalisation following the completion of the building of the demineralised whey and GOS facilities at Davidstow. Capitalised interest costs in the year amounted to £0.3 million (2017: £3.1 million) and the charge in the income statement is now broadly equal to cash costs.

Interest cover excluding pension interest calculated on total product group profit was 7.8 times(2017: 9.1 times). This is comfortably above the 3.0 times minimum requirement in the Group's banking covenants.

Other finance expenses, which comprise the net expected return on pension fund assets after deducting the interest cost on the defined benefit obligation, decreased slightly to £0.7 million (2017: £0.8 million). These costs are dependent upon the pension fund position at 31 March each year and are volatile, being subject to market fluctuations. We therefore exclude this item from adjusted profit before tax.

Profit before tax - continuing operations

Adjusted profit before tax increased by 2.8% to £62.3 million. Reported profit before tax of £179.2 million represents a £138.9 million increase from 2017, predominantly due to the exceptional gain in relation to the pension fund of £130.9 million.

Taxation

The Group's effective pre-exceptional tax rate on continuing operations was 17.3% (2017: 18.0%). The effective tax rate is slightly below the headline rate of UK corporate tax as we sold a small number of properties, the profits on which are offset by brought forward capital losses or roll over relief.

Earnings per share

The Group's adjusted basic earnings per share from continuing operations increased by 3% to36.7 pence (2017: 35.6 pence) reflecting the increase in post-tax profits. Basic earnings per share from continuing operations, which includes the impact of exceptional items, pension interest expense and the amortisation of acquired intangibles, amounted to 106.6 pence (2017: 23.7 pence).

Discontinued operations

There was no discontinued gain or loss recorded in the year ended 31 March 2018. The post-tax profit on discontinued operations in the previous year totalled £5.2 million and related to previously sold businesses in the UK and France.

Group result for the year

The reported Group profit for the year from continuing operations was £149.5 million(2017: £33.1 million). The profit for the year attributable to equity shareholders was £149.5 million(2017: £38.3 million).

Dividends

The proposed final dividend of 16.3 pence per share is in line with the previous year. Together with the interim dividend of 6.3 pence per share (2017: 6.2 pence per share) the total dividend for the year is 22.6 pence per share (2017: 22.5 pence per share). This represents a 0.4% increase in line with our progressive dividend policy. The final dividend will be paid on 10 August 2018 to shareholders on the register on 6 July 2018.

Dividend cover of 1.6 times is within the Board's target range of 1.5 to 2.5 times (2017: 1.6 times).

Pensions

At 31 March 2018 the Group had a pension surplus of £93.9 million. This represents a £203.5 million improvement compared to the deficit in March 2017 of £109.6 million.

The March 2018 position now 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 contributions has been agreed and this resulted in cash contributions of £10.7 million in 2017/18 (2017: £12.9 million) and will result in £14.2 million in 2018/19. Beyond that, contributions will revert to £20 million per annum, although the new triennial valuation in March 2019 will determine contributions beyond then when agreed.

We continue to manage pension fund liabilities and during the year a Flexible Retirement Option programme was undertaken resulting in £13.3 million of liabilities being permanently removed from the fund (2017: £18.8 million).

Cash flow

The Group delivers strong operating margins and is growing. This generates good underlying cash flows: EBITDA of £90.2 million is £6.5 million, or 8%, higher than last year. This year we have continued to develop the business for the medium term by investing in our spreads and butters facility at Kirkby, building a new streamlined group-wide IT system and refining the functional ingredients operations at Davidstow. Furthermore the business absorbed a significant increase in milk input costs during the year.

Higher milk cost is the principal reason for a stock value of £183.5 million at 31 March 2018, approximately £30 million higher than the year before. This stock will be sold in 2018/19 and we have achieved selling price increases in the market that have helped the Group broadly maintain margins. However, these temporary stock increases were only partly funded through debt. Overall net debt increased by £16 million during the year, albeit the excess of net debt over stock value of £82.2 million is as low as it has been in the last two years and represents less than one year of EBITDA.

Cash generated from operations increased to £33.7 million (2017: £32.8 million) despite being impacted by the higher cost of raw materials going into cheese and functional ingredients. There was a net cash inflow across debtors and creditors of £1.5 million (2017: £4.4 million). Debtor days of 12 is the lowest that the Group has ever achieved and represents a reduction of four days compared to last year.

Capital expenditure totalled £31.2 million (2017: 25.6 million). The main individual item was £8.6 million expenditure on new IT systems as part of a two year replacement programme that will generate savings of at least £5 million per annum from 2019. Approximately £3.9 million was spent in the first half of the year at Davidstow in relation to previously accrued functional ingredients investments. Other capital expenditure totalled £18.7 million and included: improvements to waste water treatment; Kirkby production line enhancements as part of the improvement initiative programme; and the buyout of leased units at our Frylight site giving us complete ownership of all operating facilities.

Asset sales comprised £22.1 million (2017: £42.4 million) and comprised £7.4 million in relation to previously closed properties (2017: £4.5 million) and a further £14.7 million through the sale and leaseback of certain equipment at Kirkby (2017: £37.9 million at Davidstow).

Borrowing facilities

Total borrowing facilities comprise £368 million Sterling equivalent.

The Group has a five year multi-currency revolving credit facility for £240 million, all of which expires in October 2020 following the agreement of the banks in September 2017 to extend £80 million of the facility by two years.

At 31 March 2018 the Group had a swapped Sterling equivalent of £128.2 million of loan notes outstanding maturing between 2018 and 2026.

Treasury policies

The Group operates a centralised treasury function which controls cash management and borrowings and the Group's financial risks. The main treasury risks faced by the Group are liquidity, interest rates and foreign currency. The Group only uses derivatives to manage its foreign currency and interest rate risks arising from underlying business and financing activities. Transactions of a speculative nature are prohibited. The Group's treasury activities are governed by policies approved and monitored by the Board.

Tom Atherton

Deputy Chief Executive & Group Finance Director

22 May 2018

Consolidated income statement

Year ended 31 March 2018

*Further detail provided in note 5

Consolidated statement of comprehensive income

Year ended 31 March 2018

All amounts are attributable to owners of the parent.

Consolidated balance sheet

At 31 March 2018

Consolidated statement of changes in equity

Year ended 31 March 20

Consolidated statement of cash flows

Year ended 31 March 2018

*Denotes an alternative performance measure as described in note 22

Notes to the preliminary announcement

1 Basis of preparation

The consolidated financial statements have been prepared in accordance with the Disclosure Transparency Rules of the UK Financial Services Authority, International Financial Reporting Standards ("IFRS") and International Financial Reporting interpretation committee ("IFRIC"), interpretations as endorsed by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Except as described, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2017, as described in those financial statements.

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

· IAS 7 'Disclosure Initiative' - Amendments to IAS7

· IAS 12 'Recognition of Deferred Tax Assets for Unrealised Losses' - Amendments to IAS 12

· IFRS 12 'Disclosure of Interests in Other Entities' - Clarification of the scope of the disclosure requirements in IFRS 12

The application of these standards has had no material impact on the net assets, results and disclosures of the Group in the year ended 31 March 2018.

The financial information set out in this document does not constitute the statutory accounts of the Group for the years ended 31 March 2018 or 31 March 2017 but is derived from the 2018 Group Annual Report and Financial Statements. The Group Annual Report and Financial Statements for 2018 will be delivered to the Registrar of Companies in due course. The auditors have reported on those accounts and have given an unqualified report, which does not contain a statement under Section 498 of the Companies Act 2006.

Principal risks

The main factors that could affect the business and the financial results are described in the Principal Risks section of the 31 March 2017 Annual Report. There have been no changes in the risks identified for the year ended 31 March 2018.

Going concern and viability

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. Accordingly, they continue to adopt the going concern basis in preparing the financial statements of the Group.

The Directors have assessed the Group's viability over a longer period than the twelve months required by the 'Going Concern' statement in accordance with the 2014 UK Corporate Governance Code. The Directors have assessed the Group's viability over the three year period ending 31 March 2021 which aligns with the Group's planning process. This period is considered an appropriate balance between the need to provide a longer term outlook, and the need for a reasonable degree of confidence in that outlook in a fast-moving industry

Keys areas of estimation and judgement

The Directors have determined the key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are in respect of the key assumptions used in valuing the Group's retirement benefit obligation. Key areas of judgement include the classification of exceptional items, a contingent liability in respect of Chadwell Heath, a contingent liability in respect of litigation, the recognition of a deferred tax asset relating to trading losses and the judgement made around operating segments.

Director's responsibilities

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 March 2018. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge that:

· the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

· the management report, which is incorporated into the Strategic Report and Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors and is signed on its behalf by

Mark Allen Chief Executive

Tom Atherton Group Finance Director

22 May 2018

Notes the preliminary announcement

2 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 continuing 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 product group and the butters, spreads and oils product group results included within the consolidated income statement. In disclosing the product group profit for the year, certain assumptions have been made when allocating resources which are centralised at a group level.

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.

2 Segmental analysis (continued)

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

*Denotes alternative performance measures as described in note 22

2 Segmental analysis (continued)

Notes to the preliminary announcement

2 Segmental analysis (continued)

Interest income and expense are not included in the measure of product group profit. Group treasury has always been centrally managed and external interest income and expense are not allocated to product groups. Further analysis of the Group interest expense is provided in Note 6.

Tax costs are not included in the measure of product group profit.

Product group assets comprise property, plant and equipment, goodwill, intangible assets, inventories, receivables and cash and cash equivalents. They exclude derivative financial assets and deferred tax assets. Other product group assets comprise certain property, plant and equipment that is not reported in product groups.

Product group depreciation and amortisation excludes amortisation of acquired intangible assets of £0.4 million (2017: £0.4 million) as these costs are not charged in the product group result.

Product group additions to non-current assets comprise additions to goodwill, intangible assets and property, plant and equipment through capital expenditure and acquisition of businesses.

*Comprises property, plant and equipment, goodwill, intangible assets, investments, deferred tax asset and assets held for sale.

The Group has three customers which individually represent more than 10% of revenue from continuing operations in the year ended 31 March 2018 (2017: three) with each customer accounting for £51.0 million, £54.3 million and £98.3 million (2017: £54.2 million, £56.2 million, and £92.7 million) of revenue from continuing operations being 11.2%, 11.9% and 21.5% (2017: 13.0%, 13.5% and 22.3%).

3. Operating costs - continuing operations

4 Other income - property

Other income of £2.4 million (2017: £3.0 million) relates to the profits from the disposal of closed Dairies depots retained by Dairy Crest.

Notes to the preliminary announcement

5 Exceptional items

Exceptional items comprise those items that are material 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 charge to the operating costs of the continuing operations are analysed below. The exceptional items charged in relation to discontinued operations are analysed in Note 8.

Demineralised whey powder and GOS projects

During the year ended 31 March 2017, the Group completed an 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 year ended 31 March 2018, £8.5 million of costs were charged to the income statement offset by £2.9 million received in settlement of project related litigation. Costs were incurred in two areas; £3.8 million relating to commissioning production costs and £4.7 million resulting from the write-down of stock. Demineralised whey and GOS production has stabilised over the course of the year, however the production of GOS to exacting standards was impacted by commissioning issues which has led to the write-down and rework of some inventory during the year. Production volumes of GOS have increased as the year has progressed, which has been necessary to ensure the consistent production of high quality product. However we have experienced delays in establishing our customer base due to the complexity of product formulation and the customers' qualification and audit requirements. As we build our customer base in both demineralised whey and GOS, we have offered pricing incentives to establish new customers. This has been reflected in the net realisable value of the inventory held at the year end. This level of exceptional spend was higher than anticipated at the start of the year albeit significantly below the £19.0 million incurred in the year ended 31 March 2017. We do not expect further exceptional items in 2018/19. The tax credit relating to this exceptional charge was £0.9 million (2017: £3.1 million).

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 year ended 31 March 2018, costs of £5.4 million were incurred, as a result of headcount restructuring and project management at the site as well as some project consultancy costs. The tax credit in respect of this charge is £0.9 million. Management considers the costs to be exceptional due to the materiality of the costs and one-off nature of the project and expects further costs of between £1.0 million and £2.0 million in the year ending 31 March 2019. In the medium term, the costs of restructuring should be partly offset by the proceeds from the sale of surplus land on the site. Any future profits resulting from the sale of land will also be treated as an exceptional item.

Restructuring costs resulting from changes to IT systems

In 2016, the Group undertook a project to replace its manufacturing, purchasing and financial systems. The implementation of the new systems began in November 2017 and will be phased gradually throughout 2018 and 2019. As a result of this, during the year ended 31 March 2018, the Group impaired intangible assets of £2.5 million associated with the old systems. As the project continues, costs that relate to the restructuring of the departments required to support the new systems will be incurred and charged to the project. £0.1 million of restructuring costs have been incurred in the year ended 31 March 2018. The tax credit in respect of this charge was £0.5 million. Management considers these costs to be exceptional due to the materiality of the costs and the one-off nature of the project to which they relate and expects further costs to be incurred in respect of this project in the year ending 31 March 2019.

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 31 March 2018 resulting in an exceptional gain, net of costs, of £130.9 million. The tax charge in respect of this gain was £22.1 million. Management considers this gain to be exceptional due to the materiality and one-off nature of the gain.

Profit on sale / (disposal costs) in relation to closed manufacturing sites

In the year ended 31 March 2018, the Group disposed of a closed manufacturing facility in Fenstanton, Cambridgeshire 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

Notes to the preliminary announcement

5 Exceptional items (continued)

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 prior year, 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.

Prior Year

Settlement gain in relation to Farmright Limited and Quadra Foods Limited

On 9 May 2016, 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. Management considered this credit to be exceptional due to it being one-off in nature and in relation to the debt of Quadra Foods Limited, for which £4.3 million was provided for under an exceptional impairment provision in the year ended 31 March 2012. The tax charge in relation to this release was £0.4 million.

6 Finance costs and other finance income

Interest payable on bank loans and overdrafts is stated after capitalising £0.3 million (2017: £3.1 million) of interest on expenditure on capital projects at a rate of 4.0% (2017: 4.0%). The tax impact of the capitalised interest was £0.1 million (2017: £0.6 million).

7 Tax expense

Continuing operations

The major components of income tax expense for continuing operations for the years ended 31 March 2018 and 2017 are: