24 May 2006 07:02
Dairy Crest Group PLC24 May 2006 24 May 2006 Dairy Crest Group plc ("Dairy Crest") PRELIMINARY RESULTS ANNOUNCEMENT Dairy Crest, the UK's leading branded dairy foods group, today announces itsaudited results for the year ended 31 March 2006: Financial Highlights: 2005/06 2004/05 Revenue (including share of joint ventures): £1,424.2m £1,348.8mProfit before tax: £41.3m £70.2mAdjusted profit before tax*: £67.7m £75.7mEarnings per share: 27.1p 41.4pAdjusted earnings per share*: 40.3p 43.9pYear-end net debt: £280.2m £227.5mTotal dividend for the year: 21.5p 20.2p* including share of joint ventures and before exceptional items andamortisation of acquired intangibles Business Highlights and Recent Developments: • Brand portfolio making good progress: - o Strong performances from Cathedral City, Clover, Country Life Spreadable and the Yoplait brands o Active programme of new product development with emphasis on functional foods including launch of St. Ivel advance and St. Ivel Gold with Omega-3 o Recent launch of Cathedral City Mild • Dairies division strengthened: - o Integration of Midlands Co-op Dairies and Foston (Starcross Foods) into Dairies division completed on time and to plan o Successful implementation of additional Morrisons fresh milk volume o Better balance of industry supply and demand in fresh milk o Good performance by household business • Full year dividend increases by 6.4% Drummond Hall, Chief Executive, Dairy Crest Group plc said:"The Group has delivered results in line with expectations. Whilst markets forown label and commodity products continue to be challenging, trading at thestart of the new financial year is on track. We expect our brand portfolio,supported by marketing investment and further new product development, tocontinue to make good progress. The Group should also benefit from the actionswe have taken to strengthen the Dairies division." For further information:Dairy Crest Group plc Tel: 01372 472200Drummond Hall, Chief ExecutiveAlastair Murray, Finance Director Will Shaw, Investor RelationsSinead Noble, Corporate Communications Brunswick Tel: 020 7404 5959William Cullum / Laura Cummings High resolution images will be available at www.newscast.co.uk. Chairman's Statement Dairy Crest has performed well in the second half of the year ended March 2006,despite the difficult overall trading environment, and reported full yearadjusted profit before taxation of £67.7 million, in line with expectations, onrevenue of £1,424.2 million (including share of joint ventures) and adjustedearnings per share of 40.3 pence. Reported profit before taxation was £41.3million. The Board is recommending an increase in the final dividend of 6.3% to 15.2pence per share. This together with the interim dividend of 6.3 pence makes atotal dividend for the year of 21.5 pence per share, an increase of 6.4%. TheBoard remains committed to a progressive dividend policy. The focus of the Group's strategy continues to be on growing the added value andbranded side of the business, which we have supported by increased levels ofmarketing expenditure and new product launches. The success of this strategy hasbeen evident in our Foods division, which has had another good year with astrong performance from a number of the key brands including Cathedral City,Clover, Country Life and the Yoplait brands. In the Dairies division theperformance reflects the adverse impact on the retail milk business from lastyear's supply changes in the fresh milk sector. The household side of theDairies division has continued to perform well generating good profits and cashfor the Group. Our Dairies division has been strengthened by strategicacquisitions and volume realignment across our operations. We are also investingto develop a branded position with the launch of St. Ivel advance. Taken as awhole these management actions and a better balance of industry supply anddemand should lead to an improved performance by the Dairies division in 2006/07. We continue to value the strong relationship that we have built up with our milksuppliers and in particular, Dairy Crest Direct, our direct milk supplyassociation. During the year the number of direct suppliers has risen to over1,600 representing over 70% of our milk requirements. Our close workingrelationship is built on trust, transparency, and the desire to plan togetherfor the mutual benefit of both milk suppliers and the Group. This partnershipapproach will enable us and our milk suppliers to deal more effectively with thedairy reforms of the Common Agricultural Policy currently being implemented. In August 2006, the Group will reach its tenth anniversary as a quoted companyon the London Stock Exchange. The Group has grown significantly since 1996 anddelivered good long term returns to shareholders, significantly ahead of theFTSE250 Index, both through share price appreciation and dividend growth. Thissuccessful performance reflects both the robustness of our long-term strategy todevelop the branded and added value side of the business and the dedication andhard work of our employees. Simon Oliver, Chairman23 May 2006 Chief Executive's Review OverviewThe Group has delivered results in line with expectations despite thechallenging trading environment and high oil related costs. In particular, aftera difficult first half, we performed well in the second half of the year withprofits up on the second half of last year as well as significantly up on thefirst half of this year. The focus of the Group's strategy continues to be ongrowing the added value and branded side of the business, which we havesupported with increased levels of marketing expenditure partly funded throughincreases in operational efficiencies. We have also been active in new productdevelopment with an emphasis on the functional food area including the launch ofSt. Ivel advance and St. Ivel Gold with Omega-3. Financial resultsGroup revenue (including our share of joint ventures' revenue) was £1,424.2million (2005: £1,348.8 million). Adjusted profit before tax (including share ofjoint ventures and before exceptional items and amortisation of acquiredintangibles) was £67.7 million (2005: £75.7 million), mainly reflecting reducedprofits in our Dairies division. After deducting £22.4 million of exceptionalitems, £1.0 million of acquired intangible amortisation and £3.0 million of taxon joint ventures, profit before tax was down 41% at £41.3 million (2005: £70.2million). Exceptional items include a £9.3 million non-cash impairment charge onthe assets and goodwill of our stilton and speciality cheese business. Adjustedearnings per share decreased to 40.3 pence per share (2005: 43.9 pence). Group net debt as at 31 March 2006 was £52.7 million higher at £280.2 million(2005: £227.5 million) reflecting, in particular, the acquisitions in theDairies division during the year. Continued development of brandsOver the last few years the Group has significantly increased the level ofmarketing support for its portfolio of brands and is now one of the leadingadvertisers in the UK food sector. Future marketing investment is expected togrow at a reduced rate with additional investment primarily being targeted atsupporting our active programme of new product development. During the year weinvested in new television advertising for Cathedral City, Country Life, St.Ivel advance and St. Ivel Gold. Both Cathedral City and Country Life haveperformed particularly strongly, benefiting from this support, and both continueto provide good growth opportunities for the Group within their respectivemarkets. Cathedral City is now worth £106 million at retail value, strengtheningits position as the UK's biggest cheddar brand. This strong brand presence incheese will help to offset downward pressure on market pricing in 2006/07arising from higher industry cheese stocks. During the year there has been continued focus on our new product developmentactivity. Much of this effort has been on moving into the high-value functionalfoods area within the dairy category with particular emphasis on Omega-3. In May2005 we launched St. Ivel advance, a branded fresh milk enriched with Omega-3.While it is still at an early stage of development, volumes and sales areencouraging and the brand has now achieved high levels of trade distribution inthe major retailers. In January 2006, we launched St. Ivel Gold spread withOmega-3 together with new packaging and new television advertising. St. IvelGold, despite having a more difficult year, will continue to be our platform forfurther new product development in the Health sector of the Butter and Spreadsmarket. Other products launched during the year included Country Life Lightly Salted and'Over the Moon', a speciality blended cheese brand. More recently, in May 2006,we have launched Cathedral City Mild to capitalise further on the exceptionalperformance from the Cathedral City brand and help grow this brand across thewider cheddar category. Yoplait Dairy Crest has again launched new productswithin its brand portfolio including Petits Filous Plus, a probiotic drinkingyogurt for children. Since the Group floated ten years ago we have consistently focused on a strategyof building profitable brands both organically and through acquisition. As aresult our brands now represent a significant proportion of group profitability.In 2005/06 the percentage of Group contribution (profit on operations beforeindirect overhead allocation) derived from brands (including joint ventures) was56%. Dairies position strengthenedThis year's performance of the Dairies division reflects the impact of industrysupply changes in 2004 and 2005. In particular, the major retail fresh milkbusiness was impacted by the loss of the Tesco fresh milk supply position fromApril 2005. During the year the Group has been focusing on improvingprofitability and developing a robust and sustainable future for this division.Notably, we were pleased to win additional fresh milk volumes for Morrisons,which we began to supply at the end of October 2005. In May 2005 the Group madethe strategic acquisitions of Midlands Co-op Dairies and the Foston dairy(Starcross Foods) to strengthen the Dairies business and extend its distributioncapabilities northwards. These acquisitions have now been fully integrated intoour business on time and to plan. The Midlands Co-op Birmingham dairy was closedat the end of February 2006 with volume transferred to Foston as well as otherDairy Crest sites. All our dairies are now operating at good levels of capacityutilisation. The Dairies division has again benefited from the strong performance of thehousehold business, which continues to be profitable and cash generative. Theacquisitions of both Midlands Co-op Dairies and Arla's London foodservicebusiness have strengthened the business in both the doorstep operations and inthe middle ground. There are still good opportunities for rationalisation withinthe household sector and we are expecting another good performance in 2006/07following last year's acquisitions. There is now a better balance of supply and demand in retail fresh milk afterseveral site closures across the industry although some uncertainty has beencreated by the reduction in supermarket retail milk prices in March 2006. Whilst margins in our liquid products business have been unsatisfactory they arestarting to improve. In January 2006 the Group achieved price increases on freshmilk with the major retailers to offset higher oil related input costs. Morerecently, we have reduced the raw milk price going into our liquid dairies toreflect lower commodity cream prices. At the same time the Group has beenpursuing a continuous programme of cost reduction with particular projectsfocused on distribution and energy saving. PeopleWe continue to be supported by a talented, dedicated and loyal workforce whoseskills and efforts have been instrumental in achieving our results duringanother challenging year. Through our acquisitions of the Midlands Co-op Dairies, Starcross Foods andArla's London foodservice business, we welcomed several hundred new employeesinto the business. Their co-operation and enthusiasm have enabled us tointegrate the businesses smoothly and to schedule. Our training and development programmes were further enhanced this year with theintroduction of our Leading 4 Change programme aimed at first line managersacross the business. This programme complements our existing management andemployee training schemes. PensionsIn July 2005 the Group announced that it would be closing its final salarypension scheme to new employees joining after 1 April 2006. Followingdiscussions with employees representatives, this date has been delayed to 1 July2006. The gross pension deficit under International Financial ReportingStandards ('IFRS') at 31 March 2006 has reduced to £62.0 million compared to£102.7 million at 31 March 2005. This reduced deficit reflects the strongperformance from the fund's investments and the additional cash contribution of£6 million made in the year offset by the impact of a reduction in the AAcorporate bond yield. This position will result in an increase in the netfinancial income on the pension fund in 2006/07. The pension deficit isextremely sensitive to changes in the underlying assumptions and movements inthe financial markets and is likely to be volatile from year to year. OutlookWhilst markets for own label and commodity products continue to be challenging,trading at the start of the new financial year is on track. We expect our brandportfolio, supported by marketing investment and further new productdevelopment, to continue to make good progress. The Group should also benefitfrom the actions we have taken to strengthen the Dairies division. Drummond Hall, Chief Executive23 May 2006 Operational review FoodsExcept where otherwise stated, the Foods division comprises the spreads andcheese businesses together with our share of the Yoplait Dairy Crest jointventure. Revenue increased slightly to £608.5 million (2005: £605.5 million).Profit on operations, before exceptional items, increased by 13% to £64.2million (2005: £56.7 million) with operating margin, on this basis, up from 9.4%to 10.6%. Reported profit on operations for Foods after exceptional items andexcluding joint ventures' profit on operations was £45.6 million (2005: £48.1million). The spreads business maintained a good level of performance and therewere improvements from both the cheese business and Yoplait Dairy Crest, wheremargins benefited from the closure of the own label operations. SpreadsThe butter and spreads market (excluding cooking fats) grew in the year to March2006 by 2% in value to approximately £860 million and by 1% in volume. Thegreater growth in value reflects the continued general trend towards highervalue products such as spreadable butter and functional health brands. Thehighest growth sector was spreadable butter, which grew by 13% in value and 14%in volume. Dairy spreads declined by 1% by value and 2% by volume. Against this market background, our butter and spreads brands have made progresswith overall sales up 1% by value and 2% by volume. This performance is due to asuccessful portfolio approach towards managing the brands and continuedmarketing support. The strength of our brand portfolio also enabled us toachieve price increases during the year. Our leading Dairy Spreads brands, Clover and Utterly Butterly, have continued togrow market share. Clover had a particularly good year with sales growth of 5%year on year reflecting the benefit of price increases achieved during the year.Utterly Butterly whilst showing a 2% decline in sales value increased volume by7% and performed well against its principal competitor. Country Life has performed strongly following a major new marketing campaignlaunched in August 2005 with good volume and value growth. Country Life packetbutter had sales growth of 9% despite a decline in the packet butter market of3%. Country Life Spreadable grew by 23% in value reflecting the impact of themarketing campaign in the second half of the year and the strong growth in thespreadable sector. We launched a Lightly Salted version in January 2006. St. Ivel Gold, our health spread, had a more difficult year with a decline insales of 17%. This reflected the strong performance and increased marketinginvestment by competitors in the health sector. The brand was relaunched earlyin 2006 with new packaging, television advertising and a new variant, St. IvelGold with Omega-3. This product has achieved good levels of trade distributionand is performing in line with our expectations. In 2006/07 the strategy of the spreads business will be both to maintain thestrong market position in Dairy Spreads and to gain greater share in the highvalue and growing spreadable and functional health sectors. This will again bedriven by a combination of marketing investment and new product development. CheeseThe UK cheese market grew by 2% in volume and 4% in value during the year and isnow worth almost £1.9 billion. Value growth is ahead of volume growth due toprice increases during the year and the continuing move towards more mature,branded and added value cheddar. Everyday family (mostly cheddar cheese) remainsthe biggest segment and accounts for half of the total cheese market. Againstthis market background the overall performance of the cheese business has beengood benefiting from price rises achieved in Summer 2005, another very strongperformance from Cathedral City and increased own label volumes. Cathedral City sales were up 17% by value and 11% by volume, strengthening itsmarket leading position. The higher value growth reflects the reducing level ofprice promotions. The brand is now worth approximately £106 million at retailprices making it the UK's biggest natural cheese brand. We have again increasedthe level of marketing support behind the brand with a successful new televisionadvertising campaign during the year. We continue to extend the range with newproduct development and have just launched Cathedral City Mild in May 2006. Thishas been specially developed to cater for those consumers who prefer a milderflavour and will deliver the usual Cathedral City premium quality andconsistency. The Davidstow sub-brand also performed strongly with sales growth of 19% byvalue and 18% by volume. The final stages of the Davidstow creamery developmenthave now been completed with sufficient capacity to support the continued growthof both the Cathedral City and Davidstow brands. The Stilton market, despite a good Christmas, has continued to be challengingand we have taken an impairment charge of £9.3 million on the book value of theassets of our speciality cheese business reflecting the expected future cashflows of this business. Notwithstanding this charge, there are opportunities toimprove the performance and profitability of stilton and the speciality cheesebusiness and in January 2006 we launched a new cheese brand 'Over the Moon'which is a range of blended speciality cheeses. During the year we have strengthened our own label cheese business andsuccessfully implemented new own label cheese supply arrangements with both ASDAand Morrisons. This has significantly increased our volumes with both retailersand reinforced Dairy Crest's market leading position in cheddar where we havesignificant supply positions with most of the major retailers. As a result of higher industry cheese stocks, which have grown over the last sixmonths, combined with further impact from CAP reform we expect some downwardpressure on pricing during 2006/07. Fresh Dairy ProductsThe chilled yogurts and desserts market has again shown good growth with salesup 4% by value and 5% by volume. The market is now worth over £1.7 billion perannum. Within this market the highest growth categories have been functionalhealth and organic. The children's category, where Yoplait Dairy Crest has amarket leading share of over 50%, has grown well with sales up 4% by value andvolume. The Children's category is now worth over £240 million per annum. The Yoplait Dairy Crest joint venture has continued to make good progress withthe brands overall delivering double-digit sales growth. Of these, Petits Filousand Frubes have performed particularly strongly with sales up 25% and 34% byvalue respectively. Of the other key brands Wildlife were up 6% by value and YOPup 13% by value during the year. Weight Watchers was down 4% by value but heldmarket share in the Light sector. This good performance has again resulted from a significant investment inmarketing support and an active programme of new product development. During theyear Yoplait Dairy Crest launched both a Petits Filous fruity smooth yogurt andPetits Filous Plus, a probiotic drinking yogurt for children. In June 2005 Yoplait Dairy Crest closed its remaining own-label operations atEnfield and Yeovil as planned. This has benefited the financial performance ofthe business and enabled it to invest more in marketing to support the brands. DairiesThe Dairies division comprises Dairy Crest's liquid products, household andingredients operations. Revenue increased by 10% to £815.7 million (2005: £743.3million), reflecting the impact of the Midlands Co-op Dairies acquisitionpartially offset by a reduction in major retail milk volumes. Profit onoperations, before exceptional items, decreased by 52% to £16.8 million (2005:£35.2 million), with operating margin, on this basis, down from 4.7% to 2.1%.This performance reflects the adverse impact of the changes in the fresh milksector in 2004/05, as highlighted in the Chief Executive's review. Profit onoperations after exceptional items was £2.9 million (2005: £35.9 million). Liquid ProductsThe retail fresh milk market grew by 4% by value year on year. However, itshowed slight decline of 1% in volume. Within this the organic milk market hascontinued to grow very strongly with sales up by over 50% by value. Our fresh milk volumes to major retailers were down 17% year on year, primarilydue to our supply to Tesco ceasing in April 2005. However, volumes benefited inthe second half from the additional Morrisons business, which commenced at theend of October and is performing well. The profitability of the liquid productsbusiness has been in line with our expectations and the Group is continuing tofocus on improving margins going forwards. We took action in May 2005 to strengthen the Dairies division through theacquisition of Midlands Co-op Dairies and Foston (Starcross Foods). Theintegration of these businesses has progressed to plan with the Midlands Dairyin Birmingham closing, on schedule, at the end of February 2006 and Foston nowoperational. The financial benefits of the acquisitions are now being deliveredand following the closure of Birmingham, the Group's dairies, including Foston,are now running at a good level of capacity utilisation. The Group achieved fresh milk price increases from our major retail customers inJanuary 2006 to offset higher oil related costs. From the beginning of April2006 the raw milk price on our main liquids contract reduced by 0.5 pence perlitre reflecting lower commodity cream prices. These factors together with acontinuous programme of cost reduction should lead to better margin performanceby this business in 2006/07. We continue to work towards adding value to fresh milk. In May 2005 we launchedSt. Ivel advance, a new branded fresh milk enriched with Omega-3. While it isstill at a relatively early stage of brand development distribution and salesgrowth is encouraging with annualised sales currently running at approximately£13 million at retail value. The organic milk business continues to grow, benefiting from an exceptionallystrong market. Retailer own label organic milk sales value grew by 49% and salesof the Rachel's organic milk brand (under licence from Horizon Organic Dairies)grew by 47%. Frijj, our flavoured fresh milk drink, has maintained its position as theleading brand in the flavoured fresh milk sector although sales were down 5% byvalue. We are addressing the capacity constraints on Frijj production atSevernside, which will enable more promotional activity in 2006/07 to move thebrand back into growth. We have seen good growth in potted cream with sales up15% by value and 13% by volume. We were delighted to be appointed as solesupplier of potted cream for Marks & Spencer from August 2006. HouseholdThe household business has performed well with a significant increase in volumesand turnover following the acquisition of Midlands Co-op Dairies in May 2005 andArla's London foodservice business in October 2005. Overall, Household volumeswere up 31% year on year. Our continued canvassing activity and "first class service" initiatives havehelped maintain the underlying annual decline rate in doorstep at approximately8%. Operationally the business continues to deliver industry leadingproductivity ratios. In September 2005 we implemented a cost related priceincrease for doorstep customers of 2 pence per pint. The middle ground market, which includes smaller retailers, schools, hotels andhospitals, remains competitive. During the year the Group had a number of newbusiness wins, including a sole supply contract to supply Starbucks cafesnationwide. In October 2005 we acquired the London Foodservice business of Arla.This has now been fully integrated into our existing operations and isdelivering significant benefits. The business continues to focus on sales of non-milk products such as juice andother groceries. Non-milk product sales grew by 30% year on year and we againhad a successful Christmas, which is a key trading period for non-milk products. The Midlands Co-op doorstep operations, which included 16 depots, have beenfully integrated with four depots now closed. We have been very successful inapplying the Dairy Crest operational model to this business and have seen asignificant uplift in a number of key performance indicators. This includesaverage milk delivered per round per week which has risen from 332 gallons to450 gallons and average value of non milk products delivered per round per weekwhich has risen nearly fourfold from £55 to £206. There continue to be further opportunities for consolidation in the market,which will enable us to continue our successful acquisition strategy for thisbusiness. IngredientsEuropean ingredients markets for protein remained relatively strong for most ofthe year despite the fall in intervention prices. However cream markets havebeen oversupplied and prices have fallen. Further reductions in interventionprices will take place in July 2006. The Group principally uses its ingredientsbusiness to balance a seasonal milk supply with flat demand and is planning toreduce the amount of milk processed by its ingredients business in 2006/07. Financial Review PresentationThis year, for the first time, the Annual Report and Accounts of Dairy Cresthave been prepared in accordance with International Financial ReportingStandards ('IFRS'). The financial information for the financial year ended 31March 2005, reconciled to that previously reported under UK GAAP, was issued on7 November 2005 and is available on the Group's website. There was no cashimpact arising from the conversion to IFRS. RevenueGroup revenue increased by 8% to £1,355.2 million principally reflecting theinclusion of revenue from Midlands Co-operative Dairies following itsacquisition in May 2005 partially offset, as expected, by lower revenue frommajor retail fresh milk. Group revenue, including our share of joint ventures',increased by 6% to £1,424.2 million reflecting lower Yoplait Dairy Crest revenuefollowing the closure of its own label operations in June 2005. Profit on operationsIn this review, except where otherwise indicated, profit on operations is statedbefore exceptional items and includes our share of joint ventures'pre-exceptional operating profit. On this basis, Group profit on operationsreduced by 12% to £81.0 million, generating an operating margin of 5.7%, areduction of 1.1%. Reported profit on operations after exceptional items was£48.5 million (2005: £84.0 million). As expected, the Dairies division started the year from a lower base level ofprofitability following changes in retail supply arrangements across theindustry in 2004/05. This, combined with the ongoing decline in our householdbusiness, resulted in operating profit of £16.8 million, a reduction of 52% withoperating margins declining from 4.7% to 2.1%. The Foods division's operatingprofit of £64.2 million, an increase of 13%, reflects a strong performance fromour branded cheese business and enhanced Yoplait Dairy Crest margins followingthe closure of its own label operations. Operating margins in the Foods divisionincreased from 9.4% to 10.6%. Exceptional itemsExceptional items reported within profit on operations of £23.2 millionrepresent acquisition restructuring costs of £15.3 million and an impairment ofthe assets and goodwill of our speciality cheese business of £9.3 million offsetby a profit of £1.4 million on the disposal of closed dairy sites. Of theseitems £10.3 million were non-cash. Restructuring costs of £12.7 million were incurred in relation to theacquisitions of Midlands Co-operative Dairies and Starcross Foods in May 2005.This charge includes £3.5 million of redundancy costs, £4.5 million of duplicaterunning costs (as volume was transferred from the Birmingham dairy to otherparts of the Group up to its closure at the end of February 2006), £3.7 millionof other rationalisation costs and £1.0 million of asset write-downs. Further restructuring costs of £2.6 million were incurred integrating the LondonFoodservice business of Arla Foods UK plc into our Dairies division. This chargeincludes £1.6 million of redundancy costs. Following the annual review of cash generating units' value in use, animpairment of £9.3 million has been recorded against the carrying value ofgoodwill and property, plant and equipment of our speciality cheese business. Wecontinue to take actions to improve the efficiency and profitability of ourspeciality cheese business but, despite a good Christmas, the Stilton market inparticular continues to be challenging. These market pressures inevitably impactthe cash generating capacity of this business and management considers itnecessary to recognise an impairment to reflect this. The total £9.3 millionimpairment charge comprises a write-down of the carrying value of goodwill of£2.3 million to nil and a £7.0 million write-down of the carrying value of plantand equipment. The value of these assets will continue to be reviewed annually. A profit of £1.4 million has been recognised on the disposal of a closed dairysite in Newport on the Isle of Wight. InterestFinance costs have increased by 2% to £16.7 million as a result of increasedlevels of net debt during the year predominantly due to the cost ofacquisitions. The impact of higher net debt has been mitigated by the full yearimpact of reduced margins and fees following the refinancing of our facilitiesin June 2004 and the replacement of certain interest rate swaps at lowereffective rates of interest. Other finance income comprises the net expected return on pension scheme assetsafter deducting the interest cost of the defined benefit obligation. Thisresulted in a credit of £2.2 million in the year ended 31 March 2006, anincrease of £1.9 million compared to the previous year. Interest cover, calculated before exceptional items and including our share ofjoint ventures' profit on operations, is 4.9 times (2005 - 5.6 times). Adjusted profit before taxThe Group's adjusted profit before tax (calculated before exceptional items,amortisation of acquired intangibles and tax attributable to joint ventures) was£67.7 million (2005 - £75.7 million). Profit before tax after exceptional items,reported under IFRS, was £41.3 million (2005 - £70.2 million). TaxationThe Group's effective tax rate on profits excluding exceptional items andincluding joint ventures' tax was 24.1% (2005 - 27.7%). The reduction ineffective tax rate is largely due to the release of tax provisions that werepreviously held pending the finalisation of a number of prior year assessments.In addition, the Group had increased property profits in 2005/06, which aresheltered by brought forward capital losses and rollover relief. The tax crediton exceptional costs of £23.2 million was £6.6 million. The effective tax rate on reported profit before tax was 15.7% (2005: 26.5%) Earnings per shareThe Group's basic adjusted earnings per share reduced by 8% to 40.3 pence pershare. Basic earnings per share, which includes the impact of exceptional itemsand the amortisation of acquired intangibles, decreased by 35% to 27.1 pence pershare. The weighted average number of shares increased by approximately 1.4 million to124.8 million, primarily due to the exercise of sharesave scheme options fromMarch to September 2005. A diluted earnings per share calculation, whichreflects the impact of potential ordinary shares from unvested share optionschemes, is presented for both the basic and adjusted earnings per shareamounts. DividendsThe proposed final dividend of 15.2 pence per share, together with the interimdividend of 6.3 pence per share gives a total dividend of 21.5 pence per sharefor the full year. This represents an increase of 6.4% on the total dividenddeclared for 2004/05. The final dividend will be paid on 9 August 2006 toshareholders on the register on 7 July 2006. Under IFRS, proposed final dividends are no longer provided for at the year endand as such, have been included as a memorandum item only in the consolidatedincome statement. PensionsThe total gross pension deficit, reported on the Group balance sheet under IFRS,at 31 March 2006 was £62.0 million compared to £102.7 million at 31 March 2005.The reduced deficit reflects strong performance from the fund's investments,which, due to the 70%+ equity weighting, increased by £126.4 million during theyear. This increase was partially offset by an increase of £85.7 million in thepresent value of liabilities caused, principally, by a reduction of 0.4% in theAA corporate bond yield to 5.1%. Furthermore, the Group made additionalcontributions of £6 million to the pension scheme during the year ended 31 March2006 and has committed to make £12 million additional contributions in each ofthe next two years. The pension deficit is extremely sensitive to changes in underlying assumptionsand movements in the financial markets and is likely to be volatile from year toyear. Increasing bond yields, along with the continued strong UK equityperformance to March 2006, have reduced the pension deficit significantly duringthe last quarter. The actuarial gain, before deferred tax, reported in equityfor the year is £37.2 million (2005 - £2.3 million loss). In July 2005 the Group announced that it would be closing its final salarypension scheme to new employees joining after 1 April 2006. Followingdiscussions with employees representatives, this date has been amended to 1 July2006. Cash flowThe cash inflow from operating activities was £73.4 million (2005 - £143.0million). This included a working capital outflow of £16.3 million (2005 - £22.4million inflow). The working capital increase was primarily due to inventoryincreases of £17.9 million underpinning strong growth in our branded cheddarbusiness. Increases in debtors reflect the higher proportion of foodservicebusiness in our household division, as a result of the acquisition of the LondonFoodservice business of Arla Foods UK plc. Increased year end creditors largelyoffset these increases in debtors. Cash interest and tax payments amounted to £16.4 million and £15.5 millionrespectively. Interest payments are £1.3 million lower than last year because ofthe fees incurred in 2004/05 as part of the refinancing of facilities in June2004. The Group currently borrows at a margin of 52.5 to 85 basis points overthe relevant interbank rate. Tax payments are £2.9 million higher than last yeardue, partly, to a one-off payment of £1.8 million made as a result of anelection to receive a statutory tax deduction of 4% on certain goodwill acquiredafter April 2002 rather than deductions based on goodwill amortisation. Capital expenditure, net of grants of £0.3 million, was £44.0 million (2005 -£37.7 million) with significant investment undertaken at Chard, Somerset onimproved cream processing facilities, at Foston in Derbyshire onpost-acquisition investment and on the implementation of Oracle financialsystems across the Group. Cash receipts from the disposal of fixed assetsamounted to £9.4 million (2005 - £8.2 million) of which £1.7 million related tothe exceptional property disposal of the site in Newport. Isle of Wight. The cash outflow from purchase of businesses amounted to £43.7 million in theyear (2005 - £9.9 million). In May 2005, the Group acquired Starcross FoodsLimited and the dairy business and assets of Midland Co-operative Dairies for anet consideration of £37.3 million. In October 2005, the Group acquired theLondon Foodservice business of Arla Foods UK plc for a net consideration of £4.2million. In addition, the Group acquired the goodwill of a number of bottledmilk buyers during the year for cash consideration of £2.2 million. The Group received £9.0 million in dividend receipts from Yoplait Dairy Crest inthe year (2005 - Nil) and paid dividends to shareholders of £25.6 million (2005- £23.9m). Net borrowingsNet debt increased by £52.7 million to £280.2 million at the end of the year ascash flows from operations were more than offset by acquisitions of businessesand increased capital expenditure. At 31 March 2006, gearing was 109% (2005 -103%). Borrowing FacilitiesGroup borrowing facilities at 31 March 2006 amounted to £423 million andcomprised term loans of £135 million, a multi-currency revolving credit facilityof £270 million and finance lease debt of £18 million. During the year, £65million was repaid and cancelled on our September 2002 term loan. On 4 April 2006, the Group completed a private debt placement in the US andraised £133 million (US$ 233 million) in US$ loan notes and £10 million inSterling loan notes. The loan notes mature in two tranches of 7 and 10 years.Currency swaps have been put in place to convert the US$ debt into Sterling atfixed rates. The effective interest rate on the combined issue is 5.3%. Oncompletion of this transaction and subsequent repayment of certain term loans of£90 million and cancellation of £20 million of the revolving credit facility,Group long-term borrowing facilities, including finance leases, total £456million with a significantly longer maturity profile. Treasury policiesThe Group operates a centralised treasury function, which controls cashmanagement and borrowings and the Group's financial risks. The main treasuryrisks faced by the Group are liquidity, interest rates and foreign currency. TheGroup uses derivatives only to manage its foreign currency and interest raterisks arising from underlying business activities. Transactions of a speculativenature are prohibited. The Group's treasury activities are governed by policiesapproved and monitored by the Board. Net AssetsThe Group's balance sheet remains strong with net assets of £258.0 million (2005- £220.6 million). Goodwill, intangibles and property, plant and equipment total£465.8 million (2005 - £427.4 million) despite the impairment of £9.3 million inrelation to our speciality cheese business. Going concernThe financial statements have been prepared on a going concern basis as thedirectors are satisfied that the Group has adequate financial resources tocontinue its operations for the foreseeable future. In making this statement,the Group's directors have reviewed the Group budget and available facilitiesand have made such other enquiries as they considered appropriate. Alastair Murray, Finance Director23 May 2006 Consolidated income statementYear ended 31 March 2006 Year ended 31 March 2006 Year ended 31 March 2005 * ------------------------------------------ ------------------------------------ Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total Note £m £m £m £m £m £m ------------------------------------------ ------------------------------------Group revenue 2 1,355.2 - 1,355.2 1,260.6 - 1,260.6Operatingcosts 3 (1,289.6) (24.6) (1,314.2) (1,180.9) (1.1) (1,182.0)Other income 4 6.1 1.4 7.5 4.7 0.7 5.4 ------------------------------------------ -------------------------------------Profit onoperations 2 71.7 (23.2) 48.5 84.4 (0.4) 84.0Finance costs 6 (16.7) - (16.7) (16.4) - (16.4)Other financeincome -pensions 6 2.2 - 2.2 0.3 - 0.3Share of jointventures' netprofit 6.5 0.8 7.3 5.1 (2.8) 2.3 ------------------------------------------ -------------------------------------Profit before tax 63.7 (22.4) 41.3 73.4 (3.2) 70.2 ------------------------------------------ -------------------------------------Tax expense 7 (13.1) 6.6 (6.5) (18.7) 0.1 (18.6) ------------------------------------------ -------------------------------------Group profit forthe year 50.6 (15.8) 34.8 54.7 (3.1) 51.6 ------------------------------------------ -------------------------------------Profitattributableto equityshareholders 49.6 (15.8) 33.8 54.2 (3.1) 51.1Profitattributableto minorityinterests 1.0 - 1.0 0.5 - 0.5 ------------------------------------------ -------------------------------------Group profitfor the year 50.6 (15.8) 34.8 54.7 (3.1) 51.6 ------------------------------------------ ------------------------------------- Earnings per shareBasic earningsper share (p) 9 27.1 41.4Adjusted basicearnings pershare (p) ** 9 40.3 43.9Dilutedearnings pershare (p) 9 27.0 41.0Adjusteddilutedearnings pershare (p) ** 9 40.2 43.5 ------------------------------------------ -------------------------------------Dividends ***Proposed finaldividend (£m) 8 19.0 17.7Interimdividend paid (£m) 8 7.9 7.2Proposed finaldividend (pence) 8 15.2 14.3Interimdividend paid(pence) 8 6.3 5.9 ------------------------------------------ ------------------------------------- The consolidated income statement relates to continuing operations. * Results are restated for the impact of transition to International FinancialReporting Standards** Adjusted earnings per share calculations exclude exceptional items andamortisation of acquired intangibles (see Note 9).*** Under IFRS dividends are recorded in the period in which they are declared.Dividends paid in 2005/06 totalled £25.6m (2004/05: £23.9m) In order to provide a trend measure of underlying performance, profit before taxis adjusted for items which management consider will distort comparability as aresult of specific accounting treatments. Adjusted Group profit before tax:Profit before tax 63.7 (22.4) 41.3 73.4 (3.2) 70.2Amortisationof acquiredintangibles 1.0 - 1.0 - - -Share of jointventures' taxcharge /(credit) 3.0 0.2 3.2 2.3 (1.2) 1.1----------------------------- ------ ------ ------ ------ ------- ------Adjusted Groupprofit before tax 67.7 (22.2) 45.5 75.7 (4.4) 71.3----------------------------- ------ ------ ------ ------ ------- ------ Consolidated balance sheetsAs at 31 March 2006 Consolidated ------------ 2006 2005 * Note £m £m---------------------------------------- -------- ------- ------- ASSETSNon-current assets Property, plant and equipment 330.2 317.0Goodwill 10 131.1 110.4Intangible assets 4.5 -Investments - -Investment in joint ventures using equitymethod 4.3 5.2Deferred tax asset - 0.4---------------------------------------- -------- ------- ------- 470.1 433.0---------------------------------------- -------- ------- ------- Current assets Inventories 192.6 172.7 Trade and other receivables 142.8 124.0 Financial assets - Derivative financialinstruments 0.3 - Cash and cash equivalents 14.4 27.2---------------------------------------- -------- ------- ------- 350.1 323.9---------------------------------------- -------- ------- ------- Total assets 2 820.2 756.9---------------------------------------- -------- ------- ------- EQUITY AND LIABILITIESNon-current liabilities Financialliabilities - Long-term borrowings (253.8) (234.4) - Derivative financial instruments (0.1) - Retirement benefitobligations 12 (62.0) (102.7) Deferred tax liability (13.6) -Deferred income (10.4) (11.4)---------------------------------------- -------- ------- ------- (339.9) (348.5)---------------------------------------- -------- ------- -------Current liabilitiesTrade and otherpayables (173.3) (147.9)Financialliabilities - Short-term borrowings (40.8) (20.3) - Derivative financial (0.2) - instrumentsCurrent tax (6.8) (18.7)Deferred income (1.2) (0.9)---------------------------------------- -------- ------- ------- (222.3) (187.8)---------------------------------------- -------- ------- -------Total liabilities 2 (562.2) (536.3)---------------------------------------- -------- ------- ------- Shareholders' equityOrdinary shares 13 (31.3) (31.2)Share premium 14 (28.8) (28.2)Interest in ESOP 14 1.5 1.6Other reserves 14 (55.8) (55.8)Retained earnings 14 (132.8) (97.2)---------------------------------------- -------- ------- -------Total shareholders'equity (247.2) (210.8) Minority interests 14 (10.8) (9.8)---------------------------------------- -------- ------- -------Total equity (258.0) (220.6)---------------------------------------- -------- ------- -------Total equity andliabilities (820.2) (756.9)---------------------------------------- -------- ------- ------- * Balance sheets are restated for the impact of transition to InternationalFinancial Reporting Standards. Consolidated statement of recognised income and expenseYear ended 31 March 2006 2006 2005 * Note £m £m------------------------------------------------ ------- ------ ------Income and expense recognised directly in equityActuarial gains / (losses) 12 37.2 (2.3)Exchange differences on foreign currency net investments - 0.4Exchange differences on foreign currency borrowings - (0.5)Cash flow hedges - transferred to income statement (0.1) -Cash flow hedges - losses deferred in equity (0.2) -Share of joint ventures' income recognised in equity 0.3 -Tax on items taken directly to equity 7 (11.1) 0.3------------------------------------------------ ------- ------ ------Net income / (expense) recognised directly in equity 26.1 (2.1)Profit for the year 34.8 51.6------------------------------------------------ ------- ------ ------Total recognised income and expense for the year 14 60.9 49.5 Attributable to equity shareholders 14 59.9 49.2Attributable to minority interests 14 1.0 0.3 * The consolidated statement of recognised income and expense is restated forthe impact of transition to International Financial Reporting Standards.The net gain on cash flow hedges on first-time adoption of IAS 39 is £0.3m withno impact on minority interests. Consolidated cash flow statementsYear ended 31 March 2006 Year ended Year ended 31 March 2006 31 March 2005 * Note £m £m------------------------------------ ----- --------- ---------Cash generated from operations 15 73.4 143.0Dividends received from joint ventures 9.0 -Interest (paid) / received (16.4) (17.7)Taxation paid (15.5) (12.6)------------------------------------ ----- --------- ---------Net cash flow from operating activities 50.5 112.7------------------------------------ ----- --------- ---------Cash flow from investing activitiesPayments to acquire property, plant and equpment (44.3) (39.7)Grants received 0.3 2.0Proceeds from disposal of property,plant and equipment 9.4 8.2Purchase of businesses (net of cash and debt acquired) (43.7) (9.9)Sale of businesses - 0.2------------------------------------ ----- --------- ---------Net cash used in investing activities (78.3) (39.2) ------------------------------------ ----- --------- ---------Cash flow from financing activitiesRepayment of bank loans (65.0) (110.0)Bank loans advanced 105.1 49.3Dividends paid (25.6) (23.9)Dividends received from subsidiaries - -Proceeds from exercise of share options 0.7 3.6Proceeds from redemption of convertible - -loan stockAmounts received from / (paid to) - -subsidiariesProceeds from sale and leaseback - 18.7Finance lease repayments (0.2) (0.6)------------------------------------ ----- --------- ---------Net cash used in financing activities 15.0 (62.9)------------------------------------ ----- --------- ---------Net (decrease) / increase in cash andcash equivalents (12.8) 10.6------------------------------------ ----- --------- ---------Cash and cash equivalents at beginning ofyear 27.2 16.6------------------------------------ ----- --------- ---------Cash and cash equivalents at end of year 14.4 27.2------------------------------------ ----- --------- ---------Memo: Net debt at end of year 16 (280.2) (227.5)------------------------------------ ----- --------- --------- * Cash flow statements are restated for the impact of transition toInternational Financial Reporting Standards. The Preliminary Report for the year ended 31 March 2006 was approved by theDirectors on 23 May 2006. 1 Basis of preparationThe consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards ('IFRS') and International FinancialReporting Interpretation Committee ('IFRIC') interpretations as endorsed by theEuropean Union, and those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. This is the first year that the Group's consolidated financial statements havebeen prepared under IFRS and IFRS 1 'First time adoption of IFRS' has beenapplied. Accordingly, the comparatives presented in this document have beenrestated for IFRS, with the exception of IAS 32 'Financial Instruments:Presentation and Disclosure' and IAS 39 'Financial Instruments: Recognition andMeasurement' for which the Group took advantage of the exemption available.Therefore, for the 2004/05 comparatives, financial instruments continue to beaccounted for, and presented in accordance with UK Generally Accepted AccountingPrinciples ('UK GAAP'), with an opening balance sheet adjustment made at 1 April2005 to bring the Group into line with IAS 32 and IAS 39. Detailed UK GAAP to IFRS reconciliations of equity for the date of transition, 1April 2004, 30 September 2004 and 31 March 2005 and of profit for the six monthsended 30 September 2004 and for the year ended 31 March 2005 were issued on 7November 2005 and are available on the Group's website along with the Group'sprincipal accounting policies under IFRS (www.dairycrest.co.uk). The financial information set out in this document does not constitute thestatutory accounts of the Group for the years ended 31 March 2006 or 31 March2005 but is derived from the 2006 Annual Report and Financial Statements. TheAnnual Report and Financial Statements for 2005, which were prepared under UKGAAP, have been delivered to the Registrar of Companies and the Group AnnualReport and Financial Statements for 2006, prepared under IFRS, will be deliveredto the Registrar of Companies in due course. The auditors have reported on thoseaccounts and have given an unqualified report which does not contain a statementunder Section 237(2) or (3) of the Companies Act 1985. 2 Segmental information The primary segment reporting format is determined to be business segments asthe Group's risks and rates of return are affected predominantly by differencesin the products produced. The Group is organised and managed in two divisions,Foods and Dairies according to the nature of the products sold and marketsserviced. The Household business is included within the Dairies segment as itsoperations are considered to be mutually interdependent with the Liquid Productsbusiness. In the year ended 31 March 2005, the business segments were defined asConsumer Foods and Foods Services. The change in composition of these segmentsto Foods and Dairies better reflects the split of risks and returns of theGroups operations. Prior year comparative numbers have been restated. The impactof this restatement was to reallocate certain elements of the Liquid Productsbusiness, that had previously been reported under 'Consumer Foods', into the newDairies segment. The impact on revenue, the comparatives which have not beenaffected by the conversion to IFRS, was to reduce 'Consumer Foods' by £281.8m to£517.3m now reported in 'Foods'. Inter-segment sales are not material. Allrevenue is derived from the sale of goods. The Group's geographical segments are based on the location of the Group'sassets. Turnover originates principally in the United Kingdom and assets andliabilities are located principally in the United Kingdom and therefore nogeographical segment disclosures have been made for these items. Sales toexternal customers disclosed in geographical segments are based on thegeographical location of its customers. The following tables present revenue, profit and certain assets and liabilitiesby segment for the years ended 31 March 2006 and 2005. Year ended 31 March 2006 Year ended 31 March 2005------------------ ----------------------------------- --------------------------------- Foods Dairies Total Foods Dairies Total £m £m £m £m £m £m------------------ ----------------------------------- --------------------------------- Revenue andresultsSegmentalrevenue 539.5 815.7 1,355.2 517.3 743.3 1,260.6------------------ ----------------------------------- ---------------------------------Segmental results(beforeexceptionalitems) 54.9 16.8 71.7 49.2 35.2 84.4Exceptionalitems (9.3) (13.9) (23.2) (1.1) 0.7 (0.4)------------------ ----------------------------------- ---------------------------------Segmentalresults 45.6 2.9 48.5 48.1 35.9 84.0------------------ ----------------------------------- ---------------------------------Finance costs (16.7) (16.4)Other financeincome -pensions 2.2 0.3Share of jointventures' netprofit (Foods) 7.3 2.3------------------- ------- -------Profit beforetax 41.3 70.2Tax expense (6.5) (18.6)Group profitfor the year 34.8 51.6------------------ ----------------------------------- ---------------------------------Assets andliabilitiesSegment assets 436.3 364.9 801.2 425.5 298.6 724.1Investment injoint ventures 4.3 - 4.3 5.2 - 5.2------------------ ----------------------------------- --------------------------------- 440.6 364.9 805.5 430.7 298.6 729.3Unallocated assets ------------------- 14.7 27.6------------------- ------- -------Total assets 820.2 756.9------------------- ------- -------Segment liabilities (69.3) (115.6) (184.9) (59.2) (101.0) (160.2) ------------------ --------------------Unallocatedliabilities (377.3) (376.1)------------------- ------- -------Total liabilities (562.2) (536.3)------------------- ------- -------Other segmentalinformationCapital expenditure: Property, plant and equipment 16.7 25.5 42.2 19.2 20.5 39.7 Intangible assets 1.0 1.1 2.1 - - -Acquisition ofproperty, plant& equipment 18.8 18.8 - 0.1 0.1Acquisition ofintangibleassets - 3.6 3.6 - - -Depreciation 16.5 21.8 38.3 14.9 19.0 33.9Amortisationof intangibleassets 0.1 1.1 1.2 - - -Impairment ofnon-currentassets 9.3 - 9.3 - - ---------------- --------------------------------------------------------------------------- Segment assets consist primarily of property, plant and equipment, goodwill,intangible assets, investments in joint ventures, inventories and receivables.They exclude deferred taxation, cash and cash equivalents and derivatives heldas hedges of borrowings. Segment liabilities comprise operating liabilities.They exclude taxation, retirement benefit obligations, borrowings and relatedhedges. Year ended 31 March 2006 Year ended 31 March 2005 --------------------------------- ----------------------------------Segmental analysis Foods Dairies Total Foods Dairies Totalincluding shareof joint ventures £m £m £m £m £m £m------------------ ------------------------------------------------------------------------RevenueGroup 539.5 815.7 1,355.2 517.3 743.3 1,260.6Share of jointventures 69.0 - 69.0 88.2 - 88.2------------------ ------------------------------------------------------------------------Includingshare of jointventures 608.5 815.7 1,424.2 605.5 743.3 1,348.8------------------ ------------------------------------------------------------------------Profit onoperations Profit on operations(before exceptionalitems) 54.9 16.8 71.7 49.2 35.2 84.4 Share of jointventures (beforeexceptionalitems) 9.3 - 9.3 7.5 - 7.5------------------ ------------------------------------------------------------------------Includingshare of jointventures 64.2 16.8 81.0 56.7 35.2 91.9------------------ ------------------------------------------------------------------------ Analysis of Group revenue by destination (which all relatesto continuing operations): Year ended Year ended 31 March 2006 31 March 2005 £m £m---------------------------------------------------------- --------- ---------United Kingdom 1,261.9 1,176.0Other EU countries 41.4 26.5Rest of world 51.9 58.1---------------------------------------------------------- --------- ---------Group revenue 1,355.2 1,260.6---------------------------------------------------------- --------- --------- 3 Operating costs Year ended 31 March 2006 Year ended 31 March 2005 ------------------------------------- ---------------------------------------- Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total £m £m £m £m £m £m-------------------- -------------------------------------- ----------------------------------------Cost of sales 1,011.2 22.3 1,033.5 926.9 1.1 928.0Distributioncosts 215.7 - 215.7 190.8 - 190.8Administrativeexpenses 62.7 2.3 65.0 63.2 - 63.2-------------------- -------------------------------------- ---------------------------------------- 1,289.6 24.6 1,314.2 1,180.9 1.1 1,182.0-------------------- -------------------------------------- ---------------------------------------- 4 Other income Year ended 31 March 2006 Year ended 31 March 2005 ---------------------------------- ------------------------------------ Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total £m £m £m £m £m £m---------- ------------------------------------ ------------------------------------Profit ondisposalof householddepots 6.1 - 6.1 4.7 - 4.7 Profit ondisposal ofclosed sites - 1.4 1.4 - 0.7 0.7 ---------------------------------- ------------------------------------ 6.1 1.4 7.5 4.7 0.7 5.4 ---------------------------------- ------------------------------------ The Group continues to rationalise its household operations as a result of theongoing decline in doorstep volumes. This rationalisation includes the closureof certain depots (the profit on which is shown above), acquisition of smallinfill dairy businesses and rationalisation of the ongoing household operations.These activities represent a fundamental part of the ongoing ordinary activitiesof the household operations. The net profit on rationalisation of the householdbusiness, after deducting related rationalisation costs, amounted to £3.9m inthe year ended 31 March 2006 (2005: £3.1m). 5 Exceptional items Year ended Year ended 31 March 2006 31 March 2005 £m £m------------------------------------------------ ----------- ------------Fixed asset (write-downs)/ write-backs (1.0) 0.2Redundancy costs (5.1) -Duplicate running costs (4.5) -Other rationalisation costs (4.7) (1.3)------------------------------------------------ ----------- ------------Restructuring costs (15.3) (1.1)Impairment of assets (9.3) -Profit on disposal of closed sites 1.4 0.7------------------------------------------------ ----------- ------------ (23.2) (0.4)Share of joint ventures' exceptionalitems (after tax) 0.8 (2.8)Tax on exceptional items 6.6 0.1------------------------------------------------ ----------- ------------ (15.8) (3.1) Restructuring costs in the year ended 31 March 2006 relate to the Dairiessegment and represent costs of: (i) integrating the acquisition of the dairy business of the MidlandsCo-Operative Society into the Group. The integration resulted in an exceptionalcost of £12.7m, being £3.5m of redundancy costs, £1.0m of asset write-downs,£4.5m of duplicate running costs (as volume was transferred from the Birminghamdairy to other parts of the Group up to its closure in February 2006) and £3.7mof other rationalisation costs. (ii) integrating the Arla London Foodservice business into the Group whichamounted to £2.6m, of which £1.6m related to redundancy costs and £1.0m relatedto other rationalisation costs. The cash cost of the exceptional items described above amounted to £14.3m in theyear ended 31 March 2006. These were all incurred in the Dairies segment. Further to a review of the value in use of the goodwill and assets of thespeciality cheese business (part of the Foods segment), an impairment to thecarrying value of goodwill (£2.3m) and property, plant and equipment (£7.0m) hasbeen recognised. Further details describing the impairment test and theresulting write-down are set out in Note 10. The profit on disposal of closed sites related to a surplus dairy in Newportwhich was sold in March 2006 for a consideration of £1.7m resulting in a profiton disposal of £1.4m. Restructuring costs of £1.1m in the year ended 31 March 2005 principally relatedto the final commissioning of the creamery at Davidstow. In addition, there wasa £0.7m profit on the disposal of closed dairy sites. The Group's share of joint ventures' exceptional items, after tax, amounted to£0.8m in the year ended 31 March 2006 and related to a profit on disposal of aclosed factory in Enfield. The share of joint ventures' exceptional items, aftertax, in the year ended 31 March 2005 was £2.8m representing restructuring costsrelated to factory closures. 6 Finance costs and other finance income Finance costs Year ended Year ended 31 March 2006 31 March 2005 £m £m------------------------------------------------ ----------- ------------Bank loans and overdrafts (15.8) (16.3)Finance charges on finance leases (0.9) (0.1)Total finance costs (16.7) (16.4)------------------------------------------------ ----------- ------------ Other finance income - pensions Year ended Year ended 31 March 2006 31 March 2005 £m £m------------------------------------------------ ----------- ------------Expected return on plan assets 35.3 31.0Interest cost on defined benefit obligation (33.1) (30.7)------------------------------------------------ ----------- ------------ 2.2 0.3 Other finance income comprises the expected return on assets of funded definedbenefit pension schemes less the interest cost on pension scheme liabilities(see Note 12). 7 Tax expenseThe major components of income tax expense for the years ended 31 March 2006 and 2005 are:--------------------------------------- ---------- ----------Consolidated income statement Year ended Year ended 31 March 31 March 2006 2005 £m £m--------------------------------------- ---------- ----------Current income taxCurrent income tax charge at 30% (2005: 30%) 7.9 18.4Adjustments in respect ofprevious years - current tax (3.0) (0.7) - transfer to deferred tax (1.3) 0.3--------------------------------------- ---------- ---------- 3.6 18.0Deferred income tax Relating to origination and reversal of temporary differences 1.6 0.9 Transfer from / to current tax 1.3 (0.3)--------------------------------------- ---------- ---------- 6.5 18.6--------------------------------------- ---------- ---------- Reconciliation between tax expense and the profit before tax multiplied by thestandard rate of corporation tax in the UK:--------------------------------------- ---------- ----------- Year ended Year ended 31 March 2006 31 March 2005 £m £m--------------------------------------- ---------- -----------Profit before tax 41.3 70.2 Tax at UK statutory income tax rate of 30%(2005: 30%) 12.4 21.1Adjustments in respect of previous years -current tax (3.0) (0.7)Adjustment for overseas profits taxed atdifferent rates (0.3) -Adjustment in respect of joint ventures'profits (2.2) (0.7)Non-deductible expenses 1.4 1.6Profits offset by available tax relief (1.8) (2.7)--------------------------------------- ---------- -----------At the effective rate of 16% (2005: 26%) 6.5 18.6--------------------------------------- ---------- -----------The effective pre-exceptional rate of tax on Group profit before tax afteradjusting for joint ventures' tax is 24% (2005 - 28%). Consolidated statement of changes in equity--------------------------------------- ---------- -----------Deferred income tax related to items charged or credited directly to equity Share based payments 0.1 0.4 Tax on actuarial gains / (losses) 11.2 (0.7)Income tax expense reported in equity - ---------------------------------------- ---------- ----------- 11.1 (0.3)--------------------------------------- ---------- ----------- Deferred income taxDeferred income tax at 31 March 2006 and 2005 relates to the following:---------------------------------------- ------- -------Deferred tax liability 2006 2005 £m £m---------------------------------------- ------- -------Accelerated depreciation for tax purposes (34.4) (33.7)Goodwill and intangible assets (2.9) ----------------------------------------- ------- ------- (37.3) (33.7)---------------------------------------- ------- -------Deferred tax asset---------------------------------------- ------- -------Pensions 18.6 29.5Government grants 3.3 3.5Share based payments 0.6 0.3Other 1.2 0.8---------------------------------------- ------- ------- 23.7 34.1---------------------------------------- ------- ----------------------------------------------- ------- -------Net deferred tax (liability) / asset (13.6) 0.4---------------------------------------- ------- ------- The movement on the net deferred tax balance is shown below 2006 2005 £m £m---------------------------------------- ------- ------Net deferred tax asset brought forward 0.4 0.8Deferred tax recognised on financial instruments on - -adoption of IAS 32/39 ---------------------------------------- ------- ------ 0.4 0.8Charge to income statement (1.6) (0.9)(Charge) / credit to equity (11.1) 0.3Adjustment to opening balances (1.3) 0.2---------------------------------------- ------- ------Closing net deferred tax (liability) / asset (13.6) 0.4---------------------------------------- ------- ------ The gross movement on deferred tax assets and liabilities is shown below Deferred tax liability Deferred tax asset --------------------------------------------------------- accelerated short-term Total short-term tax timing £m timing depreciation differences differences £m £m £m------------------------------- ---------------------------------------------------------Balances at 31 March 2005 (33.7) - (33.7) 34.1Charge to income statement 0.4 (2.7) (2.3) 0.7(Charge) / credit to equity - - - (11.1)Adjustment to openingbalances (1.1) (0.2) (1.3) -------------------------------- ---------------------------------------------------------Balances at 31 March2006 (34.4) (2.9) (37.3) 23.7------------------------------- --------------------------------------------------------- Deferred tax liability Deferred tax asset------------------------------- --------------------------------------------------------- accelerated short-term Total short-term tax timing £m timing depreciation differences differences £m £m £m------------------------------- ---------------------------------------------------------Balances at 31 March2004 (30.0) (1.1) (31.1) 31.9Charge to incomestatement (2.5) (0.3) (2.8) 1.9(Charge) / credit toequity - - - 0.3Adjustment to openingbalances (1.2) 1.4 0.2 -------------------------------- ---------------------------------------------------------Balances at 31 March 2005 (33.7) - (33.7) 34.1------------------------------- --------------------------------------------------------- The Group has trading tax losses which arose in the UK of £7.0m (2005: £7.0m)that are available indefinitely for offset against future taxable profits of thecompanies in which the losses arose. Deferred tax assets have not beenrecognised in respect of these losses as they may not be used to offset taxableprofits elsewhere in the Group and they have arisen in subsidiaries that havebeen loss-making for some time. The Group has capital losses which arose in the UK of £66.5m (2005: £66.5m) thatare available indefinitely for offset against future taxable gains. Deferred taxhas not been recognised in respect of these losses as there is no foreseeableprospect of their being utilised. The Group has realised capital gains amountingto £39.6m (2005: £33.6m) for which rollover relief claims have or are intendedto be made. No deferred tax liability has been recognised in relation to thesegains because there is no prospect of a chargeable gain arising on the disposalof the replacement assets. At 31 March 2006, there was no recognised deferred tax liability (2005 - nil)for taxes that would be payable on the unremitted earnings of the Group'ssubsidiaries in Ireland as the Group has determined that retained profits willnot be distributed in the foreseeable future. The deferred tax liability arisingfrom the investments in these subsidiaries, which has not been recognised, is to£2.4m (2005 - £2.1m). 8 Dividends paid and proposed-------------------------------------------- ----- -----Declared and paid during the year 2006 2005 £m £m-------------------------------------------- ----- -----Equity dividends on ordinary shares: Final dividend for 2005: 14.3 pence (2004: 13.4 pence) 17.7 16.5 Interim dividend for 2006: 6.3 pence (2005: 5.9 pence) 7.9 7.2-------------------------------------------- ----- ----- 25.6 23.7-------------------------------------------- ----- -----Proposed for approval at AGM (not recognised as a liability at 31 March) --------------------------------------------Equity dividends on ordinary shares: Final dividend for 2006: 15.2 pence (2005: 14.3 pence) 19.0 17.7-------------------------------------------- ----- ----- 9 Earnings per share Basic earnings per share ('EPS') amounts are calculated by dividing profitattributable to equity shareholders of the parent company by the weightedaverage number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profitattributable to equity shareholders of the parent company by the weightedaverage number of ordinary shares outstanding during the year plus the weightedaverage number of ordinary shares that would be issued on the conversion of allthe dilutive potential ordinary shares into ordinary shares. The shares held by the Dairy Crest Employees' Share Ownership Plan Trust('ESOP') are excluded from the weighted average number of shares in issue usedin the calculation of earnings per share. To show earnings per share on a consistent basis, which in the Directors'opinion reflects the ongoing performance of the business more appropriately,adjusted earnings per share have been calculated. The computation for basic anddiluted earnings per share (including adjusted earnings per share) are asfollows: Year ended 31 March 2006 Year ended 31 March 2005-------------------- ------------------------------------- ----------------------------------- Earnings Weighted Per share Earnings Weighted Per share £m average amount £m average amount no of shares pence no of pence million shares million-------------------- ------------------------------------- -----------------------------------Basic EPSNet profitattributableto equityshareholders 33.8 124.8 27.1 51.1 123.4 41.4Effect of dilutivesecurities:Share options - 0.4 (0.1) - 1.2 (0.4)-------------------- ------------------------------------- -----------------------------------Diluted EPS 33.8 125.2 27.0 51.1 124.6 41.0-------------------- ------------------------------------- -----------------------------------Adjusted earnings per shareBasic EPS 33.8 124.8 27.1 51.1 123.4 41.4Exceptionalitems (net oftax) 16.6 - 13.3 0.3 - 0.2Amortisationof acquiredintangibleassets (net oftax) 0.7 - 0.5 - - -Jointventures'exceptionalitems (net oftax) (0.8) - (0.6) 2.8 - 2.3-------------------- ------------------------------------- -----------------------------------Adjusted basicEPS 50.3 124.8 40.3 54.2 123.4 43.9-------------------- ------------------------------------- -----------------------------------Effect of dilutivesecurities: Share options - 0.4 (0.1) - 1.2 (0.4)-------------------- ------------------------------------- -----------------------------------Adjusteddiluted EPS 50.3 125.2 40.2 54.2 124.6 43.5-------------------- ------------------------------------- ----------------------------------- There have been no transactions involving ordinary shares or potential ordinaryshares between the reporting date and the date of completion of these financialstatements. 10 Goodwill Consolidated £m---------------------------------------------- ------CostAt 1 April 2004 99.8Additions 10.6---------------------------------------------- ------At 31 March 2005 110.4Additions 23.0---------------------------------------------- ------At 31 March 2006 133.4---------------------------------------------- ------Accumulated impairmentAt 1 April 2004 and 2005 -Impairment for the year - 'Speciality cheese' (2.3)---------------------------------------------- ------At 31 March 2006 (2.3)---------------------------------------------- ------Net book amount at 31 March 2006 131.1---------------------------------------------- ------Net book amount at 31 March 2005 110.4---------------------------------------------- ------ Impairment testing of goodwill Acquired goodwill has been allocated for impairment testing purposes to fourgroups of cash generating units ('CGUs'): Dairies, Spreads, Speciality Cheeseand Cheese excluding Speciality Cheese. All CGUs are tested for impairmentannually by comparing the carrying amount of that CGU with its recoverableamount. Recoverable amount is determined based on a value-in-use calculationusing cash flow projections based on financial budgets and strategic plansapproved by senior management covering a three-year period. The discount rateapplied to the projections is 8% (2005: 8%). The growth rate used to extrapolatecash flows beyond the three-year period for 'Spreads' and 'Cheese excludingspeciality cheese' is 2.5% pa (being the UK long-term growth rate). The growthrate used to extrapolate cash flows beyond the three-year period for the'Speciality Cheese' and 'Dairies' CGUs is 0%. The extrapolated growth rate forDairies reflects the underlying decline in the doorstep business within thewider Dairies CGU. The carrying amount of goodwill allocated to CGUs at 31 March 2006 is: Dairies £61.5m (2005: £38.5m)Spreads £65.5m (2005: £65.5m)Speciality cheese Nil (2005: £2.3m)Cheese excluding speciality cheese £4.1m (2005: £4.1m) The key assumptions used in value-in-use calculations: Gross margin - budgeted gross margins are based initially on actual marginsachieved in the preceding year further adjusted for projected input and outputprice changes, volume changes, new initiatives and anticipated efficiencyimprovements. The budgeted margins form the basis for strategic plans, whichincorporate longer-term market trends. Gross margin percentages beyond threeyears are assumed to be constant. Discount rates - reflect management's estimate of the risk-adjusted weightedaverage cost of capital (WACC) for the Group. This is the benchmark usedinternally by management to assess operating performance and to evaluate futurecapital investment proposals. Raw materials prices - budgets are prepared using the most up to date price andforecast price data available. The key resources are milk, vegetable oils, gasand electricity and packaging costs. Growth rate estimates - for periods beyond the length of the strategic plans,growth estimates are based upon published industry research adjusted downwardsto reflect the risk of extrapolating growth beyond a three year time frame. Forthe Household business within Dairies, long-term rates of market decline as seenover recent years have been extrapolated forward. The Directors consider the assumptions used to be consistent with the historicalperformance of each cash generating unit and to be realistically achievable inthe light of economic and industry measures and forecasts. Sensitivity to changes in assumptionsWith regard to the assessment of value in use of the 'Spreads' and 'Cheeseexcluding Speciality Cheese' CGUs, management believes that no reasonablypossible change in the above key assumptions would cause the carrying value ofthe unit to exceed its recoverable amount. For the Dairies CGU, there are reasonably possible changes in key assumptionswhich could cause the carrying value of the unit to exceed its recoverableamount. These are discussed as follows: Future growth rates: Management has assumed no growth after year three in thevalue in use calculation. Should the decline in the household business more thanoffset growth in the liquid products business, resulting in an overall rate ofdecline beyond year three, value in use for the CGU could be reduced to a valueapproximately equal to its carrying amount. Gross margins: Management has assumed stable gross margins after year three inthe value in use calculation. Should the margin percentage deteriorate, value inuse could be reduced towards a value approximately equal to its carrying amount. Following an assessment of the value-in-use of the Speciality Cheese CGU,goodwill has been written down to nil (2005: £2.3m). Management continues totake actions to improve the efficiency and profitability of the specialitycheese business but, despite a good Christmas, the Stilton market in particularcontinues to be challenging. These market pressures inevitably impact the cashgenerating capacity of this CGU and management considers it necessary torecognise an impairment to reflect this. The total impairment to the carryingvalue of assets is £9.3m comprising a £2.3m write-down of goodwill and a £7.0mwrite-down of property, plant and equipment. 11 Business combinations On 5 May 2005 the Group acquired the entire share capital of Starcross FoodsLimited, a dairy in Foston, Derbyshire for a consideration of £17.0m (includingdebt on acquisition of £9.1m). The fair value of the identifiable assets andliabilities of the business at the date of acquisition was: Fair value Book to Group value £m £m----------------------------------------- ------- ------Property, plant and equipment 11.7 15.4Receivables 0.4 0.4Payables (1.8) (1.5)----------------------------------------- ------- ------Net assets 10.3 14.3 ------Goodwill 6.7----------------------------------------- ------- Cash consideration (including debt on acquisition of £9.1m) 17.0----------------------------------------- ------- The business and assets of Starcross Foods Limited were legally transferred toDairy Crest Limited in September 2005 and have been absorbed into the widerbusiness. As a result, disclosure of the profit for the year ended 31 March 2006is impracticable. The revenue and profit of the combined entity for the yearended 31 March 2006, assuming the acquisition occurred on 1 April 2005 would notbe materially different from the actual revenue and profit reported in theconsolidated income statement. On 16 May 2005 the Group acquired the dairy business and assets of the MidlandsCo-Operative Society for a cash consideration of £20.3m including fees. The fairvalue of the identifiable assets and liabilities of the business as at the dateof acquisition was: Fair value Book to Group value £m £m---------------------------------------- ------- -------Property, plant and equipment 4.4 6.1Intangible assets 3.6 -Inventories 1.6 1.4Receivables 0.5 0.4Payables (2.4) (1.6)---------------------------------------- ------- -------Net assets 7.7 6.3 -------Goodwill 12.6---------------------------------------- -------Cash consideration 20.3---------------------------------------- ------- On 29 October 2005 the Group acquired the business and fixed assets of Arla'sLondon Foodservice business, including a freehold site at London, for a cashconsideration of £4.2m (including fees). The book value and provisional fairvalue of the identifiable assets and liabilities acquired was £2.6m (beingproperty, plant and equipment) resulting in goodwill of £1.6m. During the year ended 31 March 2006, the Group acquired the goodwill of a numberof bottled milk buyers for cash consideration of £2.2m resulting in goodwill of£2.1m after accounting for the fair value of property, plant and equipmentacquired of £0.1m (book value £0.1m). The businesses and assets of the Midlands Co-operative Society, Arla's LondonFoodservice and the smaller bottled milk buyers have been fully integrated andabsorbed into the Group's wider Dairy operations. As a result, disclosure of theprofit for the year ended 31 March 2006 is impracticable. The MidlandsCo-operative Society acquisition completed on 16 May 2005 and the revenue andprofit of the combined entity for the year ended 31 March 2006, assuming theacquisition occurred on 1 April 2005 would not be materially different from theactual revenue and profit reported in the consolidated income statement. Included in goodwill are certain intangible assets that cannot be separablyidentified and measured due to their nature. In the case of Householdacquisitions, this includes acquired milk round lists. Management believes thatgoodwill represents value to the Group for which the recognition of a discreteintangible asset is not permitted. The majority of the value was assessed tocomprise of synergy benefits expected to be achieved by merging the businessacquired into the Group's existing operations. During the year ended 31 March 2005 the Group acquired the remaining 44%interest in English Butter Marketing Company Limited for a cash consideration of£4.6m giving rise to goodwill on acquisition of £4.6m. In addition, the Groupacquired the goodwill of a number of bottled milk buyers for a cashconsideration of £6.3m. The fair value of the net assets acquired was £0.3mresulting in goodwill of £6.0m. 12 Retirement benefit obligations The Group has two defined benefit pension plans covering substantially all ofits employees, both of which require contributions to be made to separatelyadministered funds. The Dairy Crest Group pension fund will be closed for newemployees joining after 30 June 2006. Employees joining after this date will beinvited to join a Dairy Crest Group defined contribution plan. Yoplait DairyCrest, a 49% owned joint venture also has a defined benefit pension plan. Themost recent full actuarial valuation of the Dairy Crest Group pension fund wascarried out as at 31 March 2004 by the fund's independent actuary using theprojected unit credit method. Full actuarial valuations are carried outtriennially. The Group has charged £0.2m (2005 - £0.2m) in respect of a funded unapprovedretirement benefit scheme ('FURB') for a director whose benefits are restrictedby inland revenue limits. Under this defined contribution scheme, 42.7% ofsalary was contributed by the Group to his FURB in the year ended 31 March 2006(2005 - 42.7%). The following tables summarise the components of net benefit expense recognisedin the consolidated income statement and the funded status and amountsrecognised in the consolidated balance sheet for the defined benefit plans.These plans are all wholly funded. Dairy Crest Group pension plans ------------------ 2006 2005Net benefit expense recognised in the consolidated income £m £mstatement --------------------------------------------- ------ ------Current service cost 16.7 14.7Curtailment gains (0.7) -Interest cost on benefit obligation 33.1 30.7Expected return on plan assets (35.3) (31.0)--------------------------------------------- ------ ------Net benefit expense 13.8 14.4--------------------------------------------- ------ ------ Net actuarial gain / (loss) recognised in thestatement of recognised income and expense 2006 2005 £m £m--------------------------------------------- ------ ------Actual return less expected return on pension schemeassets 86.9 21.0Experience gains / (losses) arising on schemeliabilities 5.0 (2.3)Loss arising from changes in assumptions underlyingthe present value of scheme liabilities (54.7) (21.0)--------------------------------------------- ------ ------Net actuarial gain / (loss) 37.2 (2.3)Related tax (11.2) 0.7--------------------------------------------- ------ ------Net actuarial gain / (loss) recognised in thestatement of recognised income and expense 26.0 (1.6)--------------------------------------------- ------ ------Actual return on plan assets were £122.2m (2005 - £52.0m) The cumulative amount of actuarial gains recognised in the statement ofrecognised income and expense since 1 April 2004 are £34.9m (2005: £2.3m loss)and in the Company statement of recognised income and expense is nil (2005:nil). The directors are unable to determine how much of the pension schemedeficit recognised on transition to IFRS and taken directly to equity of £93.3mis attributable to actuarial gains and losses since inception of those pensionschemes. Consequently, the directors are unable to determine the amount ofactuarial gains and losses that would have been recognised in the Groupstatement of recognised income and expense before 1 April 2004. Defined benefit obligation 2006 2005 £m £m----------------------------------------- ------- -------Fair value of plan assets: - Equities 438.9 379.2 - Bonds and cash 160.3 119.8 - Property and other 26.7 0.5----------------------------------------- ------- ------- 625.9 499.5Defined benefit obligation (687.9) (602.2)----------------------------------------- ------- -------Net liability recognised in thebalance sheet (62.0) (102.7)Related deferred tax asset 18.6 30.3----------------------------------------- ------- -------Net pension liability (43.4) (72.4)----------------------------------------- ------- ------- Scheme assets are stated at their market values at the respective balance sheetdates. The expected rate of return on equities of 8% reflects historic UK equityreturns and is within the range of assumptions typically used by companies of asimilar size. The expected rate of return on bonds of 4.9% is based upon thegross redemption yield available on a similar profile of gilts and corporatebonds. Included in the above analysis is the Wexford Creamery pension fund. The netbenefit expense in the year ended 31 March 2006 amounted to £0.3m (2005: £0.3m).The fair value of plan assets at 31 March 2006 was £7.1m (2005: £5.5m) and thedefined benefit obligation was £9.4m (2005: £7.8m) resulting in a scheme deficitof £2.3m (2005: £2.3m). Dairy Crest Group pension plans------------------------------------------------------- -----------------Movement in the present value of the definedbenefit obligation are as follows: 2006 2005 £m £m------------------------------------------------------- -----------------Opening defined benefit obligation (602.2) (549.3)Service cost (16.7) (14.7)Curtailment gains 0.7 -Interest cost (33.1) (30.7)Contributions by plan participants (7.1) (6.3)Actuarial losses (49.7) (23.3)Benefits paid 20.2 22.1------------------------------------------------------- -----------------Closing defined benefit obligation (687.9) (602.2)------------------------------------------------------- -----------------Movement in the fair value of plan assets are as follows:------------------------------------------------------- -----------------Opening fair value of plan assets 499.5 456.0Expected return 35.3 31.0Actual less expected return 86.9 21.0Contributions by employer 17.3 7.3Contributions by employees 7.1 6.3Benefits paid (20.2) (22.1)------------------------------------------------------- ----------------- Closing fair value of plan assets 625.9 499.5------------------------------------------------------- ----------------- The principal assumptions used in determining retirement benefit obligations forDairy Crest Group's pension fund are shown below: -------------------------------------------- ------------------------ 2006 2005 % %Key assumptions: Rate of increase in salaries 4.5 4.5Rate of increase in pensions inpayment and deferred pensions (andprice inflation) 3.0 3.0Average expected remaining life of a65 year old non-retired male (years) 19.6 19.6Average expected remaining life of a65 year old retired male (years) 18.6 18.6Average expected remaining life of a65 year old non-retired female(years) 22.5 22.5Average expected remaining life of a65 year old retired female (years) 21.5 21.5Discount rate 5.1 5.5Expected return: - Equities 8.0 8.0 - Bonds and cash 4.9 4.7 - Property and other 7.0 7.0-------------------------------------------- ------------------------ 13 Share capital 2006 2005Authorised Thousands Thousands------------------------------------------ --------- ---------Ordinary shares of 25 pence each 240,000 240,000------------------------------------------ --------- --------- Issued and fully paid Thousands £m------------------------------------------ --------- ------At 1 April 2004 124,132 31.0Issued to QUEST during the year 850 0.2------------------------------------------ --------- ------At 31 March 2005 124,982 31.2Issued for cash on exercise of share options 205 0.1------------------------------------------ --------- ------At 31 March 2006 125,187 31.3------------------------------------------ --------- ------ During the year ended 31 March 2006 204,825 shares were issued at a premium of£0.6m for an aggregate consideration of £0.7m (2005: 850,389 shares were issuedto the QUEST at a premium of £3.4m for an aggregate consideration of £3.6m). 14 Reconciliation of movements in equity Attributable to equity shareholders of the parent company ---------------------------------------------------------------------------------------------------------- Ordinary Share Interest Other Retained Total Minority Total shares premium in ESOP reserves earnings £m interests equity £m £m £m £m £m £m £m ----------------------------------------------------------------------------------------------------------At 31 March2005 31.2 28.2 (1.6) 55.8 97.2 210.8 9.8 220.6Financialinstrumentsrecognition - - - 0.3 0.3 - 0.3 ----------------------------------------------------------------------------------------------------------At 1 April2005 -restated 31.2 28.2 (1.6) 56.1 97.2 211.1 9.8 220.9Totalrecognisedincomeandexpense inthe - - - (0.3) 60.2 59.9 1.0 60.9periodIssue ofshare 0.1 0.6 - - 0.7 - 0.7capitalExercise ofoptions - - 0.1 - (0.1) - - -Share-basedpayments - - - - 1.1 1.1 - 1.1Equitydividends(Note 8) - - - - (25.6) (25.6) - (25.6) ---------------------------------------------------------------------------------------------------------At 31 March2006 31.3 28.8 (1.5) 55.8 132.8 247.2 10.8 258.0 ----------------------------------------------------------------------------------------------------------At 1 April2004 31.0 24.8 (3.8) 55.9 72.4 180.3 9.5 189.8Totalrecognisedincomeandexpense inthe - - - (0.1) 49.3 49.2 0.3 49.5periodIssue ofshares toQUEST 0.2 3.4 - - (3.6) - - -ESOPoptions - - 2.2 - (2.4) (0.2) - (0.2)exercisedQUESToptions - - - - 3.5 3.5 - 3.5exercisedShare-basedpayments - - - - 1.7 1.7 - 1.7Equitydividends(Note 8) - - - - (23.7) (23.7) - (23.7) ----------------------------------------------------------------------------------------------------------At 31 March2005 31.2 28.2 (1.6) 55.8 97.2 210.8 9.8 220.6 ---------------------------------------------------------------------------------------------------------- -------------------------------- ------ ------- ----------- ------Other reserves Merger Hedging Translation Other reserve reserve reserve reserves £m £m £m £m-------------------------------- ------ ------- ----------- ------At 31 March 2005 55.9 - (0.1) 55.8Financial instruments recognition - 0.3 - 0.3-------------------------------- ------ ------- ----------- ------At 1 April 2005 - restated 55.9 0.3 (0.1) 56.1-------------------------------- ------ ------- ----------- ------Total recognised income and - (0.3) - (0.3)expense in the period-------------------------------- ------ ------- ----------- ------At 31 March 2006 55.9 - (0.1) 55.8-------------------------------- ------ ------- ----------- ------At 1 April 2004 55.9 - - 55.9-------------------------------- ------ ------- ----------- ------Total recognised income and - - (0.1) (0.1)expense in the period-------------------------------- ------ ------ ------- ------At 31 March 2005 55.9 - (0.1) 55.8-------------------------------- ------ ------ ------- ------ The merger reserve includes the premium on shares issued to satisfy the purchaseof Dairy Crest Limited in 1996. The cumulative amount of goodwill chargedagainst the merger reserve is £86.8m (2005: £86.8m). The reserve is notdistributable. The shares held by the Dairy Crest Employees' Share Ownership Plan Trust('ESOP') are available to satisfy awards under the Long Term Incentive SharePlan ('LTISP') and Executive Share Option Scheme ('ESOS'). The QUEST wasterminated in April 2005 and held no shares at 31 March 2006. During the yearended 31 March 2005 850,389 shares were issued to the QUEST at a premium of£3.4m for an aggregate consideration of £3.6m. At 31 March 2006 the ESOP held 489,075 shares (2005: 535,791 shares) in theCompany at a cost of £1.5m (2005: £1.6m). The ESOP was established in August1996 to purchase shares in the Company in order to hedge certain futureobligations of the Group including shares awarded under the LTISP and the ESOS.During the year the Trustee of the ESOP issued 46,716 (2005 - 725,331) sharesfollowing exercises of LTISP options. The market value of the shares held by theESOP which are listed on the London Stock Exchange was £2.3m at 31 March 2006(2005: £2.5m). The hedging reserve records the movements on designated hedging items, offset byany movements recognised directly in equity on underlying hedging items. The translation reserve records exchange differences arising from thetranslation of the accounts of foreign currency denominated subsidiaries offsetby the movements on loans and derivatives used to hedge the net investment inforeign subsidiaries. 15 Cash flow from operating activities Year ended Year ended 31 March 2006 31 March 2005 £m £m---------------------------------------- -------- --------Profit from operations before net financecosts and taxation 48.5 84.0Depreciation 38.3 33.9Amortisation of intangible assets 1.2 -Exceptional items 8.9 (0.9)Release of grants (0.9) (0.8)Share based payments 1.1 1.7Profit on disposal of household depots (6.1) (4.7)Difference between pension contributions paidand amounts recognised (1.3) 7.4in the income statement(Increase) / decrease in inventories (17.9) 16.8(Increase) / decrease in receivables (20.0) 3.7Increase in payables 21.6 1.9---------------------------------------- -------- -------- Cash generated from operations 73.4 143.0---------------------------------------- -------- -------- 16 Analysis of net debt At 1 April Cash Exchange At 31 March 2005 flow movement 2006 £m £m £m £m-------------------------------- -------- ------- -------- ----------Cash at bank and in hand 27.2 (12.8) - 14.4Borrowings (current) (20.0) (20.0) - (40.0)Borrowings (non-current) (216.6) (20.1) - (236.7)Finance leases (18.1) 0.2 - (17.9)-------------------------------- -------- ------- -------- ---------- (227.5) (52.7) - (280.2)-------------------------------- -------- ------- -------- ---------- 17 Post balance sheet events On 4 April 2006, the Group completed a private debt placement in the US, raising£133m in US$ loan notes and £10m in Sterling loan notes. The loan notes maturein two tranches of 7 and 10 years. Currency swaps have been put in place toconvert the US$ debt into Sterling at fixed rates. The effective interest rateon the combined issue is 5.3%. On completion of this transaction and thesubsequent repayment of certain term loans of £90m and cancellation of £20m ofthe revolving credit facility, Group long-term borrowing facilities, includingfinance leases, total £456m. This information is provided by RNS The company news service from the London Stock Exchange
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