11 November 2010

Dairy Crest Group plc (“Dairy Crest”)

Interim Results Announcement

Dairy Crest, the UK’s leading dairy company, today announces its unaudited results for the six months ended 30 September 2010:

/
Half year ended 30 September
Financial Highlights:
/
2010
/
2009
/
Change
Revenue: / £776.9m / £803.7m / -3%
Profit before tax: / £36.1m / £34.0m / +6%
Adjusted profit before tax *: / £40.1m / £38.1m / +5%
Basic earnings per share: / 19.8p / 18.6p / +6%
Adjusted basic earnings per share *: / 21.4p / 20.1p / +6%
Half year net debt: / £335.5m / £380.4m / -12%
Interim dividend: / 5.5p / 5.3p / +4%

* before exceptional items, amortisation of acquired intangibles and pension interest.

A good first half

·  Increased first half profits - benefiting from being a broadly based business

-  adjusted profit before tax up 5%

-  higher profits in Cheese more than offset anticipated reduced profits in Dairies

·  Ongoing brand sales growth

-  key brands up 5%

-  lighter variants up 13%

·  Increased sales of fresh milk to major retailers

-  new contracts secured despite competitive market

-  these reflect continued improvements in quality, service and cost base

·  Reduced debt

-  ongoing strong cashflow – cash generated from operations £51.8 million

-  net debt down £155 million in two years

Mark Allen, Chief Executive, said:

“Dairy Crest has enjoyed another good six months. In line with our strategy, we have continued to grow our brands, reduce our costs and control our debt. At the same time the improvements we have made to our quality, service and cost base have paid off with new contracts to supply fresh milk to major retailers.

Our strategy has proved successful in the challenging economic environment and positions us to deliver further value going forward. With operational efficiencies and selling price increases in certain categories limiting the impact of higher input costs, we are confident that we can continue to deliver profits in line with our expectations.”

For further information:

Dairy Crest Group plc
Arthur Reeves / 01372 472236
Brunswick
Simon Sporborg / 020 7404 5959

There will be a presentation for analysts at 09.30 am today (11th November 2010) at The Lincoln Centre, 18 Lincoln’s Inn Fields, London WC2A 3ED.

Overview

Dairy Crest has performed well during the first six months of the year. This performance demonstrates the benefits of being a broadly based dairy business with strong brands.

Higher sales of our five key brands and of milk to major retailers have been offset by lower sales of milk to the doorstep and middle ground. Excluding the effects of the disposal of our majority stake in Wexford Creamery Limited, Group revenue was broadly unchanged. The Group reported half-year revenue of £776.9 million, down 3% on £803.7 million in the comparable period last year.

Adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was up 5% to £40.1 million from £38.1 million in the comparable period last year. Reported profit before tax was up 6% to £36.1 million from £34.0 million.

Half year net debt fell by 12% to £335.5 million compared to 30 September 2009 and was lower than at 31 March 2010 despite the usual seasonal working capital outflow as cheese stocks increase.

The Group’s five key brands (Cathedral City, Country Life, St Hubert Omega 3, Clover and FRijj) have grown sales by 5% compared to the first half of last year.

In the competitive liquid milk market, improvements that we have made to our quality, service and cost base have allowed us to increase our sales of fresh milk to major retailers.

We have continued to deliver operational efficiencies in line with our expectations and have achieved selling price increases in certain categories to limit the impact of higher input costs.

Operating Review

Vision and Strategy

Dairy Crest is a broadly based dairy business. We have a strong vision based around pride in our heritage and links to the countryside; understanding the consumer; innovation; and a commitment to act responsibly. Our strategy is to grow added value sales, reduce our costs, minimise risk and progressively strengthen the balance sheet.

Growing added value sales- continuing growth of our five key brands

In total our key brands have grown sales in the period by 5% against challenging comparatives, despite FRijj slipping back slightly. Details are as follows:

Brand
(market) / Dairy Crest Growth
(1) / Market Growth
(2) / Highlights
Cathedral City
(UK retail cheese) / +4% / +1% / Strong growth in volumes of Extra Mature and Mild variants
Clover
(UK retail butter, spreads and margarine) / +10% / +5% / Strong volume growth
Country Life
(UK retail butter, spreads and margarine) / +2% / +5% / Significant price increases held back volumes in Q1, but stronger Q2 performance
St Hubert Omega 3
(French retail non-butter spreads) / +7% / 0% / A strong H1, increasing market share
FRijj
(UK retail fresh flavoured milk) / -1% / +2% / Volumes held back during commissioning of new production equipment
1.  Dairy Crest (value) sales 6 months to 30 September 2010 compared to 6 months to 30 September 2009.
2.  AC Nielsen and TNS data for 26 weeks to 2 October 2010 v 26 weeks to 3 October 2009, IRI data 26 weeks to 17 October 2010 v 26 weeks to 17 October 2009.

In line with our strategy to provide consistent support to our key brands, we increased media expenditure compared to the first half of 2009/10. Sales on promotion have also remained high in the period, although slightly below those seen in the comparable period last year.

Growing added value sales - higher fresh milk sales to major retailers

In a challenging liquid milk market, Dairy Crest has gained volumes as a result of changes in the supply arrangements of fresh milk to the major retailers. As previously announced, Dairy Crest has renewed long term contracts with Sainsbury’s and Morrisons. We have also been successful in gaining a share of Tesco’s fresh milk business, with supply commencing in December 2010. We now have agreements to supply fresh milk in polybottles to six out of the seven major UK retailers, reflecting the improvements we have made to our quality, service and cost base. Our innovative patented milk jug, Jugit, continues to gain distribution.

However, increased national milk supply in the period has resulted in a more difficult middle ground sector and we have reduced sales in this area as customer profitability has declined.

Growing added value sales – further progress with milk&more

We continue to make progress with milk&more. Important improvements to our systems which will increase customer capacity, enhance our promotional capability and deliver consumer behavioural analysis, are now almost complete. Average weekly milk&more sales in September 2010, less than a year since the service was launched nationally, were close to £800k. Although overall doorstep milk sales declined by 7% in the six month period compared to the six months ended 30 September 2009, the progress made with milk&more resulted in twelve of our 123 depots recording higher total doorstep sales in September 2010 than in September 2009, with a further twenty showing decline in total sales of less than 2%.

Cutting costs – delivering efficiency improvements

We are making good progress with the major project to simplify and centralise the administration in our depot network. This project will provide substantial savings going forward but will result in some exceptional costs in this year and next. Other cost reduction initiatives, including cost savings at our UK Spreads manufacturing sites, are progressing to plan.

We continue to expect to deliver annual cost savings of around £20 million this year.

The planned investment in our liquid milk dairies is also progressing well and should deliver benefits in line with our expectations.

Some of the savings that we are generating will help offset higher milk and other input costs. For example we have increased the price we pay our direct milk suppliers by between 0.4ppl and 1.25ppl since 1 April 2010. We have also been successful in achieving selling price increases in certain categories to limit the impact of higher input costs.

We remain committed to reducing our costs further next year and plans to do this are in hand.

Acting responsibly

Dairy Crest is a responsible business and we continue to demonstrate our commitment to Corporate Responsibility. Notable successes in the period came from increased sales of lighter (reduced fat) brands and Jugit, our environmentally friendly milk jug. We were also delighted to be the first UK dairy company to be named in the prestigious Carbon Disclosure Leadership Index and to be ranked as the 4th best company in the Consumer Staples category behind three FTSE 100 companies. Looking forward, the new biomass boilers that we are installing at our Davidstow creamery will reduce carbon emissions significantly next year.


Financial Review

The Group achieved half-year revenue of £776.9 million, down 3% on the comparable period last year. Increased sales of our five key brands have been offset by lower sales of doorstep and middle ground milk and lower revenues following the sale of our controlling interest in Wexford Creamery Limited.

Reported profit on operations (before exceptional items) increased 4% to £46.3 million (2009: £44.5 million). Exceptional costs included in profit on operations amounted to £1.6 million (2009: £0.5 million) and represent costs associated with the rationalisation of administration in our depot network. Reported profit on operations as up 2% at £44.7 million.

Summarised Segmental Performance

6 months ended 30 September / 2010 Revenue
£m / 2009
Revenue
£m / 2010
Profit*
£m / 2009
Profit*
£m
Cheese / 108.9 / 131.8 / 12.5 / 7.9
Spreads / 134.7 / 137.9 / 27.2 / 27.0
Dairies / 529.7 / 528.7 / 10.9 / 14.3
Other/Associates/Joint Ventures / 3.6 / 5.3 / - / 0.1
Total / 776.9 / 803.7 / 50.6 / 49.3

*Profit on operations plus share of associates and joint ventures, before amortisation of acquired intangibles of £4.3 million (2009: £4.7 million) and exceptional items.

Cheese

Revenues of £108.9 million are £22.9 million below last year albeit this is principally due to the sale of our controlling interest in Wexford Creamery Limited on 12 June 2010. From this date our remaining 30% stake in this business is no longer fully consolidated in the Group’s financial statements. Profits have increased by £4.6 million to £12.5 million driven by robust Cathedral City volumes and improved whey realisations.

Spreads

Revenues of £134.7 million have remained broadly stable with strong performances from our three key brands Clover, St Hubert Omega 3 and Country Life being offset by weaker Utterly Butterly volumes and revenues following distribution losses last year. Profits are marginally higher, up £0.2 million at £27.2 million, as we have succeeded in reducing our cost base and recovering inflation across cream and vegetable oils in the marketplace. We remain particularly pleased that our French business St Hubert continues to perform ahead of our expectations.

Dairies

Dairies revenues of £529.7 million are broadly in line with last year as volume gains with major retail have been offset by revenue declines in the competitive middle ground sector and ongoing doorstep decline. Profits of £10.9 million are £3.4 million below last year although there were no property profits from the sale of depots in the first half (2009: £2.3 million). Underlying margins are down as a result of increased milk and other input costs and competitive pressure on realisations; however we continue to focus on cost efficiencies and have increased capital investment in infrastructure to reduce processing costs further in the future.

Finance costs of £10.5 million were down 6% on the comparable period in 2009 reflecting lower borrowing levels. Other finance expense from the Group’s pension scheme under IAS19 was £nil (2009: £0.2 million) reflecting the position of the scheme and financial assumptions at the beginning of the financial year.

Group adjusted profit before tax (before exceptional items, amortisation of acquired intangibles and pension interest) was £40.1 million (2009: £38.1 million).

The Group has recorded an exceptional gain of £1.9 million on the sale of its controlling interest in Wexford Creamery Limited. The assets of this business had previously been impaired to reflect their fair value.

The pre-exceptional income tax expense of £10.2 million represents an effective tax rate of 28.5%. This is a marginal increase compared to the 2009/10 full year effective rate of 28.3% and results mainly from the bigger proportion of French pre-tax profits subject to a higher rate of corporation tax and the lack of tax free property disposal profits this period. The tax credit on exceptional costs amounts to £0.4 million.

Basic earnings per share were up 6% at 19.8 pence (2009: 18.6 pence). Adjusted earnings per share were up 6% at 21.4 pence compared to 20.1 pence last year.

The directors have declared an interim dividend of 5.5 pence per share (2009: 5.3 pence per share), a 4% increase.