Directors’ report
The Directors of Dairy Crest Group plc (the ‘Company’) present their fourteenth Annual Report to shareholders together with the audited financial statements of the Company and its subsidiaries for the year ended 31 March 2010. The purpose of the Annual Report is to provide information to members of the Company. The Company, its Directors, employees, agents and advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. It contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and except to the extent required by applicable regulations or by law, the Group undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report should be construed as a profit forecast.
As the 2009/10 financial year commenced after 28 June 2008, references to the Code in this report are to the Combined Code on Corporate Governance of June 2008. The relevant parts of this report have been reviewed by Ernst & Young LLP and their opinion is set out here.
Principal activities
The principal activities of the Group are the manufacture, processing and distribution of milk and dairy products. Further information can be found within the Business Review section here.
Going concern
The Group and Company’s business activities, together with factors likely to affect future development, performance and position are set out in the Chief Executive’s review here, the business reviews here and the review of principal risks and uncertainties here.. The financial position, cash flows, liquidity position and borrowing facilities are described in the Financial Review here. In addition, notes 31 and 32 to the financial statements include the Group and Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.
As highlighted in note 31, the Company and Group meet day-to-day working capital requirements through syndicated revolving credit facilities and ensure that forecast net borrowings plus a reasonable operating headroom are covered by committed facilities which mature at least 12 months after the year end. At 31 March 2010, effective headroom was £295 million and the earliest facility to expire was a £100 million revolving credit facility in November 2011. Should this £100 million facility not be renegotiated and fall away, forecasts show that facility headroom would remain adequate.
There were no breaches of bank covenants in the year ended 31 March 2010 and projections do not indicate any breaches in the foreseeable future. Since the reduction of Euro denominated borrowings in the year ended March 2009, exchange rate fluctuations no longer materially impact our bank covenant tests.
Forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Company and Group will be able to operate within the level of current facilities.
Having reviewed and taken into account the Liquidity Risk: Guidance for Directors of UK Companies 2009, published by the Financial Reporting Council in October 2009, the Directors are satisfied that the Company and the Group have adequate resources to continue operating for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
Business review
S417 of the Companies Act 2006 requires that the Company sets out in this report a fair review of the business of the Group during the 2009/10 financial year, including balanced and comprehensive analysis of the development and performance of the Group during the financial year and the position of the Group at the end of the year; together with information relating to environmental, employee, social and community matters. In addition, the Company is required to provide a description of the principal risks and uncertainties facing the Group and to the extent necessary for an understanding of the business, the main trends and factors likely to affect the future development, performance and position of the Company’s business. The information satisfying the business review requirements is set out in this report: the Chairman’s statement here; the Chief Executive’s review here; the Business Review here; the review of the principal risks and uncertainties here; and the Group Key Performance Indicators ('KPIs') here; all of which are incorporated into this report by reference. The Corporate Governance Report forms part of this Directors’ Report and is incorporated into it by reference.
Group results
The Group’s consolidated income statement here; shows a profit for the financial year of £52.5m compared with £74.3 million in 2008/09.
Dividends
The Directors are recommending a final dividend of 13.6 pence (2008/09: 13.0 pence) per ordinary share, which if approved, will be paid to members on the register at the close of business on 25 June 2010. Together, the final dividend and interim dividend (5.3 pence per ordinary share paid on 28 January 2010) make total dividends for the year of 18.9 pence per ordinary share (2008/09: 20.1 pence).
Share capital
The authorised and issued share capital of the Company together with details of movements in the Company’s issued share capital during 2009/10 are shown in note 25 to the financial statements. As at the date of this report, 133.3 million ordinary 25p shares were in issue and fully paid with an aggregate nominal value of £33.3 million.
The holders of ordinary shares are entitled to receive the Company’s reports and accounts; to attend and speak at General Meetings of the Company; to appoint proxies and to exercise voting rights. To be effective, electronic and paper proxy appointments and voting instructions must be received at the Company’s registered office, or such other place in the United Kingdom specified in the relevant notice of meeting, not later than 48 hours before a general meeting. Subject to applicable statutes, there are no restrictions on transfer or limitations on the holding of any class of shares and no requirements for prior approval of any transfers. None of the shares carries any special rights with regard to control of the Company. There are no known arrangements under which financial rights are held by a person other than the holder of the shares and no known agreements on restrictions on share transfers or on voting rights. Shares acquired through Company share schemes and plans rankpari passuwith the shares in issue and have no special rights. The Company established an employee benefit trust in 1996 which in certain circumstances holds shares in connection with the Group’s employee share incentive plans. As the registered holder the voting rights in the shares are exercisable by the trustee. However, the trustee does not ordinarily exercise those rights. Changes to the ‘Articles’ must be approved by the shareholders in accordance with the legislation in force from time to time. The Company does not have agreements with any Director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause options and awards granted to Directors and employees under such schemes and plans to vest on a takeover.
Issue of shares
At the AGM on 16 July 2009, shareholders renewed the authority for the Board under the Articles to exercise all powers of the Company to allot relevant securities up to an aggregate nominal amount of £11,105,294.
Purchase of own shares
At the AGM on 16 July 2009 shareholders granted the Company authority to make market purchases of up to 13,326,354 of its issued ordinary shares of 25 pence each, provided that: the minimum price which may be paid for any such ordinary share is 25 pence (exclusive of expenses and appropriate taxes); the maximum price (exclusive of expenses and appropriate taxes) which may be paid for any such ordinary share shall be not more than 5% above the average of the middle market values for an ordinary share in the Company as taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the date of purchase. The Company did not exercise this authority during the year and made no market purchases. Except in relation to a purchase of ordinary shares, the contract for which was concluded before this authority expires and which will or may be executed wholly or partly after such expiry, the authority granted shall expire at the conclusion of this year’s AGM.
The Directors believe it advisable to seek renewal of both of the above-mentioned authorities or replacement of them with suitable alternatives annually at the AGM. Approval will be sought from the shareholders at the AGM to renew the authorities for a further year.
Pensions
On 31 March 2010 the Group’s defined benefit pension fund was closed to future accrual. Accordingly, the fund is now in run-off. It remains under the control of a corporate trustee, Dairy Crest Pension Trustees Limited, the board of which comprises two nominees from Dairy Crest Limited and two employee members elected by all members irrespective of whether they were active, deferred or pensioners at the time. The pension funds’ assets are held separately from those of the Group and can only be used in accordance with the rules of the pension fund. Pension provision for employees is made through a defined contribution pension scheme.
Significant agreements – change of control
A change of control of the Company following a takeover bid may cause a number of agreements to which the Company or its subsidiaries are party to take effect, alter or terminate. The agreements that are considered significant are as follows:
Borrowing facilities
Non-compliance with the change of control clauses in the Group’s funding arrangements, or failure to reach agreement with the parties on revised terms, would require any acquirer to put in place replacement facilities.
Essential contracts
It is vital that the Group is able to source high quality raw milk at the most competitive prices. To that end the Group has numerous contracts for its supply. While these contracts are collectively essential to the business, no single contract nor any single supplier of raw milk is critical to the Company’s business.
The Company also has strong relationships with certain major retailers to supply them with liquid milk. Individually these contracts are important to the business but not essential.
Substantial shareholdings
As at 14 May 2010, the Company has been notified in accordance with the Disclosure and Transparency Rules issued by the Financial Services Authority of the following interests of 3% or more in the Company’s existing issued ordinary share capital.
| No. of shares | Percentage of issued share capital |
|
|---|---|---|
| Prudential plc group of companies | 6,690,526 | 5.02% |
| JP Morgan Asset Management Holdings Inc. | 6,647,567 | 4.99% |
Directors
The names and biographical details of the current Directors of the Company are given here. The names of those persons who were Directors during the year but have retired or resigned from the Board are set out here, together with the dates on which they left the Board.
The rules on appointment, reappointment and retirement by rotation of Directors are contained in the Articles. A Director may be appointed by shareholders’ ordinary resolution or by the Board. The current Articles require that all Directors are subject to election at the first AGM following appointment and thereafter to re-election at least every three years. Andrew Carr-Locke was appointed during the year and in accordance with the current Articles, he will retire at the 2010 AGM and offer himself for election. In the spirit of best practice the Board has decided that starting with this year’s AGM, all Directors will retire from the Board annually and other than in the case of any Director who has decided to stand down from the Board, will offer themselves for re-election. Neil Monnery has decided not to offer himself for re-election at the forthcoming AGM. The Directors have decided to adopt this policy in advance of any requirements on them to do so. It will be enshrined in the new Articles which shareholders will be asked to consider and adopt at this year’s AGM.
Directors’ interests
Details of the interests in the shares of the Company of the Directors holding office as at the date of this report, along with those of the Directors who held office during the year but retired or resigned from office, and their immediate families appear in the Remuneration Report here.
Details of the Directors’ service contracts and letters of appointment appear in the Remuneration Report here.
No Director had a material interest in any significant contract with the Company or any of its subsidiaries during the year. Procedures for dealing with Directors’ conflicts of interest are in place and are operating effectively.
Directors’ and officers’ indemnities and insurance
The Company maintains liability insurance for its Directors and officers. At its AGM held on 14 July 2005 shareholder approval was given for the amendment of the Articles giving Directors and officers the benefit of a qualifying third party indemnity provision. That indemnity provision has been in force throughout the year and remains in force.
Employees
The Group employs approximately 7,000 people throughout the United Kingdom, Republic of Ireland, France and Italy and depends on the skills and commitment of its employees in order to achieve its objectives. Personnel at every level are encouraged to make their fullest possible contribution to Dairy Crest’s success.
Employees are kept regularly informed on matters affecting them and on issues affecting the Group’s performance through a variety of communications tools, including the Group intranet and the in-house magazine.
The Group has well-established consultation and negotiating arrangements with established trade unions.
Employees are encouraged to acquire shares in the Company through participation in the Dairy Crest Sharesave Scheme. Details of this scheme are set out in the Directors’ Remuneration Report.
The Board is committed to ensuring that a culture free from discrimination and harassment remains embedded within the Group and discrimination of any sort is not tolerated. Proper consideration is given to applications for employment from disabled people who are employed whenever suitable vacancies arise. Wherever practicable, staff who become disabled during employment are retained. The Group practices equality of opportunity for all employees, irrespective of ethnic origin, religion, political opinion, gender, marital status, disability, age or sexual orientation.
Financial instruments
The Group’s financial risk management objectives and policies are discussed in the Financial Review and in notes 31 and 32 to the financial statements.
Research and development
The Group has adopted a target of delivering part of its annual turnover through new product development. Focus continues to be on offering consumers a wide product mix and especially, the development of lower fat variants of existing products. Dairy Crest remains at the forefront of dairy industry developments to reduce packaging waste through innovation such as our patented JUGIT and milk bag.
Land and buildings
Having obtained an informal valuation of the Group’s land and buildings the Directors are of the opinion that the current market value in existing use of the Group’s land and buildings slightly exceeds their book value.
Supplier payment policy
The Company is a holding company and had no amounts owing to trade creditors at 31 March 2010 (2008/09 : £Nil). The Group’s creditor days outstanding at 31 March 2010 were 22.5 (2008/09 24.8) of purchases. The Group has standard payment terms of 60 days of receipt of invoice. Payment terms for purchases under major contracts are agreed as part of the contract negotiations.
Charitable and political donations
No political donations or expenditures were made or incurred during the year. Charitable donations amounted to £0.1 million (2008/09 : £0.1 million). The Corporate Responsibility section of the Business Review here; provides additional detail on the charitable activities of the Group and its employees.
Disclosure of information to the auditor
So far as each Director in office at the date of approval of this report is aware, there is no relevant audit information of which the Company’s external auditor (Ernst & Young LLP) is unaware.
Each of the Directors has taken all steps that they ought to have taken in performing their roles as directors to exercise due care, skill and diligence in order to make themselves aware (i) of any relevant audit information and (ii) to establish that the Company’s external auditor is aware of such information.
For the purposes of this statement on disclosure of information to the external auditor, ‘relevant audit information’ is the information needed by the Company’s external auditor in connection with the preparation of its report are shown here.
Directors’ responsibility statements
The responsibility statements required under Disclosure and Transparency Rule 4.1 are set out here.
Annual general meeting
The AGM will be held at Eversheds LLP, 1 Wood Street, London EC2V 7WS on Tuesday, 20 July 2010 at 11.00 am. The notice convening the meeting will be issued separately, together with details of the business to be considered and explanatory notes relating to each of the resolutions being proposed.
Auditor
Ernst & Young LLP has expressed its willingness to continue as auditor of the Company. A resolution to reappoint Ernst & Young LLP as the Company’s auditor will be put to the forthcoming AGM.
Responsibility statements under the Disclosure and Transparency Rules
Each of the current Directors listed here confirm that to the best of their knowledge:
- The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and
- The Directors’ Report and the Group Operating and Financial reviews include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.By order of the Board:
Robin Miller
Company Secretary
Claygate House,
Littleworth Road,
Esher,
Surrey KT10 9PN
17 May 2010
Registered in England and wales No.3162897