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Financial Review
Overview
This year has seen the Group make good progress. We have delivered increased profits while increasing investment in advertising and innovation to drive our key brands now and in the future. Importantly, we have again reduced net debt significantly this year and made important steps towards further de-risking the business.
We end the year with stronger brands, a lower cost base and a more stable business and our strategy will continue to deliver on these in the future
| Revenue | 2010 £m |
2009 £m |
Change £m |
Change % |
|---|---|---|---|---|
| Cheese | 260.0 | 244.2 | 15.8 | 6.5 |
| Spreads | 277.7 | 284.2 | (6.5) | (2.3) |
| Dairies | 1,081.2 | 1,108.2 | (27.0) | (2.4) |
| Share of joint ventures | 1.2 | 70.3 | (69.1) | (98.3) |
| Other | 10.8 | 11.0 | (0.2) | (1.8) |
| Total segment revenue | 1,630.9 | 1,717.9 | (87.0) | (5.1) |
| Group revenue (excluding joint ventures) |
1,629.7 | 1,647.6 | (17.9) | (1.1) |
Reported Group revenue decreased by 1% to £1,629.7 million. Good growth in our key brands and retail milk operations was offset by lower ingredients realisations and reduced volumes in the Household business and non-strategic brands. Total segment revenue reduced by 5% to £1,630.9 million reflecting the sale of our 49% share in Yoplait Dairy Crest (‘YDC’) in March 2009.
| Segment operating profit | 2010 £m |
2009 £m |
Change £m |
Change % |
|---|---|---|---|---|
| Cheese | 16.9 | 34.3 | (17.4) | (50.7) |
| Spreads | 54.0 | 59.5 | (5.5) | (9.2) |
| Dairies | 34.9 | 7.9 | 27.0 | 341.8 |
| Share of joint ventures | 0.1 | 7.3 | (7.2) | (98.6) |
| Total segment profit | 105.9 | 109.0 | (3.1) | (2.8) |
| Remove share of joint ventures | (0.1) | (7.3) | – | – |
| Acquired intangible amortisation | (9.2) | (9.6) | – | – |
| Group profit on operations (pre-exceptionals) | 96.6 | 92.1 | 4.5 | 4.9 |
Segment operating profit is quoted before the impact of exceptional items and amortisation of acquired intangibles and includes our share of joint venture profit after tax. On this basis, segment profit was down £3.1 million or 2.8% due to the reduced share of profit from joint ventures following the YDC disposal.
Reported pre-exceptional Group profit on operations increased by 4.9% to £96.6 million. We have benefited from being a broadly based dairy business and a strong recovery in Dairies profits has offset lower margins in our Cheese and Spreads segments where, in the current economic environment, levels of promotional investment remains high and, in the case of cheese, we benefited from stock profits during 2008/09 as selling prices increased on the back of milk price increases, but the impact on cost of sales lagged due to the long maturation period.
Exceptional items
Six exceptional items have been recorded in the year, four of which are carried over from previous years. These items principally represent projects aimed at increasing efficiency or de-risking and simplifying the business in the future. The pre-tax exceptional gain in relation to these items was £4.0 million, which comprises the following.
Our new cheese cutting and packing operation in Nuneaton became fully operational in the first half of the year. In 2008/09 and during the first half of 2009/10, volumes were being ramped up with additional packing being carried out by a third party. We incurred duplicate running costs during this time until the Nuneaton site was running at full capacity. In 2009/10 these costs amounted to £1.5 million.
In April 2010, the Office of Fair Trading (‘OFT’) announced that the parties to the 2007 Statement of Objections will get a penalty reduction provided each company continues to co-operate with the OFT. The OFT expects to conclude and issue its decision by early summer 2010. Accordingly, the provision has been reduced to reflect our best estimate of the penalty ultimately payable along with any associated professional fees. This has resulted in an exceptional release of £2.2 million.
During the year, having consulted with employees, we closed the Dairy Crest defined benefit pension scheme to future service accrual with an effective date of April 2010. The closure of the scheme to future service accrual resulted in an exceptional curtailment gain of £16.9 million and significantly reduces future pension risks. Fees of £0.6 million were incurred resulting in a net exceptional credit of £16.3 million.
Having closed our Nottingham dairy in 2008/09, the site was sold during the year for cash proceeds of £2.5 million resulting in an exceptional profit of £1.0 million.
We announced on 2nd February 2010 our intention to sell a majority share of our investment in Wexford Creamery Limited (‘WCL’), a cheese manufacturing business in Ireland. The sale had not been completed at 31 March 2010, however the assets and liabilities of WCL represent a disposal group held for sale at 31 March 2010. The carrying value of WCL assets has been impaired by £16.0 million to management’s best estimate of the business’s fair value less costs to sell.
On disposal of our 49% share of YDC in March 2009, the Group placed cash in an escrow account to cover the cost of closing the YDC defined benefit pension scheme. The final cost of closure was lower than anticipated and the Group received £2.0 million back from escrow (net of fees) during the year.
Interest
Finance charges have decreased by £7.1 million (24%) to £22.4 million principally as a result of significantly reduced levels of borrowings. At 31 March 2010, all borrowings were at fixed rates of interest through fixed coupon loan notes or interest rate swaps. Short term borrowing requirements are met by utilisation of the November 2006 and July 2008 revolving credit facilities which are at floating rates of interest based on LIBOR plus margin.
Other finance income comprises the net expected return on pension scheme assets after deducting the interest cost of the defined benefit obligation. This resulted in a cost of £0.5 million in the year ended 31 March 2010 compared to £6.9 million income in 2008/09. This amount can be highly volatile year-on-year as it is dependent upon financial market conditions at 31 March, and therefore is excluded from our headline adjusted profit before tax.
Interest cover excluding pension interest, calculated on total segment profit, remains comfortable, at 4.7 times (2009: 3.7 times).
Adjusted profit before tax
The Group’s adjusted profit before tax (before exceptional items and amortisation of acquired intangibles) was £83.5 million (2009: £79.5 million). This is management’s key Group profit measure and the 5% increase has been achieved after having invested significantly more in marketing our key brands during 2009/10. Reported profit before tax reduced from £103.2 million in 2008/09 to £77.8 million in 2009/10. This reduction is principally due to the £50.4 million exceptional gain on the sale of our stake in YDC in 2008/09.
Taxation
The Group’s effective tax rate on profits excluding exceptional items and including joint ventures’ tax was 28.3% (2009: 26.8% after adjusting for tax on joint ventures). The increase in effective rate of tax compared to last year is primarily due to a higher proportion of St Hubert profits and tax (French profits are taxed at higher rate). The reported Group effective tax rate is 32.5% (2009: 28.0%). Last year’s reported effective tax rate benefited from the profit on disposal of our share in YDC which did not attract tax.
Group profit for the year
Reported Group profit for the year decreased to £52.5 million (2009: £74.3 million including an exceptional gain of £50.4 million on the sale of our 49% stake in YDC).
Earnings per share
The Group’s adjusted basic earnings per share decreased by 1% to 44.5 pence per share (2009: 45.0 pence per share). In the year to 31 March 2009, YDC contributed £7.1 million of profit after tax and 5.4 pence per share.
Basic earnings per share from continuing operations which includes the impact of exceptional items, pension interest and the amortisation of acquired intangibles, decreased by 29% to 40.6 pence per share (2009: 56.8 pence per share).
A diluted earnings per share calculation, which reflects the impact of potential ordinary shares from unvested share option schemes, is presented for both the basic and adjusted earnings per share amounts.
Dividends
The proposed final dividend of 13.6 pence per share represents an increase of 4.6% on last year’s final dividend of 13.0 pence. Together with the interim dividend of 5.3 pence per share this gives a total dividend of 18.9 pence per share for the full year. This represents a decrease of 6.0% on the dividend declared for 2008/09. The final dividend will be paid on 5 August 2010 to shareholders on the register on 25 June 2010.
Pensions
We have made further progress during the year in reducing exposures to pension scheme risks in the future. In the first half of the year we took out a second tranche of insurance for retired members meaning substantially all our retired membership liabilities are now covered by insurance contracts. In the second half, after consultation with members, we enacted the closure of the defined benefit scheme to future service accrual with an effective date of 31 March 2010. This action significantly reduces the future benefit accretion within the scheme and therefore reduces funding risks. The closure resulted in a one-off exceptional curtailment gain of £16.9 million in the year ended 31 March 2010. This amount has been classified as exceptional along with fees relating to the scheme closure. All members have been given the opportunity to join our stakeholder pension scheme for 2010/11.
In addition to the structural changes referred to above, we have paid additional contributions of £10 million into the defined benefit scheme in the second half of the year and are committed to paying a further £20 million in 2010/11. There is a full actuarial valuation currently taking place based on 31 March 2010. The total pension deficit at 31 March 2010 was £142.4 million compared to £63.3 million at 31 March 2009 and £178.0 million at 30 September 2009. The position since March 2009 worsened principally as a result of falling corporate bond yields, which are used as the benchmark rate for discounting future scheme liabilities. This more than offset the strong asset returns achieved during the year, both in equities and bonds. The actuarial loss reported in other comprehensive income for the year is £117.7 million (2009: £118.1 million). The March 2010 deficit excludes the deficit of £2.0 million in the Wexford Creamery pension scheme which, since the announcement of our intention to sell a controlling stake in that business, is classified within liabilities associated with disposal group held for sale.
Cash flow
We have delivered another year of strong cash generation and have substantially reduced borrowings. Cash generated from operations was £145.9 million in the year (2009: £129.1 million). This includes a working capital inflow of £25.7 million (2009: £19.1 million). This performance was driven by significant reductions in stock levels, principally maturing cheese stocks.Capital expenditure of £26.9 million, was £22.4 million lower than last year (2009: £49.3 million). Significant investment was undertaken last year at our National Distribution Centre in Nuneaton in order to build and commission a new cheese cutting and packing facility. Expenditure in the first half of 2009/10 was reduced, however capital investment has increased in the second half of the year and is expected to increase further in 2010/11. Cash receipts from the disposal of fixed assets amounted to £10.2 million (2009: £22.4 million) however last year’s proceeds included £15.5 million from the sale of certain plant and equipment at Nuneaton, which was then leased back under an operating lease.
Cash interest and tax payments amounted to £22.1 million and £10.5 million respectively (2009: £30.3 million and £9.2 million). Interest payments are £8.2 million lower than last year consistent with the lower interest cost in the profit and loss account. Tax payments remain low in the UK due to additional pension deficit contributions (£10 million in 2009/10) on which we receive a tax deduction.
Cash inflows from the sale of businesses of £1.2 million comprise the sale of certain Household depots in June 2009. Furthermore, we received a net amount of £1.2 million in relation to the sale of YDC comprising pension refund on final closure of the pension scheme less cash costs of the disposal, most of which were accrued at 31 March 2009. In 2008/09 we received proceeds of £59.9 million from the sale of our 49% share of YDC and £3.2 million from the sale of our Stilton and speciality cheese business.
Net debt
Net debt decreased by £78.6 million to £337.2 million at the end of the year driven by strong operating cash flows and reduced capital expenditure. Net debt is defined such that, where cross currency swaps are used as cash flow hedges to fix the interest and principal payments on currency debt, the swapped Sterling liability is included rather than the retranslated foreign currency debt. It also includes any cash held in businesses classified as disposal groups held for sale.
The Group remains comfortably within its covenants with the net debt to EBITDA ratio (for covenant purposes) at 31 March 2010 being 2.4 times (March 2009: 2.9 times). At 31 March 2010, gearing (being the ratio of net debt to shareholders’ funds) was 115% (2009: 116%).
Borrowing Facilities
Group borrowing facilities comprise £307.4 million of loan notes maturing between April 2013 and April 2017, a £100 million multi-currency revolving credit facility expiring in November 2011 and a £85 million plus €175 million multi-currency revolving credit facility expiring in July 2013. At 31 March 2010 there was £295.1 million effective headroom against committed facilities (2009: £234.5 million).Borrowing facilities are subject to covenants which specify a maximum ratio of net debt to EBITDA of 3.5 times and a minimum interest cover ratio of 3.0 times.
Treasury policies
The Group operates a centralised treasury function, which controls cash management and borrowings and the Group’s financial risks. The main treasury risks faced by the Group are liquidity, interest rates and foreign currency. The Group uses derivatives only to manage its foreign currency and interest rate risks arising from underlying business and financing activities. Transactions of a speculative nature are prohibited. The Group’s treasury activities are governed by policies approved and monitored by the Board.
Net Assets
The Group’s balance sheet remains robust with net assets of £292.8 million (2009: £357.0 million). Goodwill, intangible assets and property, plant and equipment total £794.4 million (2009: £834.2 million). Inventories of £153.7 million are £44.1 million lower than prior year reflecting significant reductions in maturing cheese stocks and the reclassification of inventories in Wexford as assets in a disposal group held for sale.
Going concern
The financial statements have been prepared on a going concern basis as the directors are satisfied that the Group has adequate financial resources to continue its operations for the foreseeable future. In making this statement, the Group’s directors have: reviewed the Group budget, strategic plans and available facilities; have made such other enquiries as they considered appropriate; and have taken into account ‘Liquidity Risk: Guidance for Directors of UK Companies 2009’ published by the Financial Reporting Council in October 2009.
Alastair Murray
Finance Director
17 May 2010