Dairy Crest plc
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Directors’ report

The Directors of Dairy Crest Group plc (the “Company”) present their sixteenth Annual Report to shareholders together with the audited financial statements of the Company and its subsidiaries for the year ended 31 March 2012. 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 2011/12 financial year commenced after 29 June 2010, references to the Code in this Report are to the UK Corporate Governance Code of June 2010.

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.

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, the Business Review and the review of principal risks and uncertainties.

The financial position, cash flows, liquidity position and borrowing facilities are described in the Financial Review.

In addition, notes 30 and 31 to the Accounts 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 30, 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 2012, effective headroom was £303.2 million. During the year we cancelled the old facilities and entered into a new three-year multi-currency revolving credit facility which matures in October 2016. The next maturity of funding is in April 2013 when $68.1 million of US loan notes are to be repaid. Repayment of these is intended to be out of existing bank facilities, which will still leave the Group with comfortable levels of facility headroom.

There were no breaches of bank covenants in the year ended 31 March 2012 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 Going Concern and 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 financial statements.

Business review

S417 of the Companies Act 2006 (“Companies Act”) requires that the Company sets out in this report a fair review of the business of the Group during the 2011/12 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; the Chief Executive's Review; the Business Review; the review of the principal risks and uncertainties; and the Group Key Performance Indicators (“KPIs”); all of which are incorporated into this Report by reference. The Corporate Governance Report and biographical and other information form part of this Directors' Report and are also incorporated into it by reference.

Group results

The Group's consolidated income statement shows a loss for the financial year of £17.1 million compared with £57.5 million profit in 2010/11.

Post balance sheet events

On 9 March 2012 the Group announced that it was undertaking a strategic review of its French branded spreads business, St Hubert. Since its acquisition in January 2007, St Hubert has consistently increased its market share and profitability. However, the Group has been unable to make additional synergistic acquisitions in Continental Europe, as it envisaged at the time of acquisition, and believes that greater value may be generated for shareholders through the consideration of all available options for the business. This review is ongoing and is evaluating all possible options available to maximise shareholder value including potential divestment. A disposal would reduce the Group's debt and provide a number of alternatives including releasing some proceeds to shareholders, investing in our core business and making strategic acquisitions of branded dairy and chilled foods businesses in the UK. Any disposal would be likely to occur within the next 12 months and would be subject to shareholder approval.

Dividends

The Directors are recommending a final dividend of 14.7 pence (2011/12: 14.2 pence) per ordinary share, which if approved, will be paid to members on the register at the close of business on 22 June 2012. Together, the final dividend and interim dividend (5.7 pence per ordinary share paid on 26 January 2012) make total dividends for the year of 20.4 pence per ordinary share (2010/11: 19.7 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 2011/12 are shown in Note 24 to the financial statements. As at the date of this report, 133.357 million ordinary 25p shares were in issue and fully paid with an aggregate nominal value of £33.3 million.

Rights and obligations attaching to shares

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. None of the shares carry 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 rank pari passu with the shares in issue and have no special rights.

Transfer of shares

Subject to applicable statutes and regulations, 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.

Shareholder waiver of dividends

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 and waives its entitlement to dividends.

Articles of association

Changes to the articles of association of the Company (“Articles”) must be approved by the shareholders in accordance with the legislation in force from time to time.

No compensation for loss of office

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 employees under such schemes and plans to vest on a takeover.

Issue of shares

At the Annual General Meeting (“AGM”) on 19 July 2011, 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 £22,218,626.

Purchase of own shares

At the AGM on 19 July 2011, shareholders granted the Company authority to make market purchases of up to 13,331,175 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 prices 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 this year's 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 four directors nominated by Dairy Crest Limited and three directors elected by all members. The pension fund's 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 now 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 and other branded products. Individually these contracts are important to the business but not essential.

Substantial shareholdings

During the period and up to 23 May 2012, 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.

Notified
No. of shares

Notified
percentage
of issued
share capital

Delta Lloyd & its Group of Companies

6,690,877

5.02%

The Company also received notifications during the period from Aviva plc and its subsidiaries, Prudential plc group of companies and M&G Investment Funds 3, the most recent from each of which, however, reported that they no longer have notifiable interests. No notifications have been received in the period from 1 April 2012 to 23 May 2012.

Directors

The names and biographical details of the current Directors of the Company and details of those who have served during the year 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, re-appointment and retirement of Directors are contained in the Articles (see ‘Appointments to the Board').

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.

Details of the Directors' service contracts and letters of appointment appear in the Remuneration Report.

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 and of its subsidiaries. The Directors, Secretary and other Officers of the Company and of its subsidiaries are indemnified by the Company to the extent permitted by company law. That indemnity provision has been in place during the year and remains in force.

Employees

The Group employs approximately 6,000 people throughout the United Kingdom, 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 communication 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 Group through participation in the savings-related share option scheme (“Sharesave Scheme”). Details of this Scheme are set out in Note 26 to the financial statements and in the Directors' Remuneration Report.

In recognition of the key part played by employee engagement in the Group's long-term success, the Group has established a wide ranging programme aimed at promoting and enhancing employee engagement. The programme includes regular surveys in which all employees are invited to participate, to gauge the level of employee engagement within the Group. Once the outcome of the survey has been fed back to the Divisions, business units and departments, plans designed to maintain and improve employee engagement are prepared and implemented.

The Board is committed to ensuring that a culture free from both discrimination and harassment remains embedded within the Group. 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.

Research and development

The Group has adopted a target of delivering 10% 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 jug and milk bag.

Land and buildings

Having obtained an informal valuation of certain 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 2012 (2010/11: nil). The Group's creditor days outstanding at 31 March 2012 were 23.6 (2010/11 24.3 days) of purchases. With the exception of milk suppliers, 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 (2010/11: £0.1 million). The Corporate Responsibility section of the Business review 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 (“Ernst & Young”) is unaware.

Each of the Directors has taken all steps that they might reasonably be expected to have taken 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.

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, One Wood Street, London, EC2V 7WS on Tuesday, 17 July 2012 at 12.00 pm. 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 has expressed its willingness to continue as Auditor of the Company. A resolution to reappoint Ernst & Young as the Company's Auditor will be put to the forthcoming AGM.

By order of the Board:

Robin Miller

Company Secretary

23 May 2012

Dairy Crest Group plc

Claygate House

Littleworth Road

Esher

Surrey KT10 9PN

Registered in England and Wales No. 3162897