Dairy Crest Group plc Annual Report 2013

Dairy Crest Group plc Annual Report 2013

Report of the Directors

Notice : Limitations on Director liability – Pages 2 to 56 inclusive of this document comprise the Report of the Directors which has been prepared and presented in accordance with and in reliance upon English company law and liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. English company law also provides a safe harbour limiting the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 2 to 56. The purpose of the Annual Report and the Report of the Directors contained in it 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.

Cautionary statement regarding forward looking statements – The Group’s reports including this document and written information released or oral statements made to the public in future, by or on behalf of the Group, may contain forward-looking statements. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the time of their preparation 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.

Dairy Crest Annual Report 2013 1

Contents

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THE NUMBERS 57 Independent auditor’s report 58 Consolidated income statement 59 Consolidated statement of comprehensive income 60 Consolidated and Parent Company balance sheets 61 Consolidated statement of changes in equity 62 Parent Company statement of changes in equity 63 Consolidated and Parent Company statement of cash flows 64 Accounting policies 70 Notes to the financial statements 113 Group financial history 114 Shareholders’ information

OVERVIEWWho we are and what we do

2 At a glance 4 Our vision, values and measures 6 Going where consumers take us 8 Our people 10 The Directors 12 Management team 13 Chairman’s statement 14 Chief Executive’s review 16 Principal risks and uncertainties

BUSINESS REVIEWThe business in detail

18 Spreads 20 Cheese 22 Dairies 24 Milk Procurement 26 Corporate Responsibility 30 Financial review

GOVERNANCE 34 Corporate governance 41 Directors’ remuneration report 53 Additional statutory information 56 Statement of Directors’ responsibilities

Good through & throughDairy Crest Group plc is the largest UK-owned dairy food company. We process and market nutritious fresh milk and branded dairy products. The Company has a clear strategy, a strong vision, robust values and good people. In a transformational year we have sold our French spreads business to focus on the UK; rationalised our Dairies business; introduced an innovative new milk purchase contract for our farmers that provides greater transparency and reduces volatility and initiated a process to move to one business structure focusing on consumer driven growth and an integrated supply chain. We are a responsible business and have been shortlisted to be Business in the Community’s Company of the Year 2013. Dairy Crest is well positioned to generate growth which will benefit everyone associated with the business.

2 Dairy Crest Annual Report 2013


At a glance

Divisions

Spreads revenue

14% 37%

Spreads profit

48%17%

Cheese revenue Cheese profit

69% 15%

Dairies revenue Dairies profit

*% of total Group (excluding associates and other revenue)

Dairy Crest produces leading spreads and butter brands at two factories in the UK. These brands have strong distribution through retailers. We focus on two key brands Clover and Country Life.

% of total Group (excluding associates and other revenue)

Dairy Crest has the leading cheese brand in the UK, Cathedral City, and a world-class cheese supply chain. Cathedral City is made at our Davidstow creamery in Cornwall from milk supplied by local dairy farmers. The cheese is matured, cut and wrapped at our purpose-built facility in Nuneaton from where it is despatched to retailers. We also have a smaller cheese packing facility at Frome, Somerset which provides the business with additional flexibility.

We process and deliver fresh conventional, organic and flavoured milk to major retailers, ‘middle ground’ customers including smaller retailers, coffee shops and hospitals and residential customers. We also manufacture and sell FRijj, the leading fresh flavoured milk brand, cream and milk powders.

Vision•We are proud of our links to the countryside, our dairy heritage

and the part they play in everyday life•We want to earn the right to consumers’ loyalty by providing

healthy, enjoyable, convenient products•We aim to meet consumers’ needs and go where this takes us•As we grow, we will look after our people and the communities

where we work

Dairy Crest is the largest UK-owned dairy company, processing and selling fresh milk and branded dairy products in the UK

Strategy•To build market-leading positions in branded and added

value markets•To focus on cost reduction and efficiency improvements•To improve quality of earnings and reduce risk•To generate organic growth and to make acquisitions and

disposals where they will generate value

•On-going growth for Cathedral City ahead of market

•Recent innovation, Chedds and Selections, delivering growth and widening appeal

•Good progress with premium Davidstow brand

•Improved second half margins from actions taken to restore profitability

•FRijj sales up 5% in strongly growing market

•Cost savings will contribute to future profit growth

•Clover and Country Life, our two key brands in this sector, both increased value and volume share

•MH Foods, maker of Frylight one-cal cooking spray, purchased in 2011, is making good progress

•Efficiency improvements – Production of Clover moved from Crudgington to Kirkby in the year and project underway to close Crudgington in 2014

Highlights

Spreads Cheese Dairies

Contribution to Group

Who we are

72236_Glasshouse_p01-p17.indd 2 05/06/2013 10:35


09 10 11 12 13

Segment profit** (£m)

Revenue (£m)

415.

8

337.

2

311.

6

336.

4

59.7

Net debt(£m)

09 10 11 12 13

1,55

5.5

1,53

0.6

1,50

2.2

1,51

4.7

1,38

1.6

09 10 11 12 13

79.0

71.4

73.5

68.6

69.3

Dairy is one of the largest food categories worth £10bn*

**Before exceptionals and amortisation of acquired intangibles

Total grocery £98bn

Dairy£10bn

*From Kantar – 52 weeks ended 24 March 2013

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Chard

Severnside Chadwell Heath

Hanworth

Foston

Crewe

Whitland

Nuneaton

Frome

Davidstow

Kirkby

Crudgington

Erith

KeySpreadsCheeseDairies

No1 UK dairy spread

No1 UK branded cheese

Production sites

Country Life milkFresh milk to retailers

Doorstep delivery – ‘milk&more’

No1 flavoured milk drink

Spreads

Cheese

Dairies

Markets Financial highlights

Dairy Crest has consolidated its organisation into a single structure focused on consumer driven growth with an integrated supply chain



Our vision, values and measures

Our values Value measures

Improve our employee survey results

Our profit will grow every year

10% of our annual turnover will come from consumer innovation. Internal innovation will reduce our cost base every year

Improve our Corporate Responsibility survey results

WE RESPECTWe value our people and are stronger together

WE LISTENConsumers are at the heart of our business

WE LEADWe value success and strive to be the best

WE CREATEWe constantly look for new and better ways of doing things

WE CAREWe act responsibly with a passion to do the right thing

Grow share of our consumers’ purse and be Number 1 or 2 in the markets we serve

We have created a strong vision and robust values for the business. We have value measures supported by key performance indicators that give a clear indication of progress

We do not expect to achieve every value measure every year, but by making it clear what our targets are we believe that we have set a framework that will help us deliver continuous improvements in performance



Key brand MarketMarketrank

Brandgrowth

2012/13*

Marketgrowth

2012/13*

Cathedral City UK Cheese No1 branded cheese 5% 2%

Clover UK Butter, Spreads, Margarine No1 dairy spread -1% -3%

Country Life UK Butter, Spreads, Margarine No3 UK butter 1% -3%

FRijj Flavoured milk No1 flavoured milk drink 5% 10%

*Nielsen data 52 weeks to 30/03/13

Our vision, values and measures

Key performance indicators For further information

Employee survey results*:

Our people p8

Business review p18

Financial review p30

368

343

Milk processed per employee (000 litres)

47.5

50.6

Adjusted profit before tax (£m)

13

12

13

12

Business review p18

368

343

Milk processed per employee (000 litres)

47.5

50.6

Adjusted profit before tax (£m)

13

12

13

12

5% of total 2012/13 revenue from innovation in the last three years

9% of 2012/13 key brand revenue from innovation in the last three years

Cost base – new initiatives in 2012/13

delivered £23m annualised savings

Corporate Responsibility report p26

Received a BITC Platinum Big Tick Award in 2013 and shortlisted to be BITC’s Company of the Year 2013

Overall employee engagement score

56%. Compares to UK-wide average engagement decrease of three points to 48%

Response rate

88%

* Next survey due in September 2013

2013 Corporate Responsibility survey results:

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We are proud of our links to the countryside, our dairy heritage and the part these play in everyday life

We want to earn consumers’ loyalty by providing healthy, enjoyable, convenient products

We aim to meet consumers’ needs and go where this takes us

As we grow, we look after our people and the communities in which we work

Our vision


A key part of our Vision is that we listen to consumers and react as their needs change. We have recently completed a project to gain a deeper understanding of the dairy category in UK supermarkets which accounts for over

£10 billion of shopper purchases each year.

To do this we have analysed market data, interviewed shoppers at the point of purchase and held discussion groups to refine findings and recommendations.

Dairy products are consumed by 99% of all UK households which each spend £386 per year on them.

Going where consumers take us

14 million litres of milk are sold in the UK every day

Cheese features in over 5.5 billion meals in the UK every year

The average household in the UK buys cream 12 times a year

29 packs of butter and spreads are bought in the UK every second



Bringing dairy to life – from a shopper’s perspective

We have known for some time that consumers want us to help them:

Our recent work has led us to add a fourth driver in response to growing eco-ethical issues. Consumers also want us to help them:

• lead a healthier life through the diet they eat (healthy life)

• find enjoyment and pleasure from their food (pleasure)

• create wholesome tasty meals and snacks (making life easier)

• tobemoreeco-ethicallyresponsible(responsible consumption)

What shoppers also told us is that there is a disconnect between the pleasure of consuming dairy and the chore of shopping for it. Dairy lives in the field, the farm and the home but not in supermarkets. We have made recommendations that we believe will change this and help the dairy category realise its full potential.

A summary of these are:

Shoppers understand and believe in the inherent goodness of dairy products. We should accentuate the positive messages and defend against negative perspectives in a more confident manner.

People love to consume dairy products. We need to remind them of this while they are shopping by using emotive imagery and descriptions. Product tasting and trial opportunities are also a good way of doing this.

Shoppers are hungry for advice and information. We need to provide product information in shops and on packs as well as quick and easy recipe suggestions and usage advice.

Many shoppers want to try something new and different but are wary about doing so. We need to provide opportunities for shoppers to become more adventurous while at the same time minimising the risk for them when they try something new.

Milk is happily seen as a planned top-up item because it is available everywhere.

Cheese is generally recognised as being good value despite it being one of the most expensive items in most shopping trolleys.

Spreads shoppers generally have a favourite brand and most have alternative brands that they will buy more reluctantly.

Some mums see flavoured milk as a ‘slightly better for you’ treat.

Consumers are at the heart of our business



Get the taste buds working for shoppers

Celebrate dairy

Encourage experimentation What do shoppers think about shopping for milk and dairy products?

Engage and educate shoppers

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Our people

We organised workshops for unemployed youngsters at two of our sites, outlining the types of careers available in the dairy industry, alongside some practice and coaching on how to perform best at selection interviews. It has, however, also been a challenging year for many Dairy Crest staff. Over the course of the last 12 months we have restructured our business to ensure we are better placed to drive growth and create a more integrated, efficient supply chain. Where these changes have resulted in the reduction of roles or the closure of factories, we have supported staff with a range of tools and services which have helped them find alternative roles inside and outside of Dairy Crest.

DiversityWe are committed to providing an inclusive working environment where everyone feels valued and respected. We recognise that people from different backgrounds, experiences and abilities can bring fresh ideas and innovations to improve our working practices and business, delivering commercial benefit and ultimately, shareholder value. We believe that for people to be the most productive they need to achieve an appropriate work-life balance and we believe any employee, regardless of their position, location, role or length of service should feel that they are treated flexibly in their ways of working. Our aim is to have a fully diverse workforce that reflects the communities where we operate. Employees are encouraged to reach their full potential regardless of their age, gender, marital status (including civil partnerships), disability, nationality, colour, ethnic origin, sexual orientation or religious affiliation. Dairy Crest does not tolerate discrimination or harassment on any of these grounds. As a major food business we believe that having a diverse workforce is advantageous as it ensures we are well placed to understand the diverse group of people that consume our products, and grow a more talented workforce. To help us achieve these aims we have in place maternity, paternity and adoption leave policies and benefits that are above the statutory norm; we actively promote our flexible working policy and we give staff the opportunity of taking sabbaticals, secondments and to participate in community volunteering. To ensure that our employees are kept up to date with our Diversity work, we have pages dedicated to this on our employee intranet, which includes monthly updates on our employee statistics on gender, age and working patterns.

Helping staff reach their potentialAttracting and retaining a talented workforce is vital to our future success. To achieve this we offer staff a wide range of training and development opportunities that reach out to all levels and teams. Highlights in 2012 included the introduction of an engineering apprenticeship scheme which complements our food technologist apprenticeship programme and the formal processing and manufacturing qualification delivered by Reaseheath College. In addition, we developed an online assessment tool to enhance the development of our depot managers, which allowed us to target our development in the right areas. With so many staff not office or factory based and often working different shift patterns, online development plays a key part in our learning offerings. Our online learning facility, ‘my e-learning’, gives everyone within Dairy Crest access to over 100 training courses at any time of the day. Through this portal employees can access subjects such as customer care, health & safety, Microsoft Office, pre-retirement and finance. To date, the courses have been accessed by 2,017 people.

2,017employees have accessed the new e-learning portalPersonal development plans are in place throughout the Company, and since 2011 the vast majority of staff benefit from being part of a bonus scheme that is linked to their performance, our values and the results of the business. We continue to invest in succession planning and through our talent management processes we have identified employees who have the potential to do bigger or different jobs. We have established an internal mentoring programme to support our high potential population and maintain an on-going focus on their career plans. In addition, we have created career maps for the business to help people with their career choices. As well as investing in our employees, we also played a central role in delivering the IGD’s ‘Feeding Britain’s Future’ programme, the objective of which was to provide skills training to young people so as to enhance their prospects of gaining employment and to promote the benefits of a career in the food industry.

We value our people and are stronger together



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Listening to staffThrough our employee survey we gather the views of our staff on a range of areas including: strategy and leadership; values and corporate responsibility; customers and quality; learning, development and teamwork; wellbeing and recognition; and workplace environment. The latest employee survey carried out in January 2012 resulted in a 2% increase in employee engagement with 88% of staff participating in the survey. The results of the survey have been used to create action plans that have been rolled out across the business. The next staff survey will take place in September 2013. We are committed to ensuring that staff don’t just know what is happening across our business but that they are the first to know what is happening across our business. To achieve this, we have in place tailored staff briefings called Team Talk that regularly take place at each of our places of work. We publish a weekly ‘Comms Round Up’, a quarterly business briefing which highlights our financial performance and we continue to develop and expand our staff website, ‘The Gardens’, which is accessible at work either through employees’ computers or in the case of our factories, via a free internet cafe. Staff can also access ‘The Gardens’ from home through their private internet connection. CEO Mark Allen regularly visits manufacturing sites and depots, hosting employee Q&A sessions and all staff are able to email Mark via a specially set up email address.

Road shows 2012The key messages that came out of the staff survey we carried out in 2012 were that employees wanted to know more about what our business strategy is, how Dairy Crest is performing in the challenging economic environment and the role that staff have in achieving that strategy. To ensure we successfully answered these questions, our most senior business managers carried out 263 road shows which every member of staff was invited to attend. The results of the road shows were very positive with the vast majority of staff taking up the invitation and almost two thirds of attendees saying that they would work differently as a result of them. Overall satisfaction rates were high with 73% rating the sessions as either excellent or very good.

Whistle blowing hotlineWe have a confidential whistleblower hotline, which provides a mechanism for the reporting of illegal activity or the misuse of Dairy Crest assets, while protecting the staff that make such reports from retaliation.

Reward and recognitionWe believe an engaged staff is directly linked to being a successful and productive company. For this reason, we are delighted to report that through our reward and recognition scheme, last year 595 members of staff were nominated by their colleagues for a recognition award and that 26% of employees chose to participate in our latest Sharesave Scheme.

595staff nominated by colleagues for a recognition awardDuring 2012 we successfully re-launched our voluntary benefits program, MyRewards with our partners, the Personal Group. Supported by a dedicated and Dairy Crest branded website, over a third of our employees regularly use the site and have saved themselves over £12,000 on purchases, ranging from their weekly shop to a foreign holiday. The re-launch also includes access to an innovative and leading edge second opinion welfare benefit with ‘Best Doctors’. 2012/13 has seen some major changes in the provision of pension benefits with the introduction of auto-enrolment. Dairy Crest has been working collaboratively with its Pensions Communication and Consultation Forum (PCCF) to comply with the new responsibilities under Workplace Pension Auto-enrolment legislation and, as a consequence, over half our employees have been entered into a new section of our Stakeholder scheme to meet the statutory obligations and to help them build for their future.

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Feeding

Britain’s

FutureFe

eding

Britain’s

Future

Dairy Crest

is proud to

support skills

for work week

Dairy Crest Group plcClaygate HouseLittleworth RoadEsherSurrey KT10 9PNCompany No: 3162897

www.dairycrest.co.uk



Executive Directors

4

Dairy Crest is led by an experienced Board of Directors, which today comprises three Executive Directors, one Non-executive Chairman and four independent Non-executive Directors. Together the Executive Directors have over 30 years experience of the business. The Board sets strategy and monitors progress. Day-to-day matters are the responsibility of the Management Board, which today comprises the three Executive Directors, the Company Secretary & General Counsel and five other senior managers.

* Audit Committee Member† Remuneration Committee Member‡ Nomination Committee Member◊ Corporate Responsibility

Committee Member∆ Management Board Member# Not a Board Member

1. Mark AllenChief Executive ◊ ∆Appointed a Director in 2002 and became Chief Executive in January 2007. He joined Dairy Crest in August 1991. He was formerly with Shell UK Ltd. He is Chairman of The Prince’s Rural Action Programme and a Trustee for The Prince’s Countryside Fund. He is Vice Chairman of Dairy UK and a Non-executive Director of Howdens Joinery Plc.

2. Alastair Murray Finance Director (Up to 23/5/13) ◊ ∆Appointed in September 2003. He was Finance Director of The Body Shop International plc from January 1999 and was previously Finance Director of Dalgety Food Ingredients Limited. He steps down from the Board on 23 May 2013.

3. Tom Atherton Finance Director (From 23/5/13) ◊ ∆Appointed from 23 May 2013. A Chartered Accountant who has worked for Dairy Crest for over 7 years, the last 4 as Director of Financial Control. He has previously held senior finance positions in Logica plc and Thorn plc.

4. Martyn Wilks Executive Managing Director ◊ ∆Appointed in January 2008. He was President of the Snackfood Division of Mars USA, and has held other senior management positions within Mars Incorporated including Managing Director of Mars, France, and Global Vice President for Sales and Marketing. Martyn is also currently an Appointed Non-executive Director of England Netball, the governing body for the sport.

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Non-Executive Directors and Advisers

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8 9 10

5 6 7

AuditorErnst & Young LLP

SolicitorsEversheds LLP

Principal Bankers The Royal Bank of Scotland plc

Rabobank International, London Branch

Lloyds TSB plc

Santander UK plc

Corporate BrokersJ. P. Morgan Cazenove

Jefferies Hoare Govett

Registered OfficeClaygate House, Littleworth Road, Esher, Surrey KT10 9PN

Registered in EnglandNo. 3162897

Board and main Committee meetingsThe following Directors held office during the year. The number of Board and Committee meetings attended by Directors in the year is shown in the table below. The numbers in brackets show the maximum number of meetings Directors could have attended during 2012/13.

1 Stephen Alexander was appointed chairman of the Remuneration Committee on 18 May 2012.

2 Sue Farr was appointed a member of the Remuneration and Corporate Responsibility Committees on 18 May 2012.

3 Richard Macdonald was appointed Senior Independent Director on 18 May 2012.

4 Howard Mann stood down from the Board and all Committees on 18 May 2012.

Board Audit Remuneration Nomination CR Management Board

Mr A Fry 15(15) – – 2(2) – –Mr M Allen 15(15) – – – 3(3) 37(39)Mr A Murray 13(15) – – – 3(3) 36(39)Mr M Wilks 15(15) – – – 3(3) 36(39)Mr S Alexander 1 15(15) 4(4) 6(6) 2(2) – –Mr A Carr-Locke 14(15) 4(4) 6(6) 2(2) – –Ms S Farr 2 11(15) – 4(5) – 2(3) –Mr R Macdonald 3 14(15) 3(3) – – 3(3) –Mr H Mann 4 3(4) 1(1) 1(1) – – –

5. Anthony Fry Chairman ‡Appointed as a Non-executive Director in July 2007, as Chairman on 1 January 2010 and as chairman of the Nomination Committee in May 2011. Until March 2011 he was Senior Adviser of Evercore Partners in the firm’s London office. He has previously held senior appointments at Lehman Brothers, Credit Suisse and the Rothschild Group in a career in merchant banking which has spanned more than 30 years. In November 2010 he was appointed Chairman of Cala Group Limited and in November 2012 he was appointed Senior Adviser to the Board of Espirito Santo Investment Bank. He will become Chairman of the Premier League on 1 June 2013 and is a Non-executive Director of Control Risks, Twig Europe and the BBC Trust, from which he will shortly be retiring. He is on a number of advisory boards and has served on the boards of Mowlem, The British Standards Institution and Southern Water as well as numerous not-for-profit organisations.

8. Sue FarrNon-Executive Director † ◊Appointed as a Non-executive Director in November 2011. She is a member of the Executive Management Team of Chime Communications PLC, a position she has held since 2003. She has extensive marketing communications experience, having served as Marketing Director of the BBC for 7 years, Director of Corporate Affairs, Thames Television for 3 years and Director of Corporate Communications, Vauxhall Motors. She is a Trustee of the Historic Royal Palaces and a Non-executive Director of Motivcom plc.

6. Stephen AlexanderNon-Executive Director * † ‡Appointed as a Non-executive Director in January 2011 and chairman of the Remuneration Committee in May 2012. He is Chairman of Immediate Media Company Ltd, an Operating Partner at OpCapita LLP and Chairman of Look Ahead Housing and Care. Previously Chairman of Maltby Capital Ltd (parent company of EMI Group), Chairman of Odeon Cinemas, Chief Executive of Hillsdown Holdings Ltd and held senior positions with Allied Domecq PLC and Imperial Foods. He was also Senior Independent Director at Devro plc.

9. Richard MacdonaldNon-Executive Director * ◊Appointed as a Non-executive Director in November 2010, chairman of the Corporate Responsibility Committee in May 2011 and Senior Independent Director in May 2012. He had a 30 year career with the National Farmers Union, serving as Director General for 13 years. He is a Non-executive Director of Moy Park Limited and Chairman of DEFRA’s Better Regulation Task Force. He is also a Governor of The Royal Agricultural College Cirencester, Vice Chairman of the National Institute of Agricultural Botany and will become Chairman of Farm Africa on 26 June 2013.

7. Andrew Carr-LockeNon-Executive Director * † ‡Appointed as a Non-executive Director and chairman of the Audit Committee in August 2009. A Fellow of the Chartered Institute of Management Accountants, he has previously held senior finance positions at Courtaulds Textiles, Diageo, Bowater Scott and Kodak and was Group Finance Director at George Wimpey plc until 2007. He has previously held non-executive directorships at Royal Mail Holdings, Venture Production and AWG. In April 2010 he was appointed Executive Chairman of Countryside Properties PLC.

10. Robin MillerCompany Secretary & General Counsel ◊ ∆ #Appointed in April 2008. He is a solicitor having worked in private practice and in-house in both retail and international manufacturing, latterly with Gallaher Group Plc.



Management Board

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Day-to-day matters are the responsibility of the Management Board, which currently comprises the three Executive Directors, the Company Secretary, the Group Procurement Director, the Group Supply Chain Director and the Group HR Director. Other senior managers attend by invitation. The Management Board normally meets weekly.

◊ Corporate Responsibility Committee Member

∆ Management Board Member

11. Mike Sheldon Group Procurement Director ∆Mike joined Dairy Crest from PepsiCo 20 years ago. He has held several senior management positions within the business including, most recently, Managing Director of the Customer Direct division. He took up his current role in 2012.

12. Mike Barrington Group Supply Chain Director ∆Before joining Dairy Crest in 2011, Mike held senior management positions with Cadbury Schweppes and Kraft Foods, latterly Manufacturing Director for Cadbury in the UK & Ireland. Mike joined Dairy Crest as Supply Chain Director, Dairies and was appointed to his current role in April 2013.

13. Robert Willock Group HR Director ◊ ∆Robert joined Dairy Crest 7 years ago as HR Director, Dairies from The Maersk Company where he was Director of Human Resources. He was appointed to his current role in April 2013.


Chairman’s statement

we operate. Balancing these groups’ different interests is never easy, especially at times when the need to make change is at its greatest, but the clarity provided by our Vision and Values helps us make the right decisions.

Corporate responsibilityDairy Crest is a responsible business and has demonstrated its commitment to corporate responsibility by improving its Business in the Community rating from Gold to Platinum Big Tick in the year, the only food business to achieve this prestigious ranking. We are also delighted to have been shortlisted to be Business in the Community’s Company of the Year 2013. During the year we have focused our corporate responsibility commitments on 40 pledges, making it easier to align our corporate responsibility and commercial strategies.

Employee, Board and other senior management changesThe transformation overseen by the Board has resulted in a smaller workforce which has reduced by around 20% over the year. As a responsible employer, we have endeavoured to support people who have left the business as best we can. On behalf of the Board I would like to thank all of them and all of the people who continue to work for Dairy Crest directly or indirectly for the contribution they have made to the success of the Group. On 23 May 2013, after nearly ten years as Finance Director, Alastair Murray will leave to pursue other business interests. In his time with Dairy Crest, Alastair has been a Finance Director of the highest quality with an excellent reputation both within the business and outside. He leaves Dairy Crest with our very best wishes for the future. Alastair’s successor as Finance Director is Tom Atherton who has been Dairy Crest’s Director of Financial Control for the past four

Against the background of a trading environment which remained extremely challenging, this was a transformational year for Dairy Crest. The Board has overseen the sale of our French spreads business, St Hubert; a rationalisation of our Dairies business; a reorganisation of our head office and support functions; and the introduction of a ground-breaking milk supply contract which initiated a new relationship between the business and its supplying dairy farmers. At the same time, in line with our established long-term strategy, we have continued to support our key brands and drive costs out of the business. We finish the year in a much improved financial position and with a clear plan for growth which will benefit everyone associated with the business.

Well-established Vision and Values The Group’s well-established Vision and Values continue to provide the Board with a framework in which to operate. They reflect the fact that consumers come first for Dairy Crest and that we are well aware of our links to rural Britain and the responsibility we have to our farmers, our employees, our franchisees and the communities in which

years and has worked for Dairy Crest for over seven years in total. In addition, Toby Brinsmead, who was Managing Director of the Dairies business before we reorganised into a unified structure, left the business earlier this month. I thank him for all he has done, in particular for his important work in creating a more focused Dairies business.

Increased dividend recommendedThe Board is recommending a final dividend of 15.0 pence per share, making a full year dividend of 20.7 pence, up 1.5% from last year. This dividend is covered 1.4 times by adjusted basic earnings per share. The reorganisation of our balance sheet since the year end will lower interest charges and result in an improved dividend cover in the future. The Board has reviewed its dividend policy and, given the Group’s improved cash position, is of the view that, going forward, the current progressive dividend policy should be maintained and the target cover range should be 1.5 to 2.5 times.

SummaryWe have made significant progress this year through disciplined execution of our strategy. Dairy Crest is now a simpler, more focused business which is well positioned to generate growth and good returns for shareholders.

Anthony Fry Chairman22 May 2013

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Ongoing growth for Cathedral City ahead of market

Clover and Country Life both gained market share

Innovation driving added value sales: 5% of total revenue and 9% of key brand revenue generated from products introduced in the last three years

Continued focus on costs: £23 million annualised cost savings delivered in 2012/13, with a further £20 million identified for 2013/14

BITC Platinum Big Tick Award reflects ongoing strong Corporate Responsibility commitment

Adjusted profit before tax is up 7% to £50.6 million

Year end net debt is down 82% to £60 million

Post year end restructuring of balance sheet reduces future interest charges

Post year end additional £40 million cash contribution to the pension fund reduces exposure

Proposed final dividend is up 2%

Successful sale of St Hubert has refocused the business on the UK

Process is underway to move to one business structure focusing on consumer driven growth and an integrated supply chain

Innovative new milk price formula introduced to help farmers and sustain milk supply

Operating highlightsFinancial highlights Strategic highlights



extended our major liquid milk contract with Sainsbury’s through to 2017 and reduced our exposure to less profitable contracts. Last year we set a medium-term target of a 3% return on sales for this business. Despite the additional support we provided to our farmers in the year, we have made some progress towards our target. Second half margins, which are usually higher than those in the first half, rose to 1.7%.

St HubertIt was not an easy decision to sell St Hubert. This was a strong business that had performed extremely well under Dairy Crest’s ownership and had made a significant contribution to the profitability of the business. However it did not provide the platform for further expansion into continental Europe that we anticipated. The successful disposal of St Hubert has reduced significantly the Group’s gearing. Following the sale, our year end net debt is at its lowest level since 2000. This strong position has allowed us to reduce our exposure to the pension fund by making a one-off contribution of £40 million subsequent to the year end and provides us with exciting opportunities to invest for growth.

Market backgroundThe year has seen generally lower food consumption reflecting fragile consumer confidence. Changes elsewhere in the market place have left us as the largest UK-owned dairy foods company. We are proud to be in this position and recognise the onus it places on us to provide leadership to the UK dairy sector. We have fulfilled this role by being the first major milk buyer to fully implement the Government’s voluntary code of practice for milk supply contracts and by introducing a formula based milk purchasing contract. We

Chief Executive’s review

Summary

This has been an important year in the history of Dairy Crest. The transformational sale of our French spreads business, St Hubert, resulted in proceeds of £341 million and generated a post-tax profit of £47.7 million. This sale and subsequent reorganisation of our balance sheet leaves us well placed to meet the challenges of the tough consumer environment and to invest in growth in the UK.

Taken together our four key brands have increased their value market share. This is a solid performance and reflects our consistent strategic focus on brand equity and innovation. A sustainable supply of milk is of vital importance to Dairy Crest. In the face of some of the most challenging weather ever experienced by our farmers, and higher feed costs that have put pressure on their businesses, we were first to adopt a government-sponsored voluntary code of practice. In addition, we increased the milk prices we paid to farmers and introduced a ground-breaking contract which allowed them to opt for a formulaic milk price mechanism that provides greater transparency and reduces volatility. Higher farmgate milk prices have put pressure on our Dairies business. Nevertheless we have made progress in rebuilding profitability. We have completed our three-year £75 million investment programme; closed two dairies; driven down costs;

are also taking the lead in calling for clearer country of origin labelling for dairy products so that British consumers can support British farmers. Looking forward we are hoping for a more benign climate for farming. However we expect consumers to remain cautious and demand to remain subdued.

Long-term strategy

We remain clear that our long-term strategy to grow branded and added value sales, become more efficient, reduce risk and improve the quality of our earnings and make value-enhancing acquisitions and disposals is the right one for the business. We have made good progress with the execution of this strategy during the last year.

The rationalisation of our Dairies business, which has involved a three year programme of investment in three key dairies and the closure of the Fenstanton and Aintree dairies as well as 28 distribution depots, demonstrates our determination to create a sustainable business. We retained our contract to supply liquid milk to Sainsbury’s through to 2017 in the face of fierce competition and new processing capacity coming on stream elsewhere in the dairy sector. This was a good result and vindicates the difficult decisions we have made in this part of our business. The work we have done over recent years to focus the business and remove complexity has allowed us to initiate a reorganisation into one management and operating structure. The new structure is focused on consumer-driven growth with an integrated supply chain and is consistent with our long-term strategy to build added value sales and drive efficiencies. Cutting costs is an embedded part of our strategy and cost reductions have been important in achieving our targets this year. We maintained our record of implementing cost saving initiatives of at least £20 million per annum, achieving £23 million in the year. Our employees, including Board members and senior management, have contributed by accepting below-inflation pay increases. In addition to the initiatives in our Dairies business and our reorganisation into one structure, we are also consolidating our two British spreads manufacturing facilities onto one site as we target a further £20 million of savings in the new financial year. These efficiency measures help us to support our key brands, meet profit expectations and pay our farmers more.


Trading performance and financial summary

A solid performance from our four key brands, Cathedral City, Clover, Country Life and FRijj, particularly in the first half of the year, coupled with an accelerated programme of efficiency measures, resulted in a strong trading performance and we delivered results for the year in line with our expectations.

As the table above shows, total revenue from our four key brands is flat year on year with Cathedral City and FRijj growth being offset by lower Clover and Country Life sales. Retail sales of these brands as measured by Nielsen have grown in total by 3% and Cathedral City, Clover and Country Life have all grown market share. Although FRijj has lost market share in the face of strong competition from new brands introduced by competitors, its own growth reflects the expansion of the overall market. We continue to invest behind our key brands and are committed to their ongoing success. Our market-leading cheddar brand, Cathedral City, goes from strength to strength and has become one of the UK’s major food brands. In 2012 it was the only food brand voted into the top ten of YouGov’s Brand Index, alongside BBC iPlayer, John Lewis and Amazon. New products launched in the last few years such as FRijj The Incredible, Chedds and Cathedral City Selections contributed to this performance and we continue to focus on bringing new products to the market. This year around 5% of our total revenue and 9% of our key brand revenue has come

from products introduced in the last three years. We have an ambitious target of 10% for such sales which we achieved last year but have missed this year as new products introduced three years ago dropped out of the calculation. Adjusted Group profit before tax increased by 7% to £50.6 million (2012: £47.5 million). Adjusted basic earnings per share increased by 3% to 29.9 pence (2012: 28.9 pence). Group net debt at 31 March 2013 was £60 million (2012: £336 million), principally reflecting the proceeds from the sale of St Hubert.

Future prospectsWe believe that we can generate profit growth in all three of our product categories over the medium term. We believe we can continue to grow sales and profits in our cheese business; that the consolidation of our spreads manufacturing footprint onto one site will improve the profitability of that business; and that our Dairies business will continue to benefit from the work we are doing to move towards our medium-term target of 3% return on sales. In addition, the post year end debt restructure will result in lower interest charges in the future. We are focused on generating cash from the business as well as growing profits, albeit we expect net debt to rise in the year ending 31 March 2014 as a result of our one-off cash contribution to the pension fund and investment in our new Spreads manufacturing facility. Once the Spreads project is completed we will have well-invested, modern facilities across our business and we would expect capital expenditure in the existing business to fall back towards the level of annual depreciation. We will also continue to sell

properties we no longer require and, in the absence of acquisitions or internal investment in new growth opportunities, would expect net debt to fall after 2013/14. Our strong financial position and our confidence that we can generate cash from our existing product categories means we have the capability to invest in attractive growth opportunities, either internally or through acquisition. We are excited about an opportunity to increase profits from whey, a by-product of the cheese manufacturing process. At present we manufacture whey powder which is mainly sold to food manufacturers, but we believe there now may be an opportunity to add greater value to our high quality whey stream and enter other, more attractive markets. A project is underway to scope the opportunity.

Current tradingThe current financial year has started in line with our expectations. We have announced higher milk prices for our farmers but have demonstrated in the past that we can do this without damaging profitability. Key to achieving this is the ongoing implementation of our strategy to reduce controllable costs and we are again on track to meet our targeted £20 million saving during the year.

Mark Allen Chief Executive22 May 2013

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Brand Market Dairy Crest sales growth*

Market statistics**

Brand growth Market growth

UK cheese +3% +5% +2%

UK butter, spreads, margarine -5% -1% -3%

UK butter, spreads, margarine -3% +1% -3%

Flavoured milk +5% +5% +10%

Total –% +3%

* Dairy Crest sales 12 months to 31 March 2013 v 12 months to 31 March 2012 ** Nielsen data 52 weeks to 30 March 2013



We manage risk to help us achieve our strategic objectives and protect our reputation The Audit Committee is responsible for overseeing the Group’s risk management processes and the Board is responsible for the appropriate identification of risks and the effective implementation of mitigating activities. Internal Audit provides independent assurance to management and the Audit Committee as to the effectiveness of mechanisms put in place to mitigate risks. This process explicitly recognises the relationship between Internal Audit and Risk Management. The Audit Committee is satisfied that the processes are adequate and appropriate. Further details are set out in the Corporate Governance Report on pages 34 to 40. The Group’s Risk Register is compiled by the Management Board. Each member of the Management Board individually sets out risks, the likelihood and consequence of crystallisation and mitigating controls for his area of responsibility. These are then reviewed by the Management Board as a whole and the Group Risk Register is created. The Board formally reviews the Group Risk Register when the annual budget is set and at each of the two forecast reviews throughout the year. The Company Secretary and General Counsel is responsible for highlighting to the Board any changes to the Group’s Risk Register identified during the intervening periods. The principal risks and uncertainties facing the Group are set out in the table below. This is not intended to be an exhaustive analysis of all risks facing the Group.

Threats to objectives identified

Per

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Threats quantified

Improvem

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Risk register

Group board

Management board

Commercial risks

Reduced profitability

Risk area and potential impact

We operate in extremely competitive markets. If we fail to compete effectively or are subject to higher input prices that cannot be recovered by raising selling prices without losing volumes we could lose sales and profits.

Mitigating controls

We set ourselves the target of continually reducing our cost base and are able to invest in our supply chain to help achieve this.

No one customer accounts for more than 15% of total revenues and we continually strive to widen our customer base. Despite challenging trading conditions we have maintained investment in marketing our branded products. Our innovation programme continues to generate new products that reinforce our appeal to customers. We recognise the importance of strong customer relationships and the executive team plays an active part in maintaining and developing these. They are also involved in major customer negotiations. We conduct customer surveys to benchmark our performance and we continuously monitor the service and quality levels provided to our customers and consumers, and have procedures in place to react quickly to any issues. Our commitment to corporate responsibility remains a key part of our business strategy and is an important part of our overall proposition to some customers.

Reduced demand from consumers


Consumers could move away from dairy products for economic, health, ethical, or other reasons leading to lower sales and profits.

Mitigating controls

Consumers are at the heart of our business and we regularly monitor consumer trends. We continue to promote the health benefits provided by dairy products and develop healthier products. We also continue to maintain our focus on developing a compelling new product development pipeline, enabling us to react to consumer trends, for example with more environmentally-friendly packaging, and healthier variants of branded goods. We have increased our direct involvement with government to understand and influence future legislation that could affect future consumer demand.

Input cost volatility


Volatile milk and non-milk costs (vegetable oils, diesel, electricity, gas and packaging) could reduce margins unless we can manage cost risk, find other cost efficiencies elsewhere or increase selling prices.

Mitigating controls

This area is closely reviewed by the Management Board which has established a risk committee to monitor and hedge forward non-milk commodity prices as appropriate. The risks associated with purchasing large volumes of milk have been reduced by establishing milk pools linked to major customers. We seek to absorb short term cost movements through supply chain efficiencies. Our purchasing and commercial teams have clear lines of communication between them to ensure customers are kept aware of changes to our cost base and requests for price increases can be fully justified.

Operational risks

Inability to source milk


Without milk we would not have a business. Restricted milk supply due to economic factors, weather, fuel availability or an epidemic which affects dairy cows could restrict milk supply. This in turn could lead to lower sales and profits. Consumer confidence in dairy products could also be adversely affected.

Mitigating controls

We invest significant resources in maintaining strong relationships with our milk suppliers by attending forums and discussing current issues and pressures that affect both the farms and our business. The majority of our milk comes directly from farms on contracts that include a notice period of at least one year. Our experienced milk procurement team understand milk production and are alert to changes in supply. We aim to pay a fair, market related milk price and closely monitor the milk price we pay to suppliers in order to ensure we can purchase the right quantity of milk to meet demand forecasts and have established procedures for allocating milk between our businesses if a short-term shortfall in supply does arise. We have contingency plans established for major incidents and work closely with DEFRA and industry bodies to ensure these are appropriate. These plans are regularly tested and reviewed with the Management Board.

Principal risks and uncertainties




Failure of a key supplier


We are dependent on key suppliers and could lose sales and face financial penalties from customers if suppliers’ failure leaves us unable to supply. Failure of key information technology suppliers could adversely affect our financial systems.

Mitigating controls

Our purchasing team regularly monitors suppliers’ ability to supply and puts in place alternative arrangements, including dual purchasing, if appropriate. We have taken specific actions to reduce our dependency on information technology suppliers.

Other operational risks


An accident, product contamination, the failure of equipment or systems or deliberate act could disrupt production, affect food safety, cause injury, and/or cause reputational damage with adverse consequences. We are also reliant on information technology and exposed to losses in the event that systems fail.

Mitigating controls

Dairy Crest takes product quality very seriously and has rigorous quality controls in place to minimise potential risks. Plans are maintained to respond quickly to any product quality concerns and minimise any impact to the Group. Our business is also committed to the health and safety of all our employees and maintains systems aimed at ensuring everyone is able to complete their work safely. All of our manufacturing sites have a trained engineering resource, are supported by our major equipment suppliers and hold appropriate stocks of spare parts. They also all have fire protection systems and regular fire drills. Our information technology systems are regularly backed up and duplicated in the majority of areas. We have procedures in place to help us deal with major incidents and insurance cover for property damage and business interruption risks.

People risks

Disease epidemic


A disease epidemic such as swine flu could adversely affect the health of our employees and prevent them working, leaving us unable to service customers.

Mitigating controls

Contingency plans which include working with industry bodies are in place for known epidemic risks.

Recruitment and retention


We need to retain high quality employees to provide customers and consumers with safe, high quality products and services.

Mitigating controls

We carry out rigorous selection procedures and benchmark pay and benefits to ensure we can attract and retain the best people. We have a wide bonus scheme and a range of other incentives to reward good performance. We have proposed changes to our long-term share option scheme better to align the interests of management to shareholders and improve its effectiveness in delivering retention. There is a performance review and talent management scheme to identify and develop our own people. We undertake regular surveys to monitor the relationship with our employees and their engagement.

Financial risks

Pension scheme


Despite the action we have taken to reduce the risks associated with our pension scheme, including closing the scheme to future accrual in 2010 and buying insurance to meet the liabilities associated with many of our retired members in 2008 and 2009, the deficit could continue to increase and we may then have to increase our contributions.

Mitigating controls

We continue to work closely with the Trustee of the Pension Fund to improve the Fund’s financial position at an acceptable cash cost to the business. Our recent one-off cash contribution of £40 million to the Pension Fund reduces the risk of the deficit increasing.

Legal and compliance risks


Our sector is subject to a number of complex statutory requirements. There is a risk of fines or lawsuits and reputational damage if we fail to comply.

Mitigating controls

We have a strong in-house legal function supported by external advisers. We have undertaken Group-wide training in respect of competition law and actively monitor and adjust to on-going legal and regulatory changes. We have a Business Conduct Policy, and a programme designed to ensure that all relevant employees understand what is and is not permissible under the UK Bribery Act.

Major project risk


To remain competitive we periodically undertake major transformational projects following strategic reviews. Successful execution of these projects is often key to delivering strategic objectives. At the same time we have to ensure that major projects do not divert from the on-going day-to-day delivery of products and services to our customers.

Mitigating controls

We have a good track record of managing projects and use experienced and appropriately skilled senior managers to lead these. Supervisory governance structures are also put in place to help successful delivery. We are aware that too much change concentrated in too short a timescale can be detrimental and manage this by ensuring key project resource is full time with appropriate backfilling and use of third parties.

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We constantly look for new and better ways of doing things

Business review

£ million 2012/13 2011/12

Revenue 194.5 211.3Profit 25.7 23.2Margin 13.2% 11.0%

Dairy Crest

Unilever 28%

Arla 32%

Private label 15%

Other 7%

Source: Nielsen 52 w/e 30 March 2013

Share of UK retail butter and spreads market by value

18%

We make and sell butter and spreads at two locations in the UK, but are currently in the process of consolidating manufacturing onto one of our existing sites at Kirkby, Merseyside.

The UK butter and spreads market declined during the year with values around 3% lower and volumes around 2% lower overall. Clover and Country Life, our two key brands in this sector, both increased value and volume share. Promotions are at a historically high level across the category but are not driving category growth. Looking forward we expect the trading environment for butter and spreads to remain challenging. The work we are doing to rationalise our manufacturing capability will make us more efficient and allow us to continue to compete strongly.

SpreadsSpreads



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planned for the Clover brand.Country Life is the leading British butter brand. Sales volumes remained broadly flat year-on-year, although a reduction in price, reflecting lower input costs, primarily cream, resulted in sales values falling by 3%. Our other spreads brands, Utterly Butterly, Vitalite and Willow, experienced small reductions in volume and value shares. Our Spreads business is also home to MH Foods which we purchased in 2011. This business manufactures and markets ‘one cal spray’ cooking oils. Under our ownership the business has rationalised its product range and improved manufacturing efficiencies and is making good progress. MH Foods demonstrates the contribution that small acquisitions can make over time to the profitability and growth of the Group. During the year we moved production of Clover from our factory in Crudgington, Shropshire to Kirkby, Merseyside and also commenced a project that will see Crudgington close completely in 2014 with

Reported revenue for the year ended 31 March 2013 fell by 8% to £194.5 million. Segment profits increased 11% to £25.7 million, resulting in a segment margin of 13% (2012: profit £23.2 million, margin 11%).

Two of Dairy Crest’s four key brands operate in the butter and spreads product category. Clover, our main spreads brand, saw a small increase in volume but a 5% reduction in value sales. It remains the UK’s leading dairy spread. Previously introduced innovation such as Clover Lighter continues to boost the brand’s performance. Towards the end of the year we introduced a brand new product, Clover Seedburst, into the market. This is a spread containing a blend of seven healthy seeds and whole grains and is targeted at more health-focused consumers. We have more innovation


all production being moved to Kirkby. This £38 million project has attracted a £5 million grant from the Regional Growth Fund. Looking forward we expect the profits of this business to benefit from the cost savings that will arise from a more efficient supply chain.




Business review continued

UK after it again won the Danisco Grand Prix trophy for consistently topping the judges’ lists at cheese shows around the country. Consumer-led marketing, including innovation in the form of new products and range extensions has led to significant growth in our branded cheese sales in recent years.

Reported revenue for the year ended 31 March 2013 grew by 1% to £231.3 million. Segment profits fell 6% to £33.3 million (as stock profits recorded last year were not repeated), resulting in a segment margin of 14% (2012: profit £35.5 million, margin 15%).

UK retail cheese market volumes fell by 2% in the year with values increasing by 2% to £2.6 billion. Cathedral City sales grew

Dairy Crest produces and markets the UK’s leading cheese brand, Cathedral City. Named in an independent survey as one of the UK’s top ten positively viewed brands, the only food brand to achieve this standing, Cathedral City is made at our Davidstow creamery in Cornwall from milk supplied by around 450 local dairy farmers before being matured in Nuneaton and cut and wrapped at either our state of the art facility there or our highly flexible site in Frome.

We also make and sell the premium Davidstow brand cheddar, which can justifiably claim to be the best cheddar in the

Source: Nielsen 52 w/e 30 March 2013

Other 90%

Share of the total UK retailcheese market by value

10%

Cathedral City

Cheese

£ million 2012/13 2011/12

Revenue 231.3 229.6Profit 33.3 35.5Margin 14.4% 15.5%


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by 3%, with volumes up 1%. It has again increased its market share and remains by far the largest brand in the total everyday cheese sector, although its sales account for only 16% of this sector, reflecting the dominance of retailer own label. Over recent years we have widened the appeal of Cathedral City and now have four taste variants (mild, mature, extra mature and vintage) as well as Lighter (reduced fat) Cathedral City, and Chedds, a snack brand for children. Chedds was launched in 2011 and has made a significant impact in the children’s cheese market. Innovative packaging continues to be important to the brand’s growth and the launch of Cathedral City Selections, packs containing bite-sized pieces of cheese, has been extremely successful, bringing new consumers to the cheese market, boosting sales in its own right and giving consumers an opportunity to sample the range of taste variants.

The long-established mature variant accounted for 57% of total Cathedral City sales, down from 65% last year, reflecting the progress we have made in broadening the range. We have continued to advertise and promote Cathedral City strongly and have worked with key retailers to increase the brand’s in-store presence. For example, working with Tesco, we set up a trial in 36 of their stores. A whole bay of the cheese fixture was dedicated to Cathedral City, ensuring the full range was on offer to consumers and allowing increased in-store branding. The trial was successful and Cathedral City bays will be rolled out to more Tesco stores in the year ending 31 March 2014. The strong performance of Cathedral City has been acknowledged externally. The Grocer has placed it as Britain’s 15th biggest grocery brand (up from 21st last year) and in a recent YouGov poll Cathedral City was ranked as Britain’s tenth most positively viewed brand and was the only food brand in the top ten. In addition to the performance of Cathedral City we have made good progress with our premium Davidstow brand. We continue to widen distribution, replacing Davidstow products that have carried the name of specific retailers. This has encouraged us to increase the investment

behind this brand and we expect to see further progress going forward. We also continue to achieve increased efficiencies throughout the supply chain and have reduced packing costs during the year. The growth in our cheese sales has encouraged us to expand Davidstow’s production capacity in the year and we have further plans for expansion in the future. Profits in this business have been supported by strong returns from whey – the by-product of cheese manufacture. The whey stream at Davidstow is particularly valuable because of its size and quality and because it contains no colouring. We are excited about an opportunity to increase whey profits by extending manufacturing into higher value products which are in demand world-wide and have initiated a project to scope this opportunity. The farmers supplying their milk to our cheese business have shared in its improved performance through higher milk prices. We are happy to continue to pay a premium for our milk at Davidstow to ensure we get a top-quality supply and since the year end have announced a further increase in the price we pay. Looking forward we are well positioned to increase market share and profits from cheese sales. The opportunity to boost returns from whey only adds to the future prospects of this product category.



have developed a new long life product which will allow us to push the brand into convenience and other outlets where refrigerated storage is less available. The flavoured milk category is growing strongly. Total sales are up 5% in volume and 10% in value. Fresh flavoured milk sales are up 8% in volume and 16% in value as new brands introduced by competitors have proved popular. FRijj sales grew by 5% in value in the year, boosted by the innovative FRijj The Incredible premium range of flavours but declined 2% in volume. We advertised FRijj on television with encouraging results, although we expect to continue to use social media and other alternative forms of marketing to support this brand going forward, reflecting the age of its target consumer. We expect to see further material growth in this brand in the future and are continuing to invest at our Severnside production facility to ensure there is sufficient headroom to allow unfettered growth.

A clear plan to restore Dairies profitability2012/13 was another tough year for the Dairies business. Following the drop in profits in 2011/12 we have created and started to implement a plan to restore the returns from our Dairies business to an acceptable level. We believe this business can deliver a 3% return on sales and have set this as a medium-term target. Returns in the second half of the year increased to 1.7% compared to 0.4% in the first half reflecting both the usual seasonal factors and initial results from the actions we have taken. Profits will be increased by a combination of higher FRijj and other added value sales, reduced costs and a greater willingness to only supply those customers who will pay a fair price. We expect that our actions will lead to higher margins to offset cost inflation and lower residential sales that command an above average margin. At the same time we will continue to pay a fair milk price to the farmers who supply their milk to us and provide high quality products and cost efficient services to our customers.

FRijj – one of the drivers behind the plan FRijj operates in the flavoured milk product category. This comprises fresh flavoured milk and long life flavoured milk. FRijj is predominately in the fresh category but we

The Dairies business processes and delivers fresh conventional, organic and flavoured milk to major retailers, ‘middle ground’ customers (including, for example, smaller retailers, coffee shops and hospitals) and residential customers. We also manufacture and sell FRijj, the leading fresh flavoured milk brand, cream and milk powders. Reported revenue fell by 11% to £951.6 million (2012: £1,069 million). Segment profit rose slightly to £10.3 million (2012: £10.2 million), resulting in a margin of 1.1% (2012: 1.0%).

Dairies


£ million 2012/13 2011/12

Revenue 951.6 1,069.0Profit 10.3 10.2Margin 1.1% 1.0%

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Efficiency improvements and cost reductions are also key During the year we have completed the three year £75 million investment programme. As anticipated, the investment has allowed us to pack milk more efficiently and has provided an opportunity to focus polybottle production at three sites and glass bottling on one site. As a result we closed the Aintree and Fenstanton dairies during the year with the regrettable loss of 450 jobs. We expect the resultant full-year cost savings to contribute to future profit growth. We have made further efficiencies including introducing a new design of polybottle in partnership with our supplier Nampak. This uses up to 15% less plastic – good for costs and good for the environment. Our Dairies business also benefits from our on-going company-wide cost saving projects. As the largest of our businesses it covers the highest proportion of central overheads and the decision to move to one business, which is anticipated to save over

£5 million annually, will contribute to the restoration of profitability in this area.

Getting the right customer mixDuring the year we retained our contract to supply liquid milk to Sainsbury’s - one of our largest customers - and now have an agreement to supply them through to 2017. We also strengthened our offering to retailers by buying Proper Welsh Milk, a small dairy business that packs Welsh milk in Wales. Several key retailers are customers of this business which we will look to expand. We had to negotiate higher milk prices with customers so that we could pay our farmers more and compensate them for the difficulties they faced from the poor weather and higher animal feed costs. We also need to make an acceptable return for ourselves. Many of our customers were willing to pay higher but fair prices. However, we chose to stop supplying some smaller customers who were not prepared to do so. Going forward we will continue to review our customer mix, particularly in the middle ground.

Residential sales still importantDelivering milk to customers’ doorsteps remains a key part of our business. We have 850,000 residential customers and have a network of 1,800 milkmen delivering to them. However, sales in this area continue to fall as financial pressures lead

to customers choosing to buy their milk from shops rather than have it delivered. The rate of decline was lower amongst customers who use our internet doorstep delivery proposition, milk&more, where we have maintained over 200,000 customers who use the service every week. However, overall residential volume sales of milk fell 12% compared to last year. As a result we closed 28 local depots, finishing the year with 92. We also closed our residential delivery product distribution centre in Sunbury during the year, moving this operation to our National Distribution Centre in Nuneaton. Profits from the sale of depots closed in earlier years as well as 2012/13 were £7.7 million. We anticipate that property profits from the sales of depots will continue into the future and contribute to our medium-term target of 3% margin.

IngredientsOur ingredients operation continues to provide us with a valuable balancing solution for seasonal raw milk supplies and cream. We aim to minimise throughput in this business to reduce our exposure as far as possible to dairy commodity markets. However, our Dairies business generates more cream than that required by our Spreads business. Prices for dairy ingredients were low during the early months of the year then rose towards the middle of the range seen in recent years. Since the year end they have increased further.





incentive scheme was also introduced for cheese contracts, similar to the initiative for liquid contracts, to support farmers who were able to increase milk production. Secondly, following the establishment of the Defra voluntary code, Dairy Crest became the first milk processor to sign up to the key principles in advance of the code being signed. In early summer we gave a commitment to our farmers that 30 days’ notice would be provided for any price reduction and that farmers could give three months’ notice to cease supplying their milk to us if they did not agree with a change to their milk price. Since then we have continued fully to support the code and have committed to incorporate its terms within our farmer contracts. Thirdly, together with Dairy Crest Direct (‘DCD’), the independent organisation representing our farmers, we commissioned a renowned, independent consultant to develop a more transparent formula method of milk pricing. The result was that Dairy Crest became the first processor to develop a milk price formula for farmers on standard liquid contracts. Launched with effect from April 2013, this has been a great success with 175 of our farmers applying to place all or part of their milk supply on the new formula contract. Looking forward we are determined to maintain our leading position and develop innovative ways of delivering a sustainable supply of milk.

Future suppliesNational milk supply is below the level seen last year and supply is expected to take time to recover. Weather, with the consequent impact on grass growth, will play a key part in production levels. So too will the long-term decline in dairy farmer numbers. It is recognised that the average farm size

is likely to increase. We all therefore have a part to play in ensuring consumers are well informed about how the milk they buy is produced on modern dairy farms, and the important factors that affect the level of quality and animal welfare. The market for milk supply is increasingly competitive as milk processors seek to attract new farmer suppliers. Milk contracts need to reflect the external environment and challenges. We believe the Dairy Crest package is very competitive, offering a range of contract options to enable farmers to choose how they work with us. We continue to invest in our farmer base by offering additional benefits, including the unique White Gold advisory service. This helps our farmers achieve the highest standards and comply with current dairy legislation in an efficient way. Our long standing reputation for this higher level of farmer support together with secure payment for milk is seen as a key benefit. A particular area of focus is for our farmers to be able to access up to date information and news about Dairy Crest. This is important for the decision-making process on farm. Investment in a new farmer website, Farm Connect, delivers this and has been welcomed by our farmers. The website and the upgrade of our systems to support this innovative, interactive management tool is part of our continued drive to improve efficiency.

SummaryOur supplying farmers play a key role within our business – as they do within their local communities. We are committed to doing the right thing and supporting them to produce high quality milk in a way that will support our respective businesses, as well as enhancing the rural economy and British countryside.

Working with our farmers to deliver a sustainable supply of milk.

79% of the milk that Dairy Crest sources, comes direct from farms located throughout England and South Wales. Milk from direct supply is a key part of our added value strategy and we are actively working to increase this proportion. We value the relationship we have with our 1,250 dairy farmers who supply their milk to us. It provides the opportunity to work together to generate greater efficiencies, by sharing information and knowledge, and delivers security for both our farmers and Dairy Crest.

Challenging year2012 was a particularly challenging year for agriculture and dairy farming in particular. Adverse weather conditions persisted throughout the year and will have a longer term impact on milk production than is normally seen. The combined effect of the weather together with high input costs and milk price reductions in the spring put the dairy sector under the spotlight. Dairy farmers were clearly frustrated at the situation they found themselves in with their margins being squeezed. At the same time processors had to respond to falling market values, whilst acknowledging that consumers continued to look for value as household budgets tightened. Relationships have been tested and as a result the industry questioned if the sector was operating effectively and what steps could be taken to improve the milk pricing process in order to build trust. One of the outcomes was the development of the Defra voluntary code for milk supply contracts.

Dairy Crest responseDairy Crest’s response to the challenges of the past year can be summarised with three distinct actions: Firstly, following the spring milk price reduction for liquid contracts, the plans for further milk price reductions were set aside. A series of milk price increases then followed, starting in the autumn. A volume

1,250 dairy farmers supply their milk directly to us

Milk Procurement




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We act responsibly with a passion to do the right thing



Environment

We know we have an important role to play when it comes to tackling climate change, reducing waste and looking after Britain’s natural resources.

Reducing emissions

At Dairy Crest we are committed to reducing our carbon footprint by constantly looking at how we can make best use of the energy we use in our manufacturing, storage and transport processes and by taking advantage of more environmentally-friendly technology.

Given this commitment we are pleased to report that we have continued to make good progress against our pledge of reducing our carbon emissions by 30% by 2020 against 2007 levels and by March 2013 we had achieved a carbon equivalent reduction of 22.4% with much of this coming from two biomass boilers at our Davidstow creamery. In 2012/13 Davidstow reduced its carbon emissions by 13,900 tonnes in comparison to its emissions in 2007/8. As well as investing in new, greener vehicles and making use of telematics

systems in our trucks we continue to operate a fleet of over 900 electric vehicles and we also train our drivers to be more energy efficient. Other factors that have helped reduce our on-site carbon footprint include changing the lighting used in many of our sites and warehouses to LED alternatives and ensuring we use chilling systems based on ammonia and glycol (which are more environmentally friendly) rather than HCFCs - we have plans in place to replace the few smaller remaining systems that run on HCFCs by 2015. Our award winning carbon toolkit created in partnership with our independent farmer representative body and fully accredited by the Carbon Trust continues to help dairy farmers measure accurately and compare their greenhouse gas emissions against others, it shows them where they can reduce their energy consumption and it enables them to identify and prioritise the improvements they need to make to reduce their on farm emissions. Following its successful trial the toolkit has been adopted by three leading retailers.

Aligning corporate responsibility and commercial strategies. Our future success depends on our ability to meet a range of pressing environmental and social needs – that is why thinking and acting sustainably is so important and why we treat corporate responsibility as mainstream to our business. At Dairy Crest we want our corporate responsibility commitments to benefit our business. This drives better behaviour and means we don’t just make promises which sound good or are in fashion. In short, corporate responsibility matters because it is good for Dairy Crest.


Corporate ResponsibilityOver the last three years we have doubled our efforts to make sure that sustainability is fully integrated into the way we do business and in 2012 we were confident enough to launch 40 public corporate responsibility pledges which we could be measured and judged against. An update on progress against our 40 pledges can be found in our online Corporate Responsibility report. We were especially proud that this year Dairy Crest was one of only five companies shortlisted for the Business in the Community (BITC) Responsible Business of the Year Award 2013. The nomination

has come on the back of attaining 98% and a Platinum Big Tick – the highest ranking possible – in their annual CR Index and demonstrates our commitment to put our words into action. Of course, we know that our journey towards being a sustainable business will not be easy. We know we will face difficult choices along the way. But we also know we are heading in the right direction and that our approach to corporate responsibility will ultimately benefit our business, the environment and society.

More information can be found in our online Corporate Responsibility report.

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2008 2011 2012 2013

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Waste sent to landfill2010 2013

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Since 2007 ourcarbon equivalent

emissions are down

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We are on target to achieve 30%

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Reducing waste

Our aim is to adopt a comprehensive approach to waste to ensure the environmental impact we make through our manufacturing and distribution processes is kept to a minimum. We also know that we have a role to play in the homes of our consumers where there is a growing desire to reduce packing and food waste.

Our overall aim is zero waste to landfill by 2015 (except where it is not environmentally beneficial to do so). Last year our manufacturing sites avoided sending 92% of waste to landfill, up from 88% in 2011/12. This was achieved through working with our waste broker, 707, and staff who identified alternative ways in which we can recycle waste. In 2012/13 we completed the introduction of new spreads tubs across all of our brands. The new tubs make more efficient use of materials and allow for more efficient transportation. This year we also put on-pack recycling information on our branded products. We have also continued to roll out an innovative new plastic milk bottle, designed in partnership with Nampak. It uses about 15 per cent less plastic than its standard equivalent and is made with up to 15% recycled plastic. Our goal remains to increase the amount of recycled plastic used in our polybottles from the current 15% to 30% by 2015, and despite the current lack of recycled material available within the UK, we are working with WRAP to find a solution. Through our doorstep delivery

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Although dairy products are an excellent source of protein, vitamins and minerals, especially calcium which is essential for healthy bones and teeth, we also recognise that many consumers want to reduce

the amount of saturated fat in their diet. To help them achieve this, and without compromising on taste, we have created lower fat variants of our main brands, namely Cathedral City, Clover, Country Life Spreadable and in 2013 we launched Utterly Butterly Lightly to join the Utterly Butterly family. We also supply 1% fat milk to many of our customers. The investments in our lighter range, through both advertising and promotions, have resulted in impressive growth rates. Today annual retail sales of these products total £68 million and have grown over the past year by over 10%. The two biggest drivers behind this are Cathedral City Lighter which now has a retail sales value of nearly

£40 million and has grown by 21% since last year and Clover Lighter which is now worth over £18 million, up 9% compared to 2011/12. Coupled with the investment in our lower fat variants we have introduced Clover Seedburst, the UK’s first spread with added seeds and whole grains. Blended with Clover Lighter, the product provides consumers with a natural source of vitamin E and beneficial oils. Aware that portion control is a key way of helping consumers maintain or reduce their weight we launched Cathedral City Selections which are individually wrapped, calorie controlled portions of cheddar that make it easier for consumers to have a little of what they want, when they want it. In

service we continue to sell milk in glass bottles which are, on average, reused 20 times. Milk is valuable and precious – dairy farmers work extremely hard to produce it and although some milk loss is inevitable during processing we have continued to make good progress with a 7% reduction in losses in comparison to 2007. In early 2013 we publicly committed ourselves to the third phase of WRAP’s Courtauld Commitment which includes a commitment to helping consumers reduce the amount of food they waste at home by extending where possible the shelf life of the products we make, offering them a greater range of portion sizes and giving them advice on what they can do with their left overs.

Reducing water usage

Over the course of 2012/13 we have continued to focus on our levels of water efficiency at our manufacturing sites and are confident we will achieve our target of reducing water usage by 20% by 2015 against 2007 levels. At present we have reduced it by 15.7%. With an increasing focus on water as a limited resource, in the autumn of 2011, we launched ‘WaterWell’, an innovative water auditing programme for farmers which enables them to share best practice and to benchmark their results against sector wide data. Our farmer suppliers also play a vital role in conserving the countryside and many of their activities have a positive impact on biodiversity. Getting the balance

right between milk production and helping wildlife is a challenge. We have in place several initiatives with some of the UK’s leading retailers. Working with Waitrose and AB Sustain, Dairy Crest helped set up and fund an extensive biodiversity programme whereby dairy farmers are paid to leave at least 10% of their land free for wildlife to flourish. As of 2012 the average amount of land given over to wildlife is about 25% - the equivalent of 18 times London’s Hyde Park. Farmers involved in the scheme leave hedgerows to grow, blossom and fruit and maintain wide field margins where wild flowers provide food and egg-laying areas for butterflies. Other initiatives include the introduction of ponds, ditches, beetle banks, skylark scrapes, barn own boxes, wetland and overwintered stubble. As a result of the programme it was found that wildlife has increased by 19% and sightings of birdlife considered to be in decline were up 47%.

Marketplace

We are committed to creating healthy, tasty enjoyable products, making it easier for consumers to choose healthier foods and to play our part in helping to tackle obesity.

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Business review | Corporate Responsibility continued

Safety at work

The safety and well-being of people connected with Dairy Crest could not be more important. We aim to have no accidents in the workplace and consider one accident to be one too many.

Our safety at work objective is simple; we want everyone who works for us, and with us, to go home to his or her family at the end of their working day without any injury or occupational ill health. To achieve this objective we have in place a number of training, employee engagement and behavioural safety programmes all of which have helped further reduce the number of accidents across our sites and, although our target is always to have no accidents in the workplace, the number fell from 76 last year to 56 this year. One of the highlights of the year was a children’s poster competition themed around the subject ‘My mummy/daddy works safely’. Although the poster competition was

Workplace

early 2013 when we became the first dairy company to sign up to the Department of Health’s Responsibility Deal which includes a commitment on calorie reduction. We recognise that food safety is non-negotiable and the quality of our products underpins our success. We have to ensure the food we produce is safe to eat and drink and we have well-proven quality management procedures in place to manage and control the safety and quality of our products throughout the supply chain – including the traceability of the ingredients we purchase. Over the course of the last

year we are pleased to report that we have not had to make any product recalls. As the largest UK-owned dairy company, Dairy Crest is committed to supporting and working closely with our 1,250 dairy farmers. That means paying a fair, market-related price for milk, which recognises the tough conditions our farmers continue to face and committing ourselves to only buying fresh milk from British farms. During the year we were the first milk processor to adopt the Government’s voluntary code of practice on milk contracts and have recently offered a ground-breaking contract which allows some supplying farmers to opt for a formulaic milk price mechanism that provides greater transparency and reduces volatility. More information can be found in the milk procurement section page 24. Dairy Crest also works collaboratively with non-farmer suppliers to ensure compliance with our supplier corporate responsibility policy. Introduced in 2011, the policy sets out the minimum standards expected from our suppliers and this year we enhanced it to cover a global zero tolerance on bribery and corruption.

just 30 weeks since launch, Cathedral City Selections have achieved over £2 million of sales. This range of adult snacking complements our children’s cheese brand Chedds, which is made from 100% pure mild cheddar cheese and is packed in child size portions. Since purchasing the Frylight brand in 2011, the one calorie cooking oil spray has gone from strength-to-strength and in 2013 we initiated the brand’s first ever advertising campaign on primetime television. Our overall commitment to leading the lower fat dairy agenda was highlighted in

2,000 employees, about 40% of staff, have received a health check through our ‘healthier lives’ drive

good fun and resulted in many entries from all areas of the business it had the important effect of increasing awareness of a very important issue, safety. Understanding why accidents happen is vital to reducing them. To ensure we are well placed to do this we actively encourage staff to report near misses without fear of reprisal. This open and honest approach has resulted in 9,349 near misses being reported last year an increase of 271 on the previous year. As part of our drive to help staff live healthier lives we introduced free health checks which are carried out by our team of occupational health advisers. These checkups allow staff to get tailored advice on how they can improve their lifestyles and they include a cholesterol check, a BMI test and a blood pressure check. In addition

to offering staff free health checks we also ran health awareness campaigns during the year that focused on key health issues. These have included diabetes, hypertension and alcohol misuse. Together this approach resulted in over 2,000 employees – about 40% of our staff – having a health check. As well as health hubs at each of our manufacturing sites the occupational health team also run a bespoke health website that staff can access both at home and at work. These actions have helped us keep absence rates below 3%. The work we have done to increase staff health and awareness and the work we have done to reduce accidents in the workplace has helped result in fewer days lost from accident or ill health from 1,998 days in 2011/12 to 1,531 days in 2012/13.


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We know that the actions we take can have a significant influence on the communities where we are based, and as the main employer in many areas we believe we have a unique opportunity to play a positive role in supporting projects at a local and national level.

To ensure the work we do in our local communities adds real value to society we focus on supporting issues and projects that make best use of our expertise and knowledge, provide a legacy and fit with our vision and business strategy. For this reason our community programme is based around supporting the countryside, the environment, education and health.

Countryside and environmentThe rural economy is hugely important to the UK, turning over £300 billion and employing 5.5 million people. We want it to remain that way, so as well as supporting our dairy suppliers we also want to support struggling smaller farmers – some of whom may not be in the dairy sector. To help us achieve this Mark Allen, our Chief Executive, is Chairman of the Prince’s Rural Action Programme and is a Trustee of the Countryside Fund and Lyndsay Chapman our Director of Agriculture and Farming Communications is Chairman of the Prince’s Dairy Initiative. We are also a major supporter of Pub is the Hub, a charity that helps isolated, rural pubs diversify to the benefit of the entire local community.

Helping Britain’s most vulnerable dairy farms (Case study)In 2011, working alongside Business in the Community and other dairy businesses, we helped set up the Prince’s Dairy Initiative, a programme designed to help small dairy farms that don’t have contracts with processors. Initially involving 74 economically vulnerable dairy farms in five regions across the UK, we found that by offering them a range of financial tools and by helping them create a networking forum, we were able to boost their confidence and increase the efficiency of their farms. On the back of this successful pilot programme our aim is to roll out the initiative to another 300 dairy farmers over the next three years. The programme will continue to be led by Lyndsay Chapman,

Dairy Crest’s Director of Agriculture and Farming Communications.

Healthy livingIn tandem with our strategy of increasing sales of healthier variants of our products, our aim is to use our community programme to encourage staff and consumers to live healthier lifestyles. To help achieve this we have been working in partnership with the British Heart Foundation, the UK’s leading heart charity, to promote awareness of the charity’s activities to our doorstep customers and staff. We have also made use of the British Heart Foundation’s resources and experience to support our staff wellbeing campaign. Over the course of the two year partnership, staff have raised over £390,000 for the charity. In 2012 Dairy Crest also became a key supporter of BBC2’s Hairy Bikers ‘Meals on Wheels’ campaign, with staff taking advantage of our volunteering policy to deliver healthy, homemade meals to people who need them. Our aim for the coming years is to not just support more Meals on Wheels programmes but to also play our part in getting more people and companies to support the programme.

EducationIn the UK food industry and dairy sector as a whole there is a severe shortage of food scientists, engineers and young people starting a career in agriculture. For these reasons education is an important part of our community programme.

Community

Over the course of the last year we played a leading role in the IGD’s ‘Feeding Britain’s Future’ programme which saw Dairy Crest, alongside other retailers and food manufacturers, open their doors to unemployed youngsters to help them get a job and to showcase the huge variety of roles in the food sector. Dairy Crest’s focus was very much centred on helping rural communities and included a visit to the Duchy College Farm in Cornwall and days at our Davidstow creamery and Nuneaton distribution centre. We will again be playing a leading role in the initiative in 2013. We also encourage young people to consider a career in food manufacturing and engineering through our sponsorship of the University Food Science Summer School courses at Nottingham and Reading Universities and events such as the Festival of Manufacturing and Engineering held in Stonehouse, Gloucestershire.

Engaging with local communitiesOur local community committees make up the fourth strand of our community programme and, in keeping with the overall strategy, they support:• Localgoodcausesthatmakeapositiveand direct contribution to the communities where our workplaces are based. • Goodcausesthatimprovehealth,education, the environment or countryside.Over the course of the year staff have supported over a hundred good causes though volunteering, donations of products and donations of money.




09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13

1,5

55.4

1,5

30.6

1,5

02.2

1,5

14.7

1,3

81.6

Cash generated from operations(£m)

Revenue(£m)

20.1

18.9 19

.7 20.4

Adjusted earningsper share (pence)

30.0

27.4

29.9

28.9 29

.9

Segment profit (£m)

71.7

71.3 73.

7

68.

9

69.

3

129.

1

145.

9

128.

1

84.5

19.1

116

115

85

123

19

20.7

Total dividends per share (pence)

Gearing(%)

Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12

3.0

2.5

2.0

1.5

1.0

0.5

0

500

450

400

350

300

250

200

150

100

50

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Net debt

Net debt (£m – left scale)Net debt / EBITDA (multiples – right scale)

475 491 416 380 337 335 312 365 336Sep 12 Mar 13

76 60

Before exceptional items and amortisation of acquired intangibles; excludes associates

Before exceptional items, amortisation of acquired intangibles and pension interest charges / income

Overview

The successful sale of St Hubert in August 2012 has significantly strengthened the Company’s financial position. The Group received cash consideration of £341.1 million and net debt at 31 March 2013 of £59.7 million is the lowest since 2000. Since 31 March 2013, the Group has restructured its debt facilities, repaying £100 million of loan notes early and has also made a one-off cash contribution to the pension fund of £40 million.

These actions leave the Group well placed to fund growth in its core UK market. Key projects for 2013/14 include the on-going major £38 million investment in consolidating UK spreads production onto one site in Kirkby, Merseyside.

Financial review




Segment revenue 2013 2012 Change Change£m £m £m %

Cheese 231.3 229.6 1.7 0.7Spreads 194.5 211.3 (16.8) (8.0)Dairies 951.6 1,069.0 (117.4) (11.0)Other 4.2 4.8 (0.6) (12.5)Total segment revenue 1,381.6 1,514.7 (133.1) (8.8)

Group revenue excluding St Hubert decreased by 8.8% to £1,381.6 million, predominantly as a result of lower revenues in the Dairies business. These lower revenues reflect the decision to reduce sales in the middle ground following the closure of the Fenstanton and Liverpool dairies, and also the on-going reduction in residential sales. Spreads revenue also decreased by £16.8 million due to lower average realisations on Clover and butter (following a reduction in vegetable oil and cream costs) and reduced sales of Utterly Butterly. Cheese revenues increased slightly.

Segment operating profit 2013 2012 Change Change£m £m £m %

Cheese 33.3 35.5 (2.2) (6.2)Spreads 25.7 23.2 2.5 10.8Dairies 10.3 10.2 0.1 1.0Share of associates – (0.3) 0.3 n/aTotal segment profit 69.3 68.6 0.7 1.0Remove share of associates – 0.3 (0.3) n/aAcquired intangible amortisation (0.4) (0.8) 0.4 50.0Group profit on operations (pre-exceptionals) 68.9 68.1 0.8 1.2

Segment profit excluding St Hubert increased by £0.7 million to £69.3 million. Cheese profits recorded a small decrease to £33.3 million, reflecting increased costs of milk in 2011/12 translating into higher cost of sales in 2012/13. Spreads profits increased by £2.5 million to £25.7 million due to the benefit of cost savings initiatives and lower vegetable oil costs. Dairies profits of £10.3 million were effectively flat year-on-year, with the benefit of on-going cost savings being offset by the impact of residential decline and the higher cost of raw milk. Within Dairies, property profits were £7.7 million (2012: £4.6 million).

Sale of St HubertIn August 2012 the St Hubert business was sold for cash consideration of £341.1 million, resulting in a profit on disposal of £47.7 million after fees and estimated tax costs. This profit has been classified within discontinued operations as exceptional. The results of St Hubert until the date of sale have also been disclosed as discontinued operations and prior year comparatives have been restated accordingly.

The sale of St Hubert has resulted in a UK focused business which has subsequently been reinforced by a reorganisation resulting in the removal of divisional operating and management structures. The cash proceeds have allowed the Group to restructure its debt after the year end and make a one-off contribution to the pension fund as well as retain capacity for future investment in the UK business.

Exceptional ItemsPre-tax exceptional charges of £56.5 million have been recorded in the year (2012: £93.9 million).

In September 2012 we announced the potential closure of the Crudgington site with production moving to Kirkby. This project, now confirmed, will give significant savings in future years. Exceptional costs of £13.8 million have been recorded in the year, the majority of which are non-cash asset write-downs. Cash expenditure in the year was £2.6 million.

In April 2012 we also announced a major restructuring of Dairies manufacturing, which ultimately led to closure of the Fenstanton and Aintree dairies. An exceptional cost of £21.3 million has been recorded against this project, of which £9.0 million represents redundancy costs. Cash expenditure in the year was £17.8 million and the project is now complete.

During the year we completed the restructuring of depot administration activities in the Dairies division. This project has delivered more streamlined and centralised back-office support functions and generated significant cost savings. Exceptional costs in the period were £9.2 million (predominantly redundancy) with a cash expenditure in the year of £8.5 million.

In February 2013 the Company announced a management restructure, leading to a unified business. Exceptional costs of £3.5 million have been charged in the year being accruals for redundancy costs. Some further exceptional costs will be incurred in 2013/14 as the reorganisation is completed.

On 18 April 2013 the Company repaid £100 million of loan notes ahead of their normal maturity date and reduced its revolving credit facility (“RCF”) by €60 million. The associated costs (primarily make-whole premium payable to noteholders) resulted in an exceptional charge of £8.7 million in the year to 31 March 2013 and the cash impact will be reflected in 2013/14. These costs are considered exceptional due to their size and nature, and were charged in 2012/13 because having given notice of repayment to noteholders in March 2013, the Group was irrevocably committed to repaying the loan notes at the year end.

Finance costsFinance costs have reduced by £2.4 million to £18.7 million. This primarily reflects the reduction in net debt following the sale of St Hubert in August 2012 at which point all borrowings under the revolving credit facility were repaid. The balance of the St Hubert proceeds were largely held on short-term cash deposit prior to the loan note repayments noted in the “Borrowing Facilities” section below. The quantum of the interest reduction during the year was limited due to the very low interest rates available on sterling and euro deposits.

Other finance income of £5.9 million (2012: £5.5 million) comprises the net expected return on pension scheme assets after deducting the interest cost on the defined benefit obligation. This is based on assumptions made at the start of the financial year. This amount can be highly volatile year-on-year as it comprises the net of expected returns and interest costs, both of which are dependent upon financial market conditions at 31 March each year. We therefore exclude this item from headline adjusted profit before tax.

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Following the sale of St Hubert, the Group entered into discussions with the Pension Fund Trustee about the impact of this transaction on the employer covenant. Consequently, on 18 April 2013 the Group made an additional one-off contribution to the Fund of £40 million. At the same time the Group granted the Trustee a floating charge over maturing cheese inventories, with a maximum realisable value of £60 million. This charge was put in place to protect the Fund in the unlikely event of an insolvency of Dairy Crest Limited.

The reported IAS19 pension liability at 31 March 2013 was £67.2 million comprising an IAS 19 deficit of £56.3 million and a £10.9 million additional liability reflecting an unrecoverable notional surplus. The reported deficit at 31 March 2012 was £79.8 million. Asset returns were strong during the year; however bond yields declined again increasing the discounted level of pension liabilities.

Cash flowCash generated from operations was £19.1 million in the year (2012: £84.5 million). This includes a working capital outflow of £40.0 million (2012: £20.6 million outflow) due mainly to the higher value of cheese stocks compared to March 2012 - £155.5 million in March 2013 versus £129.8 million last year. Stock value increases are a result of increased manufacturing to support future volume growth and milk cost increases during 2012. As was the case last year, we received some early settlement of invoices from customers at March 2013.

Capital expenditure of £50.9 million was £2.4 million below last year (2012: £53.3 million). Significant investment continued across our core milk processing sites, Severnside, Chadwell Heath and Foston. The investment has allowed these sites to absorb volume from the Liverpool and Fenstanton dairies, which have now closed. We now operate as a smaller, well invested Dairies manufacturing base with improved efficiencies and higher levels of capacity utilisation. In February 2013, we received a grant of £5.3 million from The Department for Communities and Local Government to be applied towards capacity expansion at our spreads site at Kirkby. Proceeds from the sale of closed depots amounted to £10.1 million.

Cash interest and tax payments amounted to £18.0 million and £4.7 million respectively. (2012: £23.6 million and £14.1 million). Interest payments are £5.6 million lower as net debt reduced following the sale of St Hubert in August 2012, at which point, all borrowings under the revolving credit facility were repaid. Furthermore, upfront fees in relation to the renewal of the revolving credit facility were paid in the prior year.

Net debtFollowing the sale of St Hubert, net debt decreased by £276.7 million to £59.7 million at the end of the year. Net debt as defined includes the fixed Sterling equivalent of foreign currency loan notes subject to swaps and excludes unamortised facility fees. At 31 March 2013, gearing (being the ratio of net debt to shareholders’ funds) was 19% (2012: 123%).

Borrowing facilitiesAt the start of the financial year, the Group’s borrowing facilities comprised: £337 million of loan notes (at the effective swapped exchange rate) maturing between April 2013 and November 2021, and a £170 million plus €150 million revolving credit facility expiring in October 2016.

Interest cover excluding pension interest, calculated on total segment profit, remains comfortable, at 3.7 times (2012: 3.3 times).

Profit before tax 2013 2012 Change Change£m £m £m %

Total segment profit 69.3 68.6 0.7 1.0Finance costs (18.7) (21.1) 2.4 11.4Adjusted profit before tax 50.6 47.5 3.1 6.5Amortisation of acquired intangibles (0.4) (0.8) 0.4 50.0Exceptional items (56.5) (93.9) 37.4 39.8Other finance income – pensions 5.9 5.5 0.4 7.3Reported loss before tax (0.4) (41.7) 41.3 n/a

Adjusted profit before tax (before exceptional items and amortisation of acquired goodwill) increased by 6.5% to £50.6 million. This is management’s key Group profit measure. The reported profit before tax was a loss of £0.4 million as a result of exceptional items. However, this measure excludes the exceptional pre-tax profit of £51.4 million recorded on the sale of St Hubert, and the pre-tax profits from St Hubert up to the date of its disposal (£11.3 million).

TaxationThe Group’s effective tax rate on profits from continuing operations (excluding exceptional items) was 20.7% (2012: 19.5%). The effective tax rate continues to be kept below the corporation tax rate by profits from property disposals, on which the tax charges are sheltered by brought forward capital losses or roll over relief. We expect the effective tax rate to decrease next year in line with the reduction in the rate of UK corporation tax.

Group result for the yearThe reported Group profit for the year amounted to £54.5 million (2012: £17.1 million loss) reflecting the profit on sale of St Hubert.

Earnings per shareThe Group’s adjusted basic earnings per share increased by 3% to 29.9 pence per share (2012: 28.9 pence per share).

Basic earnings per share from continuing operations, which includes the impact of exceptional items, pension interest income and the amortisation of acquired intangibles, amounted to nil pence per share (2012: 29.1 pence loss per share).

Dividends The proposed final dividend of 15.0 pence per share represents a 0.3 pence per share increase compared to last year. Together with the interim dividend of 5.7 pence per share this brings the total dividend to 20.7 pence per share for the full year, 1.5% higher than last year (2012: 20.4 pence per share). The final dividend will be paid on 1 August 2013 to shareholders on the register on 28 June 2013.

Comments on dividend policy going forward are provided in the Chairman’s statement on page 13.

PensionsDuring the year, the Group paid £20 million into the (closed) defined benefit scheme in line with the schedule of contributions agreed in June 2011. Contributions at this rate will continue until a new agreement is reached following the actuarial valuation due as of 31 March 2013.

Business review | Financial review continued




In November 2012, £7.5 million of notes were voluntarily redeemed at par by investors. Facilities at 31 March 2013 therefore comprised £330 million of loan notes and a £170 million plus €150 million revolving credit facility.

On 4 April 2013, £60 million of notes from the 2006 series which had reached their maturity were repaid.

On 18 April 2013, a further £100 million of loan notes were repaid from the 2007 series. Of these notes, the majority (£69 million) were due for repayment in April 2014 with the balance due in April 2017. This will reduce the Group’s interest payments going forward. The repayment was effected by exercising the Group’s right to early redemption on payment of a make whole premium.

Following these repayments, the Group has £170 million of notes outstanding which mature between 2014 and 2021.

On 18 April 2013 the Group also reduced its revolving credit facility by €60 million to £170 million plus €90 million (approximately £246 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. The Group remains very comfortably within its covenants with a net debt to EBITDA ratio of 0.6 times as of 31 March 2013 (March 2012: 2.2 times).

Treasury policiesThe 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 only uses derivatives 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. These policies are summarised in Note 30 to the financial statements.

Going concernThe 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 ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ published by the Financial Reporting Council in October 2009. Further information is presented on page 53.

Alastair Murray Finance Director22 May 2013

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The Board recognises its collective responsibility for the governance of the Company and the Company’s strong governance framework is supported by a combination of clear values, appropriate policy and an environment of transparency and accountability.

Ensuring the effective performance of the Board is one of my main responsibilities as Chairman and my aim is to ensure that it comprises individuals with a varied mix of backgrounds, skills and experience who are able to challenge each other appropriately, work in a collegiate manner and do the right thing for Dairy Crest. In managing the changes to the Board since 2010 I have sought to ensure that we have in place a strong Board with not only the appropriate technical, financial and other business skills required to provide the best leadership for the Company, but also that we have a group of people who demonstrate the values necessary to be effective stewards of the Company. My focus will remain on ensuring that the composition of the Board continues to evolve and that we maintain an appropriate mix of experience and skills through careful succession planning.

Dairy Crest has a clearly defined set of values which are communicated throughout the Group. Those values are supported by a range of procedures and guidelines which help to give employees an appropriate roadmap for behaviours. Together with external governance codes, they set the framework for the Company’s standards and governance. The Company strives to ensure the highest standards of corporate governance in all areas of its business. Throughout the 2012/13 financial year, the Company was in full compliance with the UK Corporate Governance Code 2010 (‘2010 Code’) against which this Report is prepared, apart from in relation to Board evaluation, details of which are set out at page 36. Although the 2012 edition of the UK Corporate Governance Code (‘2012 Code’) does not apply to the Company’s 2012/13 financial year, where appropriate, and as encouraged in the 2012 Code, this Report complies with it. We aim to achieve full compliance with the 2012 Code when we report our 2013/14 financial year and will continue closely to monitor developments in corporate governance practice. The 2010 Code is publicly available from the website of the Financial Reporting Council (‘FRC’) at www.frc.org.uk.

Anthony Fry Chairman22 May 2013

Chairman’s Introduction

A great deal of change has occurred at Dairy Crest and in the wider corporate world since January 2010 when I was appointed Chairman. Corporate governance is continually evolving and the pace of that evolution has increased since my appointment. It is right that boards give appropriate consideration to the broad range of issues affecting the businesses they lead. Focusing on just delivering good financial results is not enough; diversity, social and environmental impact, long-term legacy and sustainability, to name but a few, are all matters which boards must consider. The right approach to corporate governance helps to ensure that businesses are able to deliver long-term value for all of their stakeholders in the right way and an appropriate governance framework fulfils an essential role, providing a system for the direction and control of businesses.

Corporate governance

Governance framework

The Group’s business has become more focused and less complex over recent years with the sale of its stake in Yoplait Dairy Crest in 2009, the creation of a unified Dairies business and the subsequent sale of its French subsidiary St Hubert in August 2012. Moreover, since its last Report, the Company has undertaken a significant reorganisation. As a result, from the start of the current financial year, the Company consolidated its organisation into a single structure focused on customer driven growth with an integrated supply chain. The simplified structure in place as at the date of this Report (see diagram above) also enables simplified governance.

The BoardThe Board leads and controls the Company in the delivery of long-term success and the discharge of the Company’s obligations to its shareholders and other stakeholders. It is collectively responsible for the Group’s strategy, values and governance and ensuring that the resources required to meet the Group’s objectives are available within a framework of prudent controls. Certain matters have been reserved to the Board. The Board’s principal responsibilities include:•Approval of the Group’s long-term objectives and business

strategy.•Approval of the annual operating and capital expenditure budgets.•Approval of the Company’s Interim and Preliminary Results

Announcements and Annual Report and Accounts.•Declaration of interim dividends and the recommendation of a final

dividend.•Ensuring the maintenance of a sound system of internal control

and risk management.•Approval of the Company’s governance framework, including key

Group policies, for example Health and Safety and Business Conduct.

•Approval of resolutions to be put to shareholders at the Annual General Meeting (‘AGM’).

Each Director is aware of his/her responsibilities, individually and collectively, to promote the long-term success of the Company. Details of the frequency of Board meetings during the year together with Directors’ attendance are set out in the table at page 11. Changes to the membership of the Board and its Committees during 2012/13 are set out in the notes to the table on page 11.

CommitteesThere are five Committees of the Board: Audit; Remuneration; Nomination; Corporate Responsibility and the Management Board, to which the Board has delegated specific responsibilities. Each of the Board’s Committees’ terms of reference are published on the

RemunerationCommittee

AuditCommittee

GroupBoard

NominationCommittee

CRCommittee

Cheese

Demand HR Finance Legal

Spreads Dairies

ManagementBoard

Procurement Supply



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Group’s website and to the extent required, they comply with the 2010 Code. Separate reports from each of the chairmen of the Audit (pages 37 to 38), Nomination (pages 38 to 39), Corporate Responsibility (pages 26 to 29 and 39) and Remuneration (pages 41 to 52) Committees are included in this Report.

Board balance and independenceAt the date of this Report, the Board has eight Directors (three Executive, a Non-executive Chairman (who was independent on appointment) and four independent Non-executive Directors). Their biographies, responsibilities and Committee memberships are set out on pages 10 to 11. No Non-executive Director or the Chairman has any business or other relationship with the Group which may influence their independence or judgement and the Board believes them to be independent of management.

The Board believes that it has an appropriate balance of Executive and Non-executive Directors with a suitable breadth of experience and backgrounds to provide effective leadership for the Group. A highly proactive approach to the management of the Board is maintained to ensure that all Board appointments continue to reflect diversity. Further detail on the Board’s approach to diversity and the work undertaken to ensure balance and appropriate refreshment of the Board is given in the Nomination Committee’s report at pages 38 to 39.

Chairman and Chief ExecutiveThe division of responsibility between the Chairman and Chief Executive is set out in writing and has been approved by the Board. Anthony Fry leads the Board and is accountable for ensuring the Board’s effectiveness in discharging its responsibilities, including safeguarding shareholder and other stakeholder interests and ensuring effective communication with shareholders. In conjunction with the Chief Executive he sets the agenda for Board meetings ensuring that adequate time is available for all agenda items, in particular, strategic issues, and facilitates the effective contribution of all Directors. He promotes a culture of openness among the Board and ensures constructive relations between Executive and Non-executive Directors. He is supported by the Company Secretary in the discharge of his duties. Mark Allen has overall responsibility for the effective implementation of the strategy approved by the Board, for the Group’s business performance and day-to-day management of the Group’s operations, and for the effective management of the Group’s people and assets.

Appointment and re-electionThe articles of association of the Company ('Articles') provide that the Directors or the members, by ordinary resolution, may appoint a Director either to fill a vacancy or as an additional director. A Director appointed by the Directors shall retire at the next AGM following appointment and shall be eligible for election by the members. The Articles require all Directors to be elected annually. All Directors will stand for re-election at the Company’s 2013 AGM, except for Tom Atherton, who consistent with the Articles, will stand for election having been appointed since the last AGM. Having regard to the roles performed by each of the Directors, the individual input and contribution they make and their individual expertise and experience, the Board is satisfied that each candidate’s performance justifies nomination for election or re-election by shareholders. The contracts of employment of Executive Directors and the letters of appointment of Non-executive Directors are available for inspection by any person at the Company’s registered office during normal office hours and will also be available at the 2013 AGM for 15 minutes before and throughout the meeting.

Non-executive DirectorsAll Non-executive Directors (including the Chairman) confirmed on appointment that they had sufficient time available to fulfil their obligations as Directors and that they would inform the Board should the position change. Details of the Chairman’s other significant professional commitments are included in his biography (page 11). The Chairman will take up his appointment as chairman of the Premier League on 1 June 2013. He will shortly step down from his role as a member of the BBC Trust and has altered a number of his other commitments. The Board is satisfied that he continues to have sufficient time available to fulfil his obligations as a Director and Chairman. All significant commitments of Non-executive Directors were disclosed to the Board prior to their appointment and the Board was informed of subsequent changes.

As members of a unitary board, the Non-executive Directors scrutinise management’s performance in meeting agreed goals and objectives. The Board as a whole monitors the reporting of performance. The Chief Executive’s objectives, achievement of which influences his remuneration, are agreed with the Remuneration Committee following initial discussion with the Chairman. Performance against those objectives is scrutinised by the Remuneration Committee. The Audit Committee monitors and scrutinises the integrity of financial information as well as the robustness and defensibility of financial controls and systems of risk management. The Remuneration Committee is responsible for determining appropriate levels of remuneration for Executive Directors. The Nomination Committee has a prime role in selecting and appointing Directors and in succession planning. The appointment of Directors to or the removal of Directors from the Board is a matter reserved to the Board as a whole.

The Chairman periodically meets individually or collectively with the Non-executive Directors in the absence of the Executive Directors. The process for appraising the Chairman’s performance is set out on page 36. Were Directors to have unresolved concerns about the running of the Company or a proposed action, they would be recorded in the Board minutes. The Non-executive Directors recognise the principle that if on resignation from the Board a Director has unresolved concerns, that Director should provide a written statement to the Chairman for circulation to the Board. The concept that Non-executive Directors are free to question any executive decision of the Company is enshrined in the engagement letter of each Non-executive Director.

Induction and developmentThe Company Secretary ensures that Directors undergo a comprehensive induction programme on appointment. Directors variously receive independent training on technical accounting and other governance related matters from professional service providers and institutions and bulletins from the Group on developments in the dairy sector generally. The Directors keep abreast with the Group’s business through meetings and presentations by management below Board level and visits to operational sites.

Information and supportUnder the Chairman’s stewardship, the Company Secretary advises the Board on all governance matters and ensures Board procedures are followed and applicable rules and regulations complied with. He ensures that the Board is supplied in a timely manner with information in a form and of a quality appropriate to enable the Board to discharge its duties.




Corporate governance continued

Risk management and internal controlThe Board confirms that in accordance with principle C.2 of the 2010 Code, it has established and has maintained sound systems of risk management and internal control throughout the year and up to the date of this Report. It has periodically reviewed those systems during the year and has satisfied itself that they accord with the FRC’s Guidance on Internal Control (revised October 2005). It is not possible entirely to eliminate risk, accordingly, although the systems are designed to manage risks they cannot provide absolute assurance against material misstatement or loss. They provide reasonable assurance that potential issues can be identified promptly and remedied appropriately.

The key components of the risk management and internal control systems include:•The reservation to the Board of control of, amongst other matters,

all significant strategic, financial and organisational risks.•A management structure which includes clear lines of

responsibility and documented delegations of authority with appropriate policies, levels and rules for, amongst other matters, incurring capital expenditure or divesting of the Group’s assets.

•The operation of comprehensive financial and strategic planning, forecasting and review processes.

•Exercise of oversight by the Audit Committee, with input from the Group’s Head of Internal Audit, over the Group’s control processes designed to ensure the integrity of internal and external financial reporting.

•The preparation of monthly management accounts packs for the business, including KPI dashboards for each constituent part of the Group’s business, trading results, balance sheet and cash flow information with comparison against prior year and budget, all of which are reviewed by the Management Board and the Board.

•Monthly scrutiny of performance against budget (including analysis of key trends, variances and key risks and plans for mitigation as well as the continued appropriateness of those risks) in meetings known internally as Accounts Reviews where each key constituent part of the Group and key departments report performance year-to-date and forecast against budget to a panel comprising the Management Board and other senior executives.

•Formal documented financial controls and procedures including specific procedures for treasury transactions and the approval of significant contracts.

•Quarterly completion by each key constituent part of the Group of a self-assessment controls questionnaire that requires the approval of business unit management.

•Preparation and refreshment of risk registers which are reviewed by senior management, the Management Board and the Board with the assignment of individual responsibility for the ownership and mitigation of significant risks to members of the Management Board and independent assurance over the appropriate implementation and operation of mitigating activities provided by the Group’s Internal Audit function.

•Review by the Audit Committee of the Group’s risk register processes.

•Review and approval of the audit plan for the Group’s Internal Audit function together with progress against and revision of the plan as appropriate, throughout the year.

•Receipt by the Audit Committee and the Management Board of all Group Internal Audit reports detailing audit issues noted, corrective action plans and progress against those plans.

All Directors individually, the Board and each of the Board Committees, have access to the advice and services of the Company Secretary. He provides the Board with regular reports on corporate governance issues. Procedures exist enabling Directors to seek independent professional advice at the Company’s expense to assist them in the discharge of their duties.

EvaluationAn external evaluation of the Board and its effectiveness was conducted in the prior financial year. As Anthony Fry had been Chairman for only a year at the time, his performance was a key part of the evaluation, the aim being to identify from the outset of his Chairmanship areas of focus which the Board felt would add most value to its own performance. Whilst the Chairman and the Board received a very favourable evaluation, nonetheless the Directors have been striving individually and collectively to enhance their overall contribution to the Group. This year’s evaluation has commenced initially using questionnaires which have been followed up with individual interviews of all members of the Board by an external facilitator. The evaluation exercise has not yet been concluded; in due course a report on it will be published in the Corporate Governance section of the Company’s website. In recognition of the need identified in the previous year’s evaluation for the Board to be more visible within the wider business, Board meetings have been held at the Group’s Kirkby and Severnside sites and a far wider range of the Group’s management has been invited to attend and present at relevant parts of Board meetings.

The performance of the Executive Directors in the context of their management and operational responsibilities was appraised in the normal way, in accordance with the Group’s performance and development review process which applies to all management grade employees in the Group, irrespective of seniority. Under that process, the Chairman appraises the performance of the Chief Executive and the Chief Executive appraises the performance of the other Executive Directors. The outcome of the reviews of performance of all of the Executive Directors was scrutinised by the Remuneration Committee.

The Board’s Committees have considered their performance and such actions as are considered appropriate for further enhancement of their effective operation.



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Audit Committee Report

I am pleased to present to you my report on the work of the Audit Committee during the 2012/13 financial year. The Committee plays an important part in the governance of the Company. Its principal objectives are to provide effective oversight and review of the Group’s financial reporting processes, the system of internal control and management of risk, the internal and external audit processes and their effectiveness and the Group’s processes for monitoring compliance with laws and external regulations.

The Board considers that I have recent and relevant financial experience for the purposes of the 2010 Code. The other members of the Committee are Stephen Alexander and Richard Macdonald both of whom are independent Non-executive Directors. A standing invitation has been made by the Committee to all Non-executive Directors to attend the Committee’s meetings. The number of Committee meetings and attendance at them is shown in the table on page 11. The Chairman of the Board, Chief Executive, Group Finance Director, Director of Financial Control, Head of Internal Audit and representatives of the External Auditor attend meetings at the invitation of the Committee. During 2012/13 the External and Internal Auditors attended all meetings and met privately with the Committee. I provide the Board with a report on the work of the Committee after each of its meetings.

Andrew Carr-Locke Chairman of the Audit Committee22 May 2013

Terms of referenceThe Committee reviews its terms of reference at least annually, having regard, amongst other matters, to their continued compliance with the requirements of the Code, the FRC’s Guidance on Internal Control (revised October 2005) and the Guidance on Audit Committees (December 2010). Under its terms of reference, the Committee is responsible for providing advice to the Board on the Group’s Interim and Preliminary Results Announcements and Annual Report and Accounts; on accounting policies and on the control of its financial and business risks as well as reviewing the work of the Internal and External Auditors.

Audit Committee activityIn carrying out its work, the Committee embraced the requirements of provision C.3.2 of the 2010 Code and followed an annual work plan covering its principal responsibilities under its terms of reference. During 2012/13 and up to the date of this Report, amongst other matters, the Committee undertook the following work:•Monitored the integrity of the Group’s financial statements which it

reviewed prior to their submission to the Board.•Monitored the Group’s financial management and reporting

systems together with the Group’s risk management processes and controls; and satisfied itself of the integrity and their effectiveness. It reviewed any areas of control weakness identified by the Internal or External Auditors and monitored their mitigation and remediation.

•Reviewed significant accounting policies and tested the appropriateness of any proposed changes to those policies.

•Approved the external audit plan (including, scope, level of materiality, resources dedicated to the audit and the seniority, expertise and experience of the engagement team), the fee for delivering the audit and satisfied itself that the External Auditor would be able to conduct an effective audit for such fee which it recommended to the Board for approval.

•Satisfied itself as to the effectiveness of the audit, reviewed the findings of the audit, evaluated the performance, independence and objectivity of the External Auditor and the quantum and ratio of audit and non-audit fees.

•Approved the annual internal audit plan and progress against it throughout the year. It reviewed all reports on the Group from Internal Audit and review the interaction between the Internal Audit function and the External Auditor to ensure that the two worked well together and their activities complemented each other. Where the Internal Audit function identified action is required by management, the Committee reviewed and monitored management’s responsiveness and progress in implementing appropriate recommendations from the Internal Audit function. It reviewed Group Internal Audit’s charter. The Committee was satisfied as to the quality of the work of the Internal Audit function and that it was appropriately assisted in its work by management.

In addition to the Committee’s primary accountabilities related to the Group’s annual financial reporting cycle and associated audit, the Committee has other responsibilities including overseeing and reviewing the Company’s process for monitoring compliance with laws and regulations. During the year it reviewed the effectiveness of the Group’s compliance and whistleblowing procedures and was satisfied that they allow for appropriate investigation and suitable follow-up actions. The Committee undertakes an annual effectiveness review.

All outstanding matters related to the Committee’s 2012/13 work plan were completed at the Committee’s meeting on 13 May 2013.

External Auditor objectivity and independenceThe objectivity and independence of the External Auditor is critical to the integrity of the audit. During the year the Committee reviewed the External Auditor’s own policies and procedures for safeguarding its objectivity and independence. The audit engagement partner gave representations as to the External Auditor’s independence and confirmed that the External Auditor’s reward and remuneration structure includes no incentives for audit engagement partners to cross sell non-audit services to audit clients.

The Committee’s assessment is underpinned by the Group’s policy on the engagement of the External Auditor for the provision of non-audit services, which was revised and significantly strengthened in the prior year. The Committee conducted a review of the policy during the 2012/13 year and was satisfied that it continued to be appropriate. The policy contains a presumption against the use of the External Auditor for non-audit services. The External Auditor may only be engaged for the provision of non-audit services in contravention of that presumption where those services are expressly permitted under the policy; and where there is a demonstrable efficiency, audit enhancement or cost benefit resulting from the engagement of the External Auditor. Furthermore, before it may be engaged for the provision of such non-audit services, alternative providers must have been considered and discounted. Services which the External Auditor is prohibited from providing to the Group include, amongst others:•Bookkeeping services and preparation of financial information.•The design, supply or implementation of financial information

systems.•Appraisal or valuation services.• Internal audit services.•Actuarial services.•Executive management services including the secondment of staff

to perform management functions, recruitment services or other human resources functions, legal, broker, investment or banking services.





External Auditor’s feesDetails of fees paid to the External Auditor for audit services, audit related services and other non-audit services may be found at Note 2 to the Accounts on page 74.

Re-appointment of Ernst & Young LLP (‘Ernst & Young’)Ernst & Young was first appointed as External Auditor to the Company in 1996. There are no contractual restrictions on the Company with regard to its appointment. The Audit Committee has not considered it necessary since its initial appointment to require the firm to tender competitively for the audit work. In the light of the assessments and review undertaken and having considered a recommendation of the Committee to re-appoint Ernst & Young as the Company’s and Group’s External Auditor, the Board endorsed the Committee’s recommendation which was approved by shareholders in July 2012.

At its meeting in May 2013, the Audit Committee considered the appropriateness of the re-appointment of Ernst & Young as the Group’s External Auditor for the 2013/14 year. In doing so it took account of the Committee’s review of the External Auditor’s independence and objectivity, the ratio of audit to non-audit fees and the effectiveness of the audit process together with other relevant review processes conducted throughout the year.

The Committee is conscious of provisions of the 2012 Code, against which the Company shall formally report in its next reporting cycle, in particular, provision C.3.7 which recommends FTSE 350 companies should put their audit contract out to tender at least every ten years. The Committee does not currently have a formal policy dealing with the frequency with which the contract for the external audit should be tendered, or the tenure of the External Auditor. The 2012/13 audit was led by a new Audit Engagement Partner who assumed responsibility for the audit under the External Auditor’s normal rotation policy and the Committee remained satisfied as to the External Auditor’s independence. Nevertheless, the Committee shall continue to monitor best practice developments in the UK and EU and take an appropriate time in which to formulate a suitable policy.

Following its review, the Committee was satisfied that it should recommend to the Board the re-appointment of Ernst & Young as the Company’s and Group’s External Auditor at the AGM on 16 July 2013.

During the last two financial years, the Committee was focused on Board succession planning and successfully dealt with a number of changes to the composition of the Board, resulting in the appointment of Richard Macdonald, Stephen Alexander and Sue Farr. All of those appointments were achieved following preparation of outlines of the roles and capabilities required for the appointments and with the use of an external search consultancy. I am very pleased with the way the Board is working following all of the change which has occurred over the last two years. We have an excellent mix of styles and personalities amongst the Directors with an impressive range of backgrounds and business and other experience. Directors interact in a way which is thoughtful, challenging, supportive and intended to do the very best for Dairy Crest, its shareholders, employees and other stakeholders.

The Committee’s work on succession planning continued during 2012/13. The Nomination Committee was closely involved in the consideration and planning of the changes which the Group has made during the year to its structure and the impact of those changes not only on the Board, but also at the senior executive level below the Board. Succession planning remains a focus into the future and the Committee continues to maintain a watching brief for additional candidates who might improve further the balance of skills, backgrounds, experience, knowledge and diversity amongst the Board. The Committee is satisfied that the complementary balance of skills and experience which we have amongst the Directors means that there is resilience around the Board table. The Committee would nonetheless expect that when the Board next decides it would be appropriate to recruit a further Non-executive Director, experience which would enable candidates to chair the Audit Committee is likely to be a prerequisite.

The Committee’s work programme during the year included a review of its terms of reference, which it updated formally to include the Group’s policy to diversity. Consistent with the recommendations of the Davies Report ‘Women on Boards’, I published a statement on diversity for the Group (which can be found on the Company’s website www.dairycrest.co.uk) in October 2010. The Group has not adopted targets for female representation amongst the Directors. The Company interprets diversity in its widest sense and aims to achieve the best possible leadership for the Group by ensuring an appropriate balance of skills, backgrounds, experience and knowledge amongst its Directors, senior managers and other employees. The Committee and the Board recognise that there is a

Nomination Committee report

I am pleased to present to shareholders my report on the work of the Nomination Committee during the 2012/13 financial year. Details of the membership of the Committee and the attendance of members at Committee meetings during the year are set out on page 11. My role as Chairman of the Nomination Committee complements one of my key responsibilities as Chairman of the Board – to ensure the effective performance of the Board by ensuring it comprises individuals with a varied mix of backgrounds, skills and experience. Succession for the Board is a key focus for the Committee which also pays close attention to succession planning at senior executive level and more widely within the Group. The Committee is responsible for overseeing the selection and appointment of Directors and making its recommendations to the Board. In conjunction with the Chairman, it also evaluates the commitments of individual Directors and ensures that the membership of the Board and its principal committees are refreshed periodically.



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paucity of females amongst the senior management population of the Group, reflecting the food manufacturing industry generally but that improving female representation amongst that constituency would be advantageous. However, the Committee considers that, first and foremost, appointments must be made based on an objective assessment of who is the best person to fill a role, and that assessment must take into account the broadest possible assessment of candidates’ skills and backgrounds. The Group will continue to operate policies giving equal opportunities to all, irrespective of age, gender, marital status, disability, nationality, colour, ethnic origin, sexual orientation or religious affiliation.

The Committee reviewed the commitments of the Non-executive Directors and any changes which occurred to their commitments during the year. When the Committee considered my appointment to the Chairmanship of the Premier League, I took no part in its deliberations. The Committee was satisfied that all Non-executives continued to be in a position to devote sufficient time to the fulfilment of their duties as Directors.

The Committee was satisfied that given the performance of each of the Directors, their input, contribution, expertise and experience, it should recommend to the Board that they be nominated for election or re-election (as applicable) at this year’s AGM.

During the year, the Committee reviewed its own performance, one of the outputs of which was the formal review of its terms of reference. The Committee was satisfied with its performance and the contribution of its members.

Anthony Fry Chairman of the Nomination Committee22 May 2013

The Committee believes that the Group’s employees should be proud of their commitment to corporate responsibility, in particular the achievement, through their commitment to the corporate responsibility principles which the Group has adopted, of a platinum rating in the BITC corporate responsibility audit this year. They should be particularly proud of that achievement given that this is only the second year in which the Group has undertaken the BITC audit. The progress which the Group has made with corporate responsibility during the year is further exemplified by it being shortlisted for BITC’s company of the year award.

The Group’s achievements do not begin and end with awards. It is a basic tenet of the Committee’s approach that the Group’s corporate responsibility programme delivers not only, amongst other things, ethical, behavioural and community benefits, but must also deliver tangible benefits to the Group’s businesses. Once again, the Group has succeeded in that aim by, amongst other things, delivering financial as well as environmental benefits by reducing its carbon footprint and by delivering financial and human benefits by reducing the Group’s accident and incident rate through its continued focus on improving health and safety.

As you will see from the Corporate Responsibility report at pages 26 to 29, Dairy Crest is a business committed to corporate responsibility.

Richard Macdonald Chairman of the Corporate Responsibility Committee 22 May 2013

Management BoardThe Chief Executive chairs the Management Board which comprises the other Executive Directors and senior members of the Group’s executive team. Details of the members of the Management Board can be found at pages 10 to 12. The Management Board is responsible, amongst other matters, for implementing the Group’s strategic direction and monitoring the performance of the business and its control procedures on a day-to-day basis, as well as the day-to-day operations of the Group’s business, its performance against forecasts and budgets and profitability. The Management Board normally meets weekly.

Dialogue with shareholdersThe Board believes in the importance of an on-going relationship with its shareholders. It fully supports the principles encouraging dialogue between companies and their shareholders in the UK Corporate Governance Code and the UK Stewardship Code. The Chief Executive and Group Finance Director have primary responsibility for investor relations. They are supported by the Group’s Corporate Affairs Director who, amongst other matters,

Corporate Responsibility Committee report

I am pleased as Chairman of the Corporate Responsibility Committee to present the Group’s Corporate Responsibility Report to shareholders for the financial year 2012/13 at pages 26 to 29. The Committee oversees the Group’s corporate responsibility programme and ensures that key social, ethical and environmental risks are identified, assessed and prioritised. Sue Farr, each of the Executive Directors, the Company Secretary, the Group HR Director and the Corporate Affairs Director are the other members of the Committee. The frequency of the Committee’s meetings and attendance of Board members at those meetings is set out in the table at page 11.





organises presentations for analysts and institutional investors and holds meetings with key institutional shareholders to discuss strategy, financial performance and investment activities immediately after the Interim and Preliminary Results Announcements. Slide presentations made to institutional shareholders are made available on the Company’s website along with annual and interim reports, interim management statements, trading updates and company announcements. Announcements are made as appropriate and required through a Regulatory Information Service.

All the Non-executive Directors, and, in particular, the Chairman and Senior Independent Director, are available to meet with shareholders. Feedback from meetings with shareholders is provided to the Board to ensure that all Directors have a balanced understanding of the issues and concerns of shareholders. The Board receives feedback from the Chief Executive and the Group Finance Director on their meetings with shareholders, periodic reports on investor relations and independent feedback from the Company’s brokers on the views of major shareholders. The Chairman of the Board together with the Chairman of the Remuneration Committee has met with a number of shareholders during the year to consult on proposals for a new long-term incentive plan for the Group.

The notice of each AGM together with other related papers is dispatched to shareholders at least 20 working days before the meeting. All Directors attend the AGM and are available to answer shareholder questions before, during and after the meeting. The Chairman of the Board provides the meeting with an update on the progress and performance of the Group before the formal business of each AGM is addressed and a resolution is proposed relating to the Annual Report and Accounts. Details of the proxy voting on each resolution are announced at the AGM including the level of votes for and against resolutions and abstentions, and are posted on the Company’s website following the conclusion of the meeting. At the 2013 AGM, consistent with corporate governance best practice, voting at the AGM will be conducted on a poll and the result published on the Company's website after the meeting.

Financial and business reportingThe Directors recognise their responsibility to present a balanced and understandable assessment of the Company’s position and prospects. Their responsibility statement can be found at page 56.

An explanation of the Company’s business model can be found under ‘Long-term strategy’ in the Chief Executive’s review at page 14 and at pages 18 to 33. The Directors make appropriate going concern statements in the Interim and Preliminary Results Announcements and the Annual Report and Accounts. The statement in this Report and Accounts can be found at page 53.



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Key developments2012/13 2012/13 has been a year of progress for Dairy Crest in which we have continued to deliver against our strategy despite challenging trading conditions. The detail of this is covered in the Chairman’s statement and the Chief Executive’s review.

Payment of annual bonus is subject to achieving demanding short-term financial targets and personal objectives. The stretching financial targets were partly met in the year. Combined with their achievements against their personal objectives this has resulted in bonus payouts for the 2012/13 performance year of 52.5% of salary for Mark Allen and 49.4% of salary for Alastair Murray and Martyn Wilks.

Awards under the Long Term Incentive Share Plan (‘LTISP’) 2010 had a three-year vesting period to March 2013. 40% of the total award was based on the Group’s adjusted basic earnings per share (‘Adjusted EPS’) and 60% was measured against the Total Shareholder Return (‘TSR’) performance of the FTSE 250 (excluding financial services companies, real estate companies and investment trusts). The Company did not achieve the minimum Adjusted EPS target threshold or the TSR target threshold and therefore none of the awards will be released and all June 2010 share options have lapsed at 31 March 2013.

Further details on bonus and LTISP outcomes are given later in the Report.

Based on 31 March 2013 data and forecasts, awards under the 2011 and 2012 LTISPs look unlikely to vest in future years with regard to Adjusted EPS targets, however, currently their TSR performance is tracking above the vesting threshold.

Directors’ remuneration report

Dear ShareholderAs Chairman of the Remuneration Committee I am pleased to present my report on the work of the Committee during the 2012/13 financial year. Our remuneration policy continues to aim to encourage a performance based culture, to attract and retain high calibre personnel and align executives’ and shareholders’ interests. During the year the Committee has reviewed the components of executive remuneration in order to ensure that it remains appropriate in the context of the Group’s new structure following the reorganisation and that it meets these aims.

The Remuneration Committee’s review process identified that in general Executive Directors’ salaries are broadly in line with median market rates for FTSE 250 companies (excluding financial services) and that annual bonus rates were at the lower quartile level. Long-term incentives fell well below Dairy Crest’s peer group despite relatively good Company performance over recent years. The review also highlighted other challenges with the current long-term incentives which therefore led to a desire to change the structure to support better the strategy and objectives of the Company.

The proposed plan has been developed from first principles to focus the management team on the evolution and development of Dairy Crest over the longer term whilst ensuring strong alignment with shareholders. In developing an appropriate plan the Remuneration Committee identified a balanced scorecard of measures which together would generate increased value in the

business, support the delivery of long-term success and promote the desired corporate culture. The Remuneration Committee has also sought to identify metrics against which performance may be judged which are, in so far as is possible, objective and measurable.

In arriving at the new Long Term Alignment Plan (‘LTAP’) (full details of which are set out in the Remuneration Report at pages 43 to 45) which shareholders will be asked to approve at the forthcoming AGM on 16 July 2013, the Chairman of the Board and I met with a number of larger shareholders and shareholder representative bodies to consult on the detailed design of a plan which would achieve the Remuneration Committee’s aims and which shareholders would be confident would align executives’ interests with theirs.

The Remuneration Committee believes that the plan on which it has settled and which the Board has approved for proposal to shareholders at this year’s AGM, will help to attract and retain high calibre personnel, incentivise executives and will ensure alignment of executives’ and shareholders’ interests. For those reasons, the Remuneration Committee and the Board commend it to shareholders for approval at the AGM.

The Remuneration Report at pages 41 to 52 has been approved by the Board and also contains details of the other work undertaken by the Remuneration Committee during the year.

2013/142013/14 is expected to be another challenging year in light of the current economic environment. Our focus will continue to be on investment in brands and innovation, reductions in our cost base and improving the quality of earnings.

The Remuneration Committee has focused on the development of new long-term incentive arrangements, the LTAP (pages 43 to 45) and will be seeking shareholder approval at the forthcoming AGM. It is the belief of the Committee and the Board that this plan will attract and retain senior management talent for the benefit of the Company and its shareholders.

Mark Allen and Martyn Wilks have elected to forgo any inflationary salary increases this year reflecting the current economic environment. Consequently, there will be no base salary increases for these Executive Directors in 2013/14.

The Group has entered into an internal restructure that will be finalised during 2013/14. Alongside cost savings, better shared learning and greater customer and consumer focus, these changes see some new appointments at senior levels within the business, promoting talent from within and building human capital for the Group’s future. As part of these changes Tom Atherton succeeds Alastair Murray as Group Finance Director from 23 May 2013. Tom has been with the Group for seven years, having previously been in the role of Director of Financial Control. The promotion of Tom to the main Board recognises his success in previous roles and the efforts of the Company in planning succession for senior management positions. Tom Atherton’s initial salary as Group Finance Director of £200,000 p.a. is significantly below that of his predecessor and market rates. We would expect to see Tom’s salary increase over time towards market norms as he gains experience in the role.




Key elements of payThe remuneration structure and underlying principles on which the package is based, reflecting recent changes, are shown below. This policy also applies to 2012/13 unless otherwise stated.

Strategic objectives Operation and performance measures Quantum

Base salary Reflect assessment of market practice based on role and experience.

Benchmarked against executives with similar responsibilities in companies of comparable size and complexity.

There were no salary increases for Executive Directors in 2012/13.

At 1 April 2013:Mark Allen: £517,625Alastair Murray*: £344,597Martyn Wilks: £346,270Tom Atherton*: £200,000

Non-executive Directors’ fees

Remunerate Non-executive Directors.

The remuneration of the Non-executive Chairman is determined by the Board following a recommendation by the Chief Executive and the Remuneration Committee Chairman in consultation with PwC. The remuneration of Non-executive Directors is determined by the Board, also in consultation with PwC.

The total fees for Non-executive Directors remain within the limit of £600,000 set out in the Articles.

There are no pre-determined special provisions for Non-executive Directors with regard to compensation in the event of loss of office.

At 1 April 2013:

Role Fee p.a.

Non-executive Chairman £155,000

Non-executive Director (base) £38,000

Audit Committee Chair +£5,000

Corporate Responsibility Chair +£5,000

Remuneration Committee Chair +£5,000

Senior Independent Director +£5,000

There were no increases in fees in 2012/13

Pension Provide a market competitive level of provision with appropriate flexibility whilst minimising risk to the Group.

No further service accrual under final salary pension scheme from 1 April 2010 – replacement is the defined contribution scheme and/or salary supplement.

Mark Allen, Alastair Murray and Tom Atherton – employer contributions up to Annual Allowance plus cash supplements. Total benefit will not exceed 23% of salary.

Martyn Wilks – cash supplement of 23% of salary.

Benefits Provide market competitive benefits including company car benefit, life assurance cover and medical insurance.

Operated in line with normal benefits. All Executives receive a company car/car allowance and private medical insurance. Mark Allen, Alastair Murray and Tom Atherton receive life insurance cover up to 7 x annual salary. Martyn Wilks receives life insurance cover to 4 x annual salary.

Directors’ remuneration report continued

The 2012/13 reportThe UK Government Department for Business, Innovation and Skills (‘BIS’) is currently proposing changes to the layout and information required in Directors’ remuneration reports. In order to align with the emerging requirements of shareholders and move towards a more transparent approach to remuneration, Dairy Crest has chosen to adopt some of these principles early, where appropriate. As such, this report is split into two sections. The first section focuses on the policy set for 2013/14, including the objectives and operation of each element of pay, the context in which decisions for this policy were made and service contract details. The second gives a summary of the 2012/13 remuneration outcomes, including the total remuneration of the Directors and variable pay awarded in the year.

Approved by the Board and signed on its behalf by

Stephen Alexander Chairman of the Remuneration Committee

This report covers the reporting period from 1 April 2012 to 31 March 2013 and provides details of the Remuneration Committee and remuneration policy for the Company.

BIS is currently proposing changes to the layout and information required in Directors’ Remuneration Reports. In order to align with

their current requirements, the Remuneration Committee has chosen to adopt early some of these principles, where appropriate. These regulations will apply to all UK companies listed on a major stock exchange with financial years ending on or after 30 September 2013, and so the early adoption of certain aspects of these regulations in this Report is on a voluntary basis.

This Report complies with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The elements of the Report that are auditable under these regulations are highlighted throughout. Throughout the year ended 31 March 2013, the Company applied the provisions of the UK Corporate Governance Code relating to remuneration. This Report and the recommendations of the Remuneration Committee were approved by the Board on 22 May 2013 as recommended by the Remuneration Committee on 13 May 2013 and will be submitted to shareholders for approval at the 2013 AGM on 16 July 2013.

Summary of remuneration policy for 2013/14We seek to ensure that remuneration packages contribute to the delivery of long-term shareholder value. This is reflected in the Company’s annual bonus scheme and other incentive awards which are explained in more detail below.



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Strategic objectives Operation and performance measures Quantum

Bonus Ensure that annual reward is consistent with successfully achieving the short-term financial targets and strategic objectives of the Group.

Annual performance period.

75% relevant financial targets (including profit and cash targets) and 25% personal objectives linked to operational and strategic goals.

To deliver an appropriate balance between long-term and short-term reward, any bonus earned over 50% of annual salary is paid in the Company’s shares and deferred as below.

On target performance – 50% of salary.

Maximum opportunity – 100% of salary.

Deferred bonus Deliver appropriate balance between long-term and short-term reward and to build up Directors’ shareholdings in line with policy.

Deferred for three years, conditional on continued employment until vesting date.

Delivered in shares.

Any bonus over 50% of annual salary is deferred.

Long Term Incentive Share Plan

(to 2012/13 – proposed to be replaced by the LTAP for future years)

Encourage and reward continuing improvement in Group’s performance over the longer term.

Alignment of interest between participants and shareholders.

Three-year performance period.

Payable in shares.

60% subject to relative TSR performance against a comparator group comprising FTSE 250 constituents (as at the grant date) excluding financial service companies, real estate companies and investment trusts.

40% subject to Adjusted EPS growth targets.

Where possible, awards under the LTISP are granted under an HMRC-approved Executive Share Option Scheme arrangement. At 31 March 2013, there were 417,708 outstanding options under this scheme which were awarded as part of the 2011 and 2012 LTISP (2012: 141,826 awarded as part of the 2010 and 2011 LTISP).

Annual limit – 150% of salary.

Performance targets for all outstanding awards (i.e. the 2011 and 2012 grants).

TSR:18% vesting for median performance.

60% vesting for upper quartile.

Adjusted EPS:12% vesting for growth at RPI + 3% over the three year performance period.

40% vesting for growth at RPI + 15% over the three year performance period.

Long Term Alignment Plan

(proposed from 2013/14)

Encourage and reward continuing improvement in Group’s performance over the longer term.


Additional details of the rationale and structure of the new arrangement is provided under Note 2 below.

An award is granted based on the achievements over the prior year against the pre-grant performance scorecard, comprising of measures aligned to Dairy Crest’s strategic priorities.

Awards will be subject to a dividend underpin over the first three years of the vesting period.

Awards will be subject to a phased vesting requirement, with 50% of the award vesting in year 4 and 50% in year 5 following grant.

Award levels – 50-90% of salary for Executive Directors dependent on the assessment of performance against the scorecard.

If performance falls below a minimum level against the scorecard no award will be made.

Shareholding requirement


The shareholding requirement for Executive Directors is 100% of salary.

This will be increased to 200% of salary subject to approval of the LTAP.

* Alastair Murray will be succeeded by Tom Atherton, Dairy Crest’s Director of Financial Control, on 23 May 2013. Further details are contained in the section ‘Executive changes in the year’ on page 49.

Notes on policy table and components of remuneration1) Remuneration below board levelThe majority of employees participate in a bonus plan. The size of award and the weighting of performance conditions vary by level, with specific measures incorporated where relevant.

All members of the senior management team have historically participated in the LTISP arrangement and from 2013 a smaller group of senior management will participate in the LTAP, in line with the Executive Directors.

2) The new Long Term Alignment PlanAs set out in the Chairman’s introductory letter, a new long term incentive plan, the Long Term Alignment Plan, is planned to be introduced for Executive Directors to replace the current LTISP.

In the context of recent organisational changes, the Company’s strategic objectives and the current challenging external environment, the Committee carried out a review of Dairy Crest’s incentive arrangements and concluded that the LTISP should be replaced with a plan which aligns to the Company’s forward-looking strategy.




The proposed arrangement is intended to provide improved alignment with our stated strategic objectives. These are to build market leading positions in branded and added value markets, to focus on cost reduction and efficiency improvements, to reduce commodity risk in order to improve the quality of earnings and to generate growth in the business through acquisitions and disposals. The proposed design is also intended to recognise our position as a dividend stock which seeks to maintain delivery of value to shareholders by pursuing a progressive dividend policy.

The Board incorporated some changes to the LTAP following consultation with major shareholders. The LTAP has now been proposed for adoption for the 2013/14 financial year, and will be subject to a shareholder vote at the 2013 AGM.

Details of the proposed Long Term Alignment PlanThe proposed LTAP will operate as follows:

1. Pre-grant performance scorecardPre-grant performance conditions will be used to determine the level of the award based on a scorecard of measures aligned to Dairy Crest’s strategic priorities. The scorecard will be reviewed annually and amended as the Committee deems appropriate, with the scorecard to apply for the next grant usually determined in May of each year. The scorecard will always be weighted to ensure that at least 60% of the assessment reflects financial measures, and the make-up of the scorecard will reflect the strategic priorities deemed critical to the future of the Company.

Detailed disclosure will be given in the Remuneration Report each year in relation to the scorecard used to determine the next year’s grant, along with the Key Performance Indicators (KPIs) which will support each element and their respective weightings.

Detailed retrospective disclosure will also be provided, detailing how the grant level was decided based both on outcomes against the targets set and the context in which the grant decision was made.

The proposed scorecard for the initial grants under the award is provided below.

2. Award levelAward levels under the plan will be between 50% to 90% of salary for Executive Directors dependent on the assessment of performance against the scorecard. If performance falls below a minimum level against the scorecard no award will be made.

3. Vesting periodAwards will be subject to a phased vesting requirement, with 50% of the award vesting in year 4 and 50% in year 5 following grant.

Awards will be subject to an additional dividend underpin over the first three years of the vesting period.

Under this element dividend progression will be measured on a spot to spot basis. Clawback will apply in the event that the dividend declines over the three year period. An amount of the award proportional to the percentage decrease in dividend will be clawed back in this case up to a decline of 50%. For any dividend decline over this amount the Remuneration Committee will retain the discretion to determine the amount of appropriate clawback. The clawback applied in this case will be not less than 50% and up to 100% of the initial award, taking into account the circumstances at the time.

Furthermore, dividend cover must be maintained in the 1.5 to 2.5 times range over the three-year measurement period. In the event dividend cover is outside this range the Remuneration Committee will retain the discretion to apply additional clawback to awards as appropriate.

4. Shareholding requirementThe shareholding requirement for Executive Directors will be increased to 200% of salary from 100%.


Dividendunderpin

Years +3 +4 +5

Awardbased onpre-grantcriteria

50–90%of salary 50%

vesting

50%vesting



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Pre-grant performance scorecard for initial grants

Measure KPI Alignment with strategy Weighting

Profit Adjusted EBITDA target each year. Delivery of profit is core to the business and supports the progressive dividend policy.

30%

Balance sheet efficiency

ROCE target each year whilst maintaining net debt / EBITDA in the 1.0-2.0 x range.

Ensuring acceptable return on investment within a sustainable level of gearing.

20%

Corporate activity and efficiencies

Delivery of annual cost savings targets.

Delivery of synergies and return on investment following acquisitions or successful divestments (when relevant).

Ensuring cost savings are delivered on an on-going basis.

Ensuring that major acquisitions/ divestments deliver against relevant synergy and return targets.

15%

Brand growth Key brand value growth over one and three years versus markets in which they operate.

Brand growth is key to longer term business growth. 15%

Innovation Achieve each year the targeted proportion of revenue from innovation in previous three years.

Innovation is a key driver of productivity and growth. 10%

Corporate responsibility

A range of metrics including improvements in accident incident rates, reduced CO2 emissions & improved employee engagement.

Delivering results in a sustainable way which enhances reputation and stakeholder engagement.

10%

Dividend underpin To increase the dividend over the three years post-grant in line with progressive dividend policy whilst maintaining dividend cover within 1.5-2.5 x range for the three years post-grant.

Delivery of progressive dividend policy.

Service contracts & termination payments policyThe service contracts and letters of appointment include the following terms

Executive Director Date of contract Notice period

M Allen 18 July 2002 12 months

A Murray* 20 June 2003 12 months

M Wilks 7 January 2008 12 months

T Atherton* 23 May 2013 12 months

Non-executive Director Letters of appointment Notice period

A Fry 15 July 2009 3 months

A Carr-Locke 15 July 2009 3 months

R Macdonald 4 October 2010 3 months

S Alexander 4 October 2010 3 months

S Farr 6 October 2011 3 months


Letters of appointment for all Non-executive Directors include a three month notice period. It is the Company’s policy that Non-executive Directors should not normally serve for more than nine years. A summary of the terms of appointment of Non-executive Directors is available on the Company’s website.

Details of the Directors offering themselves for election and re-election at the forthcoming AGM are set out on page 35 (with biographical details at pages 10 to 11).

In accordance with best practice as set out in the Code, all Executive Directors have a notice period not exceeding one year. All such Directors’ service contracts provide explicitly for termination payments in the event of termination by the Company other than on grounds of incapacity or in circumstances justifying summary termination.

For Mark Allen, payments on termination are calculated as 90% of the value of annual salary, benefits, pension and bonus for the notice period.

For Martyn Wilks and Tom Atherton and for future appointments, payments on termination are calculated as the value of annual salary, benefits and pension for the notice period. There is a mitigation clause in the service contract with respect to termination payments such that certain compensation payments are deferred.

A summary of the service agreements of the Executive Directors is available on the Company’s website, www.dairycrest.co.uk





Remuneration scenariosA significant proportion of a Director’s total remuneration package is variable, being subject to the achievement of specified short-term and long-term business objectives. The charts below show the composition of total remuneration at minimum, target and maximum performance scenarios for the Executive Directors, based on the proposed LTAP.

Director Value of package (£000s) Composition of package (%)

M Allen

A Murray*

M Wilks

T Atherton*


Notes to the scenariosFixed Remuneration: This element comprises salary as at 1 April 2013, pension benefits (including salary supplement) and other fixed benefits (company car, etc). As these are based on previous emoluments, this figure for the new Board member, Tom Atherton, comprises salary only.

Annual Variable Remuneration: This element shows annual bonus (including any amount deferred), at 100% of salary in the maximum scenario and 50% of salary in the target scenario.

Long-term Variable Remuneration: This element shows remuneration in respect of the LTAP, at 90% of salary in the maximum scenario and 70% of salary in the target scenario. No allowance is made for share price growth.

Statement of consideration of remuneration elsewhere in the CompanyThe Remuneration Committee has oversight on remuneration matters of the broader senior management group beyond Executive Directors.

Statement of consideration of shareholder viewsAs set out in the details surrounding the operation of the new LTAP, the Board consulted with several larger shareholders on the proposal to replace the current LTISP.

In keeping with continuing dialogue with shareholders, the Remuneration Committee Chairman, along with the Company Chairman, met with a number of our large shareholders as part of a detailed consultation process. The principles and rationale for change and a high level framework for the new plan were discussed.

After this initial stage, the Remuneration Committee and the Board considered the feedback received and consulted those shareholders with the final proposed plan. The plan has now been proposed for adoption for the 2013/14 financial year, and will be subject to a shareholder vote at the 2013 AGM.

0 500 1000 1500 17501250750250 0 40 80 1006020

Maximum

Target

Minimum (Fixed)

Key: Fixed Remuneration Annual Variable Remuneration Long-term Variable Remuneration

0 200 400 600 800 1000 1200

Maximum

Target

Minimum (Fixed)0 40 80 1006020

0 200 400 600 800 1000 1200

Maximum

Target


0 100 200 300 400 500 600

Maximum

Target




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Summary of 2012/13 remuneration outcomes

Total remuneration for each Director – auditedThe table below sets out the analysis of total remuneration for each Director. An explanation of how the figures are calculated follows the table. The total remuneration for each Director reflects the performance of the Company and the contribution each individual has made to the on-going success of the Company.

Base Long term Employer’s Total

Director salary/ Cash allowances Taxable Total emoluments incentive pension remuneration

(£’000s) fees Pension Other benefits Bonus 2012/13 2011/12 vesting contributions 2012/13

Non-executive Chairman

A Fry 155 – – – – 155 155 – – 155

Executive Directors

M Allen 518 110 – 28 272 928 904 – 9 937

A Murray 345 58 1 21 170 595 603 – 22 617

M Wilks 346 80 – 21 171 618 606 – – 618

Subtotal 1,209 248 1 70 613 2,141 2,113 – 31 2,172

Non-executive Directors

H Mann (resigned 18 May 2012) 6 – – – – 6 48 – – 6

A Carr-Locke 43 – – – – 43 43 – – 43

R Macdonald 47 – – – – 47 43 – – 47

S Alexander 42 – – – – 42 38 – – 42

S Farr 38 – – – – 38 16 – – 38

Subtotal 176 – – – – 176 188 – – 176

Total 1,540 248 1 70 613 2,472 2,456 – 31 2,503

Notes Basic salary, benefits, bonus and long term incentives are defined on pages 42 to 43. Bonuses detailed above include the full value of bonus entitlement including bonus to be deferred in shares being £12,941 for Mark Allen and nil for Martyn Wilks and Alastair Murray. (There were no deferred bonuses in 2011/12).

Cash allowances principally comprise pension related salary supplements. Mark Allen and Alastair Murray were members of the defined contribution scheme throughout 2012/13. The Company made contributions up to the £50,000 limit for employee and employer contributions. Further cash supplements were paid such that the total of cash supplements and employer contributions amounted to 23% of basic salary. Martyn Wilks was not a member of any Company pension scheme in the year ended 31 March 2013 and received a salary supplement of 23% of basic salary.

BonusPayment of the bonus is subject to the achievement of demanding short-term financial targets and personal objectives. To ensure that an appropriate balance is maintained between long-term and short-term reward, any bonus earned over 50% of annual salary is paid in the Company’s shares and deferred for a three-year period subject to continued employment.

Stretching financial targets (encompassing adjusted operating profit and net cash generation) were partly met in the year (26% and 100% of maximum payout for these elements respectively). Combined with their personal objectives this has resulted in bonus payouts for the 2012/13 performance year of 52.5% for Mark Allen and 49.4% for Alastair Murray and Martyn Wilks.

Long Term Incentive Share Plan 2010Awards under the LTISP 2010 had a three-year vesting period to 31 March 2013. 40% of the total award was based on the Group’s Adjusted EPS and 60% was measured against the TSR performance of the FTSE 250 (excluding financial services companies, real estate companies and investment trusts). The Group did not achieve the minimum Adjusted EPS target threshold or the TSR target threshold and therefore none of the awards will be released.




Measure Threshold Maximum OutcomeVesting (as % award granted in 2010)

TSR performance against FTSE 250 constituents (60% of total LTISP award)

Median (30% of TSR award vests)

Upper quartile or above (100% of TSR award vests)

Below median 0%

Adjusted EPS target (40% of total LTISP award)

RPI + 9% over the three year performance period (30% of Adjusted EPS award vests)

RPI + 24% over the three year performance period (100% of Adjusted EPS award vests)

Less than RPI + 9% 0%

Overall outcome 0%

Total pension entitlements – auditedThe pension entitlements of the Directors from the Dairy Crest Group Pension Fund, a defined benefits scheme, were as follows:

Age

Length ofpensionable

serviceYears

Accumulatedtotal accrued

pension at31 March 2013

£000

Accumulatedtotal accrued

pension at31 March 2012

£000

Increase inaccrued

pension duringthe year*

£000

Transfer valueof increase in accrued

pension£000

M Allen 53 19.3 37 36 – –

A Murray 52 7.2 32 31 – –

* Excluding inflation

The transfer value of each Director’s accrued benefits at the end of the financial year is set out below. The transfer values shown in the table have been calculated in accordance with actuarial guidance note GN11. Transfer values are determined based on financial conditions at the date of calculation including stock market values and bond yields. Following the closure of the pension scheme to future accruals, there is no increase in accrued pension during the year other than inflationary increases.

Total increase in accrued

pension during the year

£000

As at31 March 2013

£000

As at31 March 2012

£000

Director’scontributions

in the year£000

Movement lessDirector’s

contributions£000

M Allen 1 1,202 1,278 – (76)

A Murray 1 541 557 – (16)

NotesThe scheme closed to future accrual at 31 March 2010 and length of pensionable service is unchanged from then.

Mark Allen decided to draw benefits from 31 March 2010 and receives an annual pension and received a cash lump sum of £221,510 in 2010/11. Mark Allen’s accrued pension immediately before electing to draw it early was £63,931 per annum (including seven months’ additional pension service). The future pension payable at March 2011 was less than £63,931 per annum due to the application of an early retirement reduction and because some pension was exchanged for a lump sum cash payment. Benefit accrual ceased on 31 March 2010 and Mark Allen and Alastair Murray are no longer paying contributions into the scheme.

The decrease in transfer value in the year is a result of an increase in the post-retirement discount rate assumption at March 2013 compared to March 2012.

Variable pay awarded during the financial yearLong Term Incentive Share Plan 2012The award made under the LTISP 2012 was made on the same basis as the awards made in 2010 and 2011, i.e. with 40% of the total award based on Adjusted EPS growth and 60% of the total award based on TSR performance against the FTSE 250 (excluding financial service companies, real estate companies and investment trusts). Performance against both Adjusted EPS and TSR is measured over a three-year period.




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Details of the LTISP 2012 award are set out in the table below:

LTISP 2012 operation

Type of award Shares

Face value awarded (% of salary) 100%

Performance period 1 April 2012 – 31 March 2015

Performance conditions Adjusted EPS performance targets TSR performance compared to the FTSE 250 (excluding financial services companies, real estate companies and investment trusts)

Weighting 40% 60%

Threshold Adjusted EPS growth at RPI + 3% over the three year performance period

30% of Adjusted EPS award vests

Dairy Crest ranked at median

30% of TSR award vests

Maximum Adjusted EPS growth at or above RPI + 15% over the three year performance period

100% of Adjusted EPS award vests

Dairy Crest ranked at or above upper quartile

100% of TSR award vests

External appointmentsExecutive Directors may be invited to become Non-executive Directors of other companies and it is recognised that exposure to such duties can broaden their experience and skills which will benefit the Company. External appointments are subject to agreement by the Chairman and reported to the Board. Any external appointment must not conflict with a Director’s duties and commitments to Dairy Crest.

During the year, Mark Allen held the position of Non-executive Director including Audit Committee member and Remuneration Committee member at Howdens Joinery Group plc, with fees in association with this work totalling £40,000 (2012: £23,000).

Remuneration of employeesFor 2012/13 there was a 1% increase in salaries for administrative and operative level employees that was deferred by nine months from the normal review date. The Directors and management group did not receive an increase.

Executive changes in the yearAlastair Murray will leave the Board on 23 May 2013, following the announcement of the Group’s preliminary results. He will be succeeded by Tom Atherton, who currently holds the position of Director of Financial Control.

The termination payment to Alastair Murray on leaving employment will be £553,220. Other emoluments made in connection with Alastair Murray’s departure will include the release of deferred bonus shares and pro-rated release of outstanding LTISP awards that meet the required performance conditions at the end of the relevant performance periods.

The termination payment level calculated in accordance with the provisions of Alastair Murray’s service contract, which entitles him to an amount based on his salary, non-cash benefits, pension benefits and 50% of the maximum annual bonus potentially payable in the financial year of his departure. This amount is pro-rated by a factor of 0.9 for accelerated payment under a contractual formula.

On appointment to the role of Finance Director, Tom Atherton’s remuneration will comprise an annual base salary of £200,000. This is below the current incumbent’s salary and the market practice for comparable roles in relevant comparator companies, and is reflective of his experience at the present time. In line with our remuneration policy, his salary will be moved towards the median for comparable roles over time and is therefore expected to progress significantly ahead of market inflationary increases, subject to satisfactory performance and reflecting his development and increasing experience in the role.

Tom Atherton’s bonus opportunity for 2013/14 will be 100% of salary at maximum and 50% of salary for on target performance, with any bonus over 50% of annual salary deferred in Company shares in line with current Executive Director arrangements. The long-term incentive award to be made in 2013/14 will be consistent with the policy for Executive Directors in respect of both quantum and performance conditions. Tom Atherton will also be expected to build up a shareholding of 100% of salary (increasing to 200% of salary on approval of the LTAP), over a reasonable period of time in line with Dairy Crest’s remuneration policy, and will also be eligible for pension and other benefits consistent with his role.

Composition of the Remuneration CommitteeThe Board has appointed a Remuneration Committee of Non-executive Directors of the Company. During the year the Committee consisted of:• Howard Mann (Chairman until 18 May 2012); • Stephen Alexander (Chairman from 18 May 2012); • Andrew Carr-Locke; and• Sue Farr (from 18 May 2012).




In March 2012, Howard Mann announced his intention not to seek re-appointment as a Non-executive Director having completed nine years’ service with the Company. He stepped down as a Director of the Company and as Chairman of the Remuneration Committee on 18 May 2012. Stephen Alexander became Chairman of the Remuneration Committee from that date.

Anthony Fry attends the Remuneration Committee by invitation. Members of the Remuneration Committee have no potential conflicts of interest arising from cross-directorships and they are not involved in the day-to-day running of the Company. The Committee also received materials, assistance and advice on remuneration policy from Rob Tansey (HR Director until his resignation in July 2012), Gareth Hopkins (Interim HR Director) and Robert Willock (appointed HR Director on 1 April 2013). The Remuneration Committee has appointed PricewaterhouseCoopers LLP (‘PwC’) to provide advice on executive remuneration. During the year, PwC also provided other consultancy services to the Group.

The Chief Executive attends all meetings by invitation, but is not present at any discussions relating specifically to his own remuneration.

Role of the Remuneration CommitteeThe Remuneration Committee is responsible for the broad policy with respect to senior executives’ salary and other remuneration. It specifically determines, within remuneration principles agreed with the Board, the total remuneration package of each Executive Director and reviews with the Chief Executive, the remuneration packages for other senior executives. A copy of the terms of reference of the Committee can be found on the Company’s website.

In 2012/13, the Committee met six times. Details of attendance are shown on page 11 and the Committee discussed, amongst others, the following matters:

Meeting Agenda items discussed

April • Implications of BIS reporting requirements• Review of operations of incentive structures

May • Approval of 2011/12 Bonus and LTISP outcomes• Approval of 2012/13 Bonus Rules and Targets and grant for 2012/13 LTISP• Approval of Directors’ Remuneration Report

November • BIS reporting requirements

December • Review of long-term incentive structures

January • Further review of long-term incentive structures

March • Review of projected 2012/13 Annual Bonus and LTISP outcomes• Succession planning• Proposed LTAP arrangement

Statement of shareholder votingThe table below shows the advisory vote on the 2011/12 remuneration report at the 2012 AGM.

Number of votes cast For Against Abstentions

64,984,337 63,230,986 (97.3%)

203,795(0.3%)

1,549,556(2.4%)

The Committee believes the 97.3% votes in favour of the remuneration report shows very strong shareholder support for the Group’s approach to remuneration.

Additional information – audited

Total shareholdings of Directors Directors are encouraged to build a shareholding in the Company equivalent to 100% of salary (increasing to 200% of salary on approval of the LTAP) and to this end would normally retain 50% of net proceeds from share plans and deferred bonus share awards until that shareholding is achieved.




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The interests of the Directors at the end of the year in the ordinary share capital of the Company were as follows:

As at 31 March 2013Resignation/ beneficial

As at 31 March 2012Beneficial

As at 31 March 2013Deferred shares*

As at 31 March 2012Deferred shares*

A Fry 3,000 3,000 – –

M Allen 143,798 139,801 52,704 52,704

A Murray 154,018 150,021 36,571 36,571

M Wilks 22,497 18,500 36,748 36,748

A Carr-Locke 2,000 2,000 – –

R Macdonald 1,000 1,000 – –

S Alexander 1,000 1,000 – –

S Farr 4,465 4,465 – –

H Mann** 20,000 20,000 – –

* This analysis excludes shares resulting from reinvested dividends on deferred shares, as Directors have no legal or beneficial interest in such shares until, and if, the Remuneration Committee exercises its discretion to award such shares at the end of the vesting period.

** Holding at date of resignation.

Shareholdings above exclude options under the LTISP scheme and deferred shares for Executive Directors as part payment of bonuses which are shown in a separate column. These deferred shares are released three years after the year in which the bonus was earned.

Further details on shares held under option by Directors are set out in the table below. There was no movement in deferred bonus shares or deferred bonus share options during the year:

(Audited table) Bonus yearYear ofaward

Balance at1 April 2012 Awarded

Dividend reinvestment Issued

Balance at31 March 2013

Mark Allen 2009/10 2010 52,704 – – – 52,704

2010/11 2011 5,070 – – – 5,070

Alastair Murray 2009/10 2010 36,571 – – – 36,571

2010/11 2011 3,409 – – – 3,409

Martyn Wilks 2009/10 2010 36,748 – – – 36,748

2010/11 2011 3,426 – – – 3,426

The share prices at the date of award for 2010 and 2011 were 395 pence and 368 pence respectively. (Note that 2011 deferred bonuses were granted as options rather than as deferred shares. These will be exercisable for up to ten years from the award date). No Director holds a non-beneficial interest in the Company’s share capital. There have been no changes in Directors’ shareholdings between 31 March 2013 and 22 May 2013.

Shares under LTISP AwardsActual and potential awards held by Executive Directors under LTISP at the beginning and end of the year, details of actual awards, awards vested during the year and their value, are as follows:

(Audited table)Year ofaward

Balance at1 April 2012 Awarded

Exercised – retained

Exercised – sold Lapsed

Balance at31 March

2013

Market price at original

award

M Allen 201020112012

129,721140,149

–

9,95610,755

160,097

–––

–––

(139,677)––

–150,904160,097

398.9p368.0p329.0p

A Murray 201020112012

90,01293,302

–

6,9087,160

106,581

–––

–––

(96,920)––

–100,462106,581

398.9p368.0p329.0p

M Wilks 201020112012

90,44993,754

–

6,9417,195

107,098

–––

–––

(97,390)––

–100,949107,098

398.9p368.0p329.0p

Notes to the LTISP table: – Awarded shares include reinvestment of dividends. – The above table includes options granted under the ESOS. – For the 2010, 2011 and 2012 awards, 60% of the award is subject to relative TSR performance against a comparator group comprising FTSE 250 constituents (excluding financial service companies, real estate companies and investment trusts) and 40% is subject to Adjusted EPS growth targets.

– The 2010 awards vested at 0% – LTISP 2011 and LTISP 2012 performance measurement and vesting periods end on 31 March 2014 and 31 March 2015 respectively. Options will be exercisable from 1 July 2014 and 3 July 2015 respectively.




– The closing share price on 31 March 2013 was 429 pence (31 March 2012: 333 pence). – There were no LTISP awards or exercises between 31 March 2013 and 22 May 2013.

Performance graphThe graph below sets out for the five years ended 31 March 2013 the total shareholder return of Dairy Crest Group plc and of the FTSE 250 index (excluding investment companies) of which the Company is a constituent member.

Executive Share Option SchemeThe Dairy Crest Executive Share Option Scheme (‘ESOS’) was established on 30 July 1996 for Directors and certain senior management and expired in July 2006. A new ESOS was adopted at the AGM 2006 (‘ESOS 2006’). Part A is approved by the Inland Revenue and Part B is an unapproved scheme. Options are granted to participants at prices determined by the Remuneration Committee which may not be less than the market price of the shares as derived from the London Stock Exchange Daily Official List at the time of grant. At 31 March 2013, there were 417,708 outstanding options under this scheme which were awarded as part of the 2011 and 2012 LTISP (2012: 141,826 awarded as part of the 2010 and 2011 LTISP).

Sharesave SchemeThe Dairy Crest Sharesave Scheme was first established on 30 July 1996 and there have been nine grant phases since that date. The life of the Sharesave Scheme was extended in August 2006 to allow options to be granted until the twentieth anniversary of flotation, being August 2016.

The Sharesave Scheme is open to all eligible employees and full time Directors. Employees enter into an approved savings contract over a three year term to make monthly contributions up to an overall maximum of £250 per month. At the end of the term, members have the right to buy ordinary shares in the Company at a price fixed at the time of the option grant. The price at which the options may be offered may not be less than 80% of the market price at the time of option grant.

A Sharesave grant was made in December 2012 at 281 pence per share in which 1,312 employees participated. We intend to make a further grant in 2014/15.

Directors’ Sharesave options At 31 March 2013 the Directors held the following share options under the Sharesave Scheme.

At 31 March

2012Granted

in yearExercised

in yearAt 31 March

2013Exercise

price Exercise period

M Allen 3,997 3,202 (3,997) 3,202 281p 3/2016 – 9/2016

A Murray 3,997 3,202 (3,997) 3,202 281p 3/2016 – 9/2016

M Wilks 3,997 3,202 (3,997) 3,202 281p 3/2016 – 9/2016

The share options in the above table at 31 March 2013 represent the total awards made in 2012/13 under the 2012 Sharesave Scheme at 281 pence per share assuming participants continue to save throughout the three year life of the Scheme.

On 1 October 2012 Mark Allen, Alastair Murray and Martyn Wilks each exercised Sharesave Scheme options over 3,997 shares and retained the shares. The unrealised gain on their exercise of the Sharesave Scheme options was £4,645 for each.

The mid-market price of the above shares as at the close of business on 31 March 2013 was 429 pence per share. During the year between 1 April 2012 and 31 March 2013 the mid-market closing price ranged from 290 pence per share to 444 pence per share.

Stephen Alexander Chairman of the Remuneration Committee22 May 2013


Dairy Crest – Relative Total Shareholder Return over five years

FTSE 250 (excluding investment companies)

Dairy Crest Group plc

March 08 March 09 March 10 March 11 March 12 March 1340

60

80

100

120

140

160

180



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Principal activitiesThe 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 at pages 18 to 33.

Going concernThe 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 on pages 14 to 15, the Business review on pages 18 to 33 and the review of principal risks and uncertainties on pages 16 to 17. The financial position, cash flows, liquidity position and borrowing facilities are described in the Financial review on pages 30 to 33. 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 cash to 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 2013, effective headroom was £573.1 million. Since 31 March 2013 the Group has repaid certain private placement notes details of which are set out in Note 34 ‘Post balance sheet events’ on page 112.

There were no breaches of bank covenants in the year ended 31 March 2013 and projections do not indicate any breaches in the foreseeable future. Since the sale of St Hubert in August 2012, 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 reviewThe information satisfying the Business review requirements of s417 of the Companies Act 2006 is set out in the Corporate governance section of the Annual Report; the Chairman’s Statement on page 13; the Chief Executive’s review on pages 14 to 15; the Business review on pages 18 to 33; the review of the principal risks and uncertainties on pages 16 to 17; and the Group Key Performance Indicators on page 5.

Group resultsThe Group’s consolidated income statement set out on page 58 shows a profit for the financial year of £54.5 million compared with £17.1 million loss in 2011/12.

Post balance sheet eventsOn 18 April 2013 the Group repaid €106.9 million (£92.7 million) and £7.2 million of 2007 notes as a premium of £8.7 million. £69.2 million of these notes were due for repayment in April 2014 and £30.7 million were due for repayment in April 2017. On the same date, the Group also paid £40 million to the Dairy Crest Group Pension Fund and it granted the Fund a floating charge over maturing cheese inventories with a maximum realisable value of £60 million.

DividendsThe Directors are recommending a final dividend of 15.0 pence (2011/12: 14.7 pence) per ordinary share, which if approved, will be paid to members on the register at the close of business on 28 June 2013. Together, the final dividend and interim dividend (5.7 pence per ordinary share paid on 24 January 2013) make total dividends for the year of 20.7 pence per ordinary share (2011/12: 20.4 pence).

Share capitalThe authorised and issued share capital of the Company together with details of movements in the Company’s issued share capital during 2012/13 are shown in Note 24 to the financial statements. As at the date of this report, 136,608,131 million ordinary 25p shares were in issue and fully paid with an aggregate nominal value of £34.2 million.

Rights and obligations attaching to sharesThe 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 sharesSubject 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 dividendsThe 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 associationChanges to the Articles must be approved by the shareholders in accordance with the legislation in force from time to time.

No compensation for loss of officeThe 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.

Additional statutory information




Issue of sharesAt the AGM on 17 July 2012, 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 £22,226,726.

Purchase of own sharesAt the AGM on 17 July 2012, shareholders granted the Company authority to make market purchases of up to 13,336,036 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.

PensionsOn 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 controlA 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 facilitiesNon-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.

Supply agreementsCertain supply agreements contain provisions whereby on a change of control of the Group, they may be terminable. Accordingly, a change of control of the Group could result in the need for the Group to source alternative supply for certain materials.

Essential contractsIt 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 shareholdingsDuring the period and up to 22 May 2013, 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.

NotifiedNo. of shares

Notifiedpercentage

of issuedshare capital

Legal & General Group plc (L&G) – < 3%

No notifications have been received in the period from 1 April 2013 to 22 May 2013.

Directors’ interestsDetails 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 on page 51.

Details of the Directors’ service contracts and letters of appointment appear in the Remuneration Report on page 45.

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 insuranceThe Company maintains liability insurance for its Directors and Officers and those of its subsidiaries. The Directors, Company Secretary and other Officers of the Company and those 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.

EmployeesAt the end of March 2013, the Group employed approximately 4,900 people. It 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.

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 the Scheme are set out in Note 26 to the financial statements and at page 52 of the Directors’ Remuneration Report.

Additional statutory information continued



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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 developmentThe 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.

Land and buildingsHaving 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 policyThe Company is a holding company and had no amounts owing to trade creditors at 31 March 2013 (2011/12: nil). The Group’s creditor days outstanding at 31 March 2013 were 24.3 (2011/12: 23.6 days) of purchases. With the exception of milk suppliers, the Group has standard payment terms of 60 days from invoice date. Payment terms for purchases under major contracts are agreed as part of the contract negotiations.

Financial instrumentsDetails of the use by the Company and its subsidiaries of financial instruments and any related risk management objectives and policies (including hedging policy) and exposure, including to price risk, credit risk, liquidity risk and cash flow risk (of the Company in connection with such financial instruments) can be found at Note 30 to the financial statements.

Charitable and political donationsNo political donations or expenditures were made or incurred during the year. Charitable donations amounted to £0.1 million (2011/12: £0.1 million). The Corporate Responsibility section of the Business review at pages 26 to 29 provides additional detail on the charitable activities of the Group and its employees.

Disclosure of information to the AuditorSo 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 is unaware. Each of the Directors has taken all steps that they might reasonably be expected to have taken in order to (i) make themselves aware of any relevant audit information and (ii) establish that the 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 at page 57.

Directors’ responsibility statementsThe responsibility statements required under Disclosure and Transparency Rule 4.1 are set out on page 56.

Annual general meetingThe AGM will be held at Eversheds LLP, One Wood Street, London, EC2V 7WS on Tuesday, 16 July 2013 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.

AuditorErnst & 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 Secretary22 May 2013




The Directors are responsible for preparing the Annual Report and the Group and Company’s financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union.

Under company law the Directors must not approve the Group and Company’s financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements the Directors are required to:•present fairly the financial position, financial performance and cash

flows of the Group and Company;• select suitable accounting policies in accordance with IAS 8,

‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently;

•present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

•provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the financial position of the Group and Company and performance of the Group;

• state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and

•make judgements and estimates that are responsible and prudent.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and of the Company and hence for taking reasonable steps for the prevention and detection of fraud or other irregularities.

The Directors are responsible for preparing the Directors’ Report, the Directors’ Remuneration Report and the Corporate Governance Statement in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules.

The Directors are also responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

DTR 4.1 StatementEach of the Directors, the names and functions of whom are set out on pages 10 to 11 confirms that to the best of his knowledge, they have complied with the above requirements in preparing the Group and Company’s financial statements in accordance with applicable accounting standards and that the financial statements give a true and fair view of the assets, liabilities and financial position of the Group and Company and of the Group’s income statement and the Company’s profit for that period. In addition, each of the Directors confirms that the management report represented by the Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Mark Allen Chief ExecutiveAlastair Murray Finance Director

The Report of the Directors from pages 2 to 56 inclusive was approved by the Board on 22 May 2013 and is signed on its behalf by:

Robin Miller Company SecretaryDairy Crest Group plcClaygate HouseLittleworth RoadEsherSurrey KT10 9PNRegistered in England and Wales No. 316289722 May 2013

Statement of Directors’ responsibilities in relation to the Group and Company financial statements

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Independent auditor’s report to the members of Dairy Crest Group plc

We have audited the financial statements of Dairy Crest Group plc for the year ended 31 March 2013 which comprise the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated and Parent Company balance sheets, Consolidated statement of changes in equity, Parent Company statement of changes in equity and the Consolidated and Parent Company statement of cash flows and the related notes 1 to 35. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorAs explained more fully in the Directors’ Responsibilities Statement set out on page 56, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statementsIn our opinion:• the financial statements give a true and fair view of the state of the

Group’s and of the parent company’s affairs as at 31 March 2013 and of the Group’s profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006In our opinion:• the part of the Directors’ Remuneration Report to be audited has

been properly prepared in accordance with the Companies Act 2006; and

• the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion:•adequate accounting records have not been kept, or returns

adequate for our audit have not been received from branches not visited by us; or

• the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or

•certain disclosures of Directors’ remuneration specified by law are not made; or

•we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:• the Directors’ statement, set out on page 53, in relation to going

concern;• the part of the Corporate Governance Statement relating to the

Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and

•certain elements of the report to the shareholders by the Board on Directors’ remuneration.

Alison Duncan (Senior statutory auditor)for and on behalf of Ernst & Young LLP, Statutory AuditorLondon22 May 2013

Notes:1. The maintenance and integrity of the Dairy Crest Group plc website is the

responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.



Consolidated income statementYear ended 31 March 2013

2013 2012

Earnings per share

Basic earnings/(loss) per share from

continuing operations (pence) 8 – (29.1)

Diluted earnings/(loss) per share from

continuing operations (pence) 8 – (29.1)

Adjusted basic earnings per share from

continuing operations (pence)* 8 29.9 28.9

Adjusted diluted earnings per share from

continuing operations (pence)* 8 29.5 28.4

Basic earnings per share from discontinued

operations (pence) 8 40.5 16.3

Diluted earnings per share from discontinued

operations (pence) 8 39.9 16.0

Basic earnings/(loss) per share on profit/(loss)

for the year 8 40.5 (12.8)

Diluted earnings/(loss) per share on

profit/(loss) for the year 8 39.9 (12.8)

2013 2012

Dividends

Proposed final dividend (£m) 7 20.5 19.6

Interim dividend paid (£m) 7 7.8 7.6

Proposed final dividend (pence) 7 15.0 14.7

Interim dividend paid (pence) 7 5.7 5.7

2013 2012

Note

Beforeexceptional

items£m

Exceptionalitems

£m Total

£m

Beforeexceptional

items£m

Exceptionalitems

£m Total

£m

Group revenue 1 1,381.6 – 1,381.6 1,514.7 – 1,514.7

Operating costs 2,3,4 (1,320.4) (47.8) (1,368.2) (1,451.2) (93.9) (1,545.1)

Other income – property 3 7.7 – 7.7 4.6 – 4.6

Profit/(loss) on operations 68.9 (47.8) 21.1 68.1 (93.9) (25.8)

Finance costs 5 (18.7) (8.7) (27.4) (21.1) – (21.1)

Other finance income – pensions 5 5.9 – 5.9 5.5 – 5.5

Share of associate's net loss 14 – – – (0.3) – (0.3)

Profit/(loss) before tax 56.1 (56.5) (0.4) 52.2 (93.9) (41.7)

Tax (expense)/credit 6 (11.6) 12.0 0.4 (10.2) 13.1 2.9

Profit/(loss) from continuing operations 44.5 (44.5) – 42.0 (80.8) (38.8)

Profit from discontinued operations 29 6.8 47.7 54.5 21.7 – 21.7

Profit/(loss) for the year attributable to equity shareholders 51.3 3.2 54.5 63.7 (80.8) (17.1)

As a result of its disposal in August 2012, the results of the St Hubert business have been classified as discontinued operations and prior period comparatives have been restated accordingly. The post–tax profit relating to discontinued activities is further analysed in Note 29.

* Adjusted earnings per share calculations are presented to give an indication of the underlying operational performance of the Group. The calculations exclude exceptional items, amortisation of acquired intangibles and pension interest in relation to the Group’s defined benefit pension scheme, the latter being highly dependent upon market assumptions at 31 March each year.

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Note2013

£m2012

£m

Profit/(loss) for the year 54.5 (17.1)

Net investment hedges:

Exchange differences on foreign currency net investments (15.3) (19.3)

Exchange differences on foreign currency borrowings designated as net investment hedges 6.0 7.7

(9.3) (11.6)

Exchange differences reclassified to income statement on sale of subsidiary 11.4 –

Actuarial losses and recognition of liabilities for unrecoverable notional surpluses 20 (13.5) (46.2)

Cash flow hedges – reclassification adjustment for gains in income statement (9.5) 4.3

Cash flow hedges – gains/(losses) recognised in other comprehensive income 10.0 (8.3)

Exchange difference on investment in associate – (0.2)

Tax relating to components of other comprehensive income 6 7.6 11.9

Other comprehensive loss for the year, net of tax (3.3) (50.1)

Total comprehensive gain/(loss) for the year, net of tax 51.2 (67.2)

All amounts are attributable to owners of the parent

Consolidated statement of comprehensive incomeYear ended 31 March 2013


Consolidated Parent Company

Note2013

£m2012

£m2013

£m2012

£m

Assets

Non-current assets

Property, plant and equipment 10 270.3 282.9 – –

Goodwill 11 74.3 260.0 – –

Intangible assets 12 30.5 170.5 – –

Investments 13 0.3 – 480.9 479.5

Investment in associate using equity method 14 0.5 0.5 – –

Deferred consideration 1.4 1.3 – –

Deferred tax asset 6 – – 0.4 0.7

Financial assets – Derivative financial instruments 17 14.5 16.6 12.9 15.0

391.8 731.8 494.2 495.2

Current assets

Inventories 15 208.2 187.8 – –

Trade and other receivables 16 98.8 131.5 170.7 219.8

Financial assets – Derivative financial instruments 17 9.6 0.3 9.6 –

Cash and short–term deposits 18 276.1 79.4 14.8 –

592.7 399.0 195.1 219.8

Total assets 1 984.5 1,130.8 689.3 715.0

Equity and Liabilities

Non-current liabilities

Financial liabilities – Long-term borrowings 19 (184.3) (419.7) (182.4) (407.2)

– Derivative financial instruments 19 (3.9) (8.7) (3.9) (8.7)

Retirement benefit obligations 20 (67.2) (79.8) – –

Deferred tax liability 6 (14.6) (69.4) – –

Deferred income 22 (9.6) (6.9) – –

(279.6) (584.5) (186.3) (415.9)

Current liabilities

Trade and other payables 21 (221.8) (266.4) (16.9) (8.0)

Financial liabilities – Short-term borrowings 19 (167.5) (2.0) (165.7) –

– Derivative financial instruments 19 (2.3) – (2.2) –

Current tax liability (2.6) (0.7) – –

Deferred income 22 (1.6) (0.6) – –

Provisions 23 (1.7) (2.3) – –

(397.5) (272.0) (184.8) (8.0)

Total liabilities (677.1) (856.5) (371.1) (423.9)

Shareholders’ equity

Ordinary shares 24 (34.1) (33.3) (34.1) (33.3)

Share premium (77.5) (70.9) (77.5) (70.9)

Interest in ESOP 0.6 0.6 – –

Other reserves 25 (51.4) (49.0) (154.4) (152.2)

Retained earnings (145.0) (121.7) (52.2) (34.7)

Total shareholders’ equity (307.4) (274.3) (318.2) (291.1)

Total equity and liabilities (984.5) (1,130.8) (689.3) (715.0)

Mark Allen Chief Executive Alastair Murray Finance Director

The financial statements were approved by the directors on 22 May 2013

Consolidated and Parent Company balance sheetsAt 31 March 2013

72236_Glasshouse_p58_p63.indd 60 04/06/2013 05:48

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Attributable to owners of the parent

2013

Ordinaryshares

£m

Sharepremium

£m

Interestin ESOP

£m

Otherreserves*

£m

Retainedearnings

£m

TotalEquity

£m

At 31 March 2012 33.3 70.9 (0.6) 49.0 121.7 274.3

Profit for the year – – – – 54.5 54.5

Other comprehensive gain/(loss):

Net investment hedges – – – (9.3) – (9.3)

Exchange differences reclassified to income statement on sale of subsidiary – – – 11.4 – 11.4

Cash flow hedges – – – 0.5 – 0.5

Actuarial losses – – – – (13.5) (13.5)

Tax on components of other comprehensive income – – – (0.2) 7.8 7.6

Other comprehensive gain/(loss) – – – 2.4 (5.7) (3.3)

Total comprehensive gain – – – 2.4 48.8 51.2

Issue of share capital 0.8 6.6 – – – 7.4

Share based payments – – – – 1.9 1.9

Equity dividends – – – – (27.4) (27.4)

At 31 March 2013 34.1 77.5 (0.6) 51.4 145.0 307.4

2012

At 31 March 2011 33.3 70.8 (0.6) 64.1 197.9 365.5

Loss for the year – – – – (17.1) (17.1)

Other comprehensive gain/(loss):

Net investment hedges – – – (11.6) – (11.6)

Cash flow hedges – – – (4.0) – (4.0)

Actuarial losses – – – – (46.2) (46.2)

Exchange difference on investmentin associate – – – (0.2) – (0.2)

Tax on components of other comprehensive income – – – 0.7 11.2 11.9

Other comprehensive loss – – – (15.1) (35.0) (50.1)

Total comprehensive loss – – – (15.1) (52.1) (67.2)

Issue of share capital – 0.1 – – – 0.1

Share based payments – – – – 2.4 2.4

Equity dividends – – – – (26.5) (26.5)

At 31 March 2012 33.3 70.9 (0.6) 49.0 121.7 274.3

Consolidated statement of changes in equityYear ended 31 March 2013

* Further details are provided in Note 25



2013

Ordinaryshares

£m

Sharepremium

£m

Capitalreserve

£m

Hedgingreserve

£m

Otherreserve*

£m

Retainedearnings

£mTotal

£m

At 31 March 2012 33.3 70.9 142.7 (1.9) 11.4 34.7 291.1

Profit for the year – – – – – 44.4 44.4

Other comprehensive loss:

Cash flow hedges – – – 1.2 – – 1.2

Related tax – – – (0.4) – – (0.4)

Other comprehensive gain – – – 0.8 – – 0.8

Total comprehensive gain – – – 0.8 – 44.4 45.2

Issue of share capital 0.8 6.6 – – – – 7.4

Share based payments – – – – 1.4 0.5 1.9

Equity dividends – – – – – (27.4) (27.4)

At 31 March 2013 34.1 77.5 142.7 (1.1) 12.8 52.2 318.2

2012

At 31 March 2011 33.3 70.8 142.7 1.0 9.7 20.1 277.6

Profit for the year – – – – – 40.4 40.4

Other comprehensive loss:

Cash flow hedges – – – (3.8) – – (3.8)

Related tax – – – 0.9 – – 0.9

Other comprehensive loss – – – (2.9) – – (2.9)

Total comprehensive gain/(loss) – – – (2.9) – 40.4 37.5

Issue of share capital – 0.1 – – – – 0.1

Share based payments – – – – 1.7 0.7 2.4

Equity dividends – – – – – (26.5) (26.5)

At 31 March 2012 33.3 70.9 142.7 (1.9) 11.4 34.7 291.1

Parent Company statement of changes in equityYear ended 31 March 2013

* Other reserve represents the share based payment credit in respect of amounts capitalised as investments (see Note 13).


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Note2013

£m2012

£m2013

£m2012

£m

Cash generated from operations 32 19.1 84.5 – –

Interest paid (18.0) (23.6) – –

Taxation paid (4.7) (14.1) – –

Net cash (outflow)/inflow from operating activities (3.6) 46.8 – –

Cash flow from investing activities

Capital expenditure (50.9) (53.3) – –

Grants received 22 5.3 0.2 – –

Grants repaid (0.4) – – –

Proceeds from disposal of property, plant and equipment 10.1 12.6 – –

Purchase of businesses and investments 29 (0.6) (12.3) – –

Sale of discontinued operation (net of cash disposed of and fees) 29 330.8 – – –

Amounts (paid to)/received from subsidiaries – – 97.1 (28.0)

Net cash generated from/(used in) investing activities 294.3 (52.8) 97.1 (28.0)

Cash flow from financing activities

Repayment and cancellation of bank facilities and loan notes (7.5) (155.2) (7.5) (65.2)

New bank facilities advanced – 165.2 – 65.2

Proceeds from issuance of loan notes – 54.5 – 54.5

Net repayment of borrowings under revolving credit facilities (68.7) (0.1) (55.9) –

Dividends paid 7 (27.4) (26.5) (27.4) (26.5)

Proceeds from issue of shares 24 7.4 0.1 7.4 –

Finance lease repayments 33 (1.7) (2.4) – –

Net cash (used in)/generated from financing activities (97.9) 35.6 (83.4) 28.0

Net increase in cash and cash equivalents 192.8 29.6 13.7 –

Cash and cash equivalents at beginning of year 33 79.4 49.9 – –

Exchange impact on cash and cash equivalents 33 3.9 (0.1) 1.1 –

Cash and cash equivalents at end of year 33 276.1 79.4 14.8 –

Memo: Net debt at end of year 33 (59.7) (336.4) (315.5) (398.6)

Consolidated and Parent Company statement of cash flowsYear ended 31 March 2013


Basis of preparationThe consolidated and Company financial statements are presented in sterling and all values are rounded to the nearest 0.1 million (£ million) except where otherwise indicated.

The consolidated financial statements of Dairy Crest Group plc have been prepared in accordance with IFRSs as adopted by the European Union. The separate Company financial statements have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006. The Company has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish its individual income statement and related notes.

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. See the Going Concern Statement on page 53.

The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are (i) the measurement of the impairment of goodwill, intangible assets and property, plant and equipment (ii) the measurement of defined benefit pension scheme assets and obligations (iii) the estimation of tax costs in France in relation to the sale of St Hubert.

(i) The Group determines whether goodwill is impaired on an annual basis and this requires an estimation of the value in use of the cash-generating units to which goodwill is allocated. The assessment of value in use is compared to the carrying value of goodwill. This requires estimation of future cash flows and the selection of a suitable discount rate. Goodwill in Dairies was fully impaired in the year ended 31 March 2012.

The Group tests whether intangible assets, property, plant and equipment are impaired where there are indications that there is a risk of impairment. This requires an estimation of the value in use of the cash-generating units in which these assets reside. The assessment of value in use is compared to the carrying value of assets. This requires estimation of future cash flows and the selection of a suitable discount rate.

(ii) Measurement of defined benefit pension obligations requires estimation of future changes in inflation, mortality rates, the expected return on plan assets and the choice of a suitable discount rate.

(iii) The sale of the St Hubert business will result in tax payable in France both on the chargeable gain on disposal and on dividend payments made to the UK parent between 31 March 2012 and the date of disposal in August 2012. An estimate has been made of the likely tax costs resulting from these transactions. However, the final assessment has yet to be agreed with the French tax authorities which may result in a change to the level of tax provisioning.

Further analysis of the key sources of estimation uncertainty and sensitivities are included in the relevant notes to the accounts.

The key judgements made by management in the process of applying the Group accounting policies are those used to determine whether certain individual operating segments meet all of the

aggregation criteria set out in IFRS 8 when aggregated for external reporting purposes. Those segments that have been aggregated and a description of the key judgements made in reaching that conclusion are set out in Note 1 of the accounts.

Changes in accounting policiesThe following accounting standards and interpretations became effective for the current reporting period:

International Accounting Standards (IAS/IFRSs)IFRS 7 – Amendments to IFRS 7: Disclosures – Transfers of Financial Assets.IAS 12 – Amendments to IAS 12 ‘Income Taxes’ – deferred tax: recovery of underlying assets.

The application of these standards has had no impact on the net assets, results and disclosures of the Group in the year ended 31 March 2013.

The IASB and IFRIC have issued the following standards (with an effective date after the date of these accounts) and interpretations:

International Accounting Standards (IAS/IFRSs)IFRS 9 – Financial Instruments: Classification and Measurement (effective from 1 January 2015) IFRS 10 – Consolidated Financial Statements (effective from 1 January 2013) IFRS 11 – Joint Arrangements (effective from 1 January 2013) IFRS 12 – Disclosures of Interests in Other Entities (effective from 1 January 2013) IFRS 13 – Fair Value Measurement (effective from 1 January 2013) IAS 1 – Amendments to IAS 1: Presentation of Financial Statements (effective from 1 July 2012) IAS 19 – Amendments to IAS 19: Employee Benefits (effective from 1 January 2013) IAS 27 – Separate Financial Statements (effective from 1 January 2013) IAS 28 – Investments in Associates and Joint Ventures (effective from 1 January 2013) IAS 32 – Amendments to IAS 32: Financial Instruments – Presentation (effective from 1 January 2014)

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine (effective from 1 January 2013)

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application with the exception of the amendments to IAS 19 – Employee Benefits. The principal impact on the Group of the application of this standard will be the requirement to use the discount rate when calculating expected returns on the asset component of pension cost. We currently calculate expected returns based on return assumptions on the actual classes of asset held. This change is likely to result in higher charges to the Consolidated Income Statement for the pension interest cost. There is no material impact on the reported pension liabilities each year end as the impact in the Consolidated Income Statement is mitigated by an offsetting change in the calculation of actuarial gains and losses in the Statement of Comprehensive Income – namely the difference between actual and expected asset returns will increase.

Further details are included in Note 20 to the accounts.

Accounting policiesYear ended 31 March 2013


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ConsolidationThe Group financial statements consolidate the accounts of Dairy Crest Group plc and its subsidiaries drawn up to 31 March each year using consistent accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full.

Subsidiaries acquired during the year are consolidated from the date on which control is transferred to the Group. Subsidiaries continue to be consolidated until the date that control ceases.

Where the Group ceases to control a subsidiary, it (i) derecognises the assets (including goodwill) and liabilities of the subsidiary; (ii) derecognises the carrying amount of any non-controlling interest; (iii) derecognises the cumulative translation differences on net assets and borrowings designated as net investment hedges, previously recorded in other comprehensive income; (iv) recognises the fair value of any investment or associate retained; and (v) recognises any surplus or deficit in the consolidated income statement, and (vi) reclassifies the parent’s share of components previously recognised in other comprehensive income or retained earnings as appropriate.

Interest in associates The Group’s investments in associates are accounted for under the equity method of accounting. Associates are entities over which the Group exerts significant influence. The Company and its associates use consistent accounting policies. The investment in associates are carried in the balance sheet at initial fair value plus post-acquisition changes in the Group’s share of net assets, less any impairment in value and any distributions received. The consolidated income statement reflects the share of the post-tax results of associates. Where there has been a change recognised directly in the associates’ other comprehensive income, the Group recognises its share of such changes and discloses this, where applicable in other comprehensive income.

Foreign currency translation The functional and presentational currency of Dairy Crest Group plc and its United Kingdom (‘UK’) subsidiaries is Sterling (£).

Transactions in foreign currency are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the balance sheet date. Exchange differences on monetary items are taken to the income statement, except where recognised in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.

On consolidation, assets and liabilities of foreign subsidiaries are translated into sterling at year end exchange rates. The results of foreign subsidiaries are translated into sterling at average rates of exchange for the year (being an approximation of actual exchange rates). Exchange differences arising from the retranslation of the net investment in foreign subsidiaries at year end exchange rates, less exchange differences on borrowings, which finance or provide a hedge against those undertakings are taken to a separate component of equity as long as IFRS hedge accounting conditions are met. Exchange differences relating to foreign currency borrowings that provide a hedge against a net investment in a foreign entity remain in equity until the disposal of the net investment, at which time they are recognised in the consolidated income statement.

Property, plant and equipmentProperty, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the

purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated to write off the cost (less residual value) of property, plant and equipment, excluding freehold land, on a straight-line basis over the estimated useful lives of the assets as follows:

Freehold buildings: 25 years

Leasehold land and buildings: 25 years or, if shorter, the period of the lease

Office equipment: 4 to 6 years

Factory plant and equipment: 6 to 20 years

Vehicles: 4 to 10 years

The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds the estimated recoverable value, the asset is written down to its recoverable amount. The recoverable amount of plant and equipment is the greater of the fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are charged to the consolidated income statement.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset is included in the consolidated income statement in the year that it is derecognised.

Borrowing costsBorrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the cost of the respective assets. All other borrowing costs are recognised as an expense in the period they occur.

InvestmentsThe Company recognises its investments in subsidiaries at cost being the fair value of consideration paid, less provisions for impairment where appropriate.

Business combinations and GoodwillBusiness combinations from 1 April 2010 are accounted for using the acquisition method (previously used the purchase method). The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The choice of measurement of non-controlling interest, either at fair value or at the proportionate share of acquiree’s identifiable net assets will be determined on a transaction by transaction basis. Acquisition costs incurred are expensed to profit and loss.

Goodwill on acquisition is initially measured at cost being the cost of the acquisition (see above) less net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances



annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. All goodwill was tested for impairment at the time of transition to IFRS and no impairment was identified.

Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at the net book value as at this date and is not subsequently amortised.

As at the acquisition date, any goodwill acquired is allocated to the cash-generating unit or groups of cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

The Group’s cash-generating units, for the purpose of considering goodwill, are ‘Dairies’, ‘Spreads’, ‘MH Foods’ and ‘Cheese’. These represent the lowest level at which goodwill is monitored for management purposes and are no larger than the Group’s operating segments.

Goodwill arising on acquisitions before 1 April 1998 has been charged against the merger reserve and will remain set off against reserves even if the related investment becomes impaired or the business sold.

The Group has not restated business combinations prior to the transition date of 1 April 2004. Acquisitions prior to this date are recorded under previous accounting rules.

Intangible assetsIntangible assets acquired as part of an acquisition of a business are capitalised at fair value separately from goodwill if the fair value can be measured reliably on initial recognition and the future expected economic benefits flow to the Group. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Currently, all the Group’s intangible assets have finite useful lives and are amortised over 3 to 15 years. Acquired intangible assets principally comprise acquired brands and, following the sale of St Hubert, principally the FryLight brand which was considered to have a useful life of 15 years at the date of acquisition.

Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.

Intangible assets generated internally comprise software development expenditure. Software development is carried at cost less accumulated amortisation and is amortised over four to seven years. Internally generated intangible assets that are not yet available for use are tested for impairment annually either individually or at the cash-generating unit level or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Research and developmentExpenditure on research is written off as incurred. Development expenditure is also written off as incurred unless the future recoverability of this expenditure can reasonably be assured as required by IAS 38: Intangible Assets.

Recoverable amount of non-current assetsAt each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.

InventoriesInventories are stated at the lower of cost and net realisable value. Cost includes the purchase price of raw materials (on a first in first out basis), direct labour and a proportion of manufacturing overheads based on normal operating capacity incurred in bringing each product to its present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and selling costs.

Trade and other receivablesTrade and other receivables are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Cash and cash equivalentsCash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdrafts.

Interest bearing loansAll loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in the Consolidated Income Statement when the liabilities are derecognised.

Net debtThe Group and Company define net debt as cash and cash equivalents, interest bearing loans and finance leases. The calculation of net debt excludes the fair value of derivative financial instruments with the exception of cross currency swaps to fix foreign currency debt in Sterling where they are designated as cash flow hedges. In this case the fixed Sterling debt, not the underlying foreign currency debt retranslated, is included in net debt. It includes any cash or borrowings included within disposal groups classified as held for sale and excludes unamortised upfront facility fees.

Retirement benefit obligationsThe asset or liability in respect of defined benefit schemes is the present value of the relevant defined benefit obligation at the balance sheet date less the fair value of plan assets and an adjustment for

Accounting policies continued

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past service costs not yet vested. The independent actuary completes a full actuarial valuation of the Dairy Crest Group pension fund triennially. The obligation is updated annually for financial reporting purposes by the actuary using the projected unit credit method. The present value of the obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds, which have terms to maturity approximating the terms of the related liability.

The current service costs, settlement gains or losses and any curtailment gains are recognised in operating costs in the Consolidated Income Statement, classified as cost of sales, distribution costs or administrative expenses depending upon which area of the business active members are employed in. Past service costs are included in operating costs where the benefits have vested, otherwise they are amortised on a straight-line basis over the vesting period. The expected return on assets of funded defined benefit schemes and the interest on pension scheme liabilities comprise the finance element of the pension cost and the difference between these amounts are included in other finance income or costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full and are charged or credited to other comprehensive income in the period in which they arise.

The recognition of any future retirement benefit surplus as calculated by the actuary as part of the annual update for reporting purposes, is limited to the present value, using an appropriate discount rate, of any real cash benefit the Company will obtain in the future through cash (net of taxes or costs) on a winding up of the scheme. In order to calculate the potential future benefits, or to establish whether a liability needs to be established under IFRIC 14, consideration is given to any minimum funding requirements agreed between the Company and the Pension Trustee.

Contributions to the Dairy Crest defined contribution pension scheme are charged as an expense as they fall due. Any contributions unpaid at the balance sheet date are included as an accrual at that date. The Group has no further payment obligations once contributions have been settled.

Share based paymentsEquity based performance paymentsThe Group and Company has issued equity-settled share based payment schemes for which they receive services from employees in consideration for the equity instrument. Equity-settled share based payment schemes are measured at fair value at the grant date by an external valuer using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance (vesting conditions), other than performance conditions linked to the price of the shares of the Company (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value.

The cost of equity settled transactions with employees is measured by reference to the fair value and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees became fully entitled to the award. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in cumulative expense since

the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance or service conditions are satisfied.

Where an equity-settled award is cancelled (including when a non-vesting condition within the control of the entity or employee is not met), it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for the award is expensed immediately.

Rights granted to employees of subsidiary undertakings over equity instruments of the Company are treated as an investment in the Company’s balance sheet.

Employees’ Share Ownership Plan (‘ESOP’)The shares in the Company held by the Dairy Crest Employees’ Share Ownership Plan Trust to satisfy Long Term Incentive Share Plan awards are presented as a deduction from equity in arriving at shareholders’ equity. Consideration received from the sale of such shares is also recognised in equity with no gain or loss recognised in the Consolidated Income Statement.

The Group and Company have not adopted the exemption to apply IFRS 2 Share-based payments only to awards made after 7 November 2002.

Leased assetsAssets acquired under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at fair value of the leased asset or, if lower, the present value of the minimum lease payments. The net present value of future lease rentals is included as a liability on the balance sheet. The interest element of lease rentals is charged to the Consolidated Income Statement in the year. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease rentals are charged to the Consolidated Income Statement on a straight-line basis over the lease term.

RevenueRevenue on sale of food and dairy products is recognised on delivery. Revenue comprises the invoiced value for the sale of goods net of value added tax, rebates and discounts and after eliminating sales within the Group.

Dividend income is recognised when the Company’s right to receive payment is established.

Other incomeOther income comprises the profit on disposal of closed depots.

Exceptional itemsCertain items are recorded separately in the Consolidated Income Statement as exceptional. Only items of a material, one-off nature, which result from a restructuring of the business or some other event or circumstance are disclosed in this manner in order to give a better understanding of the underlying operational performance of the Group. The profits arising on disposal of closed sites, other than as a result of depot rationalisation, are reported within exceptional items.



Government and other grantsGovernment grants are initially recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the Consolidated Income Statement over the expected useful life of the relevant asset in equal annual instalments.

Income taxCurrent tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except as indicated below.

Deferred income tax liabilities are recognised for all taxable temporary differences except: • where the deferred income tax liability arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carry-forward of unused tax assets and unused tax losses can be utilised except: • where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax assets and liabilities are offset only if a legal enforcement right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the group to make a single net payment.

Income tax is charged or credited to Other Comprehensive Income if it relates to items that are charged or credited to Other Comprehensive Income. Similarly, income tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity. Otherwise income tax is recognised in the Consolidated Income Statement.

Financial assetsThe Group and Company classifies financial assets that are within the scope of IAS 39 as: • financial assets at fair value through profit and loss; • loans and receivables; • held-to-maturity investments; or • available-for-sale financial assets, as appropriate.

The Group and Company determines the classification of financial assets at initial recognition and re-evaluates this designation at each financial year-end. When financial assets are recognised initially, they are measured at fair value. The Group and Company currently hold only loans and receivables.

Derivative instrumentsThe Group and Company use derivative financial instruments such as forward currency contracts, cross-currency swaps and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value and subsequently re-measured to fair value at each balance sheet date.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap and cross-currency swap contracts is determined by reference to market values for similar instruments and specific valuations performed by counterparties at the balance sheet date.

For the purpose of hedge accounting, hedges are classified as either: • fair value hedges where they hedge the exposure to changes in the fair value of a recognised asset or liability;

• cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or a firm commitment in relation to foreign exchange exposure; or

• net investment hedges where they hedge the exposure to variability in the translated net assets of an overseas operation.

Neither the Group nor the Company has entered into any fair value hedges during the year.

Cash flow hedgesIn relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in Other Comprehensive Income and the ineffective portion is recognised in the Consolidated Income Statement.

When the hedged firm commitment (in relation to foreign exchange exposure) or the highly probable forecast transactions results in the recognition of a non-monetary asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in Other Comprehensive Income are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in Other

Accounting policies continued

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Comprehensive Income are transferred to the Consolidated Income Statement in the same year in which the hedged item affects the net profit and loss, for example when the future sale actually occurs, interest payments are made or when debt matures. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the Consolidated Income Statement for the year.

Hedges of net investments in foreign operationsWhere the Group hedges net investments in overseas entities through currency borrowings, the gains and losses on retranslation of those borrowings are recognised in Other Comprehensive Income. If the Group uses derivatives as the hedging instrument, the effective portion of the hedge is recognised in Other Comprehensive Income, with any ineffective portion being recognised in the Consolidated Income Statement whenever applicable. Gains and losses accumulated in Other Comprehensive Income are reclassified to the Consolidated Income Statement on disposal of the foreign entity.

In order to satisfy hedge accounting, the Group (or Company) documents in advance the relationship between the item being hedged and the hedging instrument. The Group (or Company) also documents and demonstrates an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge has been and will be highly effective on an ongoing basis. The effectiveness testing is re-performed on a regular basis (being at least half-yearly) to ensure that the hedge remains highly effective.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in Other Comprehensive Income is retained in Other Comprehensive Income until the highly probable forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in Other Comprehensive Income is transferred to the Consolidated Income Statement for the period.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts, and the host contracts are not carried at fair value with unrealised gains or losses reported in the Consolidated Income Statement. When the contracts are closely related and hedge accounting is adopted, they are designated at inception and treated as described above.


1 Segmental analysisIFRS 8 requires operating segments to be determined based on the Group’s internal reporting to the Chief Operating Decision Maker (‘CODM’). The CODM has been determined to be the Company’s Board members as they are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

The CODM uses trading profit, as reviewed at monthly business review meetings, as the key measure of the segment’s results as it reflects the segment’s underlying trading performance for the period under evaluation. Trading profit is a consistent measure within the Group and the reporting of this measure at the monthly business review meetings, which are organised according to the product types, has been used to identify and determine the Group’s operating segments. Trading profit is defined as profit on operations before exceptional items and amortisation of acquired intangible assets, but includes the Group share of post-tax results of associates.

The Group’s operating segments at 31 March 2013 were ‘Cheese’, ‘Spreads’, ‘MH Foods’, ‘Dairies’, ‘Share of Associates’ and ‘Other’. Certain of these operating segments have been aggregated and the Group reports on five continuing segments within the business: ‘Cheese’, ‘Spreads’, ‘Dairies’, ‘Share of Associates’ and ‘Other’. At 31 March 2012 ‘St Hubert’ was an operating segment which was aggregated into the Spreads segment. St Hubert was sold in August 2012 and therefore St Hubert has now been disclosed as a Discontinued Operation for 2012 and 2013.

In years up to 2011, the Liquid Products and Customer Direct segments were aggregated into one reportable segment being Dairies. During the year ended 31 March 2012, these two businesses were merged with one senior management team responsible for the whole of the Dairies segment. Since the restructuring, discrete financial information for the former Liquid Products and Customer Direct divisions is no longer available or reviewed by either the Dairies senior management team or the CODM (in the past, segment information was based on allocations of the combined cost base which is not now necessary). The Dairies segment principally comprises the sale of non-branded fresh milk in the UK to a number of customers including major retail, foodservice and residential customers. The segment is managed on a combined basis including milk sourcing, production volumes, demand planning, technical, quality and distribution. The factories process and pack milk for a mix of customers which varies depending on customer and demand mix. Having considered these factors, management has judged that this business now comprises one operating segment under IFRS 8.

The Spreads segment incorporates the MH Foods business acquired in June 2011. This business is branded, has similar end-customers as Spreads and shares the same input cost risks. Therefore management judges that this meets the IFRS 8 aggregation criteria. Furthermore, its revenue, result and assets do not represent more than 10% of the Group so the quantitative criteria for a reportable segment are not met.

The Cheese segment has not been aggregated with any other segment. This business manufactures predominantly branded cheese in the UK and sells mainly to retail customers.

Share of Associates forms a separate segment whose results are reviewed on a post-tax basis.

The Other segment comprises revenue earned from distributing product for third parties and certain central costs net of recharges to the operating segments. Generally, all central costs less external other revenue are recharged to the operating segments such that their result reflects the total cost base of the Group. Other segment profit therefore is nil.

Notes to the financial statements

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1 Segmental analysis continuedThe segment results for the year ended 31 March 2013 and for the year ended 31 March 2012 and the reconciliation of segment measures to the respective statutory items included in the financial statements are as follows:

Year ended 31 March

Note 2013

£m 2012

£m

Segment external revenue

Cheese 231.3 229.6

Spreads 194.5 211.3

Dairies 951.6 1,069.0

Other 4.2 4.8

Total segment external revenue 1,381.6 1,514.7

Segment profit

Cheese 33.3 35.5

Spreads 25.7 23.2

Dairies 10.3 10.2

Share of associate’s net loss 14 – (0.3)

Total segment profit 69.3 68.6

Finance costs 5 (18.7) (21.1)

Adjusted profit before tax 50.6 47.5

Acquired intangible amortisation 3 (0.4) (0.8)

Exceptional items 4 (56.5) (93.9)

Other finance income – pensions 5 5.9 5.5

Group loss before tax (0.4) (41.7)

Segment total assets

Cheese 237.7 216.2

Spreads 138.0 136.5

Dairies 268.1 279.0

Investment and share of associate 2.2 1.8

Other 38.3 39.5

684.3 673.0

Discontinued operations – 361.5

Unsegmented assets 300.2 96.3

Total assets 984.5 1,130.8

Inter-segment revenue

Cheese 11.3 9.9

Spreads 2.8 4.7

Elimination (14.1) (14.6)

Total – –

Notes to the financial statements continued


1 Segmental analysis continuedYear ended 31 March

Note2013

£m2012

£m

Segment depreciation and amortisation (excluding amortisation of acquired intangible assets)

Cheese 6.7 6.0

Spreads 3.2 4.2

Dairies 17.2 19.4

Other 4.5 2.5

Continuing operations 31.6 32.1

Discontinued operations 0.8 2.0

Total 32.4 34.1

Segment additions to non-current assets

Cheese 6.9 5.5

Spreads 12.5 25.5

Dairies 23.7 30.5

Other 4.8 3.1

47.9 64.6

Discontinued operations 1.1 3.3

Total 49.0 67.9

Segment exceptional items

Cheese – –

Spreads (13.8) (2.6)

Dairies (30.5) (91.3)

Unsegmented (3.5) –

Total exceptional operating costs 4 (47.8) (93.9)

Interest income and expense are not included in the measure of segment profit reviewed by the CODM. Group treasury is centrally managed and external interest income and expense is all incurred in the UK following the sale of St Hubert and is not allocated to segments. Where interest is reviewed by the CODM it is done so on a net basis. Further analysis of the Group interest expense is provided in Note 5.

Tax costs are not included in the measure of segment profit reviewed by the CODM. Tax is centrally managed and the group effective tax rate, not individual segment tax rates, is reported.

Segment assets comprise property, plant and equipment, goodwill, intangible assets, inventories, receivables, assets in disposal group held for sale and investments in associates and joint ventures using the equity method and deferred consideration but exclude cash and cash equivalents, derivative financial assets and deferred tax assets as these items are managed on a Group basis. Other segment assets comprise certain property, plant and equipment that is not reported in the segments. Total segment liabilities have not been presented as this measure is not regularly reviewed by or provided to the CODM.

Inter-segment revenue comprises the sale of finished Cheese and Spreads products to the Dairies segment on a cost plus basis and is included in the segment result. Other Inter-segment transactions principally comprise sales of cream from the Dairies segment to the Spreads segment for the manufacture of butters. Cream sold into Spreads is priced by reference to external commodity markets and is adjusted regularly so as to reflect the costs that the Spreads segment would incur if it were a stand alone entity. Revenue from Inter-segment cream sales is not reported as revenue to the CODM but as a reduction to the Dairies segment’s input costs.

Segment depreciation and amortisation excludes amortisation of acquired intangible assets of £0.4 million (2012: £0.8 million) as these costs are not charged in the segment result.

Segment additions to non-current assets comprise additions to goodwill, intangible assets and property, plant and equipment through capital expenditure and acquisition of businesses.


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1 Segmental analysis continued

Geographical information – continuing operations Year ended 31 March

External revenue attributed on basis of customer location2013

£m2012

£m

UK 1,336.3 1,450.1

Rest of world 45.3 64.6

Total segment revenue (excluding joint ventures) 1,381.6 1,514.7

Non-current assets* based on location

UK 375.1 370.5

France – 338.0

Rest of world 0.8 5.4

Total 375.9 713.9

* Comprises property, plant and equipment, goodwill, intangible assets, investments and investment in associate.

The Group has two customers which individually represent more than 10% of revenue from continuing operations in the year ended 31 March 2013 (2012: one). These customers account for £327.1 million (2012: £175.7 million) of revenue from continuing operations being 23.7% (2012: 11.6%).

The business segmentation above is based upon similar product groupings, namely Cheese, Spreads and Dairies, and therefore the analysis of Group revenue by product and services is consistent with the revenue analysis presented above with the exception of non-milk product sales in the Dairies segment, which amounted to £81.3 million (2012: £100.1 million).

2 Operating costs – continuing operations

Year ended 31 March 2013 Year ended 31 March 2012

Beforeexceptional

items£m

Exceptional

items£m

Total£m

Beforeexceptional

items£m

Exceptional

items£m

Total£m

Cost of sales 1,008.2 44.3 1,052.5 1,106.5 13.6 1,120.1

Distribution costs 229.1 – 229.1 259.0 – 259.0

Administrative expenses 83.1 3.5 86.6 85.7 80.3 166.0

1,320.4 47.8 1,368.2 1,451.2 93.9 1,545.1

Profit on operations from continuing operations before exceptional items is stated after (charging)/crediting

Year ended31 March

2013£m

Year ended31 March

2012£m

Release of grants 0.9 0.6

Depreciation (28.2) (29.2)

Amortisation of intangibles – acquired (0.4) (0.8)

Amortisation of intangibles – internally generated (3.4) (2.9)

Operating lease rentals (29.2) (31.0)

Research and development expenditure (3.3) (2.8)

Cost of inventories recognised as an expense (1,008.2) (1,106.5)

Including: Write-down of inventories recognised as an expense (1.2) (1.0)

The comparative amounts for 2012 have been amended to exclude amounts relating to St Hubert which has been disclosed as a Discontinued Operation.



2 Operating costs – continuing operations continued

Remuneration paid to auditors

Year ended31 March

2013£m

Year ended31 March

2012£m

Fees payable to the Company’s auditors – audit of Company’s annual accounts* 0.1 0.1

Fees payable to the Company’s auditors and its associates for other services:

audit of the Company’s subsidiaries pursuant to legislation 0.3 0.3

taxation services 0.1 0.2

corporate finance services 0.2 –

governance assurance services – 0.1

0.7 0.7

* £10,000 (2012: £10,000) of this relates to the Company.

Other services in the year ended 31 March 2013 comprised reporting accountant work in relation to the disposal of St Hubert (2012: governance assurance services for an IT systems project).

Fees paid to Ernst & Young LLP and its associates for non-audit services to the Company itself are not disclosed in the individual accounts of the Company because Group financial statements are prepared which are required to disclose such fees on a consolidated basis.

Ernst & Young LLP are auditors of the Dairy Crest Group Pension Scheme. Fees paid by the pension scheme for audit services are not included in the above table.

3 Other income – property


Beforeexceptional

items£m

Exceptional

items£m

Total£m

Beforeexceptional

items£m

Exceptional

items£m

Total£m

Profit on disposal of depots 7.7 – 7.7 4.6 – 4.6

The Group continues to rationalise its Dairies operations as a result of the ongoing decline in doorstep volumes. This rationalisation includes the closure of certain depots (the profit on which is shown above) and rationalisation of the ongoing Dairies operations. These activities represent a fundamental part of the ongoing ordinary activities of the Dairies operations.

4 Exceptional itemsExceptional items comprise those items that are material and one-off in nature that the Group believes should be separately disclosed to assist in the understanding of the underlying financial performance of the Group.

Operating costs

Year ended31 March

2013£m

Year ended31 March

2012£m

Depot administration restructuring costs (Dairies) (9.2) (5.3)

Costs associated with closure of Dairy processing sites (Dairies) (21.3) –

Spreads restructuring costs (Spreads) (13.8) (2.6)

Business reorganisation (3.5) –

Impairment of goodwill, property, plant and equipment (Dairies) – (81.7)

Provision for bad debts (Dairies) – (4.3)

(47.8) (93.9)

Finance costs

Repayment of loan notes and associated costs (Note 5) (8.7) –

(56.5) (93.9)

Tax relief on exceptional items 12.0 13.1

(44.5) (80.8)

Post-tax gain on disposal of St Hubert (Discontinued operations – Note 29) 47.7 –

3.2 (80.8)


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Exceptional items in the year ended 31 March 2013 comprise:

– £9.2 million of costs associated with the rationalisation of administrative activities and other structural changes in the Dairies depot network. This restructuring results in centralisation of back office activities supporting the depot network. These costs relate to redundancies (£7.4 million), incremental operating costs associated with delivery of the project (£1.1 million) and write downs of property, plant and equipment (£0.7 million). The project has now completed.

– During the year the Group has closed two processing sites at Aintree in Liverpool and Fenstanton in Cambridgeshire. The closure of the sites and resultant changes in the supply chain, volume requirements and customer channels has resulted in exceptional costs of £21.3 million. These costs relate to redundancies (£9.0 million), duplicate running costs (£6.2 million), asset write downs (£0.7 million) and other costs (£5.4 million) including stock write offs and duplicate running costs.

– In September 2012 the Group announced that it was to consult with employees on plans to consolidate spreads production into a single UK location at its site in Kirkby, Liverpool. As a result of this consolidation the site at Crudgington, Shropshire will close in 2014. Following the transfer of Clover manufacture to Kirkby in the first half of 2012, the Crudgington cash generating unit (‘CGU’) does not generate material cash flows from the remaining site production. Subsequent to this decision, value in use calculations have been prepared to 2014 rather than in perpetuity using a discount rate of 8.7%. As a result we have impaired the carrying value of property, plant and equipment by £12.3 million. This impairment has resulted in a carrying value of nil for plant and equipment and £1.0 million for land and buildings. The relevant CGU for goodwill testing purposes is Spreads which encompases both the Crudgington and Kirkby sites. This restructure will result in a more efficient Spreads supply chain and Spreads goodwill has not been impaired.

In addition to the impairment of property, plant and equipment, £1.5 million of costs were incurred during the year both to complete the transfer of Clover manufacture from Crudgington to Kirkby and to commence the project that will result in the closure of the Crudgington site.

– In February 2013 the Group announced plans to reorganise the business into a single management and operational structure from 1 April 2013. This is replacing the divisional structures that previously existed and will lead to a more efficient and simplified organisation. This reorganisation has resulted in exceptional costs in the year ended 31 March 2013 of £3.5 million comprising predominantly redundancy costs. Further costs will be incurred in 2013/14 as the project is conmpleted.

– In March 2013 the Group gave notice to the holders of its 2007 private placement loan notes that it would repay £100 million of principal in April 2013. The costs of early repayment have been accrued at 31 March 2013 as the Group was irrevocably committed to the repayment at that date. Costs of £8.7 million predominantly comprise make whole penalties which are calculated based on the discounted future coupons between repayment date and original note maturity.

Exceptional items in the year ended 31 March 2012 comprised: – £5.3 million of costs associated with the rationalisation of administrative activities and other structural changes in the Dairies depot

network. This restructuring resulted in centralisation of back office activities supporting the depot network. The majority of costs related to redundancies (£2.2 million) and other incremental operating costs associated with delivery of the project (£3.1 million).

– Trading in the Dairies segment was was adversely impacted in 2011/12 by increased costs of milk, the ongoing level of competition in the sector and in the second half by significant falls in the value of cream. Furthermore, volume declines in doorstep deliveries continued despite the growth of our milk&more business. A range of actions was taken in order to restore margins within Dairies to an acceptable level in the medium term and create a cost-efficient, sustainable dairies business. These included the expected closure of sites referred to below (subject to consultation). However, the outlook for Dairies was weaker and more uncertain than it was in 2011. This, combined with the volatility of assumptions in forecasting future cash flows due to the commoditised nature of the business and the competitive environment, led management to conclude that the total carrying amount of Dairies goodwill of £70.7 million should be impaired as it could not be supported on a value in use basis. This impairment reduced the carrying value of goodwill in this segment to nil. Further details are provided in Note 11.

Furthermore, the Group has announced a major restructuring of its Dairies operations with the expected closure of two processing sites at Aintree in Liverpool and Fenstanton in Cambridgeshire subject to consultation. These closures were expected to be completed in 2012/13. As a result of the anticipated closures, the carrying value of property, plant and equipment at these sites could no longer be supported by a value in use calculation based upon future cash flows generated by these assets. Consequently, the carrying value of property, plant and equipment was impaired by £9.8 million at 31 March 2012. Further details are provided in Note 10. In addition, an impairment of £0.4 million was recorded against intangible assets (see Note 12) and £0.8 million of inventories of engineering spares and packaging were written off (see Note 15).

At 31 March 2012, following the impairments of goodwill, property, plant and equipment and intangibles, there remained property, plant and equipment and intangibles with a carrying value of £161.6 million in the Dairies segment.

– On 13 February 2012, the Group announced that a customer, Quadra Foods Limited (‘Quadra’) had gone into administration. As a result a bad debt provision of £4.3 million was charged representing the entire amount owing from this customer. Bad debt write-offs of this size are extremely rare and management considered this a one-off incident which, due to its material size, has been classified as exceptional. The Group previously purchased fresh milk from Farmright Limited (‘Farmright’), a member of the same group as Quadra, which also went into administration. In the opinion of management, set-off arrangements were agreed and in place between Dairy Crest Limited and Quadra/Farmright at the date of them going into administration, however this is being challenged in the administration process. Under IFRS, the recognition criterion threshold for a contingent asset is higher than that required for a contingent liability and therefore, although a provision has been recorded against amounts due from Quadra, no exceptional gain was recognised in the year ended 31 March 2012 in relation to amounts owed to Farmright as the outcome was not yet virtually certain.




4 Exceptional items continued – On 17 May 2011, the Group announced that, subject to a consultation process, production of its leading dairy spread brand, Clover,

would be consolidated into its site in Kirkby, Liverpool. The Clover manufacturing process was split between Kirkby, Liverpool and Crudgington, Shropshire. This consolidation would result in approximately 90 redundancies at Crudgington and the creation of approximately 45 jobs at Kirkby. The consolidation would be completed in 2012/13, however exceptional costs of £2.6 million were incurred in the year ending 31 March 2012. These predominantly comprised redundancy costs (£1.2 million) and the impairment of property, plant and equipment impacted by the restructured operations (£1.0 million). This impairment reduced the carrying value of equipment made redundant by this processing change to management’s best estimate of its fair value less costs to sell (see Note 10). In addition, inventories of engineering spares of £0.2 million were written off (see Note 15) and other project costs of £0.2 million were incurred.

5 Finance costs and other finance income

Finance costs

Year ended31 March

2013£m

Year ended31 March

2012£m

Bank loans and overdrafts (at amortised cost) (19.6) (20.5)

Unwind of discount on provisions (Note 23) (0.2) (0.2)

Finance charges on finance leases (0.3) (0.5)

Pre-exceptional finance costs – continuing operations (20.1) (21.2)

Finance income on cash balances (financial assets not at fair value through profit and loss) 1.4 0.1

Pre-exceptional net finance costs – continuing operations (18.7) (21.1)

Exceptional cost of repayment of loan notes (Note 4) (8.7) –

Total net finance costs – continuing operations (27.4) (21.1)

Other finance income – pensions

Year ended31 March

2013£m

Year ended31 March

2012£m

Expected return on defined benefit plan assets (Note 20) 47.4 49.0

Interest cost on defined benefit obligation (Note 20) (41.5) (43.5)

5.9 5.5

6 Tax expenseThe major components of income tax expense for the years ended 31 March 2013 and 2012 are:

Consolidated income statement2013

£m2012

£m

Current income tax

Current income tax charge at 24% (2012: 26%) – –

Adjustments in respect of previous years – current tax – (1.1)

– transfer from deferred tax (2.8) (1.1)

(2.8) (2.2)

Deferred income tax

Relating to origination and reversal of temporary differences (1.8) (1.4)

Adjustment in respect of previous years – deferred tax 1.4 (0.4)

– transfer to current tax 2.8 1.1

(0.4) (2.9)

Analysed: Before exceptional items 11.6 10.2

Exceptional items (12.0) (13.1)

(0.4) (2.9)

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6 Tax expense continuedReconciliation between tax credit and the loss before tax multiplied by the standard rate of corporation tax in the UK:

2013

£m2012

£m

Loss before tax (0.4) (41.7)

Tax at UK statutory corporation tax rate of 24% (2012: 26%) (0.1) (10.8)

Adjustments in respect of previous years 1.4 (1.5)

Adjustment in respect of associate’s losses – 0.1

Deferred tax adjustment for change in UK corporation tax rate (24% to 23%; 2012: 26% to 24%) (0.9) (2.6)

Non-deductible expenses 1.5 14.3

Profits offset by available tax relief (2.3) (2.4)

(0.4) (2.9)

The effective pre-exceptional rate of tax on Group profit before tax is 20.7% (2012: 19.5%).

The UK corporation tax rate reduced to 23% from April 2013. A further 2% reduction was proposed in the December 2012 Autumn Statement, taking the rate to 21% by April 2014. An additional 1% reduction was then proposed in the March 2013 Budget, taking the rate to 20% by April 2015.

At the balance sheet date, only the 23% rate had been substantively enacted and therefore it is only the impact of this reduction that has been reflected in the Group’s financial statements as at 31 March 2013. We estimate the effect of the reduction in the tax rate to 20% to be a reduction in the deferred tax liability of £2.2 million.

The effect on the Group of the further proposed reductions in the UK corporation tax rate will be reflected in the Group’s financial statements in future years, as appropriate, once the proposals have been substantively enacted.

Consolidated other comprehensive income2013

£m2012

£m

Deferred income tax related to items charged to other comprehensive income

Tax relief on actuarial losses (7.8) (11.2)

Valuation of financial instruments 0.2 (0.7)

Tax credit (7.6) (11.9)

There were no income tax or deferred tax amounts charged to changes in equity in the year ended 31 March 2013 (2012: nil).

Deferred income taxDeferred income tax at 31 March 2013 and 2012 relates to the following:

Deferred tax liability2013

£m2012

£m

Accelerated depreciation for tax purposes (31.7) (37.4)

Goodwill and intangible assets (9.2) (55.4)

(40.9) (92.8)

Deferred tax asset

Government grants 3.0 1.8

Share based payments 0.1 0.4

Pensions 17.1 15.8

Financial instruments valuation 0.2 0.3

Other 5.9 5.1

26.3 23.4

Net deferred tax liability (14.6) (69.4)

The Company has a deferred tax asset of £0.4 million at 31 March 2013 (2012: £0.7 million asset). This relates to temporary differences in respect of financial instruments valuations.




6 Tax expense continued The movement on the net deferred tax balance is shown below:

2013£m

2012£m

Opening net deferred tax liability (69.4) (86.3)

(Charge)/credit to income statement (2.4) 3.3

Credit to other comprehensive income 7.6 11.9

Disposal/(acquisition) of businesses 47.3 (1.6)

Exchange impact 2.3 3.3

Closing net deferred tax liability (14.6) (69.4)

The movement on the deferred tax liability is shown below:

Deferred tax asset/(liability)

Goodwill andintangible

assets£m

Pensions£m

Acceleratedtax

depreciation£m

Othertiming

differences£m

Total£m

Balances at 31 March 2012 (55.4) 15.8 (37.4) 7.6 (69.4)

(Charge)/credit to income statement: continuing operations (0.9) (6.5) 3.2 1.8 (2.4)

Credit/(charge) to other comprehensive income – 7.8 – (0.2) 7.6

Disposal of businesses 44.8 – 2.5 – 47.3

Exchange impact 2.3 – – – 2.3



Credit/(charge) to income statement: continuing operations 6.3 (11.0) 3.9 4.1 3.3

Credit to other comprehensive income – 11.2 – 0.7 11.9

Acquisition of businesses (1.5) – (0.1) – (1.6)

Exchange impact 3.2 – 0.1 – 3.3


The Group has capital losses which arose in the UK of £56.3 million (2012: £63.8 million) that are available indefinitely for offset against future taxable gains. Deferred tax has not been recognised in respect of these losses as there is no foreseeable prospect of their being utilised. The Group has realised capital gains amounting to £36.9 million (2012: £39.7 million) for which rollover relief claims have been or are intended to be made.

7 Dividends paid and proposed

Declared and paid during the year2013

£m2012

£m

Equity dividends on ordinary shares:

Final dividend for 2012: 14.7 pence (2011: 14.2 pence) 19.6 18.9

Interim dividend for 2013: 5.7 pence (2012: 5.7 pence) 7.8 7.6

27.4 26.5

Proposed for approval at AGM (not recognised as a liability at 31 March)

Equity dividends on ordinary shares:

Final dividend for 2013: 15.0 pence (2012: 14.7 pence) 20.5 19.6

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8 Earnings per shareBasic earnings/losses per share (‘EPS’) on profit/(loss) for the year from continuing operations is calculated by dividing profit/(loss) from continuing operations by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS is calculated by dividing the profit/(loss) from continuing operations by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Note that in the circumstances where there is a basic loss per share, share options are anti-dilutive and therefore are not included in the calculation of diluted losses per share.

The shares held by the Dairy Crest Employees’ Share Ownership Plan Trust (‘ESOP’) are excluded from the weighted average number of shares in issue used in the calculation of earnings and diluted 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 has been calculated. The computation for basic and diluted earnings per share (including adjusted earnings per share) is as follows:


Earnings

£m

Weightedaverage

no of sharesmillion

Per shareamount

penceEarnings

£m

Weightedaverage

no ofsharesmillion

Per shareamount

pence

Basic EPS from continuing operations – 134.7 – (38.8) 133.2 (29.1)

Effect of dilutive securities:

Share options – 1.9 – – – –

Diluted EPS from continuing operations – 136.6 – (38.8) 133.2 (29.1)

Adjusted EPS from continuing operations

Profit/(loss) from continuing operations – 134.7 – (38.8) 133.2 (29.1)

Exceptional items (net of tax) 44.5 – 33.0 80.8 – 60.7

Amortisation of acquired intangible assets (net of tax) 0.3 – 0.2 0.6 – 0.4

Pension interest income (net of tax) (4.5) – (3.3) (4.1) – (3.1)

Adjusted basic EPS from continuing operations 40.3 134.7 29.9 38.5 133.2 28.9


Share options – 1.9 (0.4) – 2.5 (0.5)

Adjusted diluted EPS from continuing operations 40.3 136.6 29.5 38.5 135.7 28.4

Basic EPS from discontinued operations 54.5 134.7 40.5 21.7 133.2 16.3


Share options – 1.9 (0.6) – 2.5 (0.3)

Diluted EPS from discontinued operations 54.5 136.6 39.9 21.7 135.7 16.0

Basic EPS on profit/(loss) for the year 54.5 134.7 40.5 (17.1) 133.2 (12.8)


Share options – 1.9 (0.6) – – –

Diluted EPS on profit/(loss) for the year 54.5 136.6 39.9 (17.1) 133.2 (12.8)

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of signing of these financial statements.




9 Remuneration of employees and key management personnel

Number of employees (continuing operations) – Group

Year ended31 March

2013number

Year ended31 March

2012number

Average number of employees:

Production 2,036 2,221

Sales, distribution and administration 3,247 3,757

Total employees 5,283 5,978

Remuneration of employees, including key management personnel (continuing operations)

Year ended31 March

2013£m

Year ended31 March

2012£m

Wages and salaries 176.5 189.5

Social security costs 17.2 19.0

Equity settled share based payments expense (Note 26) 1.9 2.4

Pension costs (Note 20) 7.1 7.9

202.7 218.8

The above costs are from continuing operations and include amounts paid to the Company’s Executive and Non-executive Directors.

Further analysis is as follows:

Directors

Year ended31 March

2013£000

Year ended31 March

2012£000

Salaries and benefits 1,528 1,515

Bonuses 613 598

Fees to non-executive directors 331 343

Emoluments 2,472 2,456

Employer payments to defined contribution pension scheme 31 18

Gain on exercise of sharesave options 15 –

Highest paid director

Salary and benefits 656 648

Bonus 272 259

Emoluments 928 907

Employer payments to defined contribution pension scheme 9 9

Gain on exercise of sharesave options 5 –

Further information relating to directors’ remuneration for the year ended 31 March 2013 is provided in the Directors’ Remuneration Report on pages 41 to 52.


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10 Property, plant and equipment

Consolidated 2013

Land andbuildings

£m

Vehicles,plant and

equipment£m

Assets inthe course of construction

£mTotal

£m

Cost

At 1 April 2012 192.6 303.0 29.0 524.6

Additions 3.5 18.0 21.3 42.8

Acquisition of businesses – 0.5 – 0.5

Disposals (4.2) (22.8) (0.5) (27.5)

Disposal of St Hubert (8.7) (15.7) (1.2) (25.6)

Transfers and reclassifications 0.6 24.3 (24.9) –

Exchange (0.4) (0.8) (0.1) (1.3)

At 31 March 2013 183.4 306.5 23.6 513.5

Accumulated depreciation

At 1 April 2012 64.8 176.9 – 241.7

Charge for the year 5.9 23.1 – 29.0

Asset impairments 1.4 12.3 – 13.7

Disposals (2.3) (22.8) – (25.1)

Disposal of St Hubert (5.2) (10.1) (15.3)

Exchange (0.2) (0.6) – (0.8)

At 31 March 2013 64.4 178.8 – 243.2

Net book amount at 31 March 2013 119.0 127.7 23.6 270.3

Consolidated 2012

Cost

At 1 April 2011 187.9 285.3 22.2 495.4

Additions 4.6 16.0 27.5 48.1

Acquisition of businesses 0.1 0.4 – 0.5

Disposals (2.5) (10.5) (5.0) (18.0)

Transfers and reclassifications 3.1 12.6 (15.7) –

Exchange (0.6) (0.8) – (1.4)

At 31 March 2012 192.6 303.0 29.0 524.6

Accumulated depreciation

At 1 April 2011 57.8 153.3 – 211.1

Charge for the year 6.9 24.0 – 30.9

Asset impairments 2.1 8.7 – 10.8

Disposals (1.7) (8.5) – (10.2)

Exchange (0.3) (0.6) – (0.9)

At 31 March 2012 64.8 176.9 – 241.7


Depreciation of property, plant and equipment relating to the discontinued St Hubert business, included in the table above amounted to £0.8 million in the year ended 31 March 2013 (2012: £1.7 million).

2012/13Following the decision in 2011 to transfer all Clover manufacture from Crudgington, Shropshire to Kirkby, Liverpool, in September 2012 the Group announced plans to consolidate all spreads production into a single UK location at its site in Kirkby. Subject to consultation, this decision will result in the closure of the site at Crudgington in 2014. As a result of this decision £11.4 million of plant and equipment at the sites have been impaired to nil net book value (representing management’s best estimate of resale value net of costs of sale). In addition, the land and buildings at Crudgington were impaired by £0.9 million. See Note 4.

The culmination of the centralisation of administrative activity in the Dairies depot network along with the closures of milk processing sites at Fenstanton, Cambridgeshire and Aintree, Liverpool resulted in impairments of £0.5 million to land and buildings and £0.9 million to plant and equipment. See Note 4.

The carrying value of property, plant and equipment within each cash generating unit (‘CGU’) is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. With regard to the Dairies CGU, goodwill was fully impaired



10 Property, plant and equipment continuedin 2011/12 however given the low margins in this business and large movements in milk input costs during 2012/13, the carrying value of property, plant and equipment within this CGU has been reviewed along with its value in use. The impairment methodology and key inputs are as set out in Note 11. The discount rate applied to the value in use calculation was 8.7% and cash flows are forecast to year five with no growth assumed thereafter. The impairment review has not indicated any required write down of the carrying value of property, plant and equipment in the year ended 31 March 2013, however management believes that there are changes in key assumptions that could result in impairments. The key assumptions are discount rates and margins. A 1.0% increase in the discount rate applied, with all other assumptions unchanged, would result in a carrying amount equal to value in use. A margin of 2% versus the assumption of 2.5% in perpetuity from year five with all other assumptions unchanged, would result in a carrying value equal to value in use.

2011/12

Following the decision to close, subject to consultation, two Dairies processing sites at Fenstanton, Cambridgeshire and Aintree, Liverpool in 2012/13, the assets within these cash generating units and other assets in the Dairies supply chain were reviewed for evidence of impairment. The carrying value of property, plant and equipment at these sites and certain plant and equipment at our site in Foston, Derbyshire could no longer be supported by value in use and an impairment was recorded to reduce the carrying value to management’s best estimate of fair value less costs to sell. Land and buildings at Aintree and Fenstanton were impaired by £2.1 million resulting in a carrying value of £4.5 million reflecting the best estimate of resale value of these sites, both of which were owned. Plant and equipment at Aintree, Fenstanton and Foston were impaired by £7.7 million resulting in a carrying value of £0.2 million reflecting the best estimate of resale value less costs of sale or disposal at that time. All of these impairments were recorded as exceptional items in the Dairies segment (see Note 4). At 31 March 2012, there remained property, plant and equipment with a carrying value of £142.1 million in the Dairies segment after these impairments.

Following the decision in 2011 to transfer all Clover manufacture from Crudgington, Shropshire to Kirkby, Liverpool certain assets at Kirkby became obsolete as future plans for the utilisation of these assets had changed. Obsolete assets with a carrying value of £1.0 million were identified and these assets were impaired to nil value reflecting management’s best view as to their fair value less costs of removal and sale. This impairment was recorded as an exceptional item in the Spreads segment (see Note 4).

Capitalised leases included in vehicles, plant and equipment comprise:2013

£m2012

£m

Cost 32.1 32.2

Accumulated depreciation (22.9) (21.5)

Net book amount 9.2 10.7

11 Goodwill

£m

Cost

At 31 March 2011 337.8

Additions (Note 29) 6.7

Exchange (11.5)

At 31 March 2012 333.0

Disposal (Note 29) (176.4)

Exchange (9.3)

At 31 March 2013 147.3

Accumulated impairment

At 31 March 2011 (2.3)

Impairments in year ended 31 March 2012 (Dairies) (70.7)

At 31 March 2012 (73.0)

At 31 March 2013 (73.0)

Net book amount at 31 March 2013 74.3

Net book amount at 31 March 2012 260.0

Impairment testing of goodwillAcquired goodwill has been allocated for impairment testing purposes to four groups of cash generating units (‘CGUs’): Dairies, Spreads, MH Foods and Cheese. At March 2012 goodwill in relation to the Dairies CGU was fully impaired and the carrying value of goodwill for this CGU at 31 March 2013 is nil.

All groups of CGUs with goodwill are tested for impairment annually by comparing the carrying amount of that CGU with its recoverable amount. Recoverable amount is determined based on a value-in-use calculation using cash flow projections based on financial budgets and strategic plans approved by senior management covering a three-year period and appropriate growth rates beyond that other than for Dairies where a five-year period was forecast with appropriate growth rates beyond that. The discount rate applied to the projections is 8.7% for Spreads, MH Foods and Cheese (2012: 8.4% and Dairies 9.4%).


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11 Goodwill continuedDiscount rates are pre-tax and calculated by reference to average industry gearing levels, the cost of debt and the cost of equity based on the capital asset pricing model and CGU-specific risk factors. Discount rates have not changed significantly since March 2012.

The growth rate used to extrapolate cash flows beyond the three-year period for Spreads, MH Foods and Cheese is 2.0% per annum (being the estimated UK long-term growth rate adjusted for industry growth rates and extrapolation risks) (2012: 2.0% per annum beyond year three). The growth rate used to extrapolate cash flows beyond a five-year period for the Dairies CGU was 0% at March 2012 with cash flows in the first five years being based on extended strategic plans for that business.

The carrying amount of goodwill allocated to groups of CGUs at 31 March 2013 is:

Dairies Nil (2012: nil)

MH Foods £6.7 million (2012: £6.7 million)

Spreads £65.5 million (2012: £65.5 million)

St Hubert n/a (2012: £185.7 million)

Cheese £2.1 million (2012: £2.1 million)

Gross margin – budgeted gross margins are based initially on actual margins achieved in the preceding year further adjusted for projected input and output price changes, volume changes, initiatives implemented and associated efficiency improvements. The budgeted margins form the basis for strategic plans, which incorporate longer-term market trends.

Discount rates – reflect management’s estimate of the risk-adjusted weighted average cost of capital for each CGU.

Raw materials prices – budgets are prepared using the most up to date price and forecast price data available. This is based on forward prices in the market place adjusted for any contracted prices at the time of forecast. The key resources are milk, vegetable oils, fuel oil, diesel, gas and 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 downwards to reflect the risk of extrapolating growth beyond a three year time frame. For the residential business, long-term rates of market decline as seen over recent years have been extrapolated forward offset by growth assumptions for milk&more, FRijj and the liquid milk business.

The Directors consider the assumptions used to be consistent with the historical performance of each CGU where appropriate and to be realistically achievable in the light of economic and industry measures and forecasts.

2012/13

Sensitivity to changes in assumptionsWith regard to the assessment of value in use of the UK Spreads, MH Foods and Cheese CGUs, management believes that no reasonably possible change in the above key assumptions would cause the carrying value of those units to exceed their recoverable amount.

2011/12

Dairies CGU – impairment of goodwillDairies margins were impacted in 2011/12 by a number of factors including higher input costs, falling realisations for cream (a by-product of milk production), the ongoing decline of residential sales and high levels of competition in the sector. Furthermore, weak UK consumer demand and a very competitive landscape had adversely impacted the Group’s expectations regarding the speed of recovery in future Dairies margins. In 2011 we highlighted that changes in key assumptions could cause the carrying value of the then Liquid Products and Customer Direct CGUs to exceed their recoverable amount. As described in Note 4, management has taken action to close certain sites in order to underpin factory utilisation and improve operating efficiencies. This combined with other activities will, in the opinion of management, restore margins to an acceptable level in the medium term. However, the outlook is significantly weaker than it was in 2011 and margin recovery will take longer than previously anticipated. Given the inherent uncertainties of cash flow forecasts in what is a predominantly commodity business in a competitive sector especially given the sensitivity of low absolute margins, management has concluded that it is appropriate to fully impair the carrying amount of Dairies goodwill as there is no assurance that it can be supported on a value in use basis, excluding the impact of restructuring activities.

Therefore, management has concluded that it is appropriate to fully impair the carrying value of Dairies goodwill resulting in an exceptional charge of £70.7 million recorded in the year ended 31 March 2012. After fully impairing goodwill and impairing certain other property, plant, equipment and intangible assets, the remaining carrying value of these items at 31 March 2012 was £161.6 million. As goodwill has been fully impaired, there is no headroom and any future adverse change in key assumptions would lead to further impairment against these assets. There are changes in key assumptions in the calculation of Dairies CGU value in use that could result in further impairments. The key assumptions are discount rates and annual cash flows. A 1% increase in the discount rate applied, with all other assumptions unchanged, would result in a further impairment of approximately £20 million. A reduction in cash flows of £2 million per annum in perpetuity, representing approximately 2% margin, with all other assumptions unchanged, would result in a further impairment of £22 million.

Other CGUs – Sensitivity to changes in assumptionsWith regard to the assessment of value in use of the UK Spreads, St Hubert, MH Foods and Cheese CGUs, management believes that no reasonably possible change in the above key assumptions would cause the carrying value of the unit to exceed its recoverable amount.



12 Intangible assets

Assets inthe course of construction

£m

Internallygenerated

£m

Acquiredintangibles

£mTotal

£m

Cost

At 31 March 2011 5.4 24.5 197.0 226.9

Additions 6.4 0.2 – 6.6

Acquisitions – – 6.0 6.0

Transfers and reclassifications (2.0) 2.0 – –

Exchange – – (11.8) (11.8)

At 31 March 2012 9.8 26.7 191.2 227.7

Additions 5.7 – – 5.7

Disposal – (7.2) (173.5) (180.7)

Transfers and reclassifications (7.2) 7.2 – –

Exchange – (0.4) (9.0) (9.4)

At 31 March 2013 8.3 26.3 8.7 43.3

Accumulated amortisation

At 31 March 2011 – 9.8 37.3 47.1

Impairments – 0.4 – 0.4

Amortisation for the year – 3.2 9.1 12.3

Exchange – – (2.6) (2.6)

At 31 March 2012 – 13.4 43.8 57.2

Disposal – (6.8) (42.4) (49.2)

Amortisation for the year – 3.4 3.4 6.8

Impairments – – 0.2 0.2

Exchange – (0.3) (1.9) (2.2)

At 31 March 2013 – 9.7 3.1 12.8



Amortisation of acquired intangible assets relating to the discontinued St Hubert business, included in the table above amounted to £3.0 million in the year ended 31 March 2013 (2012: £8.3 million).

Internally generated intangible assets comprise software development and implementation costs across manufacturing sites, the milk&more business and Head Office. Acquired intangibles comprise predominantly brands acquired with the acquisition of businesses. The largest component within acquired intangibles is the ‘Frylight’ brand acquired with the acquisition of Morehands Limited (MH Foods) in June 2011. A useful life of 15 years has been assumed for this brand.

The remaining useful lives at 31 March 2013 for significant intangible assets are as follows:

Acquired Frylight brand: 13 years

The carrying value of the Frylight brand at 31 March 2013 is £5.3 million (2012: £5.7 million).

2013Disposal in the year relates to the sale of St Hubert – see Note 29.

2012Additions in the year relate to the acquisition of Morehands Limited (see above and Note 29) and computer software development for the UK Group.

Following the decision to close, subject to consultation, two Dairies sites, certain capitalised software development costs have been impaired by £0.4 million (see also Note 4 and Note 10).


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13 InvestmentsGroupDuring the year ended 31 March 2013, the Group acquired 7% of the share capital of HIECO Limited for a consideration of £0.3 million.

Company

Share grants awarded

in subsidiaries£m

Shares insubsidiary

undertakings£m

Total£m

Cost

At 1 April 2011 9.7 468.1 477.8

Share based payment charge in subsidiary companies 1.7 – 1.7

At 31 March 2012 11.4 468.1 479.5

Share based payment charge in subsidiary companies 1.4 – 1.4

At 31 March 2013 12.8 468.1 480.9

Shares in subsidiary undertakings comprise an investment in Dairy Crest Limited of £239.2 million and an investment of £228.9 million in Dairy Crest UK Limited.

Share grants awarded in subsidiaries represents the cumulative cost of the Company’s grant of equity instruments, under share based payment awards, to employees of subsidiary undertakings.

At 31 March 2013 the principal subsidiary undertakings and other associates were:

Business

Percentage ofordinary share

capital held

Subsidiary undertakings and associates:

Dairy Crest Limited Manufacture of dairy products 100%

Philpot Dairy Products Limited* Trading in dairy products 100%

Fayrefield Foodtec Limited* Manufacture and trading in dairy products and ingredients 100%

Morehands Limited* Manufacture of cooking oils 100%

Wexford Creamery Limited Manufacture of dairy products 30%

* Investments are held by Dairy Crest Limited

The principal place of operation and country of incorporation of all subsidiary undertakings and associates is England and Wales except for Wexford Creamery Limited which is in Ireland.

14 Investment in associates and joint ventures using equity methodThe investment in associates using the equity method at 31 March 2013 is represented predominantly by a 20% interest in Wexford Creamery Limited (‘WCL’) which is involved in the manufacture of cheese in the Republic of Ireland. Following the sale of 50% of the ordinary shares of WCL in June 2010, the Group equity accounts for a 20% shareholding in that company. The Group holds a further 10% of the issued share capital of WCL however, due to the existence of fixed-price put and call options in relation to this additional holding, it is considered deferred consideration and is not equity accounted.

The share of the assets, liabilities, income and expenses of associates at 31 March and for the years then ended, which are equity accounted for in the consolidated financial statements, are as follows:

2013

£m2012

£m

Current assets 1.7 2.3

Current liabilities (1.2) (1.5)

Non-current liabilities – (0.3)

(1.2) (1.8)

Share of net assets 0.5 0.5

Revenue 10.3 14.4

Operating costs (10.3) (14.6)

Finance costs – (0.1)

Loss before tax – (0.3)

Tax expense – –

Share of net loss – (0.3)



15 Inventories

Consolidated

2013£m

2012£m

Raw materials and consumables 33.2 35.8

Finished goods 175.0 152.0

208.2 187.8

Cheese inventories at 31 March 2013 totalled £155.5 million (2012: £129.8 million).

During the year ended 31 March 2013, £1.2 million of engineering and packaging inventories were written off comprising £1.0 million of inventories in Dairies and £0.2 million of inventories in Spreads. These write offs were necessitated by the closure of two Dairies sites and the consolidation of Clover manufacture into one site. See also Note 4.

In April 2013 the Group granted the Trustee of the Dairy Crest Group Pension Fund a floating charge over maturing cheese inventories with a maximum realisable value of £60 million.

16 Trade and other receivables


2013£m

2012£m

2013£m

2012£m

Trade receivables 83.3 115.2 – –

Amounts owed by subsidiary undertakings – – 169.3 218.8

Other receivables 10.6 10.7 1.4 1.0

Prepayments and accrued income 4.9 5.6 – –

98.8 131.5 170.7 219.8

All amounts above, with the exception of prepayments and accrued income, are financial assets.

Trade receivables are denominated in the following currencies:

Consolidated

2013

£m2012

£m

Sterling 79.9 98.5

Euro 0.6 15.0

Dollars 2.8 1.7

83.3 115.2

There are no material concentrations of credit risk.

Trade receivables are non interest bearing and are generally on 30–90 days’ terms and are shown net of a provision for impairment.

As at 31 March 2013, trade receivables at nominal value of £7.0 million (2012: £8.3 million) were impaired and provided for. Movements in the provision for impairment of receivables were as follows:

Consolidated

2013

£m2012

£m

At 1 April 8.3 5.3

Charge for the year – operating 0.9 1.1

Charge for the year – operating (exceptional – see Note 4) – 4.3

Amounts written off (2.2) (2.4)

At 31 March 7.0 8.3

Bad debt provisions are principally in the Dairies residential and mid sized commercial channels on debt over 90 days. These businesses sell product on the doorstep and to middle ground and foodservice customers. The Group has no history of bad debt with regard to sales to large multiple retailers. There were no impairment provisions on any other class of receivables at 31 March 2013 or 2012.


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16 Trade and other receivables continuedAt 31 March, the analysis of trade receivables that were past due but not impaired is as follows:

Past due, not impaired

Total

£m

Neither pastdue nor

impaired£m

30 – 60 days£m

60 – 90 days£m

> 90 days£m

31 March 2013 83.3 72.1 6.7 3.0 1.5

31 March 2012 115.2 103.3 9.4 2.5 –

The credit quality of trade receivables is assessed by reference to external credit ratings where available, otherwise historical information relating to counterparty default rates is used.

17 Financial assets

Derivative financial instrumentsConsolidated

Note

2013£m

2012£m

Current

Cross currency swaps (cash flow hedges) 9.6 –

Forward currency contracts (cash flow hedges) 31 – 0.3

9.6 0.3

Non-current

Option to sell 20% holding in Wexford Creamery Limited 31 1.6 1.6

Cross currency swaps (cash flow hedges) 31 12.9 15.0

14.5 16.6

Company

2013

£m2012

£m

Current

Cross currency swaps (cash flow hedges) 31 9.6 –

Non-current

Cross currency swaps (cash flow hedges) 31 12.9 15.0

All derivative financial instruments are fair valued at each balance sheet date and all, with the exception of the option to sell a 20% holding in Wexford Creamery Limited (‘WCL’), comprise Level 2 valuations under IFRS 7: Financial Instruments – Disclosures, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).

The WCL options comprise call and put options over 20% of the company for a price of €3.6 million adjusted for 20% of WCL’s post-tax profits/losses from June 2010 until the date of exercise. This comprises a Level 3 valuation, namely that it is not based on inputs observable directly or indirectly. Management has valued this option by comparing the current equity accounted carrying value of the 20% holding with the estimated present value of consideration received from the exercise of the option. The difference between these amounts comprises the option value of £1.6 million at 31 March 2013. The principal input assumptions in valuing these options are (i) estimated future profits of WCL which have been based upon best available budgets and forecasts (ii) an appropriate post-tax discount rate of 6% and (iii) an option exercise date of 2018. Over the period until exercise of these options, any movement in the fair value of these instruments is charged/credited to the income statement.

There has been no material movement in the fair value of the WCL options between recognition in June 2010 and 31 March 2013.




18 Cash and short-term deposits


2013

£m2012

£m2013

£m2012

£m

Cash and short-term deposits 276.1 79.4 14.8 –

Cash at bank earns interest at floating rates based on daily bank deposit rates.

Following the sale of St Hubert, significant amounts of cash were placed on deposit resulting in concentrations of credit until the repayment of loan notes and the one-off contribution to the pension scheme in April 2013. Counterparty risk and the Group’s policy for managing deposits are described in Note 30.

19 Financial Liabilities

Group Note2013

£m2012

£m

Current

Obligations under finance leases 31 2.4 2.7

Loan notes (at amortised cost) 165.7 –

Debt issuance costs (0.6) (0.7)

Financial liabilities – Borrowings 167.5 2.0


Forward currency contracts (at fair value: cash flow hedge) 31 0.1 –

Financial liabilities – Derivative financial instruments 2.3 –

Current financial liabilities 169.8 2.0

Non-current

Obligations under finance leases 31 3.1 4.5

Loan notes (at amortised cost) 31 182.4 345.5

Bank loans (at amortised cost) 31 – 71.7



Cross currency swaps (cash flow hedges) 3.9 8.7

Financial liabilities – Derivative financial instruments 3.9 8.7

Non-current financial liabilities 188.2 428.4

All derivative financial instruments are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 7: Financial Instruments – Disclosures, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).


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19 Financial Liabilities continuedInterest bearing loans and borrowingsThe effective interest rates on loans and borrowings at the balance sheet date were as follows:

Maturity

2013£m

EffectiveInterest rate

at March 20132012

£m


at March 2012

Current

Loan notesUS$ swapped into £ April 2013 68.7 5.32% – –

Euro April 2014 (repaid April 2013) 21.0 4.74% – –


Euro swapped into £ April 2014 (repaid April 2013) 45.6 5.04% – –

Sterling April 2017 (repaid April 2013) 7.2 5.84% – –

Finance leases 2.4 5.18% 2.7 5.18%


167.5 2.0

Non-current

Multi-currency revolving credit facilities:

Euro floating October 2016 – – 61.7 EURIBOR + 135bps

Sterling floating October 2016 – – 10.0 LIBOR + 135bps

Loan notes:US$ swapped into £ April 2013 – – 68.1 5.32%

US$ swapped into £ April 2016 81.0 5.31% 78.8 5.31%

Sterling April 2016 10.0 5.27% 10.0 5.27%

Euro April 2014 8.2 4.74% 29.8 4.74%

Euro April 2017 9.0 4.85% 32.7 4.85%

Euro swapped into £ April 2014 17.8 5.04% 62.5 5.04%

Sterling April 2017 2.8 5.84% 10.0 5.84%

US$ swapped into £ November 2018 16.5 3.87% 15.8 3.87%


Finance Leases 3.1 5.18% 4.5 5.18%


184.3 419.7

On 2 November 2012, following the disposal of St Hubert, the Group repaid £7.5 million of loan notes at par comprising: $5.6 million (£3.2 million) of 2006 notes, €2.4 million (£2.0 million) of 2007 notes and $3.7 million (£2.3 million) of 2011 notes.

In March 2013, the Group gave irrevocable notice to holders of the loan notes maturing in 2014 and 2017, that 72% of the principal plus any make whole penalties would be repaid in April 2013. Those notes repaid in April have therefore been classified as current liabilities at 31 March 2013, along with any cross currency swaps that were designated as cash flow hedges against those notes. Furthermore, in March 2013, £0.3 million of unamortised debt issuance costs were written off representing approximately one sixth of the unamortised amount. This write down resulted from a proportionate reduction in the revolving credit facility that was completed in April 2013. See Note 34.

On 12 October 2011, the Group entered into a new five year revolving credit facility of £170 million plus €150 million with a syndicate of five banks. The existing £100 million and £85 million plus €175 million revolving credit facilities (maturing in November 2011 and July 2013 respectively) were cancelled and repaid on 19 October 2011 using funds drawn under the new facility. Upfront debt issuance costs amounted to £3.0 million and these are charged to the consolidated income statement over four years being the expected life of the new facility before it is replaced. Unamortised debt issuance costs at 31 March 2013 amounted to £1.8 million (2012: £2.7 million) of which £0.6 million (2012: £0.7 million) will amortise within 12 months.

The Group raised $85 million (£54.5 million) by way of a debt private placement with US investors on 30 November 2011. These notes were a mix of seven-year ($25 million) and ten-year ($60 million) maturities. All principal and interest cash flows have been swapped into Sterling at an exchange rate of 1.56 and interest rates of 3.87% and 4.52% on the seven and ten year notes respectively.

The Group is subject to a number of covenants in relation to its borrowing facilities which, if contravened, would result in its loans becoming immediately repayable. These covenants specify a maximum net debt to EBITDA ratio of 3.5 times, and minimum interest cover ratio of 3.0 times. No covenants were contravened in the year ended 31 March 2013 (2012: None). Key covenants under the 2011 revolving credit facility and debt private placement were unchanged from existing covenants.

Details of the Group’s interest rate management strategy and interest rate swaps are included in notes 30 and 31.



19 Financial Liabilities continued

Company2013

£m2012

£m

Current

Loan notes (at amortised cost) 165.7 –

Financial liabilities – Borrowings 165.7 –


Financial liabilities – Derivative financial instruments 2.2 –

Current financial liabilities 167.9 –

Non-current

Loan notes (at amortised cost) 182.4 345.5

Bank loans (at amortised cost) – 61.7


Cross currency swaps (cash flow hedges) 3.9 8.7

Financial liabilities – Derivative financial instruments 3.9 8.7

Non-current financial liabilities 186.3 415.9

All derivative financial instruments are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 7: Financial Instruments – Disclosures, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).

Interest bearing loans and borrowingsThe effective interest rates on loans and borrowings at the balance sheet date were as follows:

Maturity

2013£m


at March 20132012

£m

EffectiveInterest rateat March 2012

Current

Loan notesUS$ swapped into £ April 2013 68.7 5.32% – –



Euro swapped into £ April 2014 (repaid April 2013) 45.6 5.04% – –

Sterling April 2017 (repaid April 2013) 7.2 5.84% – –

165.7 –

Non–current

Multi-currency revolving credit facilities:

Euro floating October 2016 – – 61.7 EURIBOR + 135bps

Loan notes:US$ swapped into £ April 2013 – – 68.1 5.32%

US$ swapped into £ April 2016 81.0 5.31% 78.8 5.31%

Sterling April 2016 10.0 5.27% 10.0 5.27%

Euro April 2014 8.2 4.74% 29.8 4.74%

Euro April 2017 9.0 4.85% 32.7 4.85%

Euro swapped into £ April 2014 17.8 5.04% 62.5 5.04%

Sterling April 2017 2.8 5.84% 10.0 5.84%



182.4 407.2


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20 Retirement benefit obligationsThe Group has one defined benefit pension scheme in the UK which was closed to future service accrual from 1 April 2010. This pension scheme is a final salary scheme that had previously been closed to new employees joining after 30 June 2006. Employees joining after this date and those members of the defined benefit pension scheme on its closure to future service accrual were invited to join the Dairy Crest Group defined contribution plan.

The most recent full actuarial valuation of the Dairy Crest Group Pension Fund was carried out as at 31 March 2010 by the fund’s independent actuary using the projected unit credit method. Full actuarial valuations are carried out triennially. This valuation resulted in a deficit of £137 million compared to the IAS19 deficit of £142.4 million reported at that date. The next full actuarial valuation will be carried out in 2013/14 on the 31 March 2013 position.

The following tables summarise the components of net benefit expense recognised in the consolidated income statement and the funded status and amounts recognised in the consolidated balance sheet for the defined benefit pension scheme.

Dairy Crest GroupPension Fund

Net benefit income recognised in the consolidated income statement2013

£m2012

£m

Gain on settlement (see below) – (0.3)

Interest cost on benefit obligation 41.5 43.5

Expected return on scheme assets (47.4) (49.0)

Net benefit income (5.9) (5.8)

Net actuarial loss recognised in other comprehensive income

Actual return less expected return on pension scheme assets 69.4 21.9

Experience gains/(losses) arising on scheme liabilities 0.8 (6.5)

Loss arising from changes in assumptions underlying the present value of scheme liabilities (72.8) (61.6)

Net actuarial loss (2.6) (46.2)

Recognition of liability for unrecoverable notional surplus (10.9) –

Recognised in other comprehensive income (13.5) (46.2)

Related tax 7.8 11.2

Net actuarial loss recognised in other comprehensive income (5.7) (35.0)

Actual returns on plan assets were £116.8 million (2012: £70.9 million).

Defined benefit obligation

Fair value of scheme assets: – Equities 84.3 72.7

– Bonds and cash 393.4 293.2

– Equity return swaps valuation 42.9 61.8

– Property and other 62.5 58.8

– Insured retirement obligations 286.3 279.6

869.4 766.1

Defined benefit obligation: – Uninsured retirement obligations (639.4) (566.3)

– Insured retirement obligations (286.3) (279.6)

Total defined benefit obligation (925.7) (845.9)

Recognition of liability for unrecoverable notional surplus (10.9) –

(936.6) (845.9)

Net liability recognised in the balance sheet (67.2) (79.8)

Related deferred tax asset 17.1 15.8

Net pension liability (50.1) (64.0)

From October 2009, the Group has been making additional funding contributions to the scheme of £20 million per annum. The level of cash contributions will continue at this level until March 2018 based on the latest schedule of contributions which was signed in June 2011. However a new schedule of contributions will be agreed with the Trustee following the next full actuarial review at 31 March 2013. The £20 million per annum amount includes £2.8 million per annum of rental payments for land and buildings that are subject to a sale and leaseback agreement between the Group and the scheme as part of the final schedule of contributions. The land and buildings included in these arrangements are subject to long term leases and the Group will continue to benefit from substantially all of the risks and rewards of ownership. On this basis, under IFRS, these land and buildings continue to be recognised in property, plant and equipment and rental payments of £2.8 million per annum are treated as cash contributions, reflecting the substance of the arrangements.




20 Retirement benefit obligations continuedThe Group is entitled to any surplus on winding up of the pension scheme albeit refunds are subject to tax deductions of 35% at source. Based on the present value of committed cash contributions at 31 March 2013 and the IAS 19 valuation at that date of £56.3 million, £10.9 million would be deducted from any notional surplus returned to the Group and this has been recognised as an additional liability in accordance with IFRIC 14. However, it should be noted that cash contributions are determined by reference to the triennial actuarial valuation, not the IAS 19 valuation. The actuarial deficit is greater than that recognised under IAS 19 since liabilities are discounted at gilt yields rather than high quality corporate bond yields.

In December 2008, certain obligations relating to retired members were hedged by the purchase of an insurance contract. A further insurance contract for retired members was purchased in June 2009 resulting in coverage for all members who retired up to August 2008. These contracts are included within scheme assets and their value will always be equal to the obligation as calculated under IAS 19 for those members covered.

The purchase of the second insurance contract in June 2009 was funded by the sale of equities. Subsequently, in order to re-establish an appropriate equity weighting of scheme assets, the Fund purchased equity total return swaps (synthetic equity). These instruments comprise an asset leg and a liability leg. The asset leg generates a return based on UK and overseas equity indices and the liability leg incurs a cost based on LIBOR plus margin. Credit risk is minimised since collateral is provided by the counterparties to the benefit of the Fund when the instruments are in the money. At 31 March 2013, the valuation of the above comprises a positive equity exposure of £276.8 million and a negative LIBOR exposure of £233.9 million (2012: equity exposure of £226.4 million and LIBOR exposure of £164.6 million).

An Enhanced Transfer Value (‘ETV’) exercise took place during the year ended 31 March 2012 which resulted in approximately 220 members transferring a total of £14.3 million in ETVs out of the Fund. The net gain as a result of this settlement of £0.3 million represents the difference between the £14.3 million transferred out and the corresponding liabilities, measured on an IAS 19 basis, at the date that the settlement became binding.

Scheme assets are stated at their market values at the respective balance sheet dates with the exception of the insured retirement obligations which equal the IAS 19 valuation of obligations which they cover. The Group will adopt amendments to IAS 19R in the year ending March 2014. These amendments will result in the return on assets being calculated by reference to the discount rate assumption and not return assumptions for individual asset classes. Had IAS 19R been adopted in the year ended 31 March 2013, the expected return on scheme assets in the table above would have amounted to £38.0 million, resulting in an overall net cost of £3.5 million being charged to the consolidated income statement. Under the revised IAS 19, the net pension liability of £56.3 million would be unchanged. Furthermore under changes to IAS 19, future scheme administrative expenses will be charged as operating costs in the consolidated income statement. Had this been effective for the year ended 31 March 2013, the Group would have charged £0.7 million to operating costs.

The average duration of scheme liabilities is approximately 18 years (2012: 19 years). Discount rate assumptions for each reporting period are based upon quoted AA-rated corporate bond indices, excluding collateralised bonds, with maturities matching the Scheme’s expected benefit payments.

The RPI inflation assumptions are determined by adopting a yield curve approach, based on the break-even rate of inflation implied by fixed interest gilt yields and index-linked yields. Applying this approach to the Scheme’s projected benefit payments gives an average break-even inflation assumption of 3.5% (2012: 3.4%). The CPI inflation assumption is determined by reference to adjusted RPI rather than by reference to CPI-linked investments where the market is small and illiquid. The principal differences between RPI and CPI are (i) the formula effect due to RPI using arithmetic means and CPI geometric means, and (ii) the bundles of goods considered – CPI excludes mortgage payments and other housing costs. The assumption used at 31 March 2013 is that CPI inflation will track 1.0% points below RPI inflation in the long term (2012: 1%) and is therefore set at 2.5% (2012: 2.4%). Pension increase assumptions are based on RPI with an adjustment to reflect caps within the Scheme rules.

Mortality assumptions were updated in the year ended 31 March 2011 based on analysis of the membership data performed as part of the March 2010 full actuarial valuation. The result was an increase in life expectancy assumptions of approximately 1.7 years. Broadly the same mortality input assumptions have been used for March 2012 and 2013 with no material resultant change in life expectancies.

The Scheme deficit is highly dependent upon these input assumptions which are set at the reporting period end dates. A 0.1% decrease in the discount rate assumption would increase the Scheme obligation by approximately £19 million (2012: £17 million). A 0.1% increase in the inflation assumption would increase the Scheme obligation by approximately £14 million (2012: £16 million). An increase in life expectancy across all members of one year would increase the scheme obligation by approximately £37 million (2012: £43 million).


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20 Retirement benefit obligations continued Dairy Crest GroupPension Fund

Movement in the present value of the defined benefit obligations are as follows:2013

£m2012

£m

Opening defined benefit obligation (845.9) (778.7)

Settlement gains – 0.3

Interest cost (41.5) (43.5)

Actuarial losses (72.0) (68.1)

Benefits paid 33.7 44.1

Closing defined benefit obligation (925.7) (845.9)

Movement in the fair value of plan assets are as follows:

Opening fair value of scheme assets 766.1 718.6

Expected return 47.4 49.0

Actual less expected return 69.4 21.9

Contributions by employer 20.2 20.7

Benefits paid (33.7) (44.1)

Closing fair value of plan assets 869.4 766.1

The principal assumptions used in determining retirement benefit obligations for the Dairy Crest Group Pension Fund are shown below:

2013

%2012

%

Key assumptions:

Price inflation (RPI) 3.5 3.4

Price inflation (CPI) 2.5 2.4

Average expected remaining life of a 65 year old non-retired male (years) 22.6 22.5

Average expected remaining life of a 65 year old retired male (years) 21.7 21.6

Average expected remaining life of a 65 year old non-retired female (years) 25.3 25.2

Average expected remaining life of a 65 year old retired female (years) 24.1 24.0

Discount rate 4.6 5.0

Expected return: – Equities 8.0 8.0

– Gilts and bonds 4.3 4.3

– Synthetic equity exposure on equity swap contracts 8.0 8.0

– LIBOR exposure on equity swap contracts 3.2 3.3

– Property and other 7.0 7.0

– Insured retirement obligations 4.6 5.0

History of experience gains and losses:2009

£m2010

£m2011

£m2012

£m2013

£m

Fair value of scheme assets 513.0 680.1 718.6 766.1 869.4

Present value of defined benefit obligation (576.3) (822.5) (778.7) (845.9) (936.6)

Net deficit (63.3) (142.4) (60.1) (79.8) (67.2)

Experience adjustments arising on scheme liabilities 6.8 7.9 16.4 (6.5) 0.8

Adjustments arising from changes in underlying assumptions 106.2 (259.8) 21.7 (61.6) (72.8)

Experience adjustments arising on scheme assets (231.1) 134.2 22.5 21.9 69.4

Recognition of liability for unrecoverable notional surplus. – – – – (10.9)

Net actuarial gain/(loss) (118.1) (117.7) 60.6 (46.2) (13.5)

The cumulative amount of actuarial losses recognised in the statement of other comprehensive income since 1 April 2004 is £145.6 million (2012: £143.0 million) and in the Company statement of other recognised income and expense is nil (2012: nil).

The directors are unable to determine how much of the pension scheme deficit recognised on transition to IFRS, and taken directly to equity of £93.2 million, is attributable to actuarial gains and losses since inception of those pension schemes. Consequently, the directors are unable to determine the amount of actuarial gains and losses that would have been recognised in the Group statement of other recognised income and expense before 1 April 2004.



20 Retirement benefit obligations continuedThe Company recognises no liabilities on its balance sheet, or charges or credits in its income statement or statement of recognised income and expense in relation to the Group pension plans. The legal sponsor of the Dairy Crest Group Pension Fund is Dairy Crest Limited.

The Group has charged £7.1 million in respect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2013 (2012: £7.9 million). The Company has made no charge in repect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2013 (2012: nil).

21 Trade and other payables


2013

£m2012

£m2013

£m2012

£m

Trade payables* 109.9 146.0 – –

Other tax and social security 4.7 7.8 – –

Other creditors* 13.6 15.7 – –

Accruals* 93.6 96.9 16.9 8.0

221.8 266.4 16.9 8.0

* Financial liabilities at amortised cost.

22 Deferred income

Current2013

£m2012

£m

Grants 1.6 0.5

Other – 0.1

1.6 0.6

Non-current

Grants 9.6 6.9

In 2010/11 two new biomass boilers were installed at the Davidstow cheese manufacturing site. Capital expenditure amounted to £3.9 million and we received cash grants of £0.8 million during the year ended 31 March 2011 and £0.2 million during the year ended 31 March 2012 from the South West of England Regional Development Agency. This grant is conditional upon certain conditions – principally regarding continued use and ownership of the boilers until 29 November 2014. In the year ended 31 March 2013, £0.4 million of this grant was voluntarily repaid in order to receive annual renewable heat incentives. The conditions concerning the remaining outstanding grant are unchanged.

In 2012/13 the Group announced that it was consolidating its spreads manufacturing in a single site at Kirkby, Liverpool. During the year the Group received a grant of £5.3 million under the Regional Growth Fund from the Department of Business, Innovation and Skills in relation to this project. This grant is conditional upon certain conditions over a five year term, principally the project being completed and creating or safeguarding the agreed number of jobs.

A grant of £0.3 million in relation to the Crudgington site was written off to exceptional items in the year ended 31 March 2013 following the write down of property, plant and equipment at that site following the announced closure plans. All conditions on this grant had been met and no repayment was required.

With the exception of the grants relating to the biomass boiler at Davidstow and the Kirkby job creation, the Group has met all applicable conditions attaching to grants at 31 March 2013 and all previously received grants were unconditional at that date.

23 Provisions

OFT provision(includinglegal fees)

£m

Onerouscontracts

£mTotal

£m

At 31 March 2011 – Current 7.3 3.0 10.3

Utilised (7.3) (0.9) (8.2)

Discount unwind – 0.2 0.2

At 31 March 2012 – Current – 2.3 2.3

Utilised – (0.8) (0.8)

Discount unwind – 0.2 0.2

At 31 March 2013 – current – 1.7 1.7

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23 Provisions continuedOffice of Fair Trading (‘OFT’)An exceptional provision was charged in 2007/08 in relation to the settlement of the OFT investigation into milk price initiatives (including legal costs). The amount of the fine provided was £9.4 million plus legal fees and reflected the early resolution agreement that was reached with the OFT in December 2007. In April 2010, the OFT announced that parties to the 2007 Statement of Objections will get a penalty reduction provided each company continues to co-operate with the OFT. Accordingly, the provision was reduced to reflect our best estimate of the penalty ultimately payable (£7.1 million) plus legal fees expected to be incurred (£0.2 million). The penalty was settled on 11 October 2011.

Onerous contractIn June 2010, the Group disposed of 50% of the share capital of Wexford Creamery Limited (‘WCL’). As part of the disposal, the Group entered into an agreement to purchase guaranteed minimum volumes of cheese from WCL for a period of five years from the date of disposal. The price paid by the Group for that cheese is determined by reference to cost plus margin. Realisations for commodity cheese fluctuate and at the date of disposal a provision of £3.6 million was charged in order to provide for the cost of the cheese purchase arrangements. At 31 March 2013 the provision amounted to £1.7 million (2012: £2.3 million).

24 Share capital

Authorised2013

Thousands2012

Thousands

Ordinary shares of 25 pence each 240,000 240,000

Issued and fully paid Thousands £m

At 31 March 2011 133,306 33.3

Issued for cash on exercise of share options 45 –

At 31 March 2012 133,351 33.3

Issued for cash on exercise of share options 3,245 0.8

At 31 March 2013 136,596 34.1

During the year ended 31 March 2013 3,244,954 shares were issued at a premium of £6.6 million for an aggregate consideration of £7.4 million (2012: 45,195 shares at a premium of £0.1 million for an aggregate consideration of £0.1 million). Exercises of LTISP options and vesting of deferred bonus shares are fulfilled by the issue of existing shares from the Dairy Crest Employees’ Share Ownership Plan (‘ESOP’) – see Note 25.

25 Notes to statement of changes in equityConsolidatedThe shares held by the ESOP are available to satisfy awards under LTISP (see Note 26)

At 31 March 2013 the ESOP held 127,939 shares (2012: 127,939 shares) in the Company at a cost of £0.6 million (2012: £0.6 million). The ESOP was established in August 1996 to purchase shares in the Company in order to hedge certain future obligations of the Group including shares awarded under the LTISP, ESOS and the deferred bonus plan. During the year the Trustee of the ESOP issued no shares (2012: 6,891) following exercises of LTISP options and deferred bonuses.

The market value of the shares held by the ESOP, which are listed on the London Stock Exchange was £0.5 million at 31 March 2013 (2012: £0.4 million).

Other reserves – Consolidated

Mergerreserve

£m

Hedgingreserve

£m

Translationreserve

£m

Otherreserves

£m

At 31 March 2012 55.9 (3.3) (3.6) 49.0

Total recognised in other comprehensive income – 0.3 2.1 2.4

At 31 March 2013 55.9 (3.0) (1.5) 51.4

At 31 March 2011 55.9 – 8.2 64.1

Total recognised in other comprehensive income – (3.3) (11.8) (15.1)

At 31 March 2012 55.9 (3.3) (3.6) 49.0

The merger reserve includes the premium on shares issued to satisfy the purchase of Dairy Crest Limited in 1996. The cumulative amount of goodwill charged against the merger reserve is £86.8 million (2012: £86.8 million). The reserve is not distributable.

The hedging reserve records the gains and losses on hedging instruments, to the extent that they are effective cash flow hedges. Any gains and losses previously recorded in the hedging reserve are reclassified in profit and loss when the underlying hedged item affects profit and loss.

The translation reserve records exchange differences arising from the translation of the accounts of foreign currency denominated subsidiaries offset by the movements on loans and derivatives designated to hedge the net investment in foreign subsidiaries.




25 Notes to statement of changes in equity continuedParent CompanyAs permitted by section 408 of the Companies Act 2006, no separate profit and loss account is presented for the Company. The profit for the year dealt with in the accounts of the Company is £44.4 million (2012: £40.4 million) including dividends received from subsidiary companies of £51.5 million (2012: £46.8 million). Dividends paid amounted to £27.4 million (2012: £26.5 million) which, along with a credit for share based payments of £0.5 million (2012: £0.7 million) resulted in a £17.5 million increase in retained earnings (2012: £14.6 million increase).

In 1996 the Company acquired the entire issued share capital of Dairy Crest Limited. Consideration was in the form of cash and the issue of 109.8 million ordinary shares of 25 pence each. The fair value of the shares issued was estimated as £170.2 million. The capital reserve of £142.7 million, shown in the statement of changes in equity, represents the difference between the fair value of shares issued and their nominal value of £27.5 million.

26 Share based payment plansGroupThe Group has three share option schemes in operation.

The Dairy Crest Long Term Incentive Share Plan (‘LTISP’)This is a long-term incentive scheme under which awards are made to directors and senior managers consisting of the right to acquire shares for a nominal price subject to the achievement of financial targets based on (i) total shareholder return (‘TSR’) over a three year period versus comparator companies and (ii) growth in adjusted basic earnings per share. From 2009, the TSR element was increased from 50% to 60% of the awards granted. The vesting period for grants made under this scheme is 3 years with an exercise period of 7 years. In June and July 2012, a total of 1,094,734 options was granted under the LTISP scheme (July 2011: 995,183). There are no cash settlement alternatives.

Dairy Crest Sharesave SchemeAll employees are eligible to join the Dairy Crest Sharesave Scheme, which allows employees to use regular monthly savings to purchase shares. Options are granted at a discount of up to 20% of the market value of the shares. No financial performance criteria are attached to these options and they vest three years from the date of grant with an exercise period of six months. On 14 December 2012 2,390,456 options were granted under the Dairy Crest Sharesave Scheme at a grant price of 281 pence (December 2011: 1,145,978 options at a grant price of 265 pence). There are no cash settlement alternatives.

Deferred bonus schemeFrom 2005/06, bonuses earned that are in excess of 50% of basic salary are deferred in shares (and from 2011 in share options) with a vesting period of three years. The only vesting condition is continuing employment. The cost of these shares is charged over four years (being the year the bonus was earned and the three-year vesting period) and is based on the number of shares issued (or from 2011 over which nil cost options are granted) and the share price at the date of issue. No deferred shares were awarded or issued in relation to the year ended 31 March 2013 (2012: £nil).

The number of share options and weighted average exercise price for each of the principal schemes is set out as follows:

LTISP* Sharesave Scheme

number number

weighted averageexercise

price(pence)

Options outstanding at 1 April 2012 1,860,408 4,768,410 238.4

Options granted during the year 1,094,734 2,390,456 281.0

Reinvested dividends 154,244 – –

Options exercised during the year – (3,244,954) 227.2

Options forfeited during the year (1,108,586) (387,864) 259.3

Options outstanding at 31 March 2013 2,000,800 3,526,048 275.4

Exercisable at 31 March 2013 24,978 34,459 227.0

Options outstanding at 1 April 2011 1,957,774 3,855,782 237.8

Options granted during the year 995,183 1,445,978 265.0


Options exercised during the year (3,252) (45,195) 227.0

Options forfeited during the year (1,247,523) (488,155) 313.4

Options outstanding at 31 March 2012 1,860,408 4,768,410 238.4

Exercisable at 31 March 2012 25,563 – –

* The weighted average exercise price for LTISP options is nil.

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26 Share based payment plans continuedSharesave scheme options are exercisable up to September 2016 at prices ranging from 227p to 281p (March 2012: exercisable up to September 2015 at prices ranging from 227p to 265p). LTISP options are exercisable at varying dates up to July 2022 (March 2012: July 2021).

The remaining weighted average contractual life of options outstanding at 31 March 2013 is 8.7 years for the LTISP and 3.1 years for the Sharesave Scheme (2012: 8.71 years and 1.67 years respectively). The weighted average share price on exercise of Sharesave options was £3.53 (2012: £3.47).

The fair value factor of the Sharesave Scheme options issued in December 2012 is 20.7% (December 2011: 22%) giving a fair value of £0.81 (December 2011: £0.58) per option granted. This has been computed using a Black-Scholes option pricing model. The key assumptions used in the valuation model for the December 2012 grant were: Expected share price volatility 22% (December 2011: 38%), risk free rate of interest 0.5% (December 2011: 0.5%) and dividend yield 5.22% (December 2011: 6.2%). The volatility assumption is based on the historical volatility of the Dairy Crest Group plc share price over a period commensurate with the expected option life, ending on the grant date of the option.

The LTISP has market and non-market based performance conditions. The fair value of the market performance element of the LTISP awards is calculated using a Monte Carlo option pricing model. The fair value factor for the award made in July 2012 is 65% for the TSR element and 100% for the EPS element (July 2011: 65% TSR and 100% EPS) giving a fair value of £2.75 per option granted (2011: £2.91). The share price on granting 2012 awards was £3.34 (2011: £3.68). The non-market performance element of the LTISP is based on EPS and the charge for this is the value of shares expected to vest calculated by reference to the share price at the date of grant. Volatility assumptions are made for Dairy Crest Group plc and comparator companies based on historical volatility of share prices over a period commensurate with the option life.

The input assumptions for the LTISP grant in the year ended 31 March 2013 were as follows:

Term 3 years (2012: 3 years)

Volatility 23% (2012: 40%)

Risk free rate 0.4% (2012: 1.3%)

Average volatility of comparator TSR 36% (2012: 44%)

TSR correlation (Dairy Crest vs comparators) 22% (2012: 22%)

The expected life of the LTISP options is assumed to be equal to the vesting period, being three years.

The Group expense arising from share option plans for the year ended 31 March 2013 is £1.9 million (2012: £2.4 million) (See Note 9).

CompanyThe number of share options and weighted average exercise price for each of the schemes for employees of the Company is set out as follows:

LTISP Sharesave Scheme

number number

weighted averageexercise

price(pence)

Options outstanding at 1 April 2012 683,272 15,988 227.0

Options granted during the year 393,540 12,808 281.0


Options exercised during the year – (15,988) 227.0

Options forfeited during the year (358,247) – –

Options outstanding at 31 March 2013 777,916 12,808 281.0

Exercisable at 31 March 2013 – – –

Options outstanding at 1 April 2011 728,972 15,988 227.0

Options granted during the year 343,252 – –


Options exercised during the year – – –

Options forfeited during the year (447,804) – –

Options outstanding at 31 March 2012 683,272 15,988 227.0

Exercisable at 31 March 2012 – – –

Sharesave Scheme options are exercisable up to September 2016 at a price of 281p (March 2012: up to March 2013 at a price of 227p). LTISP options are exercisable at varying dates up to July 2022 (2012: July 2021). The remaining average weighted average contractual life of options outstanding at 31 March 2013 is 8.8 years for the LTISP and 3.4 years for the Sharesave Scheme (2012: 8.76 years and 0.92 years respectively). There were no exercises of LTISP options in the year ended 31 March 2013 (2012: nil).

The Company expense arising from share option plans for the year ended 31 March 2013 was £0.5 million (2012: £0.7 million).




27 Commitments and contingenciesThe Group has entered into commercial leases on certain land and buildings, vehicles and equipment. There are no material renewal options, escalation clauses or purchase options included in the lease contracts. There are no contingent rentals or operating leases or material sub-leases. There are no significant restrictions placed upon the lessee by entering into these leases. Excluding land and buildings, these leases have an average life of between three and seven years.

During the year ended 31 March 2012, certain assets at our Severnside facility were sold for cash consideration of £6.8 million. This equipment has been leased back under an operating lease with a six year term. The assets subject to the operating lease have an average useful economic life of approximately ten years. There are no purchase option clauses or any contingent lease rentals.

Future minimum rentals payable under non-cancellable operating leases as at 31 March are as follows:

2013

£m2012

£m

Within one year 23.6 26.0

After one year but not more than five years 43.8 49.6

More than five years 14.5 17.2

Finance leasesThe Group finance leases principally comprise certain items of plant and equipment at the Davidstow site. The initial lease term is for 10 years with a further renewal term of 7 years. There are no purchase options and escalation clauses and there is no sub-leasing of the assets or contingent rentals. Future minimum payments under finance leases together with the present value of the net minimum lease payments are as follows:

2013 2012

Minimumpayments

£m

Present value

of payments

£m

Minimumpayments

£m

Present value

of payments£m

Within one year 2.5 2.4 2.9 2.7

After one year but not more than two years 3.2 3.1 3.3 3.2

After two years but not more than five years – – 1.3 1.3

After more than five years – – – –

Total minimum lease payments 5.7 5.5 7.5 7.2

Less: amounts representing finance charges (0.2) – (0.3) –

Present value of minimum lease payments 5.5 5.5 7.2 7.2

Trading guaranteesThe Group has provided guarantees and counter-indemnities which totalled £4.1 million at 31 March 2013 (2012: £3.4 million). These guarantees are made principally by Philpot Dairy Products Limited, a subsidiary company, to customers as performance bonds and to the Rural Payment Agency in relation to EU subsidies claimed.


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28 Related party transactionsIn June 2010, the Group disposed of its controlling interest in Wexford Creamery Limited (‘WCL’). WCL has been treated as an equity accounted associate from June 2010 to 31 March 2013. On disposal, the Group contracted to purchase guaranteed minimum volumes of cheese from WCL for a period of five years from the date of disposal. In the year ended 31 March 2013 the cost of cheese purchased was £7.5 million (2012: £8.9 million).

Compensation of key management personnel of the Group and Company2013

£m2012

£m

Short-term employee benefits 2.8 2.8

Share-based payments 0.5 0.7

Total compensation paid to key management personnel* 3.3 3.5

* Further details relating to compensation of key management personnel are set out in the Directors’ Remuneration Report. This includes a description of pension arrangements and any cash supplements paid.

Key management personnel comprise Executive and Non-executive Board members of Dairy Crest Group plc. The senior management team is small and all key decisions are made by either the three Executive directors in the Executive Management Committee or by the Group Board which meets regularly.

Dairy Crest Limited, a subsidiary company, incurred costs of £2.8 million (2012: £2.4 million) from the Company for the provision of management and administrative services carried out on its behalf. Dairy Crest Limited received £2.1 million (2012: £2.1 million) for the remuneration of the Company’s employees which had been paid by Dairy Crest Limited.

Interest charges of £0.2 million (2012: £0.2 million) were incurred by the Company from Dairy Crest Limited on a loan reflecting an interest rate of LIBOR+100 basis points. Interest income of £12.1 million (2012: £11.4 million) was received by the Company from Dairy Crest Limited on a loan reflecting an interest rate of 5.3% (2012: 5.3%) and a further £0.3 million was received by the Company from Dairy Crest Limited on floating rate loans paying LIBOR plus margin (2012: £0.3 million). The Company paid no interest (2012: £0.4 million) to Dairy Crest Limited on cross-currency swaps paying LIBOR and receiving EURIBOR.

29 Business combinations and disposalsYear ended 31 March 2013

Disposal of Discontinued OperationFollowing a strategic review of the Group’s overseas operations in the light of the inability to undertake synergistic acquisitions, on 28 August 2012 the Group completed the disposal of St Hubert SAS (‘St Hubert’) for a cash consideration of £341.1 million (€430.5 million). St Hubert formed part of the Spreads reportable segment. Cash held in the disposed business at that date amounted to £4.1 million, resulting in a net cash inflow to the Group of £337.0 million. This amount has been reduced by fees of £6.2 million. The disposal resulted in a post-tax profit of £47.7 million which can be analysed as follows:

£m £m

Sales proceeds – cash consideration 341.1

Book value of assets disposed of:

Property, plant and equipment 10.3

Goodwill 176.4

Intangible assets 131.5

Inventories 3.3

Trade and other receivables 14.9

Cash and short-term deposits 4.1

Trade and other payables (18.4)

Current tax (5.5)

Deferred tax (44.5) (272.1)

Gain on disposal before fees and recycling of exchange differences 69.0

Fees (6.2)

Amounts reclassified to profit and loss (11.4)

Pre-tax gain on disposal 51.4

Expected tax charge (3.7)

Post-tax gain on disposal of Discontinued Operation 47.7

The expected tax charge principally comprises capital gains taxes resulting from the disposal as well as expected taxation on €74million of dividends paid in the period up to the date of disposal. These taxes were crystallised as a result of the divestment and as a consequence the breaking of the St Hubert tax group. An estimate has been made of the likely tax costs resulting from these transactions however the final assessment has yet to be agreed with the French tax authorities which may result in a change to the level of tax provisioning.




29 Business combinations and disposals continuedAs a result of the disposal the St Hubert business has been classified as discontinued operations and prior period comparatives have been adjusted accordingly. The post-tax profit of discontinued activities can be analysed as follows:

Year ended31 March

2013£m

Year ended31 March

2012£m

Revenue 41.7 117.4

Operating costs before amortisation of acquired intangibles (27.5) (77.6)

Trading profit 14.2 39.8

Amortisation of acquired intangibles (3.0) (8.3)

Profit on operations 11.2 31.5

Finance income 0.1 0.1

Profit before tax 11.3 31.6

Tax expense (4.5) (9.9)

Profit for the year from Discontinued Operation 6.8 21.7

The cash flows of the St Hubert business in the period to the date of disposal and in the prior year can be analysed as follows:

Cash flow from operating activities 0.3 32.2

Cash used in investing activities (0.6) (2.3)

Cash generated from financing activities 0.1 0.1

Net movement in cash and cash equivalents (0.2) 30.0

AquisitionsOn 1 March 2013, the Group acquired the business and certain assets of Proper Welsh Milk Company Limited from the administrators BDO LLP for £0.3 million. The fair value of the net assets acquired was £0.3 million, comprising property, plant and equipment of £0.5 million less statutory and other liabilities taken over of £0.2 million, resulting in goodwill on acquisition of nil.

During the year ended 31 March 2013, the Group acquired 7% of the share capital of HIECO Limited for a consideration of £0.3 million.

Year ended 31 March 2012AcquisitionOn 30 June 2011, the Group acquired 100% of the issued share capital of Morehands Limited (trading as MH Foods Limited), a manufacturer of branded low calorie spray oils and salad dressings. Initial cash consideration was £11.9 million, with further consideration of £1.6 million paid in October 2011. The final fair value of the identifiable assets and liabilities of the business at the date of acquisition was:

Fair valueto Group

£m

Bookvalue

£m

Property, plant and equipment 0.5 0.5

Intangible asset – Frylight brand 6.0 –

Inventories 0.6 0.6

Receivables 1.5 1.5

Cash 1.2 1.2

Payables (0.9) (0.9)

Current tax (0.5) (0.5)

Deferred tax (1.6) (0.1)

Net assets 6.8 2.3

Goodwill 6.7

13.5

Comprising: Cash consideration 13.5

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29 Business combinations and disposals continuedThe Frylight brand is estimated to have a useful economic life of 15 years and the amount capitalised as an intangible asset and related deferred tax will be amortised over this period. This life is consistent with the 15–25 year useful economic lives assumed on the acquisition of St Hubert. Goodwill, representing the cost of acquisition less net identifiable assets and liabilities assumed on acquisition, arises on consolidation only and there is no amortisation or related tax deduction in the accounts of Dairy Crest Limited, the acquiring entity. Group reported revenue and result would not be materially different had the acquisition occurred on 1 April 2011. Revenue and profit from the date of acquisition to 31 March 2012 were £5.8 million and £1.3 million respectively. The Group incurred fees of £0.3 million in relation to this acquisition which have been charged to administrative expenses in the income statement in the year ended 31 March 2012.

Goodwill of £6.7 million comprises certain intangible benefits of the acquisition that could not be individually separated and reliably measured due to their nature. These include the synergistic benefits resulting from access to the wider group’s sales channels, marketing expertise and product development pipeline.

30 Financial risk management objectives and policiesThe objective of the treasury function, which is accountable to the Board, is to manage the Group’s and Company’s financial risk, secure cost-effective funding for the Group’s operations and to minimise the effects of fluctuations in interest rates and exchange rates on the value of the Group’s and Company’s financial assets and liabilities, on reported profitability and on cash flows.

The Group’s principal financial instruments comprise bank loans and overdrafts, loan notes, finance leases and cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

The Group also enters into derivative transactions; principally cross currency swaps and forward currency contracts. The purpose is to manage the interest rate and currency risks arising from the Group’s operations and its sources of finance. It is, and has been throughout 2012 and 2013, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are liquidity risk, interest rate risk, foreign currency risk, price risk and credit risk. Information on how these risks arise is set out below, as are the objectives, policies and processes agreed by the Board for their management and the methods used to measure each risk. Derivative instruments are used to change the economic characteristics of financial instruments in accordance with the Group’s treasury policies. The Group’s accounting policies in relation to derivatives are set out in the Accounting Policies note.

Liquidity riskThe Group’s objectives are:

• to ensure that forecast peak net borrowings, plus a prudent operating headroom are covered by committed facilities which mature after at least 12 months;

• to ensure that prudent headroom versus bank and loan note covenant ratios are forecast for the next three years;

• to maintain flexibility of funding by employing diverse sources of funds (eg use of non-bank markets such as private placements); and

• to avoid a concentration of facility maturities in any particular year.

The maturity analysis of Group borrowings is set out in Note 19. At 31 March 2013 the Group’s total credit facilities amounted to £627.3 million (2012: £640.5 million) excluding finance leases of £5.5 million (2012: £7.2 million) and the impact of cross-currency swaps on US Dollar and Euro loan notes of £17.8 million (2012: £8.6 million). The facilities at 31 March 2013 and 2012 consisted of:

March 2013• £170 million plus €150 million multi-currency revolving credit facility repayable at maturity in October 2016; and

• loan notes totalling £330.4 million repayable between April 2013 and November 2021.

March 2012• £170 million plus €150 million multi-currency revolving credit facility repayable at maturity in October 2016; and

• loan notes totalling £345.5 million repayable between April 2013 and November 2021.

Undrawn revolving credit facilities at 31 March 2013 amounted to £297 million (2012: £223.8 million). Effective headroom including cash and short term deposits amounted to £573.1 million (2012: £303.2 million).

On 4 April 2013 £60 million of loan notes matured and on 18 April 2013 £100 million of loan notes were repaid early. This reduced the loan notes outstanding to £170 million. At the same time, the revolving credit facility was reduced by €60 million (£51 million). Therefore total facilities at 18 April 2013 amounted to £416 million.

The Group aims to mitigate liquidity risk by closely managing cash generation by its operating businesses and by monitoring performance to budgets and forecasts. Capital investment is carefully controlled, with detailed authorisation limits in place up to Executive level and cash payback criteria considered as part of the investment appraisal process. Short-term and long-term cash and debt forecasts are constantly reviewed and there are regular treasury updates to the Executive highlighting facility headroom and net debt performance.

Day-to-day cash management utilises undrawn revolving credit facilities, overdraft facilities and occasionally short-term money market deposits if there is excess cash.



30 Financial risk management objectives and policies continuedInterest rate risk The Group’s exposure to the risk for changes in market interest rates relate primarily to the Group’s long-term debt obligations with a floating interest rate.

The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s long-term strategy is to keep between one third and three quarters of its borrowings at fixed rates of interest in the medium term. To manage this mix in a cost-efficient manner, the Group has issued fixed coupon loan notes and also enters into interest rate swaps from time to time on a portion of its floating bank borrowings, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt interest cash flow obligations. In the short-term the proportion of fixed and floating rate borrowings can go outside the long-term range.

At 31 March 2013, 100% of the Group’s borrowings were at a fixed rate of interest (2012: 83%). The proportion of fixed interest borrowings is higher than our long-term target, however following the maturity and repayment of loan notes referred to above, amounts drawn under revolving credit facilities will increase in 2013/14 and the fixed rate percentage of borrowings will fall. In the medium term we expect the fixed proportion of borrowings to return to the target range.

The Group’s borrowing facilities require minimum interest cover of 3.0 times.

The Group’s exposure to interest rate risk is shown (by way of a sensitivity analysis) in Note 31.

Foreign currency riskFollowing the sale of St Hubert SAS, the Group has no significant operations outside the UK. However it buys and sells a small amount of goods in currencies other than Sterling. As a result the value of the Group’s non-Sterling revenues, purchases, assets, liabilities and cash flows can be affected by movements in exchange rates – predominantly Euro/Sterling.

When the Group owned St Hubert, a Euro-denominated subsidiary, it mitigated the effect of its structural currency exposures by borrowing to some extent in the same functional currency as the foreign operation into which it invested. Our policy was to hedge 100% of the inventories and tangible fixed assets and 33% of goodwill and intangible assets exposure through borrowings and/or cross-currency swaps in Euros. At 31 March 2012, all borrowings designated as a net investment hedge were done so on a pre-tax basis and no cross currency swaps were utilised as part of the hedging relationship.

The majority of the Group’s transactions are carried out in the relevant entity’s functional currency and therefore transaction exposures are limited. It can be seen in Note 16 that the only significant non-Sterling debtors are in Dollars. The Group trades skimmed milk products and bulk butter mainly to customers in Europe and Central and South America. The Group also exports its own skimmed milk products, bulk butter and other branded products. The Group’s policy requires foreign currency sales and purchases through Philpot Dairy Products Limited, a subsidiary company, to be hedged by foreign exchange contracts once the transaction is committed so that the margin on the transaction can be fixed.

Currency exposures on other transactions, such as certain capital expenditure denominated in a foreign currency, are hedged following approval of the project using forward foreign exchange contracts.

In 2006 and November 2011, the Group issued loan notes denominated in $US. At the same time, cross-currency swaps were implemented to hedge the interest and principal repayment cash flows. These have the effect of fixing the liability and coupon in Sterling. The principal amount and interest and principal payment dates on these swaps match those on the loan notes exactly and all swaps are with counterparties with strong credit ratings. There is no profit and loss exposure in relation to $US debts as any retranslation impact on the profit and loss account is offset by reclassification of amounts from other comprehensive income into profit and loss.

In 2009, the Group entered into cross-currency swaps on €75 million of its loan notes denominated in Euros in order to hedge the future interest and principal repayment cash flows. This has the effect of fixing the liability and coupon on those notes in Sterling. The principal amount and interest and principal payment dates on these swaps match those on the loan notes exactly and all swaps are with counterparties with strong credit ratings. There is no profit and loss exposure in relation to this €75 million of debt as any retranslation impact on the profit and loss account is offset by reclassification of amounts from other comprehensive income into profit and loss.

Price riskThe Group is exposed to price risk related to certain commodities and their by-products used by the Group’s businesses. The principal non-milk commodities that affect input prices for the Group are vegetable oils, gas, electricity, diesel, heavy fuel oil and crude oil by-products (used in packaging).

The Group monitors prices on an ongoing basis in order to assess the impact that movements have on profitability and to assess whether the amount of forward cover is appropriate. This includes vegetable oil contracts and energy, which is generally contracted one season in advance for both Summer and Winter energy but with some requirement contracted at more regular intervals.

The Group regularly reviews relevant commodity markets and levels of future cover. Fixed price contracts are only entered into with the approval of the Commodity Risk Committee comprising senior operational and finance management and external advisers.

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30 Financial risk management objectives and policies continuedCredit risk It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. The Group only offers these terms to recognised, creditworthy third parties. In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s history of bad debt losses is not significant. In the year ended 31 March 2012 one customer, Quadra Foods Limited, went into administration and the outstanding balance of £4.3 million was fully provided.

The Dairies doorstep business trades with individuals and receives cash payments on a weekly basis. Cash and debt management is a crucial part of this business and cash collection and balances due are closely monitored to ensure write-downs are minimised.

Debtor days outstanding are closely monitored throughout the year and action is taken promptly when payment terms are breached.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, trade and other debtors (excludes prepayments) and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counterparty. The maximum exposure for the Group is equal to the carrying amount of these financial assets of £395.5 million (2012: £223.5 million). Following the sale of St Hubert the Group had significant cash deposits and until those funds were utilised to repay loan notes and provide one-off funding to the pension scheme in April 2013, no one financial institution had deposits in excess of £60 million and all institutions holding deposits were required to be rated A or above.

All borrowings are through banks with long-term credit ratings of A or above. Funds temporarily surplus to business requirements are invested overnight through deposit accounts with mainstream UK commercial banks with a credit rating of A or better. The Group currently has no requirement to place deposits for a longer period, accordingly counterparty risk is considered to be acceptable. Derivative financial instruments are contracted with a range of banks with long-term credit ratings of A or above to avoid excessive concentration of financial instruments with one counterparty.

Capital managementThe primary objective of the Group’s capital management is to ensure that it maintains an appropriate level of gearing in order to support its business and maximise shareholder value. In addition, the Group monitors its forecast net debt to EBITDA ratios in order that they are comfortably within its banking covenant requirements. The maximum net debt to EBITDA ratio for the purposes of bank covenants is 3.5 times. At 31 March 2013 the ratio of net debt to EBITDA was 0.6 times (March 2012: 2.2 times).

The Group monitors its capital structure and makes adjustments to it in the light of changes in economic conditions or changes in Group structure. Possible mechanisms for changing capital structure include adjusting the level of dividends, issuance of new shares or returning capital to shareholders. No significant changes in capital structure have been implemented in the year ended 31 March 2013 or 2012.

The Group monitors capital using a gearing ratio, which is net debt divided by shareholders’ funds. The analysis of net debt is included in Note 33. The gearing ratio at March 2013 and 2012 can be analysed as follows:

2013£m

2012£m

Net debt 59.7 336.4

Shareholders’ funds 307.4 274.3

Gearing ratio 19% 123%

DividendsDetails of dividends paid and proposed during the year are given in Note 7. The dividend policy following the sale of St Hubert is to maintain a progressive dividend whilst seeking to maintain a level of dividend cover between 1.5 and 2.5 times. The final proposed dividend for 2012/13 is 15.0 pence up 0.3 pence from last year (2012: 14.7 pence). Total dividends paid and proposed in respect of the year ended 31 March 2013 amount to 20.7 pence (2012: 20.4 pence).




31 Financial instrumentsAn explanation of the Group’s financial instrument risk management objectives, policies and strategies are set out in the discussion of Treasury policies in Note 30.

Consolidated

Interest rate maturity profile of financial assets and liabilities The following table sets out the carrying amount, by maturity of the Group’s financial assets and liabilities that are exposed to interest rate risk. No other financial assets and liabilities, other than those shown below, are exposed directly to interest rate risk.

At 31 March 2013< 1 year

£m >1 <2 years

£m >2 <3 years

£m >3 <4 years

£m >4 <5 years

£m > 5 years

£m Total

£m

Fixed rate

Loan notes* (165.7) (26.0) – (91.0) (11.8) (53.6) (348.1)

Finance leases (2.4) (3.1) – – – – (5.5)

Forward currency contracts (0.1) – – – – – (0.1)

Deferred consideration – – 1.4 – – – 1.4

Cross currency swaps 7.4 – – 12.9 – (3.9) 16.4

Floating rate

Option to sell 20% holding in WCL – – – – – 1.6 1.6

Cash at bank and in hand 276.1 – – – – – 276.1

At 31 March 2012

Fixed rate

Loan notes* – (68.1) (92.3) – (88.8) (96.3) (345.5)

Finance leases (2.7) (3.2) (1.3) – – – (7.2)

Forward currency contracts 0.3 – – – – – 0.3

Deferred consideration – – – 1.3 – – 1.3

Cross currency swaps – 5.9 (4.8) – 9.1 (3.9) 6.3

Floating rate

Bank loans – – – – (71.7) – (71.7)

Option to sell 20% holding in WCL – – – – – 1.6 1.6


* Classified as fixed rate after taking into account the effect of interest rate swaps.

Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument.

Interest rate riskThe following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax through the impact on floating rate borrowings. There is no impact on the Group’s equity resulting from movements in interest rates other than in relation to the $US/GBP and EUR/GBP cross-currency swaps used as a cash flow hedge on $US and EUR loan notes. The impact on equity is nil over the life of the instruments as these swaps comprise an effective hedge. At 31 March 2013 100% of Group borrowings were at fixed rates of interest (2012: 83%) (see Note 30).

The sensitivity analysis excludes all non-derivative fixed rate financial instruments carried at amortised cost but includes non-derivative floating rate financial instruments except those where interest rate swaps have been used as cash flow hedges. This is due to the fact that gains and losses on the hedging instrument offset losses and gains on the non-derivative floating rate financial instrument which are subject to the hedge and are matched in both profit and loss and cash terms. No non-derivative fixed rate financial instruments have profit and loss exposure due to floating rates as a result of interest rate swaps.


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31 Financial instruments continuedThe 2013 analysis below reflects lower reasonably possible changes in interest rates to 2012 – upside LIBOR expectations assumed last year were not realised and the assumption is that base rates will increase less than anticipated at March 2012.

Increase/

decrease inbasis points

Effect onprofit before

tax£m

Effect onequity

£m

2013

Sterling + 50 – –

Dollar + 50 – –

Sterling – 50 – –

Dollar – 50 – –

2012

Sterling + 200 1.0 1.3

Euro + 200 (0.8) 6.8

Dollar + 200 – 14.9

Sterling – 50 (0.2) (0.3)

Euro – 50 0.2 (1.7)

Dollar – 50 – (4.1)

Equity price riskThe Group holds no listed equity investments and is not subject to equity price risk other than through the pension scheme (Note 20).

Credit riskThere are no significant concentrations of credit risk within the Group unless otherwise disclosed. The maximum credit risk exposure relating to financial assets is represented by carrying value as at the balance sheet date (see Note 30).

Foreign currency riskFollowing the sale of St Hubert, the Group has no significant foreign currency risk. In 2012 it had a foreign currency risk with Euros. The table below demonstrates the sensitivity in 2012 to a reasonably possible change in Sterling/Euro exchange rate with all other variables held constant, of the Group’s profit before tax and the Group’s equity.

Increase/decrease in

Sterling/Euro rate


tax£m

Effect onequity*

£m

2012

Euro Sterling depreciation – 10% (0.5) (13.8)

Sterling appreciation + 10% 0.4 11.3

* Equity exposure resulted from the Group’s net investment hedging arrangements (see Note 30).



31 Financial instruments continuedLiquidity riskThe Group’s policy on managing its liquidity risk is set out in Note 30.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2013 and 2012 based on contractual undiscounted payments of interest and principal.


£m>1 <2 years

£m>2 <3 years

£m>3 <4 years

£m>4 <5 years

£m> 5 years

£mTotal

£m

Loan Notes (174.7) (33.8) (7.9) (93.6) (13.8) (59.4) (383.2)

Cross-currency swaps (on loan notes):

payment leg (106.6) (33.3) (6.0) (72.6) (2.3) (60.5) (281.3)

receipt leg 114.2 32.7 6.7 83.0 2.0 59.4 298.0

Finance leases (2.5) (3.2) – – – – (5.7)

At 31 March 2012

Loan Notes (17.6) (81.8) (101.6) (9.4) (93.1) (104.2) (407.7)


payment leg (12.8) (71.2) (6.1) (6.1) (73.7) (63.6) (233.5)

receipt leg 13.5 77.7 6.7 6.7 80.9 61.5 247.0

Bank loans (71.7) – – – – – (71.7)

Finance leases (2.9) (3.3) (1.3) – – – (7.5)

Forward currency contracts, and short-term payables all mature within one year.

Fair values of financial assets and financial liabilitiesSet out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments that are carried in the financial statements.

Carrying amount Fair value

2013

£m 2012

£m2013

£m 2012

£m

Financial assets

Current

Cash and cash equivalents (Note 18) 276.1 79.4 276.1 79.4

Forward currency contracts (Note 17) – 0.3 – 0.3

Cross currency swaps (Note 17) 9.6 – 9.6 –

Non-current

Deferred consideration 1.4 1.3 1.4 1.3

Wexford Creamery Limited option (Note 17) 1.6 1.6 1.6 1.6

Cross currency swaps (Note 17) 12.9 15.0 12.9 15.0

Financial liabilities

Current

Current obligations under finance leases (Note 19) (2.4) (2.7) (2.4) (2.7)

Forward currency contracts (Note 19) (0.1) – (0.1) –

Cross currency swaps (Note 19) (2.2) – (2.2) –

Non-current

Non-current obligations under finance leases (Note 19) (3.1) (4.5) (3.1) (4.5)

Non-current instalments due on bank loans (Note 19) – (71.7) – (71.7)

Loan notes (Note 19) (348.1) (345.5) (355.2) (355.8)

Cross currency swaps (Note 19) (3.9) (8.7) (3.9) (8.7)

The above table excludes trade and other receivables and payables as their fair value approximates carrying value. The fair value of interest rate swaps and forward currency contracts has been determined by the third party financial institution with whom the Group holds the instrument, in line with the market value of similar instruments. The fair value of borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates.


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31 Financial instruments continuedCross currency swapsThe notional principal amount of the outstanding USD/GBP cross currency swap contracts at 31 March 2013 was $308.7 million (£181.9 million) (2012: $318.0 million, £187.5 million). These cross currency swaps have both legs at fixed interest rates, are designated as cash flow hedges and meet the criteria for hedge accounting. At 31 March 2013 the fixed interest rates varied from 3.863% to 5.315% (2012: 3.863% to 5.315%). The gain deferred in equity will reverse in the income statement (finance costs) during the next one to nine years (being the life of the swaps).

The notional principal amount of the outstanding EUR/GBP cross currency swap contracts at 31 March 2013 was €75.0 million (£67.0 million) (2012: €75.0 million, £67.0 million). These cross currency swaps have both legs at fixed interest rates, are designated as cash flow hedges and meet the criteria for hedge accounting. At 31 March 2013 and 2012 the fixed interest rates varied from 4.955% to 5.180%. The loss deferred in equity will reverse in the income statement (finance costs) during the next year (being the life of the swaps).

Hedge of net investment in foreign entitiesUntil 28 August 2012, the Group had Euro denominated borrowings which it designated as a hedge of the net asset investment in St Hubert SAS, its subsidiary in France. The fair value of the Euro borrowings at 31 March 2012 was £124.2 million. A foreign exchange gain of £6.0 million (2012: £7.7 million) on translation of the borrowings into Sterling to 28 August 2012 has been recognised in other comprehensive income.

Forward currency contractsThe Group has entered into certain forward currency contracts in order to hedge the Sterling cost of currency-denominated future purchases and receipts. These forward currency purchases have been designated cash flow hedges and meet the criteria for hedge accounting. They all have a duration of less than one year and any gains or losses deferred will then be reclassified to the income statement (operating costs).

Borrowing facilitiesThe Group has undrawn committed long-term borrowing facilities available at 31 March 2013 of £297 million (2012: £223.8 million) in respect of which all conditions precedent had been met at that date. In April 2013, £51 million of the facilities were cancelled (see Note 34). Undrawn facilities expire in October 2016.

Company

Interest rate maturity profile of financial assets and liabilitiesThe following table sets out the carrying amount, by maturity of the Company’s financial assets and liabilities that are exposed to interest rate risk. No other financial assets and liabilities, other than those shown below, are exposed directly to interest rate risk.


£m >1 <2 years

£m >2 <3 years

£m >3 <4 years

£m >4 <5 years

£m > 5 years

£m Total

£m

Fixed rate

Loan notes (165.7) (26.0) – (91.0) (11.8) (53.6) (348.1)

Intercompany receivables 218.7 – – – – – 218.7

Cross currency swaps 7.4 – – 12.9 – (3.9) 16.4

Floating rate


Intercompany payables (49.4) – – – – – (49.4)

At 31 March 2012

Fixed rate

Loan notes – (68.1) (92.3) – (88.8) (96.3) (345.5)

Intercompany receivables 268.0 – – – – – 268.0

Cross currency swaps – 5.9 (4.8) – 9.1 (3.9) 6.3

Floating rate

Bank loans – – – – (61.7) – (61.7)

Intercompany payables (49.2) – – – – – (49.2)

Interest rate riskThe following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company’s profit before tax through the impact on floating rate borrowings. There is no impact on the Company’s equity resulting from movements in interest rates other than in relation to the $US/GBP and EUR/GBP cross-currency swaps used as a cash flow hedge on $US and EUR loan notes. The impact on equity is nil over the life of the instruments as these swaps comprise an effective hedge.




31 Financial instruments continuedThe sensitivity analysis excludes all non-derivative fixed rate financial instruments carried at amortised cost but includes non-derivative floating rate financial instruments except those where interest rate swaps have been used as cash flow hedges. This is due to the fact that gains and losses on the hedging instrument offset losses and gains on the non-derivative floating rate financial instrument which are subject to the hedge are matched in both profit and loss and cash terms. No non-derivative fixed rate financial instruments have profit and loss exposure due to floating rates as a result of interest rate swaps.

The 2013 analysis below reflects lower reasonably possible changes in interest rates to 2012 – upside LIBOR expectations assumed last year were not realised and the assumption is that base rates will increase less than anticipated at March 2012.

Increase/decrease inbasis points

Effect onequity

£m

2013

Sterling + 50 –

Dollar + 50 –

Sterling – 50 –

Dollar – 50 –

2012

Sterling + 200 1.3

Euro + 200 6.8

Dollar + 200 14.9

Sterling – 50 (0.3)

Euro – 50 (1.7)

Dollar – 50 (4.1)

Equity price riskThe Company holds no listed equity investments and is not subject to equity price risk.

Credit riskThe maximum exposure to credit risk is the carrying amount of financial assets.

Foreign currency riskThe following table demonstrates the sensitivity to a reasonably possible change in Sterling/Euro exchange rate with all other variables held constant, of the Company’s profit before tax and the Company’s equity.

Increase/decrease in

Euro rate


tax

Effect onequity

£m

2013

Euro Sterling depreciation – 10% – –

Sterling appreciation + 10% – –

2012

Euro Sterling depreciation – 10% – –

Sterling appreciation + 10% – –

The Company has no significant foreign currency liabilities other than Euros. Euro borrowings are matched by inter-company cross currency swaps with no resultant profit before tax or equity exposure for the Company.

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31 Financial instruments continuedLiquidity riskThe Company’s policy on managing its liquidity risk is set out in Note 30.

The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2013 and 2012 based on contractual undiscounted payments of interest and principal.


£m>1 <2 years

£m>2 <3 years

£m>3 <4 years

£m>4 <5 years

£m> 5 years

£mTotal

£m

Loan Notes (174.7) (33.8) (7.9) (93.6) (13.8) (59.4) (383.2)


payment leg (106.6) (33.3) (6.0) (72.6) (2.3) (60.5) (281.3)

receipt leg 114.2 32.7 6.7 83.0 2.0 59.4 298.0

At 31 March 2012

Loan Notes (17.6) (81.8) (101.6) (9.4) (93.1) (104.2) (407.7)


payment leg (12.8) (71.2) (6.1) (6.1) (73.7) (63.6) (233.5)

receipt leg 13.5 77.7 6.7 6.7 80.9 61.5 247.0

Intra-group cross currency swaps:

payment leg (126.3) – – – – – (126.3)

receipt leg 126.3 – – – – – 126.3

Bank loans (61.7) – – – – – (61.7)

Forward currency contracts, and short-term payables and accruals all mature within one year.

Fair values of financial assets and financial liabilitiesSet out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the financial statements.

Carrying amount Fair value

2013

£m 2012

£m2013

£m 2012

£m

Financial assets

Current

Cash and cash equivalents (Note 18) 14.8 – 14.8 –

Other receivables (Note 16) 169.3 218.8 169.3 218.8

External cross currency swaps (Note 17) 9.6 – 9.6 –

Non-current

External cross currency swaps (Note 17) 12.9 15.0 12.9 15.0

Financial liabilities

Current

External cross currency swaps (Note 19) (2.2) – (2.2) –

Non-current

Non-current instalments due on bank loans (Note 19) – (61.7) – (61.7)

Loan notes (Note 19) (348.1) (345.5) (355.2) (355.8)

External cross currency swaps (Note 19) (3.9) (8.7) (3.9) (8.7)

No other financial assets and liabilities are exposed directly to interest rate risk

Other receivables comprise the net of all intercompany balances with Dairy Crest Limited. All intercompany balances are repayable on demand and are subject to interest based on LIBOR plus a margin with the exception of one intercompany receivable from Dairy Crest Limited of £277.1 million (2012: £263.6 million) on which interest is receivable at 5.0% (2012: 5.0%).




31 Financial instruments continuedCross currency swaps

ExternalThe notional principal amount of the outstanding USD/GBP cross currency swap contracts at 31 March 2013 was $308.7 million (£181.9 million) (2012: $318.0 million, £187.5 million). These cross currency swaps have both legs at fixed interest rates, are designated as cash flow hedges and meet the criteria for hedge accounting. At 31 March 2013 the fixed interest rates varied from 3.863% to 5.315% (2012: 3.863% to 5.315%). The gain deferred in equity will reverse in the income statement (finance costs) during the next one to nine years (being the life of the swaps).

The notional principal amount of the outstanding EUR/GBP cross currency swap contracts at 31 March 2013 was €75.0 million (£67.0 million) (2012: €75.0 million, £67.0 million). These cross currency swaps have both legs at fixed interest rates, are designated as cash flow hedges and meet the criteria for hedge accounting. At 31 March 2013 and 2012 the fixed interest rates varied from 4.955% to 5.180%. The loss deferred in equity will reverse in the income statement (finance costs) during the next year (being the life of the swaps).

IntercompanyThe notional principal amount of the outstanding EUR/GBP floating rate cross currency swap contracts at 31 March 2013 with Group companies was €nil (£nil) (2012: €150.0 million (£125.0 million)). The Company received EURIBOR and pays LIBOR. Intercompany cross currency swaps were not designated as cash flow hedges and any gain or loss arising on revaluation was credited or charged to the income statement. These swaps were used in order to minimise currency exchange risk in the Company and match the external Euro-denominated borrowings at 31 March 2012 of €149 million.

Borrowing facilitiesThe Company has undrawn committed long-term borrowing facilities available at 31 March 2013 of £297 million (2012: £224 million) in respect of which all conditions precedent had been met at that date. These undrawn facilities expire in October 2016

32 Cash flow from operating activities

Year ended31 March

2013£m

Year ended31 March

2012£m

Loss before taxation – continuing operations (0.4) (41.7)

Profit before taxation – discontinued operations 62.7 31.6

Remove pre-tax profit on disposal of business (51.4) –

Finance costs and other finance income – continuing operations 21.5 15.6

Finance costs and other finance income – discontinued operations (0.1) (0.1)

Share of associate’s net loss – 0.3

Profit on operations 32.3 5.7

Depreciation 29.0 30.9

Amortisation of internally generated intangible assets 3.4 3.2

Amortisation of acquired intangible assets 3.4 9.1

Exceptional items 17.9 80.2

Release of grants (0.9) (0.6)

Share based payments 1.9 2.4

Profit on disposal of depots (7.7) (4.6)

Profit on disposal of plant and equipment – (0.2)

Difference between pension contributions paid and amounts recognised in the income statement (20.2) (21.0)

Increase in inventories (25.0) (23.9)

Decrease in receivables 18.7 9.4

Decrease in payables (33.7) (6.1)

Cash generated from operations 19.1 84.5

No cash was generated from operations for the Company in the year ended 31 March 2013 (2012: nil).


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33 Analysis of net debtGroup

At 1 April2012

£m

Cashflow£m

Non-cashmovement

£m

Exchangemovement

£m

At 31 March2013

£m

Cash and cash equivalents 79.4 192.8 – 3.9 276.1

Borrowings (current) – – (165.7) – (165.7)

Borrowings (non-current) (417.2) 76.2 165.7 (7.1) (182.4)

Finance leases (7.2) 1.7 – – (5.5)

Debt issuance costs 2.7 – (0.9) – 1.8

(342.3) 270.7 (0.9) (3.2) (75.7)

Debt issuance costs excluded (2.7) – 0.9 – (1.8)

Impact of cross-currency swaps * 8.6 – – 9.2 17.8

Net debt (336.4) 270.7 – 6.0 (59.7)

At 1 April2011

£m

Cashflow£m

Non-cashmovement

£m

Exchangemovement

£m

At 31 March2012

£m

Cash and cash equivalents 49.9 29.6 – (0.1) 79.4

Borrowings (current) (65.5) 63.7 – 1.8 –

Borrowings (non-current) (298.2) (128.1) – 9.1 (417.2)

Finance leases (9.6) 2.4 – – (7.2)

Debt issuance costs – 3.0 (0.3) – 2.7

(323.4) (29.4) (0.3) 10.8 (342.3)

Debt issuance costs excluded – (3.0) 0.3 – (2.7)

Impact of cross-currency swaps * 11.8 – – (3.2) 8.6

Net debt (311.6) (32.4) – 7.6 (336.4)

* The Group and Company have $308.2 million and €75 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (2012: $318 million and €75 million). Under IFRS, currency borrowings are retranslated into Sterling at year end exchange rates. The cross-currency swaps are recorded at fair value (Note 31) and incorporate movements in both market exchange rates and interest rates. The Group defines net debt so as to include the effective Sterling liability where cross-currency swaps have been used to convert foreign currency borrowings into Sterling. The £17.8 million adjustment included above (2012: £8.6 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£266.7 million (2012: £263.1 million)) to the fixed Sterling liability (£248.9 million (2012: £254.5 million)).

Company

At 1 April2012

£m

Cashflow£m

Exchangemovement

£m

At 31 March2013

£m

Cash and cash equivalents – 13.7 1.1 14.8

Borrowings (current) – (165.7) – (165.7)

Borrowings (non-current) (407.2) 229.1 (4.3) (182.4)

(407.2) 77.1 (3.2) (333.3)

Borrowings (non-current) – impact of cross-currency swaps 8.6 – 9.2 17.8

(398.6) 77.1 6.0 (315.5)

At 1 April2011

£m

Cashflow£m

Exchangemovement

£m

At 31 March2012

£m

Borrowings (current) (65.5) 63.7 1.8 –

Borrowings (non-current) (298.2) (118.1) 9.1 (407.2)

(363.7) (54.4) 10.9 (407.2)

Borrowings (non-current) – impact of cross-currency swaps 11.8 – (3.2) 8.6

(351.9) (54.4) 7.7 (398.6)




34 Post balance sheet eventsOn 18 April 2013 the Group repaid €106.9 million (£92.7 million) and £7.2 million of 2007 notes at a premium of £8.7 million. £69.2 million of these notes were due for repayment in April 2014 and £30.7 million were due for repayment in April 2017. On this date the Group paid £40.0 million to the Dairy Crest Group Pension Fund and it granted the Trustee of the Fund a floating charge over maturing cheese inventories with a maximum realisable value of £60 million. Furthermore the five-year multi-currency revolving credit facility dated October 2011 was reduced by €60 million (£51 million).

35 Corporate informationThe consolidated accounts of Dairy Crest Group plc for the year ended 31 March 2013 were authorised for issue in accordance with a resolution of the Directors on 22 May 2013 and the consolidated and Company balance sheets were signed on the Board’s behalf by Mr M Allen and Mr A Murray. Dairy Crest Group plc is a limited company incorporated in England and Wales and domiciled in the United Kingdom whose shares are publicly traded on the London Stock Exchange.


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Consolidated income statement summary – continuing operations2009

£m 2010

£m 2011

£m 2012

£m 2013

£m

Segment revenue

Cheese 244.2 260.0 223.1 229.6 231.3

Spreads 192.0 178.6 183.2 211.3 194.5

Dairies 1,108.2 1,081.2 1,089.8 1,069.0 951.6

Other 11.0 10.8 6.1 4.8 4.2

Group 1,555.4 1,530.6 1,502.2 1,514.7 1,381.6

Segment profit

Cheese 34.3 16.9 28.0 35.5 33.3

Spreads 29.5 19.5 18.6 23.2 25.7

Dairies 7.9 34.9 27.1 10.2 10.3

Associates & joint ventures 7.3 0.1 (0.2) (0.3) –

Group including share of joint ventures 79.0 71.4 73.5 68.6 69.3

Less: share of associates & joint ventures (7.3) (0.1) 0.2 0.3 –

Group 71.7 71.3 73.7 68.9 69.3

Amortisation of acquired intangibles (1.6) (0.8) (0.3) (0.8) (0.4)

Exceptional items (24.0) 2.0 (1.1) (93.9) (56.5)

Profit on disposal of joint venture 50.4 2.0 – – –

Finance costs (29.5) (22.4) (20.6) (21.1) (18.7)

Other finance income/(charges) – pensions 6.9 (0.5) – 5.5 5.9

Share of associates’ and joint ventures’ net profit/(loss) 7.3 0.1 (0.2) (0.3) –

Profit/(loss) before tax 81.2 51.7 51.5 (41.7) (0.4)

Adjusted profit before tax 49.5 49.0 52.9 47.5 50.6

Balance sheet summary

Property, plant & equipment, goodwill and intangibles, investments 837.1 794.4 800.6 713.9 375.9

Inventories, receivables, payables, deferred income and provisions 86.8 43.7 21.9 45.8 74.1

Total operating assets 923.9 838.1 822.5 759.7 450.0

Financial instruments excluding amounts included in net debt 4.2 0.9 5.0 0.9 1.5

Tax (92.0) (70.3) (90.3) (70.1) (17.2)

Retirement obligations (63.3) (142.4) (60.1) (79.8) (67.2)

Disposal group held for sale (excluding cash) – 3.7 – – –

Net debt (415.8) (337.2) (311.6) (336.4) (59.7)

Net assets 357.0 292.8 365.5 274.3 307.4

Non-controlling interests (4.7) (3.0) – – –

Shareholders’ equity 352.3 289.8 365.5 274.3 307.4

Cash flow summary

Generated from operating activities 129.1 145.9 128.1 84.5 19.1

Dividends from joint ventures 2.9 0.1 – – –

Fixed asset investments (net of grants) (49.3) (26.9) (48.5) (53.1) (46.0)

82.7 119.1 79.6 31.4 (26.9)

Interest paid (30.3) (22.1) (19.8) (23.6) (18.0)

Taxation paid (9.2) (10.5) (16.1) (14.1) (4.7)

Dividends paid (32.3) (24.3) (25.4) (26.5) (27.4)

Purchase of businesses (1.3) (1.9) (0.1) (12.3) (0.6)

Other items (principally asset disposals) 49.4 18.3 7.4 20.3 354.3

Movement in net debt 59.0 78.6 25.6 (24.8) 276.7

Basic earnings/(loss) per share from continuing operations (pence) 45.9 27.7 30.1 (29.1) –

Adjusted basic earnings per share from continuing operations (pence)* 30.0 27.4 29.9 28.9 29.9

* Adjusted basic earnings per share excludes exceptional items, amortisation of acquired intangibles and pension interest

Group financial history


Shareholders’ information

Company Registrar and shareholder enquiriesIf you have administrative enquiries concerning your shareholdings in the Company, such as the loss of share certificates, change of address, dividend payment arrangements, amalgamation of accounts, please contact the Company’s registrar by writing to, Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU or by telephone on (UK) 0871 664 9266. (Calls cost 10p per minute plus network extras). Lines are open 9.00am to 5.30pm Monday to Friday. From overseas please call +44 800 181 4706.

Capita also provides online facilities for shareholders to check their holdings and update their details. Registering is easy, and there is no fee involved, simply access www.dairycrestshares.com

Payment of dividendsShareholders may arrange to have their dividends paid directly into a bank or building society account using the Bankers Automated Clearing System (BACS). Bank mandate forms are available from Capita whose details appear above or you can register your mandate details online at www.dairycrestshares.com

Low cost share dealing serviceIf you do not have share dealing arrangements in place, Dairy Crest has a low cost share dealing service arranged by Capita Share Dealing Services. Shareholders wishing to use the service should either visit the Capita Share Dealing website at www.capitadeal.com or call 0871 664 0445. (Calls cost 10p per minute plus network extras). From overseas please call +44 203 367 2686. Lines are open 8.00am to 4.30pm Monday to Friday.

Gifting shares to charityShareholders who have a small holding of shares on the register whereby their value makes them uneconomic to sell, may donate these shares to charity under the Sharegift Scheme – administered by the Orr Mackintosh Foundation – a registered charity. Information can be found at www.sharegift.org Telephone: 020 7930 3737.

General informationGeneral information about Dairy Crest can be found on our corporate website, www.dairycrest.co.uk

Investors who have questions relating to the Group’s business activities should contact: Investor Relations, Dairy Crest Group plc, Claygate House, Littleworth Road, Esher, Surrey KT10 9PN. Telephone: 01372 472200e-mail: [email protected]

Financial calendarDividends FinalEx-dividend Wednesday 26 June 2013Record date Friday 28 June 2013 Payment date Thursday 1 August 2013

Group results (Anticipated)Half Year (Interims) November 2013Preliminary Announcement of 2013/14 results May 20142013/14 Report and Accounts circulation June 2014

Analysis of ordinary shareholders at 21 May 2013 HoldersNumber % Shares %

Category

Individuals and other holders 18,117 87.50 30,415,305 22.26

Insurance companies, pension funds, banks,

nominees and limited companies 2,589 12.50 106,192,826 77.74

20,706 100.00 136,608,131 100.00

Size of holdings

Up to 5,000 shares 19,105 92.27 25,964,287 19.01

5,001 – 20,000 shares 1,351 6.52 10,175,572 7.45

20,001 – 100,000 shares 133 0.64 5,881,588 4.30

Over 100,000 shares 117 0.57 94,586,684 69.24

20,706 100.00 136,608,131 100.00


This report is printed on Hello Silk paper. This paper has been independently certified as meeting the standards of the Forest Stewardship Council® (FSC) and was manufactured at a mill that is certified to the ISO14001 and EMAS environmental standards. The inks used are all vegetable based.

Printed at Pureprint.

Designed and produced by Tor Pettersen & Partners.Photographic direction by Hudson Wright Associates.Board photography by Ed Hill.

Dairy C

rest Gro

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plc A

nnual Report 2

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Dairy Crest Group plc Annual Report 2013

Dairy Crest Group plcClaygate HouseLittleworth RoadEsherSurrey KT10 9PNCompany No: 3162897

Visit our website at www.dairycrest.co.ukhttp://www.dairycrest.co.uk/investors/

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Documents

Dairy Crest Group plc Annual Report 2013