Dairy Crest Group plc Interim Results 2000
Unaudited results for the half year to 30 September 2000

Operating and financial review

These results deliver an attractive increase in adjusted Group profit before tax of 16% and adjusted earnings per share of 11%. The results include the benefit of the acquisition of Unigate's dairy and cheese business with effect from July 2000 and I am pleased to report the acquisition is already earnings enhancing.

Our strategy to invest and focus on building brands and adding value continues to provide attractive growth and demonstrate the potential for further progress with Clover, Cathedral City, Frijj and the Yoplait brands showing impressive annual volume growth of between 5% and 25%.

The integration of the acquisition into Dairy Crest is progressing smoothly and is delivering the anticipated synergies. We are confident that the full acquisition benefits will be achieved as planned. Our twin strategic objectives are to optimise the growth potential of our added value businesses and to establish industry leading standards of operational cost efficiency across the Group.

Financial Review


At the time of our last results we indicated that our added value businesses would continue to demonstrate attractive growth, but that trading pressures in our commodity businesses would offset these benefits. This has proved to be the case, with the underlying Dairy Crest business being slightly ahead of expectations before operating exceptional items and goodwill amortisation, and almost in line with last year's first half performance. The newly acquired business provides scale benefits that will address effectively the commodity trading pressures as well as strengthening our added value businesses.

The Dairy Crest results for the six months to September 2000 include three months trading from the acquired dairy and cheese business. The Group achieved turnover of £559 million for the period being £390 million for the existing Dairy Crest businesses and £169 million for the acquired businesses from July 2000 onwards.

Adjusted operating profit (before operating exceptional items and goodwill amortisation) was £30.5 million, being £22.3 million for the underlying Dairy Crest activities and £8.2 million for the newly acquired operations. Group operating profits also reflect charges of £5.1 million for operating exceptional costs, including £2.7 million of acquisition integration costs and £1.8 million of costs relating to the start up of the Nuneaton distribution centre. Goodwill amortisation amounts to £0.5 million. At the time of the acquisition we indicated that the cash exceptional restructuring costs were likely to amount to £30 million. These cash costs, together with any related asset write downs, will be charged against operating profit as exceptional items when incurred over the next three years.

The interest charge has increased significantly from £1.4 million last year to £6.1 million in the half year to September. This increase largely reflects interest on additional borrowings related to the acquisition, but also the completion of the investment in the Nuneaton distribution centre.

Excluding the £5.6 million charge for operating exceptional items and goodwill, the adjusted Group profit before tax was £24.4 million, which represents an increase of 16% over the comparable £21.1 million reported in the first half of 1999/2000. The tax charge of £5.6 million shows a small increase in the effective tax rate to 29% from 28% last year. Basic earnings per share which is calculated after charging exceptional items and goodwill amortisation was 11.7 pence (1999 - 13.8 pence). Adjusted earnings per share was 15.4 pence, an increase of 11% over the prior period. The directors have declared an interim dividend of 4.5 pence per share which represents an increase of 8% over the 4.15 pence per share in the corresponding period last year.

The £246.4 million acquisition of Unigate's business was largely debt financed although 6.3 million additional shares (representing consideration of £11.6 million) were issued to shareholders who elected to take their entitlement in the form of Dairy Crest shares. The provisional fair value of the net assets acquired was £220.3 million resulting in provisional goodwill on acquisition of £26.1 million. Group net debt amounted to £287.6 million at September 2000 reflecting a net cash outflow in the first half year of £240.1 million before financing.

Business operations

Dairy Crest's added value strategy continues to make encouraging progress and is a key driver of Group operating profit. Our investment in media and marketing to build branded growth has led to strong volume increases by our leading brands, Clover, Cathedral City and Frijj and the Yoplait brands.

Consumer Foods, which includes the acquired retail liquid milk and cheese businesses, achieved an adjusted operating profit of £16.5 million on turnover of £333 million producing an operating margin of 5.0%. Food Services, which includes the acquired household and ingredients businesses, achieved an adjusted operating profit of £14.0 million on turnover of £226 million producing an operating margin of 6.2%.

Our spreads business continued to benefit from the ongoing strength of Clover where volumes increased by 5% compared with the dairy spreads market which increased by 1%. This growth, ahead of the market, helped maintain Clover's position as the leading brand in the sector. We have been pleased with the progress of the new Country Life Spreadable which was recently launched.

In cheese, Cathedral City and Davidstow recorded strong volume growth of around 20% compared to the mature cheddar sector which grew by around 1%. To sustain future profitable growth it is essential to continue to build prepack sales. It is therefore pleasing that Cathedral City prepack sales increased by nearly 50%. The cheese business is already beginning to benefit from the greater scale and resultant efficiency enhancement following the integration of the acquisition into the Dairy Crest operation. The announcement of the closure of Sturminster Newton and Fermanagh are steps in this integration process, as we provide Dairy Crest with the optimal operational infrastructure to support our strategic development of the cheese sector. In addition, lower levels of industry cheese stocks are leading to a firming of market prices which will benefit the second half performance.

The branded Yoplait Dairy Crest fresh dairy products business continued to show encouraging growth in the half year with sales volumes ahead by around 25% including strong performances by Petits Filous and the recently launched Weight Watchers from Heinz confectionery range. Overall the financial results from the joint venture reflect the lower returns from the very competitive retailer brand sector. Following a review of operational facilities, steps have been taken to strengthen efficiency and the closure of the Wantage site has now been completed. The strength of the Yoplait brands and the ongoing focus on enhanced efficiency will enable us to benefit from continued growth in the fresh dairy products market and will help offset this competitive retailer brand environment.

The retail liquid milk market remains highly competitive, but our market position has been materially strengthened by the acquisition of Unigate's milk business. Dairy Crest is now a strong number two in the market with the opportunity to develop its position through the scale and enhanced efficiency afforded by the acquisition. It is our intention to secure an industry leading operating cost position and build sustainable competitive advantage. We plan to create two highly efficient "super dairies" to service our major retail customers. As a first step we are announcing a plan to invest £15 million to double processing capacity at our Chadwell Heath dairy to an initial 380 million litres per annum, creating a highly efficient facility serving major retail customers in London and Southern England. Our intention is to increase this capacity to around 600 million litres per annum with further investment. The new facility is expected to be operational by the end of 2001 and will accommodate milk currently processed at the Westway site which will subsequently be closed. An announcement will be made early in the new year regarding our investment to establish a matching facility in our western serving area.

Frijj had a particularly good half year with sales volumes increasing by around by 22% compared to market growth of 17%.

The household business continued to experience a market decline of around 10%. The business generated strong operating cash flow and is already benefiting from the enhanced operational efficiency achieved through the acquisition. We recently announced the establishment of Aldershot as the administrative and financial centre for our household business and the subsequent closure of the Luton office.

Ingredients market prices reflected the comparative strength of demand for ingredients products of butter and skimmed milk powder. However, in the UK, reduced availability of raw milk has restricted our ability to capitalise fully on these strong market conditions.

Outlook

These are good results delivering an attractive increase in adjusted Group profit before tax and earnings per share. We are pleased with the performance of the underlying Dairy Crest business, where our branded and added value products have continued to demonstrate encouraging growth. The benefits of the Unigate acquisition are being delivered in line with expectations and the transaction is already earnings enhancing.

As the UK's only broadly based dairy company we benefit from leading positions in all market sectors. Our strategy will continue to focus on growing our brands and added value businesses. The acquisition has materially enhanced our scale and operational efficiency and is delivering the anticipated synergies. The strength of our competitive position gives confidence that we will deliver attractive earnings growth and provides the opportunity for a greater appreciation in Dairy Crest's value.