Dairy Crest Cuts Debt as Milk Sales Rise

Our Dairies Division has benefited from milk price reductions and from the ongoing cost reduction programme. This has compensated for the unwinding of stock profits in our cheese business.

30 Sep 2009 --- Dairy Crest has performed well and has made good progress in the first six months of the year. We are seeing the benefits of being a broadly based dairy business and from the decisive actions taken over the past year to reduce costs and simplify the Group.

Our key brands continue to perform strongly.  They have been supported by high levels of advertising and promotional spend. Our Dairies Division has benefited from milk price reductions and from the ongoing cost reduction programme.  This has compensated for the unwinding of stock profits in our cheese business.

Lower borrowings and interest rates have led to a reduced finance charge for the period, offsetting the loss of contribution from Yoplait Dairy Crest, following the sale of our 49% stake in March 2009.

Branded growth

Our five key brands have all showed strong growth in the first half.  All these brands (Country Life, Cathedral City, St Hubert, Clover and FRijj) have been advertised on television in the period and we have continued with a strong promotional programme aimed at providing value to consumers.  Highlights of our brands' performance include:

-Country Life is the fastest growing butter brand and has overtaken Anchor in value share for the first time

-Cathedral City remains larger than the next three cheddar brands combined St Hubert Omega 3 has continued to gain market share

-FRijj goes from strength to strength and now has over half the total flavoured fresh milk category

-Clover has achieved an increased volume share of the butter, spreads and margarine market, supported by new packaging and advertising

We will continue to advertise and promote our key brands strongly in the second half.

Innovation

We remain strongly committed to improving our profitability by creating new products and improving the way we do business.

Our new 'lighter' brands continue to meet the needs of health-conscious consumers and we are pleased with the progress they are making.  Penetration of both Clover Lighter and Cathedral City Lighter are at record highs.  In addition our recently acquired subsidiary, Fayrefield FoodTec Limited has launched a range of stress-reducing products with Boots under the Equilibrium brand.

Sales of milk to our major retail customers are up 10% compared to last year.  We continue to offer these customers innovative ideas for their own-brand milk such as 1% fat milk and milk in environmentally friendly bags ('Jugit').

We have completed our new cheese packing facility at Nuneaton and this is now fully operational.  We will be introducing new packaging for our Cathedral City brand during the second half of the year.

We have also completed the rollout of our new doorstep delivery internet proposition, milk&more.  This is now available to all 1.3 million of our household customers. Uptake is good, with over 100,000 customers currently registered, and these customers are spending more with us. We will market the service to new customers during the second half of the year.

Cutting costs

The action we took last year to reduce our cost base, most notably the head office restructure in September 2008 and closing our Nottingham dairy in February this year has contributed to lower costs this year, particularly benefiting our Dairies Division.

Other cost reduction measures implemented in the period include contracting out milk collection in our Davidstow milk field and changing our media buying arrangements.

Reducing risk and focusing the business

Over the past years we have reduced risk and simplified our business and we continue to find ways to make further improvements.  Dairy commodity prices have remained depressed over the period and in response we have successfully minimised the amount of milk we have balanced into our Ingredients business.  This also has contributed to an improved performance from our Dairies Division.  Very recently there has been some signs of improvement in dairy commodity prices.

In May 2009, following a comprehensive review of our household depot operations in the north of England we sold 16 depots to Medina Dairy Limited.  We retained supply of packed milk into these depots.

Over the past year we have continued to reduce the risks associated with operating a defined benefit pension scheme.  Having previously closed the scheme to new employees in June 2006, the scheme insured substantially all of its liability for pensions in payment in two tranches in December 2008 and June 2009.

To further reduce risk, the Company intends to close its defined benefit pension scheme to future accruals with effect from 1 April 2010.  Formal consultation with our employees and their representatives has now been satisfactorily completed.  We expect to conclude discussion on this matter with the Scheme Trustee in two to three weeks at which point we will be in a position to confirm full details of new and transitionary arrangements to our employees.

Net Debt

We have focused on cash management in the first six months of the year and our borrowings at 30 September 2009 will be below those at 31 March 2009.  We are pleased with this performance because it is usual for the seasonal increase in cheese production and stocks to result in our borrowings increasing in the first half of the year.