Dairy plc Group Crest Annual Report 2017/18 FUTURE Feeding the

Dairy Crest Group plc Annual Report 2017/18 Visit our website at www.dairycrest.co.uk Dairy Crest Group plc House Claygate Littleworth Road Esher Surrey KT10 9PN Company No: 3162897 Contents About us Shareholders’ information

Strategic report Dairy Crest is a producer of leading British Company Registrar and Shareholder Enquiries Low cost share dealing service 1 Highlights If you have administrative enquiries concerning your shareholdings If you do not have share dealing arrangements in place, Dairy Crest 2 At a glance food brands and value-added ingredients. in the Company, such as the loss of share certificates, change of has a low cost share dealing service arranged by Link Share Dealing 4 Our business address, dividend payment arrangements or amalgamation of Services. Shareholders wishing to use the service should either visit 6 Our strategy and The company’s success is driven by a strong portfolio of market- accounts, please contact the Company’s registrar by writing to, the Link Share Dealing website at www.linksharedeal.com or call key performance indicators Link Asset Services, The Registry, 34 Beckenham Road, 0371 664 0445. Calls are charged at the standard geographical rate 8 Chairman’s statement leading brands including Cathedral City cheese, Clover dairy Beckenham, Kent BR3 4TU or by telephone on 0371 664 9266. and will vary by provider. Calls from outside the UK are charged at 9 Chief Executive’s review spread, Country Life butter and Frylight, the original one calorie the applicable international rate. Lines are open 8.00am to 4.30pm 12 Financial review cooking spray. Calls are charged at the standard geographical rate and will vary by Monday to Friday. 16 Cheese & Functional Ingredients provider. Calls from outside the UK are charged at the applicable 18 Butters, Spreads & Oils We also produce ingredients for the high growth global infant international rate. Lines are open 9.00am to 5.30pm Monday to Friday. Gifting shares to charity 20 Corporate responsibility Shareholders who have a small holding of shares on the register 26 Principal risks and uncertainties formula market – demineralised whey powder, a by-product from Link Asset Services also provides online facilities for shareholders to whereby their value makes them uneconomic to sell, may donate the cheese-making process, and galacto-oligosaccharides (GOS), check their holdings and update their details. Registering is easy, and these shares to charity under the Sharegift Scheme – administered Governance a lactose-based prebiotic which helps to improve gut health. there is no fee involved, simply access www.dairycrestshares.com. by the Orr Mackintosh Foundation – a registered charity. Information 30 Board of Directors, Executive can be found at www.sharegift.org or telephone: 020 7930 3737. Committee and Advisers Payment of dividends 32 Corporate governance We strive constantly to innovate, bringing new products to market Shareholders may arrange to have their dividends paid directly into 43 Directors’ remuneration report and introducing new ways of working across the business. a bank or building society account using the Bankers Automated 63 Directors’ report Clearing System (BACS). Bank mandate forms are available from 66 Statement of Directors’ Our success has been built on our links to the countryside, our Link Asset Services whose details appear above or you can register responsibilities dairy heritage and our people and we continue to ensure we are your mandate details online at www.dairycrestshares.com. The numbers setting the standard for responsible business practice. 67 Independent auditor’s report 72 Consolidated income statement Holders 73 Consolidated statement Analysis of ordinary shareholders at 22 May 2018 number % Shares % of comprehensive income Category 74 Consolidated and Parent Individuals and other holders 16,229 88.31 26,827,648 18.97 Company balance sheets 75 Consolidated statement Insurance companies, pension funds, banks, 2,149 11.69 114,587,813 81.03 of changes in equity nominees and limited companies 76 Parent Company statement 18,378 100.00 141,415,461 100.00 of changes in equity Size of holdings 77 Consolidated and Parent Up to 5,000 shares 17,013 92.572 22,954,113 16.23 Company statement of cash flows 78 Accounting policies 5,001 – 20,000 shares 1,142 6.214 8,539,344 6.04 84 Notes to the financial statements 20,001 – 100,000 shares 103 0.561 4,383,539 3.10 122 Group financial history Over 100,000 shares 120 0.653 105,538,465 74.63 123 Alternative performance measures 18,378 100.00 141,415,461 100.00 125 Shareholders’ information

Alternative performance measures: The Group uses alternative performance General information Financial calendar measures (APMs) as key financial performance General information about Dairy Crest can be found on our Dividends Final indicators to assess the underlying corporate website, www.dairycrest.co.uk Ex-dividend 5 July 2018 performance of the Group. The APMs are Investors who have questions relating to the Group’s business Record date 6 July 2018 widely used industry measures and form the measurement basis of key targets. Definitions activities should contact: Payment date 10 August 2018 of the APMs discussed throughout this Annual Investor Relations, Dairy Crest Group plc, Claygate House, Report and Accounts and a reconciliation to Littleworth Road, Esher, Surrey KT10 9PN. Group results (Anticipated) the equivalent statutory measure are detailed on pages 123 to 124. Telephone: 01372 472200 Half Year (Interims) November 2018 e-mail: [email protected] Preliminary Announcement of 2018/19 results May 2019 Notice: Limitations on Director liability – The purpose of the Annual Report Directors in connection with those reports shall be subject to the limitations 2018/19 Report and Accounts and Accounts is to provide information to members of the Company and it and restrictions provided by such law. circulation June 2019 has been prepared for, and only for, the members of the Company as a body. The Company, its Directors, employees, agents and advisers do not accept or Cautionary statement regarding forward-looking statements – assume responsibility to any other person to whom this document is shown The Group’s reports including this Annual Report and Accounts and written or into whose hands it may come and any such responsibility is expressly information released or oral statements made to the public in the future, by disclaimed. Under the Companies Act 2006, a safe harbour limits the liability of or on behalf of the Company and the Group, may contain forward-looking Directors in respect of statements in and omissions from the Directors’ report statements. By their nature, these statements involve uncertainty since future contained on pages 2 to 42 and 63 to 65 and from the Directors’ remuneration events and circumstances can cause results to differ materially from those report at pages 43 to 62. Under English law the Directors would be liable to the anticipated. The forward-looking statements reflect knowledge and information Company (but not to any third party) if the Directors’ report contained errors as available at the time of their preparation and, except to the extent required by a result of recklessness or knowing misstatement or dishonest concealment applicable regulations or by law, the Company and the Group undertake no This report is printed on Chorus Lux Silk paper. Printed at Pureprint. of a material fact, but they would not otherwise be liable. The Directors’ report obligation to update these forward-looking statements. Nothing in this Annual This paper has been independently certified as meeting Designed and produced by Tor Pettersen & Partners. and the Directors’ remuneration report have been drawn up and presented in Report and Accounts should be construed as a profit forecast. the standards of the Forest Stewardship Council® (FSC) Photographic direction by Hudson Wright Easton. accordance with and in reliance upon English company law. Liabilities of the and was manufactured at a mill that is certified to the ISO14001 Board photography by Ed Hill. and EMAS environmental standards. The inks used are all vegetable based.

Dairy Crest Annual Report 2017/18 125 2017/18 Highlights

• Group revenue up 10% to £456.8m

• Cathedral City revenue grows by 6%

• Spreads brands increase revenue by 10% Strategic report

• Sales channels developing for GOS beyond infant formula

• Adjusted profit before tax1 rises 3% to £62.3m; reported profit before tax (after net exceptional

items2) up 345% to £179.2m Governance

• EBITDA1 increases 8% to £90.2m

• Pension surplus of £93.9m – an improvement of more than £200m

• Net debt1 of £265.7m to fund higher value stock

• Innovation* accounts for 14% of total revenue numbers The

Revenue Adjusted profit Net debt1 Total dividends (£m) before tax1 (£m) (£m) per share (pence) £456.8m £62.3m £265.7m 22.6p 22.6 265.7 62.3 456.8 448.2 22.5 446.2 60.6 249.8 58.8 57.7 422.3 416.6 22.1 229.0 21.7 46.5 198.7 21.3 142.2

13/14 14/15 15/16 16/17 17/18 13/14 14/15 15/16 16/17 17/18 13/14 14/15 15/16 16/17 17/18 13/14 14/15 15/16 16/17 17/18

1 This highlight is an APM as defined and reconciled on pages 123 to 124 2 Further details on exceptional items can be found in Note 4 to the Accounts * Revenue from new products launched within the past three years

Dairy Crest Annual Report 2017/18 1 At a glance

Business model Dairy Crest is a leading British dairy company. We aim to generate growth through building strong positions in branded and added-value markets while maintaining a commitment to progressively growing the dividend.

Experienced management World class, well invested Culture of corporate team focussed on supply chain enables responsibility which executing a clear and us to provide unrivalled runs throughout the consistent strategy quality and consistency organisation across the product portfolio

CO2

High quality portfolio Constantly striving to Financially strong of market-leading food innovate, bringing new business with stable brands and ingredients products to market and margins and progressive generating growth and introducing new ways dividend policy increasing market share of working across the business

Supply chain

Butters & Spreads Kirkby

Innovation Centre Harper Adams Nuneaton Cheese maturation, 500 million packing & distribution litres of milk from Head Office Claygate Erith Oils Cheese & Frome Functional Versatile 330 Ingredients cheese packing farmers Davidstow

2 Dairy Crest Annual Report 2017/18 Vision Our success has been built on our links to the countryside, our dairy heritage and the people in our business. From this, we will grow through a shared passion to create exceptional food, loved by every generation.

Strategy Strategic report To generate growth by To simplify, make building strong positions more resilient and 1 in branded and added- 2 reduce costs value markets

To generate cash To make acquisitions and reduce risk where they will 3 4 generate value

UK’s No1 dairy spread UK’s No1 cheese brand UK’s No1 oil brand

UK’s No3 butter brand UK’s No1 dairy-free spread

Corporate responsibility Our culture of corporate responsibility defines the organisation. We focus our efforts on four key areas: Climate Colleagues Consumers Community To reduce the impacts of To provide a safe, To create healthy, tasty To support and enhance our supply chain on the diverse and inclusive and sustainable foods the communities in environment workplace that which we work and live offers employees the opportunity to grow

Dairy Crest Annual Report 2017/18 3 Our business

Dairy Crest manufactures and markets branded food products and value-added ingredients. We have two product groups – Cheese & Functional Ingredients and Butters, Spreads & Oils.

Cheese & Functional Ingredients

We produce Cathedral City, the UK’s number one cheese a by-product from the cheese-making process, and galacto- brand, and the premium Davidstow cheddar brand at our highly oligosaccharides (GOS), a lactose-based prebiotic. Dairy Crest is automated creamery in Davidstow, Cornwall. Our functional well positioned to produce premium demineralised whey due to ingredients operation produces ingredients for the high-growth its high quality, traceable milk supply. global infant formula market – demineralised whey powder, Cheddar and demineralised whey Galacto-oligosaccharides

Milk Cream Lactose, water and heat c500m litres

Starter and Whey Enzymatic reaction adjunct cultures Whey butter

Filtration and evaporation Removal of 90% of minerals Galacto-oligosaccharides (GOS) 13,500t capacity

Cheddar Demineralised whey (D90) Infant Adult Animal 50,000t 24,000t nutrition nutrition nutrition

Annual production

Our retail markets

Cheese Functional Ingredients

The UK cheese market generates £2.7 billion of sales each year, Dairy Crest has Global infant formula market approximately half of which are cheddar. Cheddar volumes grew made a significant by 2% last year. Cathedral City is the largest cheddar brand, investment at its ** accounting for 20% of total cheddar sales but 55% of the branded Davidstow creamery market. With retail sales of approximately £280 million, Cathedral to manufacture $47bn City sells more than all of the other cheddar brands combined, demineralised whey and is three times larger than the number two brand. Private for use in infant label still dominates, however, which presents us with further formula products. This is a global market that is expected to grow at opportunities to a compound annual rate of 9% from 2015 to 2020. The Asia Pacific UK cheddar market* expand both in the region is the largest consumer of infant formula as population UK and abroad. growth and urbanisation fuel demand. Consumers are willing to pay Cathedral City 20% for safety and quality more than ever before. Dairy Crest also manufactures GOS, a prebiotic derived from Pilgrim’s Choice 6% the lactose in cow’s milk, which is used in infant formula. We are £1.3bn Seriously Strong 3% exploring additional uses for GOS as an ingredient in the adult Wyke Farms 1% food market and in animal feed. Other 5%

Private label 65%

4 Dairy Crest Annual Report 2017/18 Revenue Profit

Cheese & Functional Cheese & Functional Contribution to Group Ingredients 61% Ingredients 70% (% of total Group): Revenue excludes other revenue. Profit is product group profit. Butters, Spreads Butters, Spreads This information is presented in & Oils 39% & Oils 30% Note 1 to the Accounts.

Butters, Spreads & Oils Strategic report

We manufacture a number of leading butter and spreads brands at our facility in Kirkby, Merseyside. Key brands include Country Life butter, Clover dairy spread and Vitalite dairy-free spread. We also produce Frylight, the one calorie cooking spray, in Erith, Kent.

Diverse range of butters, spreads and oils

Bulk butter Oils and oils

Block Dairy Dairy-free Cooking Spreadable butter spreads spreads spray

Butters & Spreads Oils

The UK butters and spreads market totals £1.3 billion of retail Spray oils represent around 13% of Frylight household sales. Dairy Crest’s five brands make up 17% of that market by total cooking oil retail volumes in the penetration **** volume. Our four spreads brands represent 30% of the standalone UK and grew by 8% over the past 12 spreads market. months. Frylight, with its one calorie Over the past decade butter has profited from the growing spray, is the number one oil brand consumer trend to eat more natural products. Over the past two across the total category (including years, however, this has increased global demand for dairy fats pouring oils), and makes up 88% of 25% which, coupled with a reduced milk supply, has led to butter spray oil sales, making it the stand prices rising by more than 20% on shelf. This has helped to slow out market leader. the decline of the spreads market which has been contracting in Over the past two years, spray recent years. oils have doubled their presence on supermarket shelves, driven Clover is the No1 predominantly by the increased breadth of Frylight’s product dairy spread with range. With a household penetration rate of 25% there is still market share of considerable potential for Frylight to grow.

*** * IRI Kantar 52 weeks ended 24 March 2018 ** Euromonitor estimate 2017 *** IRI Kantar 52 weeks ended 24 March 2018, spreads market 20% **** Kantar Worldpanel 52 weeks ended 25 February 2018

Dairy Crest Annual Report 2017/18 5 Clear and consistEnt Strategy

Dairy Crest has a clear and consistent strategy against which we continue to make progress.

To generate growth by building To simplify, make more resilient strong positions in branded and and reduce costs 1 added-value markets 2 Progress 2017/18 Progress 2017/18 • Combined revenues of our four key brands grew by 6%. • Following the Dairies sale the business is significantly Total revenue up by 10% less complex and more focussed, with c.1,100 colleagues employed across five key operating sites • Cathedral City increased revenues by 6% and currently represents 55% of all branded cheddar sales in the UK • Introduced 24/7 working schedule and new site agreement in Kirkby to improve flexibility and efficiency. Spreads portfolio delivered a combined 10% uplift in • This is expected to result in annual cost savings of £2.5 revenue versus a spreads market which was flat million Frylight continued its double digit volume and revenue • The project to replace and simplify core IT systems is growth for the sixth consecutive year since it was • well advanced and expected to complete in 2018. It will acquired in 2011 deliver further efficiencies as procedures and support • Customer base of infant formula manufacturers building structures are simplified and improved for demineralised whey and GOS following further Key farming support services brought in-house to commissioning costs incurred in the period • simplify and strengthen the relationship with our farmers • New sales channels developing for GOS in both adult and animal nutrition

Future priorities Future priorities • Focus will remain on growing market share of our key • To complete the programme to replace core IT systems brands – Cathedral City, Clover, Country Life and Frylight to deliver a less costly and simpler IT infrastructure more appropriate for the business • Continued investment in advertising and promotion Roll out revised milk pricing schedule which will be Further advance our strong pipeline of innovation • • simpler to manage and, over time, will reward farmers • Work with Fonterra, our sales partner, to accelerate who supply milk of a composition most appropriate for returns from our demineralised whey and GOS products the manufacture of cheese and demineralised whey in the infant formula sector • Continue to seek cost reductions and drive operational • Continue marketing our GOS business to the adult and efficiency improvements throughout the business animal nutrition markets

Key performance indicators Our key performance indicators (‘KPIs’) are summarised below. and performance in the year These KPIs are also used as measures for our Long Term Alignment Plan (‘LTAP’) for Directors and senior employees. ended 31 March 2018

• Grow earnings before • Deliver an acceptable • Reduce net debt/EBITDA1 • Grow our four key brands interest, tax and return on capital to the range 1 – 2 times ahead of the market depreciation (EBITDA1) employed (ROCE1) and adjusted profit before At 31 March 2018 net debt/ In the year ended 31 March tax (adjusted PBT1) ROCE for the year ended EBITDA was 2.9 times 2018 Cathedral City, Clover 31 March 2018 was 16.1%. (31 March 2017: 2.9 times). and Frylight grew ahead of In the year ended 31 March the market although Country 2018 EBITDA rose by 7.8% Life did not (31 March 2017: and adjusted PBT increased three of our key brands by 2.8%. grew ahead of the market).

1 These APMs are defined and reconciled on pages 123 to 124

6 Dairy Crest Annual Report 2017/18 To generate cash and To make acquisitions where 3 reduce risk 4 they will generate value Progress 2017/18 Progress 2017/18 Strategic report • Future annual increases for pensions in payment • Focus has been on organic growth and we have not now linked to CPI rather than RPI, thereby reducing made any acquisitions during the year ended 31 March estimate of future benefit costs and consequently cash 2018 contributions to the Group Pension Fund. Liabilities reduced by an estimated £132 million as a result • Gearing unchanged at 2.9 times • Cash generated from operations up 3% at £33.7 million – despite £34.4 million outflow to fund stock

Future priorities Future priorities • Free cash flow expected to increase as cost pressures • Continue to look for value-enhancing acquisitions which ease, pension liabilities reduce and capital expenditure meet our stringent requirements reverts to a lower run rate. This will enable further reductions in gearing • New IT system will reduce process and data complexity • Next full pension scheme valuation due in March 2019

• Deliver cost saving • Achieve innovation • Improve corporate initiatives revenue targets for responsibility measures products developed in Cost reduction projects the last three years During the year we initiated in the year ended focussed our corporate 31 March 2018 have In the year ended 31 March responsibility efforts on 14 delivered substantial 2018 around 14% of our pledges grouped under benefits ahead of plan. revenue came from such the four pillars of Climate, sales against a target of Colleagues, Consumers 10% (31 March 2017: 13% and Community. See the of revenue). Corporate Responsibility section on pages 20 to 25 for more detail.

Dairy Crest Annual Report 2017/18 7 Chairman’s statement

The business has a strong management“ team who are delivering against a clear strategy of building brands, adding value, driving simplicity, generating cash and reducing risk ” Review of the year Value-added ingredients This year we have delivered a strong set of results despite volatile We have completed our investment at our creamery at Davidstow, market conditions. This performance demonstrates the underlying Cornwall and we are producing demineralised whey, an added- robustness of our business, which today is predominantly branded value by-product of the cheese-making process. Whey is used as and value-added. Adjusted profit before tax increased by 3% to the base ingredient for infant formula and together with our sales £62.3 million on revenues that have increased by 10%. After net partner Fonterra we have been building the customer base. exceptional items of £118.0 million, reported profit before tax was Furthermore, we are manufacturing GOS at Davidstow. GOS is £179.2 million. a prebiotic which is added into infant formula to help aid digestion In the first half of the year, dairy markets were inflationary. and growth in babies. Sales of this product are growing. We Our input costs rose markedly as we increased the price we paid also continue to research other potential applications for GOS in our supplying farmers for milk and unprecedentedly high prices both adult nutrition and animal feed. This work could potentially in cream and butter markets put pressure on input costs in our broaden the market for GOS beyond infant formula. butters business. However, in the second half of the year, these pressures eased and we ended the year with milk and butter Our culture and values costs approximately 10% and 30% respectively off their highs. Dairy Crest remains committed to doing the right thing in the way Dairy market volatility is not unusual. In the last five years we conduct ourselves and do business. We have 14 corporate we have seen pronounced swings in dairy markets, which are responsibility pledges across Climate, Colleagues, Consumers increasingly global. We must expect that volatility is here to stay. and Community. We have made these pledges specific and However Dairy Crest has delivered consistently high margins measurable in order to continuously improve, as we passionately throughout this period. This is due to the underlying business believe that success will benefit our business performance as well model which focusses on investing in a high-quality, efficient as our culture and values. We report on each of these pledges in supply chain. This focus on investment in quality and efficiency the Corporate Responsibility section of this report. allows us to pay leading prices for our milk, to invest in innovation and brand marketing and to reward shareholders with high Increased dividend recommended margins and a progressive dividend policy. It is a model that will The Board is recommending a final dividend of 16.3 pence per continue to drive our growth in the future, irrespective of volatility share, making a full year dividend of 22.6 pence per share. In in dairy markets. line with our progressive dividend policy, this is a 0.4% increase on last year. The dividend is covered 1.6 times by adjusted basic Developing brands earnings per share. A key part of our strategy remains to continue Developing brands is at the heart of our business and 2017/18 to increase dividends each year, aiming for a target cover range of saw good progress across our portfolio. Cathedral City grew sales 1.5 to 2.5 times. by 6%, with innovation and consumer marketing again driving this growth. One of our recent innovations – Cathedral City Spreadable Summary – was voted Product of the Year 2018 in the UK cheese category Our performance this year is not only a result of the Group’s long- of the world’s largest online consumer survey. The brand also term strategy but also a reflection of the significant contribution sponsored a new family quiz show on ITV1 in the final quarter. Our and dedication of all of our employees, for which I would like to portfolio of spreads brands delivered an impressive 10% increase sincerely thank them. in sales helped by clear positioning in the category and Frylight The Board remains confident in the future prospects for Dairy enjoyed its sixth consecutive year of double-digit sales growth Crest. The business has a strong management team who are since we acquired the business in 2011. delivering against a clear strategy of building brands, adding value, Innovation is critical in order to continue to grow our business driving simplicity, generating cash and reducing risk. and 14% of the Group’s revenue in 2017/18 resulted from products that are less than three years old. This is well ahead of the Stephen Alexander Chairman challenging 10% target we set ourselves. 22 May 2018

8 Dairy Crest Annual Report 2017/18 Chief Executive’s review

Market background Following a two year period of extremely low milk prices, they started to rebound in August 2016 and the price increases continued for much of the first half of our financial year. As the milk supply started to increase, we reduced our milk price in the latter part of the year, although it stayed above 30 pence per litre until March 2018 and remains one of the highest in the country. Milk supplies were affected across the country in the fourth quarter due to the severe weather conditions. Farmers and delivery

drivers had to contend with extremely challenging conditions but Strategic report our team worked hard to minimise any adverse impact. Cream prices, which determine the input costs for our butter business, rose by 65% between April and August 2017 to reach £2.85 per litre. They fell back to just below £2.00 per litre by the Highlights end of the financial year although they have started to firm again. As a comparison, the average cream price over the previous three • Group revenue up 10% to £456.8m years was £1.20 per litre. We were able to partially offset the cost impact on our Butters, Spreads & Oils division by selling excess • Cathedral City revenue grows by 6% cream and whey butter generated in our Cheese & Functional Ingredients business. • Spreads brands increase revenue by 10% The input cost inflation resulted in considerable increases in • Sales channels developing for GOS beyond the retail price of butter over the period. Spreads, and Clover in infant formula particular, were the major beneficiaries as consumers switched to cheaper alternatives. Retail prices also started to increase for • Adjusted profit before tax rises 3% to £62.3m; cheese in the second half of the year. reported profit before tax (after net exceptional items) up 345% to £179.2m Healthy brand revenue growth In aggregate, revenues of our four key brands (Cathedral City, • EBITDA increases 8% to £90.2m Clover, Country Life and Frylight) grew by 6% during 2017/18. • Pension surplus of £93.9m – an improvement Positive volume growth for Cathedral City, Clover and Frylight was of more than £200m offset by Country Life which we chose not to promote for most of the year to protect margins. • Net debt of £265.7m to fund higher value stock Brand Market Volume* Value* • Innovation* accounts for 14% of total revenue * Revenue from new products launched within the past three years Cheese +3% +6%

I am pleased to report that our brands have delivered a strong Spreads +3% +7% combined performance this year. Cathedral City has been the key driver but our spreads and oils brands have also produced excellent growth, allowing us to deliver overall Group revenue Butters -20% 0% growth of 10%. Country Life has had a more challenging year due to unprecedented input cost inflation. More infant formula customers for both demineralised whey and GOS have been Oils +12% +13% secured and we are also making progress in selling GOS to the adult and animal nutrition markets under our brands, Promovita Total 0% +6% and Nutrabiotic. * Dairy Crest volume and value sales 12 months to 31 March 2018 vs 12 months Managing fluctuations in input costs is part of the normal to 31 March 2017 course of business at Dairy Crest. Although there has been considerable volatility in the dairy markets during the year, our operating margin has remained comparatively stable which is Cathedral City revenues increase testament to the resilience of our business model. Cathedral City delivered a strong performance over the year, We have made significant progress in reducing our pension generating volume growth of 3%, revenue growth of 6% and an liabilities so the fund is now in surplus on an accounting basis, increase in market share. In comparison, IRI Kantar data for the due largely to the agreed change to the indexation of pensions in 52 weeks ended 24 March 2018 showed that the total everyday payment. Cheese stocks, which have risen significantly in value cheese market grew by 2% in volume and 5% in value terms. due to the increase in the input cost of milk, built up during the Cathedral City is a top 20 food grocery brand in the UK. It year which led to net debt increasing to £265.7 million. The stock can be found in more than half of all fridges across the country will be sold through this year and working capital requirements are and represents 55% of branded cheddar sales. It is by far the starting to ease as milk and cream costs have reduced. largest cheddar brand in the UK by retail sales value and is more than three times the size of the number two brand. However, with around 65% of everyday cheese sales still attributed to private label products, there is plenty of room for further growth. The Cathedral City snack bar was launched at the end of the previous financial year. Sales are accelerating and it is now

Dairy Crest Annual Report 2017/18 9 Chief Executive’s review continued

present in most convenience stores, as well as increasingly being volumes increased by 12% and revenues grew by 13%, confirming stocked in the ‘on-the-go’ section at the front of supermarkets. its position as the UK’s leading oil brand. The oils market in the UK Snacking is a core part of the Cathedral City growth strategy grew volumes by 3% and revenues by 6%, according to Kantar and we are developing further innovations in this area as well as data for the 52 weeks ended 25 February 2018. expanding sales channels to include travel hubs, for example. Frylight represents 9% of total UK oil market sales and 88% of One of our more recent innovations, Cathedral City the spray oil market. As the Frylight range has increased, so too Spreadable, won Product of the Year 2018 in the UK cheese has its presence on retailers’ shelves. During the year the brand category of the world’s largest consumer survey award for product benefitted from an additional 5,000 new distribution points and is innovation. We were also pleased to be the lead sponsor on a new now listed in all the major supermarkets and discounters. Itsu, the ITV quiz show – Britain’s Brightest Family – which attracted an Asian-inspired food chain, has also started using Frylight in its 70 average of almost 4 million viewers in a prime time evening slot for UK shops. a 15 week period in 2018. Establishing customer base for demineralised whey We manufacture approximately 50,000 tonnes of cheddar at our A Great British business Davidstow creamery each year which results in a by-product of whey. By removing the water and 90% of the minerals, we produced 24,000 tonnes of demineralised whey (D90) this financial year. Operational stability improved during the year and we focussed our efforts on establishing our credentials as a trusted supplier which has taken longer than expected and also involved some promotional activity. This has resulted in an exceptional cost which is described in further detail in the Financial Review. In spite of that, Functional Ingredients revenue increased by 51% over the year. Quality controls surrounding ingredients for infant formula are rightly demanding. In partnership with Fonterra we welcomed Cathedral City has a strong British heritage. Each year, we collect 500 million litres of milk from an exclusive pool of 330 farmers many potential customers to Cornwall during the year to showcase located within 80 miles of the Davidstow creamery in Cornwall. the technical operation, process management and the quality We’ve been making cheddar to the same recipe there for over 25 and provenance of the product. Our high quality, traceable milk years. Once produced, the cheese is taken to our technologically supply should mean that we can generate a premium price for our advanced store in Nuneaton where it matures before being cut and packed in the same facility. It is then transported to retail product going forward, particularly as customers are placing even outlets around the country. Our exacting standards ensure that greater emphasis on transparency and product traceability. we consistently produce exceptional cheese. Demand for dairy products remains strong in China, with overall dairy imports into the country increasing by 20% for the 12 months to January 2018 and infant formula manufacturers Spreads brands grow strongly; butter contends with reporting strong revenue growth. considerable price inflation In conjunction with our sales partner, Fonterra, we acquired All four of Dairy Crest’s spreads brands grew revenues over the business for D90 from a number of global and regional infant year, delivering a combined uplift of 10% compared to the overall formula manufacturers by the end of the financial year and we spreads market which was flat, according to IRI Kantar data. expect demand to continue to build in the coming months. Following on from its success in winning the spreads category Product of the Year 2017 award, Clover delivered another Galacto-oligosaccharides (GOS) research continues strong year of both volume and revenue growth at 3% and 7% GOS is a prebiotic derived from the lactose in cow’s milk and is respectively. As the only major spreads brand with no artificial used in infant formula to help support babies’ natural defences, ingredients it has clearly positioned itself as the leading UK dairy increase mineral absorption and aid digestive comfort. GOS feeds spread with 20% of the spreads market by volume. We expect to ‘friendly’ bacteria within the large intestine, encouraging them to launch Clover Lighter with no artificial ingredients later this year. thrive and helping to maintain a healthy gut. Our other spreads brands also performed extremely well. As with demineralised whey, it has taken time for the plant to They all grew revenues and gained market share over the year. stabilise but through our sales and marketing partner, Fonterra, we Willow and Vitalite, the UK’s number one dairy-free spread, both have been selling GOS to infant formula manufacturers throughout generated high double digit volume and revenue growth. Dairy the year and sales are growing steadily. Volumes are expected Crest’s overall volume share of the spreads market has now to increase in the year ahead. Demand for organic infant formula reached 30%. in particular is growing more rapidly and we have established Country Life revenue was flat this year but volumes fell by 20% ourselves as a leading supplier in this area. as we chose not to promote the brand in light of the considerable Nutrabiotic GOS is the brand we have developed for use in input cost inflation. According to IRI Kantar, average butter prices animal feed. There are a number of challenges facing the meat on shelf increased by over 20% during the period, compared with industry currently, including a rise in global meat consumption, spreads prices which grew by just 2%. growing awareness of quality and safety and regulatory changes We relaunched the Country Life packaging in November 2017 such as restrictions on the use of antibiotics. GOS can, through to further emphasise its British heritage which has resonated well the creation of a healthy gut, help to improve efficiency of animal with customers, and promotions were introduced again at the end production and potentially reduce the need for antibiotics. of the year. Over the past year we have conducted a number of academic and commercial trials on chickens and pigs with significant Frylight growth continues results. The trials have shown that GOS has a positive impact on a Frylight, the one calorie cooking spray, has delivered double digit number of aspects of the animals’ physiology which lead to weight volume growth each year since we acquired it in 2011. In 2017/18 gain and improvements in the feed conversion ratio. We now have

10 Dairy Crest Annual Report 2017/18 a substantial amount of empirical data to illustrate these aspects groups, with the goal to be 100% recyclable by 2021/22. At which is leading to significant interest from potential customers. present, 80% of all our packaging is recyclable. Our research on pigs shows that weight gain continued after GOS As signatories of Courtauld 20251 and working members of was withdrawn from the feed, indicating that GOS only needs WRAP2, we are working to improve packaging, manufacturing to be included in the early stages of an animal’s diet, and not efficiencies and reduce consumer food waste. We are also acutely throughout its lifetime, to obtain the desired results. This helps to aware of the need to provide responsible packaging with on-pack reduce the feed cost for the producer which is a key consideration advice to consumers regarding storage and recycling. With one in in our conversations with potential customers. three tonnes of food produced globally being wasted, the effect of GOS-fed chickens outperformed the control groups in terms household food waste is a pressing issue. of weight gain and were also more efficient in converting feed. In Our innovation team is looking at ways in which we can reduce Strategic report addition, we have research that demonstrates the benefits that the packaging of our products whilst maintaining freshness, GOS brings in supporting the resilience of bird health. hygiene and food safety, while also increasing the percentage of Additional studies on calves and fish have started recently. our packaging that is fully recyclable. We are working in conjunction with a number of academic institutions and commercial partners to conduct trials, including Driving efficiencies Danisco Animal Nutrition – part of DuPont. We also have interest We are a simple, lean and efficient business. We have five well- from a number of global feed manufacturers, with the level of invested operating sites employing around 1,100 people. At the attention continuing to grow. end of 2017 we moved production at our butters and spreads Promovita GOS is the brand we use for human nutrition. site in Kirkby onto a 24/7 manufacturing schedule which allows The global digestive health food market is worth over £44 billion us to be more flexible in the face of changing market conditions. and growing. There are a number of major food companies The restructuring has resulted in one-off exceptional costs of looking into the potential of including GOS in their products to approximately £5 million but will reduce the annual cost base by promote gut health, increase fibre content and replace sugar. £2.5 million from the next financial year onwards. We intend to Our primary focus at the moment is on yoghurt, dairy beverage sell surplus land on the site for redevelopment which should cover and cereal manufacturers which we think are best suited to GOS’s these exceptional costs. dairy foundations. The project to replace our bespoke IT systems with a standardised product is progressing well. We completed the first phase in early 2018 which incorporated our finance and payment Innovating for growth systems. Phases two and three are underway and will bring supply chain and receipts onto the new platform. Once the new system has been fully rolled out, we expect to make annualised cost savings of around £5 million from 2019/20.

Looking ahead This has been a year of considerable progress for Dairy Crest. We have delivered a strong performance, broadly maintaining our industry-leading margins against a backdrop of unprecedented cost inflation in the butters market. Our brands are in good shape. Cathedral City has had a good year growing value, volume and market share, and we see plenty of room for further growth for this Prebiotics feed ‘friendly’ bacteria found within the large intestine, encouraging them to thrive and helping to maintain a healthy gut. industry-leading brand. We have seen good momentum in revenue Dairy Crest manufactures galacto-oligosaccharides (GOS) which growth going into the new financial year. is a unique prebiotic derived from lactose, a natural ingredient With much of the groundwork now complete, we expect sales in cow’s milk, and is similar to the prebiotics found in human of demineralised whey at infant formula grade to accelerate further breast milk. It helps support the body’s natural defences, improve over the coming year. We have already established ourselves as the absorption of key minerals in our diet and promote digestive comfort. Already an existing ingredient in infant formula, our a leading supplier for organic GOS and we are also making good research has shown that GOS can also be added to a wide range progress in developing a market for GOS beyond infant formula, of adult and animal formulations to help improve gut health. having carried out research which has shown the meaningful benefits of using this product in animal feed. We will continue to invest in our brands, supply chain and Focus on innovation infrastructure to ensure that we are well positioned to capitalise on Innovation is at the heart of our business. Our innovation centre future growth opportunities. is now firmly established on the campus of agricultural university, Harper Adams. 14% of our revenue this year came from Mark Allen Chief Executive innovations developed during the previous three years, driven 22 May 2018 largely by the success of Clover with no artificial ingredients. We are particularly proud of this product as it is still the only dairy spread with these ‘natural’ credentials. In March 2017 we launched the Cathedral City snack bar which significantly enhanced our adult snacking offer. Take up by retailers has been high and we are making firm progress in establishing the snack bar in the ‘on-the-go’ category. Innovation will continue to drive our business forward. 1 Courtauld 2025 is a voluntary agreement that brings together organisations across the In 2016, as part of the review of our Corporate Responsibility food system – from producer to consumer – to make food and drink production and consumption more sustainable. programme, we committed to deliver annual increases in the 2 WRAP is a charity focussed on maximising the value of waste by increasing the quantity percentage of recyclable packaging used across our product and quality of materials collected for re-use and recycling.

Dairy Crest Annual Report 2017/18 11 Financial review

Product group profit* Pensions** (£m) (£m)

£71.8m £93.9m surplus 71.8 93.9 68.3 66.9 66.0 Butters, 21.7 56.1 Spreads & Oils 25.5 33.8 29.6 39.9

16.8 Cheese & -16 -17 50.1 Functional Se p Ma r 42.8 Ingredients 39.3 36.4 33.1 -17 -18 Ma r Overall, the financial Se p performance“ of the 13/14 14/15 15/16 16/17 17/18 Group during the year has been robust (109.6) ” * This information is presented (120.5) ** This information is presented in Note 1 to the Accounts in Note 21 to the Accounts

Overview Revenue We have continued to make progress in 2017/18. We have We continue to provide product group analysis consistent with managed the business through a period of high input cost prior years to assist the users of the Financial Statements, increases and delivered broadly stable margins compared to the although the Group continued to operate as one segment prior year. More importantly, we have also continued to invest in throughout the year ended 31 March 2018. the future: • our functional ingredients business is growing and we are 2018 2017 Change Change developing opportunities for GOS beyond infant formula markets; £m £m £m % • we have delivered significant operational changes at our butters Cheese & Functional and spreads site in Kirkby that deliver increased flexibility and Ingredients 277.2 254.8 22.4 8.8 efficiency; and Butters, Spreads & Oils 174.2 150.7 23.5 15.6 • we have delivered the first phase of an IT transformation project Other 5.4 11.1 (5.7) (51.4) that will allow us to reduce complexity and costs Group 456.8 416.6 40.2 9.6 These initiatives further develop the business and will support future growth. Revenue increased by 10% to £456.8 million with increases across Overall, the financial performance of the Group during the year all parts of the business except “Other” which comprises third has been robust despite significant price inflation in the first nine party warehousing revenue. months of the year. Revenue increased by 10% and product group Cheese revenues were up 4% as we started to recover profit increased by 5% to £71.8 million. Reported profit before tax increases in the cost of milk. In the second half of the year we increased 345% to £179.2 million due to the exceptional income focussed on pricing in a market where milk input costs were high. of £130.9 million recognised in relation to the reduction in pension We chose not to discount too heavily, especially in the final quarter, scheme liabilities. as we are confident of selling year end cheese stocks in 2018/19. We continue to tightly manage the balance sheet, although The Group benefitted from increased sales of our Davidstow the scale of input cost inflation has temporarily inflated stock by-products, cream and whey butter, as well as D90 and GOS, valuations and levels of debt at 31 March 2018. Other working which saw Functional Ingredients revenue increase 51%. capital has generated cash and the pension fund has moved Butter revenue was up 25%, reflecting cost price increases from a £109.6 million deficit at 31 March 2017 to a £93.9 million achieved to mitigate the unprecedented increase in butter input surplus at 31 March 2018, primarily as a result of moving the costs across 2016 and 2017. In this environment, Country Life basis of indexation for pensions in payment from RPI to CPI. This volumes fell as promotional activity was scaled back, however is a permanent reduction in future scheme liabilities that would other own-label and bulk butter sales increased. Spreads revenue otherwise have to be funded by the Group. growth of 10% reflected volume gains across all of our brands and momentum is building – sales in the second half were 13% ahead of last year. Frylight achieved 13% revenue growth and 12% volume growth in the year.

12 Dairy Crest Annual Report 2017/18 Profit on continuing operations product formulation results in long lead times for customers switching their ingredients suppliers. We have prudently written 2018 2017 Change Change down the carrying value of certain formulations recognising these £m £m £m % factors. This level of exceptional spend is higher than anticipated Cheese & Functional at the start of the year, albeit significantly below the £19.0 million Ingredients 50.1 42.8 7.3 17.1 incurred in the year ended 31 March 2017. There will not be any Butters, Spreads & Oils 21.7 25.5 (3.8) (14.9) further exceptional items in 2018/19 in relation to this project. Total product group profit 71.8 68.3 3.5 5.1 Finally, we have recognised a non-cash write down of £2.6 Acquired intangible million for certain legacy IT assets that are being replaced as part amortisation (0.4) (0.4) – – of a two year programme to upgrade our core IT infrastructure. Strategic report Group profit on This work will enable a significant reduction in the complexity and continuing operations costs of the Group’s core processes and should deliver savings (pre-exceptional items) 71.4 67.9 3.5 5.2 of approximately £5 million per annum following its completion in early 2019. Overall product group profit increased by £3.5 million to £71.8 Exceptional items in the year ended 31 March 2017 related million and the margin decreased slightly to 15.7% (2017: 16.4%). predominantly to the building and commissioning of the This margin is after charging all central corporate costs and demineralised whey and GOS facilities at the Davidstow creamery includes £2.4 million profit (2017: £3.0 million) on the sale of closed in Cornwall. depots that were not disposed of as part of the sale of the Dairies business in 2015 to Muller UK & Ireland Group LLP. These depot Finance costs sales will not repeat in future years. Their treatment as operating Finance costs of £9.5 million increased by £1.8 million in the income is consistent with the treatment in previous years of the year. This reflects lower levels of interest capitalisation following related closure costs. Future sales of ex-manufacturing sites the completion of the building of the demineralised whey and such as Crudgington, Shropshire will be classified as exceptional, GOS facilities at Davidstow. Capitalised interest costs in the year consistent with the historic treatment of the related closure costs. amounted to £0.3 million (2017: £3.1 million) and the charge in the Cheese & functional ingredients product group profits income statement is now broadly equal to cash costs. increased by 17.1% and the margin increased to 18.1% (2017: Interest cover excluding pension interest calculated on total 16.8%). This reflects an improved functional ingredients product group profit was 7.8 times (2017: 9.1 times). This is performance and a rising dairy market where selling price comfortably above the 3.0 times minimum requirement in the increases were achieved. However, the full impact of milk input Group’s banking covenants. cost increases will not be felt in cost of sales until 2018/19 given Other finance expenses, which comprise the net expected the year-long average maturation cycle of our cheese. return on pension fund assets after deducting the interest cost on Butters, spreads & oils product group profits of £21.7 million the defined benefit obligation, decreased slightly to £0.7 million (2017: £25.5 million) were £3.8 million lower than 2017 with profit (2017: £0.8 million). These costs are dependent upon the pension margins of 12.5% (2017: 16.9%) reflecting the competitive butters fund position at 31 March each year and are volatile, being and spreads market and significantly higher butter input costs. subject to market fluctuations. We therefore exclude this item from However, margins in the second half increased markedly versus adjusted profit before tax. the 3.7% delivered in the first six months of the year as cost pressures abated somewhat. Profit before tax – continuing operations

Exceptional items 2018 2017 Change Change Pre-tax exceptional gains from continuing operations amounted to £m £m £m % £118.0 million (2017: £19.1 million charge). Total product group profit 71.8 68.3 3.5 5.1 Exceptional income of £130.9 million was recognised in Finance costs (9.5) (7.7) (1.8) (23.4) relation to the reduction in pension fund liabilities resulting from Adjusted profit before tax 62.3 60.6 1.7 2.8 the change in the indexation benchmark for pensions in payment Amortisation of acquired from RPI to CPI. Exceptional income of £0.7 million has also been intangibles (0.4) (0.4) – – recognised on the sale of a closed dairy facility in Fenstanton, Exceptional items 118.0 (19.1) 137.1 n/a Cambridgeshire. Other finance expense Exceptional income was partly offset by certain exceptional – pensions (0.7) (0.8) 0.1 12.5 charges. Reported profit before tax Firstly, the Group incurred £5.4 million of restructuring costs – continuing operations 179.2 40.3 138.9 344.7 at the butters and spreads facility in Kirkby where a number of initiatives have been implemented in order to improve efficiency Adjusted profit before tax increased by 2.8% to £62.3 million. across the site. These one-off costs should, in time, be broadly Reported profit before tax of £179.2 million represents a £138.9 offset by the sale of surplus land on the site. million increase from 2017, predominantly due to the exceptional Secondly, we have recognised a net exceptional charge gain in relation to the pension fund of £130.9 million. of £5.6 million with respect to the functional ingredients facility at Davidstow. This comprises £8.5 million of costs partly Taxation offset by £2.9 million received in settlement of project related The Group’s effective pre-exceptional tax rate on continuing litigation. Demineralised whey and GOS production stabilised operations was 17.3% (2017: 18.0%). The effective tax rate is over the course of the year, however £3.8 million of exceptional slightly below the headline rate of UK corporate tax as we sold commissioning production costs were incurred, of which £2.9 a small number of properties, the profits on which are offset by million were in the first half of the year. In addition, sales of brought forward capital losses or roll over relief. both demineralised whey and GOS have been underpinned by promotional activity in infant formula markets where complex

Dairy Crest Annual Report 2017/18 13 Financial review continued

Earnings per share Dividends The Group’s adjusted basic earnings per share from continuing The proposed final dividend of 16.3 pence per share is in line with operations increased by 3% to 36.7 pence (2017: 35.6 pence) the previous year. Together with the interim dividend of 6.3 pence reflecting the increase in post-tax profits. Basic earnings per per share (2017: 6.2 pence per share) the total dividend for the share from continuing operations, which includes the impact of year is 22.6 pence per share (2017: 22.5 pence per share). This exceptional items, pension interest expense and the amortisation represents a 0.4% increase in line with our progressive dividend of acquired intangibles, amounted to 106.6 pence (2017: 23.7 policy. The final dividend will be paid on 10 August 2018 to pence). shareholders on the register on 6 July 2018. Dividend cover of 1.6 times is within the Board’s target range Discontinued operations of 1.5 to 2.5 times (2017: 1.6 times). There was no discontinued gain or loss recorded in the year ended 31 March 2018. The post-tax profit on discontinued Pensions operations in the previous year totalled £5.2 million and related to At 31 March 2018 the Group had a pension surplus of £93.9 previously sold businesses in the UK and France. million. This represents a £203.5 million improvement compared to the deficit in March 2017 of £109.6 million. Group result for the year The March 2018 position now reflects an agreed change to the The reported Group profit for the year from continuing operations indexation of pensions in payment. Following detailed negotiations was £149.5 million (2017: £33.1 million). The profit for the year with the Trustee, future annual increases will be linked to CPI attributable to equity shareholders was £149.5 million (2017: £38.3 rather than RPI. CPI is already used by the Fund for calculating million). increases in deferred pensions and is becoming more widely used across the UK, including for the calculation of increases in public sector pensions. CPI is generally lower than RPI and therefore changing to CPI reduces the estimate of future benefit costs.

14 Dairy Crest Annual Report 2017/18 Higher milk cost is the principal reason for a stock value of £183.5 million at 31 March 2018, approximately £30 million higher than the year before. This stock will be sold in 2018/19 and we have achieved selling price increases in the market that have helped the report

Group broadly maintain margins. However, these temporary stock increases were only partly funded through debt. Overall net debt increased by £16 million during the year, albeit the excess of net debt over stock value of £82.2 million is as low as it has been in the last two years and represents less than one year of EBITDA.

Cash generated from operations increased to £33.7 million Strategic report (2017: £32.8 million) despite being impacted by the higher cost of raw materials going into cheese and functional ingredients. There was a net cash inflow across debtors and creditors of £1.5 million (2017: £4.4 million). Debtor days of 12 is the lowest that the Group has ever achieved and represents a reduction of four days compared to last year. Capital expenditure totalled £31.2 million (2017: 25.6 million). The main individual item was £8.6 million expenditure on new IT systems as part of a two year replacement programme that should generate savings of around £5 million per annum from 2019. Approximately £3.9 million was spent in the first half of the year at Davidstow in relation to previously accrued functional ingredients investments. Other capital expenditure totalled £18.7 million and included: improvements to waste water treatment; Kirkby production line enhancements as part of the improvement initiative programme; and the buyout of leased units at our Frylight site giving us complete ownership of all operating facilities. Asset sales comprised £22.1 million (2017: £42.4 million) and comprised £7.4 million in relation to previously closed properties (2017: £4.5 million) and a further £14.7 million through the sale and leaseback of certain equipment at Kirkby (2017: £37.9 million at Davidstow).

Borrowing facilities Total borrowing facilities comprise £368 million Sterling equivalent. The Group has a five year multi-currency revolving credit facility for £240 million, all of which expires in October 2020 following the agreement of the banks in September 2017 to extend £80 million of the facility by two years. At 31 March 2018 the Group had a swapped Sterling equivalent of £128.2 million of loan notes outstanding maturing between 2018 and 2026.

This change was agreed as part of a broader package to put Treasury policies the Fund on a stronger foundation for the future. This package The Group operates a centralised treasury function which controls includes continuing to move to lower-risk investments over time. cash management and borrowings and the Group’s financial risks. A new schedule of contributions has been agreed and The main treasury risks faced by the Group are liquidity, interest this resulted in cash contributions of £10.7 million in 2017/18 rates and foreign currency. The Group only uses derivatives to (2017: £12.9 million) and will result in £14.2 million in 2018/19. manage its foreign currency and interest rate risks arising from Beyond that, contributions will revert to £20 million per annum, underlying business and financing activities. Transactions of a although the new triennial valuation in March 2019 will determine speculative nature are prohibited. The Group’s treasury activities contributions beyond then when agreed. are governed by policies approved and monitored by the Board. We continue to manage pension fund liabilities and during the year a Flexible Retirement Option programme was undertaken Tom Atherton Deputy Chief Executive & Group Finance Director resulting in £13.3 million of liabilities being permanently removed 22 May 2018 from the fund (2017: £18.8 million).

Cash flow The Group delivers strong operating margins and is growing. This generates good underlying cash flows: EBITDA of £90.2 million is £6.5 million, or 8%, higher than last year. This year we have continued to develop the business for the medium term by investing in our spreads and butters facility at Kirkby, building a new streamlined group-wide IT system and refining the functional ingredients operations at Davidstow. Furthermore the business absorbed a significant increase in milk input costs during the year.

Dairy Crest Annual Report 2017/18 15 Performance

Cheese & Functional Ingredients

Market background THE Number Fundamental to our business is the high quality milk supplied exclusively to us by approximately 330 farmers in Cornwall and one cheese Devon. After almost two years of falling milk prices, 2017 brought welcome relief to farmers as prices continued the ascent that brand and had started in August 2016. During the financial year the price we paid to our farmers for their milk reached a peak of 32 pence per growing litre (ppl) in December 2017. We paid an average price of 30.1ppl during 2017/18 compared with 24.6ppl for the prior year. We always aim to pay a fair, market-leading price for our milk. £ million 2017/18 2016/17 The maturation process means we sell cheese made with milk Revenue 277.2 254.8 purchased approximately one year earlier. Therefore the impact Product group profit 50.1 42.8 of the rising milk price was only reflected in the profit and loss Margin (%) 18.1 16.8 account in the second half of the year, although the effect was seen in higher working capital balances for cheese throughout the 2017/18 period.

16 Dairy Crest Annual Report 2017/18 innovations in this area. this in innovations further developing weare and strategy growth City Cathedral the of part acore is Snacking of supermarkets. front the at section ‘on-the-go’ the in stocked being increasingly as well as stores convenience most in present now is and traction gaining is which bar snack City Cathedral of the launch the saw year of last end 15 of its run. week course the over viewers weekly million four of almost average an attracted programme evening time prime Family. The Brightest –Britain’s show quiz ITV a new secured an exciting to opportunity become the lead sponsor of devices. mobile on browsing by customers easily more seen be can they that so sites optimised the of imagery Cathedral products City on e-commerce We have category. dairy the for average the than higher is which online transacted are 10% sales total of our Approximately UK. by 6%. revenues growing market, the outperformed City Cathedral outstripped volume growth, reflecting the market. dairy inflationary growth revenue year of the part latter the in while growth volume strong by very characterised was year of the half first The last year. last Cheese. 55% of households in the UK consumed Cathedral City label), thereby confirming its position as the Nation’s Favourite private (excluding sales cheddar 55% branded and of all market cheddar 20% of the represents It market. 10% cheese total of the around with UK the in brand cheese largest the is City Cathedral C market. dairy of the segments other in seen whey has remained relatively steady compared to the volatility year. the during increased also cheddar for prices Retail levels. unprecedented reaching butter and cream for year, prices the with producing and cheese whey. demineralised who supply us with milk of a composition most appropriate for farmers to reward schedule pricing milk anew launched and Standards Farm Davidstow our updated We recently have athedral C athedral O Year 2018 the of Product C innovations introduced in the previous three years. taste”. delicious and quality “superior its for recognised was product the consumers 10,000 over of study nationwide the In innovation. product for award survey consumer largest world’s the of category cheese UK the in 2018 Year the of Product voted was Spreadable, ne of Dairy C Dairy of ne Snacking is a fast-developing segment of the food sector. The sector. The food of the segment afast-developing is Snacking 2018 early we in as screens to TV returned City Cathedral 8-10% the in by around growing are annually sales food Online Demand for protein held up well and pricing for demineralised demineralised for pricing and well up held protein for Demand marketsDairy experienced considerable inflation throughout athedral C In 2017/18, 14% of Dairy C 2017/18, 14%In Dairy of ity: The N The ity: ity Spreadable ity rest's more recent innovations, C innovations, recent more rest's ation’s F ation’s rest’s turnover was generated by by generated was turnover rest’s avourite C avourite heese athedral C athedral ity ity placed to generate further growth in the future. future. the in growth further to generate placed well remains It markets. exciting and new within opportunities facilities,art strong brands with market-leading positions and Our Cheese & Functional Ingredients business has state-of-the- A efficacy. to test trials own their conducting are of whom many channels, of different avariety from customers potential attracting We are nutrition. animal for Nutrabiotic and applications food in use for Promovita as marketed is It health. gut improve to help formulations nutritional animal and of adult range organic GOS. of supplier aleading weare and brand Fonterra’s SureStart under manufacturers formula to infant GOS selling We are Growing interest in G ahead. year the in grow will D90 grade formula of infant sales and year the during progress good However, made wehave customers. new secure to expected originally than longer taking is it that meant has This, combined with the impact of regulatory changes in China, surrounding ingredients for infant formula are rightly demanding. controls quality The product. of the provenance and quality the and management process operation, technical the to showcase to Cornwall customers potential many welcomed wehave Fonterra with partnership In (D90). whey demineralised grade formula infant manufacturing operational, fully now is Davidstow in creamery Our Infant formula business developing supply. milk West South of our quality the and heritage British to its prominence increased to give continue wewill from, comes food their where and eat they what about discerning more becoming are consumers As quality. superior and brand’s provenance the to emphasise cheddar Davidstow premium our for packaging the of 2017 end At the werelaunched Davidstow: provenance and quality business with huge potential Our research indicates that GOS can also be added to a wide to awide added be also can GOS that indicates research Our O S Dairy Crest AnnualReport2017/18 17 Strategic report Performance continued

18 Dairy Crest Annual Report 2017/18 margin category and underpin ongoing cash generation. high- this into investment continued enable will performance, ayear. £2.5 million by around flexibility at and efficiency the site while reducing operating costs improve to greatly expected are scheme, leavers’ avoluntary and improvements line agreement, site arevised with together working, of 2017. end the at schedule way of new a 24/7 working This introduced wesuccessfully Kirkby, in site manufacturing single a into production spreads and butters our consolidated Having efficiencies Increasing both generated high double digit volume and revenue growth. Willow and Vitalite share. market gained all and well extremely performed also brands spreads other Our market. spreads the 20% of with spread dairy UK leading the as position its solidified major spreads brand with ingredients no artificial it has clearly only the As growth. revenue and volume of both year robust Year another of the 2017Product delivered Clover award, period. same by 2% the over contracted brands, our excluding which, market, spreads overall the with compared year the for revenue in 10% in uplift resulting performance fell. costs input as year of the end the at again introduced were Promotions customers. with well resonated has which heritage We refreshed the packaging to emphasise its further British profitability. manage to help year of the most for Life Country for needs. of consumers’ spectrum full the covers awhole as portfolio the and market the in E Spreads brands grow share flat. were revenues by 2% while decreasing aresult, as slowed volumes spreads in decline ongoing The by 1% fell year. the which over volumes in growth long-term the disrupted 20%, this than by more strongly revenues increased promotional activity was reduced so, while the butter category and shelf on prices butter increased year. Retailers financial the of end by the litre per £2 below to just falling before litre per £3 2017 September in of almost highs record by 65% to reach soared pricing), cream on (based butter of bulk form the in costs, input as market 2017/18 butter the for year achallenging been has Butter prices rise ach of our butters and spreads brands has a well-defined place place awell-defined has brands spreads and butters of our ach Margin (%) Product group profit Revenue £ million In &O Spreads Butters, s market These changes, combined with improvements in brand category spreads the winning in success its from on Following astrong delivered brands spreads Crest Dairy The promotions on back wepulled costs cream of rising face the In har cr e e n asi ils 2017/18 174.2

12.5 21.7 g g 2016/17 150.7 16.9 25.5

well for future growth. growth. future for well ofand efficiency the production site in E the NHS to promote the health benefits of using Frylight. with to engage starting also We are virtues. its to extol bloggers food and dieticians as such influencers health with partnering 2018. April in launched was variant new Afurther momentum. gaining are sales and received well been –have coconut and –avocado range to the additions Recent years. three previous the in launched by innovations generated 20% in the fourth quarter compared to the same period last year. last period same to the compared quarter fourth 20% the in by increased consequently Volumes stockists. by all promoted well was brand the year This calendar. Frylight’s in periods important 70 shops. of its UK all in Frylight using now also is chain, food Asian-inspired the Itsu, discounters. and supermarkets major the all in listed now is and points distribution new 5,000 additional an from 2011.in benefitted brand The revenues for the consecutive sixth year since its acquisition Frylight achieved double digit growth in both volumes and F rylight performingrylight well capitalise on the strong brand to expand our dairy-free offer. offer. dairy-free our expand to brand strong the on capitalise further to looking are We UK. the in spread dairy-free selling one number the to it propelling 25%, around by revenues and dairy-free credentials. During its 2017/18 highlight to Vitalite grew both volumes branding the refreshed and products dairy-free C Dairy ago Two years years. 30 over for brand established an been has Vitalite N UK’s Vitalite Investment was made during the year to improve the capacity capacity the to improve year the during made was Investment been wehave brand of the awareness to raise weseek As M most the are Day Year Pancake New of and the start The ore than 18% of total Frylight turnover in 2017/18 in turnover 18% than ore Frylight of total was o1 dairy-free spread o1 dairy-free rest recognised the growing demand for for demand growing the recognised rest Dairy Crest AnnualReport2017/18 rith which positions us 19 Strategic report Corporate Responsibility

We recognise our responsibility to create a sustainable business which thrives both today and in the future. Dairy Crest’s Corporate Responsibility (CR) strategy is comprised of 14 pledges which aim to improve the sustainability of our business and the role it plays within the wider community. These pledges are grouped into four strategic pillars – Climate, Colleagues, Consumers and Community – which cover the full scope of our business activities. Our Greenhouse Gas Report can be found on page 42.

This report provides an opportunity to present the first full year Beverage benchmarking sector. We have embraced the feedback of progress in delivering our ambitious CR strategy which we that the benchmarking process provides and incorporated this into launched during the previous reporting year. the ongoing management and measurement of our CR strategy. In this section we report on our advancements in achieving Within our Climate pillar we have made good progress in the qualitative and quantitative objectives which we set out in our reducing our energy and water consumption and minimising five year programme. We, like many organisations, recognise the waste, while we also launched our revised Davidstow Farm benefits of a shared focus in addressing global environmental Standards. Under our Colleagues pillar we are rolling out a new challenges. To this end we have aligned our pledges to a number Diversity and Inclusion agenda which focuses on improved of the United Nations’ Sustainable Development Goals (SDGs) education and awareness amongst all employees. Reducing and, as a producer of consumer foods and functional ingredients, the use of plastic has dominated the headlines in recent times. we consider the most relevant of which to be SDG12 ‘Responsible Our Consumer pledges commit us to increase the recyclability Consumption and Production’. of our packaging and our innovation team are working hard to During the year we once again took part in the Business in do just that. 80% of our packaging is recyclable and we are the Community’s annual Corporate Responsibility Index in order working on further ways to improve that percentage. Finally, to ensure that our strategy is meeting the expectations of a wide within the Community pillar we continued to support The Prince’s range of stakeholders. We are proud to have achieved a score of Countryside Fund and other worthwhile causes during the year. 95% – the highest of the participating companies in the Food &

Dairy Crest CR icons (spot colour) 4 pillars Climate 14 pledges Dairy Crest CR icons (spot colour)

Climate Climate Consumers Colleagues Dairy Crest CR icons (spot colour) To reduce the impacts of our supply chain To provide a safe, diverse and inclusive workplace Climate onDairy Crestthe CR icons environment (spot colour) that offers employees the opportunity to grow Consumers

Climate Dairy Crest CR icons (spot colour) Colleagues

Climate Dairy Crest CR icons (spot colour) Responsible stewardship on farm Employee engagement 1 Consumers 5 Climate Colleagues

Consumers Community

Dairy Crest CR icons (spot colour) 2 Low carbon manufacturingConsumers 6 Holistic approach to health & safety Climate Colleagues Dairy Crest CR icons (spot colour) Consumers Community

Dairy Crest CR icons (spot colour) Colleagues 3 Water stewardship Climate 7 Diversity and inclusion Climate Colleagues Dairy Crest CR icons (spot colour) Consumers Community

Colleagues Reducing waste Climate Employee development Community 4 8 Consumers

Dairy Crest CR icons (spot colour) Consumers Community

Colleagues Climate Dairy Crest CR icons (spot colour) Community Consumers Climate Consumers CommunityColleagues

Colleagues ToDairy createCrest CR icons (spot colour)healthy, tasty and sustainable foods To support and enhance the communities Community Consumers in which we work and live Climate Colleagues

Consumers Community

Dairy Crest CR icons (spot colour) Community

Improving health & nutrition Colleagues Supporting rural communities Climate 9 12 Consumers Community

Colleagues 10 Sustainable ingredients 13 Supporting local communities Consumers Community

Colleagues Community 11 Reducing our packaging impacts 14 Employee volunteering

Colleagues

Community

20 Dairy Crest Annual Report 2017/18

Community Climate As a leading food and ingredients manufacturer we are determined to play an active role in mitigating, and adapting to, the effects of climate change, reducing waste and looking after our natural resources.

Delivering the objectives of our Climate pledges is underpinned We are committed to reducing Relative CO2 by our Environmental Management System (EMS) which we have greenhouse gas emissions by Strategic report redesigned and centralised to increase our focus on environmental emissions reduced using less, and cleaner, energy. risks and opportunities for our business. We are pleased to During the year we continued have achieved certification of our EMS to the stretching new by 10% vs. 2016/17 to invest in projects to reduce international standard ISO14001:2015. our energy usage which helped contribute to a 10% reduction In order to raise understanding of our CR programme we in our relative greenhouse gas (GHG) emissions intensity. GHG designed a bespoke awareness course in which around 700 reduction opportunities will remain a priority for years to come. colleagues have now participated. We were pleased that this We maintained a high (c.78%) utilisation of the biomass boilers initiative was recognised by Asda’s Save and Sustain Exchange at our Davidstow creamery in Cornwall which led to us exceeding community which awarded us the winner of their ‘Internal our pledge for a minimum of one third of the total energy that we Engagement’ category. use to come from on-site renewables. We continue to assess the Dairy Crest CR icons (spot colour) Each year we provide an annual disclosure of our carbon feasibility of additional sources of on-site renewable energy. management plans via CDP’s (formerly the Carbon DisclosureClimate Project) Investor Index. Despite increasingly challenging requirements, in 2017 we maintained our rating of B ‘Management’ 3 Water stewardship which recognises that we are taking coordinated action on climate Dairy Crest CR icons (spot colour) Consumers change mitigation and adaptation issues. To recycle more than 50% of the 47% of water Climate water required to manufacture our utilised from Responsible stewardship on farm products while further reducing recycled sources 1 Colleagues relative freshwater abstraction by 10% by 2021/22 vs. 2016/17 baseline Consumers Use the Davidstow Farm Standards to drive continuous improvement in animal husbandry and farm environmental During the period we reduced our relative freshwater abstractions standards. We will target a year-on-year increaseCommunity in the by 8% to around 620,000m3 per year. We engaged specialists

percentageColleagues of farms achieving the highest level of the to identify opportunities to reduce our demand for water. We Davidstow Farm Standards also increased utilisation of our waste water recovery plant at Davidstow where we target a daily recovery rate of up to 1.5 We have refreshed the million litres of water. Community Davidstow Farm Standards The proportion of water used from recycled sources increased for our supplying dairy farms, to 47% which is an increase over last year and indicates good 72% Dairy Crest CR icons (spot colour) of farms achieving reflecting the changing progress towards our target of 50%. the highest level of our priorities sinceClimate they were first Davidstow Farm Standards introduced in 2015. Our aim is to support our supplying 4 Reducing waste dairy farmers to go above and beyond the Red Tractor assured Consumers farm standards to ensure we can deliver the highest quality Deliver a year-on-year increase in the value generated products. Examples include an additional emphasis on antibiotic from unavoidable non-edible wastes. Achieved by management and the impact on-farm protocols have on health & reduction at source, converting wastes into by-products

safety and the environment. Colleagues and moving materials up the waste hierarchy During 2017 we engaged with the West Country Rivers Trust to increase our understanding of the impact of farming on the We continue to play an active role in the Courtauld 2025 Dairy environment and which farm protocols deliver the greatest level of Working Group which is facilitated by WRAP and Dairy UK. The Dairy Crest CR icons (spot colour) environmental assurance. Community group focuses on waste reduction and resource efficiency, and Climate aims to improve education of the sector as a whole. Low carbon manufacturing WRAP’s support to our CR strategy has included advising 2 on manufacturing efficiencies, understanding the processes of municipal recycling and shared insights of the varying attitudes Consumers 20% reduction in relative and behaviours towards household food waste of different carbon emissions from consumer groups. our direct operations by We continue to work to reduce non-edible operational Colleagues 2021/22 vs. 2016/17 baseline. 40% waste which totals 2,850 tonnes per year. We met our target of of energy now comes Achieved by building on from renewable sources a minimum of 80% waste to be segregated on-site to optimise our previous successes recycling. in energy efficiency and low carbon technologies and by Community ensuring that a minimum of one third of our energy comes Engagement with WRAP from on-site renewables through Courtauld 2025 to reduce waste

Dairy Crest Annual Report 2017/18 21 Corporate Responsibility continued

Colleagues Dairy Crest CR icons (spot colour) At Dairy Crest we continually work to improve the excellent safety record we have achieved and Climate engage with our people to fully utilise their expertise and experience. 2017/18 has seen a high level of activity on employee engagement with a new employee survey, enhanced employee

Consumers communications and development opportunities. We have further developed our people plan with a refreshed emphasis on Diversity and Inclusion.

Colleagues 5 Employee engagement

Community To survey the organisation regularly and achieve increasing employee engagement participation in the employee survey and To provide our Colleagues with the opportunity to invest in commitment to run a our company via Company Sharesave Schemes 92% survey every year We continue to invest in the development of our teams, finding practices. Improving on collaboration is an area highlighted for new ways to promote learning in the workplace. In April 2017 focus in 2018. We have made the commitment to run the survey

Dairy Crest CR icons (spot colour) we refreshed our approach to surveying our employees and on an annual basis going forward. introduced our re-designed employee survey. Measuring employee 2017/18 saw the continuation of our Executive Committee-led Climate engagement and identifying ways to improve what we do are key employee roadshows. Conducted twice during the year (June and to developing our business. In the two surveys conducted a high November), 79% of the workforce participated in the roadshows, participation rate has been achieved, with the 92% response in discussing our values, CR pledges, business performance

Consumers the 2018 survey being our highest rate ever. Comparing 2017 and and important initiatives. 80% of those attending thought the 2018 surveys, we have seen improvements across all categories, content was good or excellent. Our plan is to run similarly timed notably in leadership, communicating with employees and roadshows again in 2018/19 to further improve communication involving our teams in problem solving and improving our work and collaboration within the Group.

Colleagues 6 Holistic approach to health & safety

Community To target a 50% reduction in accident/ incident rate and addressing these issues, we have created greater levels of by 2021/22 dialogue, involvement and a safety first culture. To build on this programme, this year we introduced the STAR safe system of Total Accident Rate We have seen over the years work (SSoW) review conversation, where front line managers reduced by that a commitment to health & initiate a conversation with work colleagues and third parties safety (H&S) is fundamental for to confirm their recognised safe system of working is correct. developing a great business. Through this discussion, better and safer ways of working have We continue to build upon been identified, further reducing risk of injury. the excellent progress made % during 2016/17, demonstrating Scope of wellbeing checks extended to include mental 86 a further reduction in health with year-on-year increase in the proportion of accidents and a strong ongoing performance. employees attending voluntary consultations We have achieved two full financial years without a reportable accident. We also reduced our lost time accident (LTA) frequency One of the significant activities within our occupational health rate from 0.65 to 0.10, delivering an 84% reduction in the number of programme is our attention to employee wellbeing. Every year lost time incidents against the 2013 baseline. Having set ourselves we complete health campaigns and wellbeing days across the what appeared to be a challenging objective of a 50% reduction in business, which include stress and mental health questionnaires the total accident rate by 2018 versus the 2013 baseline, we have and involve as many colleagues as possible. Our programme aims already achieved an 86% reduction by the end of March 2018. to encourage colleagues to take ownership of their own health by Encouraging employees to report safety concerns and have putting into place changes to their lifestyle where they are needed. meaningful conversations that drive safety-conscious behaviour To further improve our occupational health programme, we are are important if we want to achieve a sustainable long-term moving to an outsourced service, which will increase geographical improvement in H&S. Against our target of 100:1 ratio of hazard cover across the Group. As we went through this transitional concerns and behavioural conversations versus all types of period, we saw 210 employees go through our voluntary wellbeing accidents by end of March 2018, we achieved a ratio of 954:1, an checks, which is down on the 256 involved last year. improvement on last year’s 423:1 performance. We are developing our approach to mental wellbeing and have Another important way of engaging our teams in safety is internal presentations to improve management awareness and through our cultural change programme, encouraging employees online mental health training for employees. These will be rolled to ‘Stop, Think, Assess, Review’ (STAR) and complete STAR cards out during 2018. where they see safety-related situations or actions. By discussing

22 Dairy Crest Annual Report 2017/18 Dairy Crest CR icons (spot colour)

Climate

Consumers

Colleagues 7 Diversity and inclusion

Community To develop employment policies and working practices that Gender profile encourage a diverse and inclusive workforce All employees Senior management In 2017/18 we have been working on fully refreshing our employment policies and working practices to focus our diversity and inclusion efforts on: Male 69% Male 77%

• Addressing talent needs (787) (31) Strategic report • Improving insight and understanding • Developing a high performance culture • Role modelling and embedding our values

Refreshed Diversity & Inclusion Female 31% (351) Female 23% (9) programme developed and being Dairy Crest CR icons (spot colour) In March 2018, the Company published its Gender Pay Gap for both Dairy Crest Limited and the broader Group. On a mean Climate rolled out across the business basis, men earn 9.1% more than women, reflecting the higher Focus groups involving a cross section of employees have worked number of male employees occupying the most senior roles. This together to produce actions plans that will be delivered during gap is significantly lower than the national average of circa 18%

Consumers 2018/19. These plans include recruitment and diversity training for and Dairy Crest is committed to reducing this pay difference. On managers, mentoring for high potential employees and working a median basis, women earn 2.9% more than men. Further details with our recruitment providers to deliver a diverse range of of our gender pay gap and our action plan to reduce it can be candidates to our business. found on our Company website. Colleagues 8 Employee development

Community Every business-critical role to have a clear succession plan in place drawing on internal and external talent more e-learning courses Develop policies to retain high potential employees and completed during 2017/18 those with specialist skills 5x compared to previous year We continue to offer development opportunities to our employees, We continue to encourage our employees to access the wide finding new ways to deliver learning in the workplace. range of development materials in our learning management An important emphasis this year has been on embedding system ‘mydevelopment’. This has resulted in five times more the management development programme which was rolled courses being completed this year compared to last year. This out during 2016/17. This training focussed on achieving high platform incorporates e-learning programmes on a diverse range performance from individuals and teams and included coaching of business topics, including our proprietary environmental skills, giving feedback, objective setting and development awareness module, for which we were proud to win an Asda planning. 97% of attendees felt their leadership skills had sustainability award. improved as a result of the programme. Follow-up group coaching The Dairy Crest talent management review is undertaken sessions were also arranged for the original attendees from all annually and is the foundation of our talent assessment process disciplines within the business, from first line manager to Director and succession planning. As recognised in the CR pledges, there level. During 2017/18 we have also designed and delivered a has been additional emphasis this year on creating individual training programme for new managers to ensure this momentum development plans and succession action plans for the business- is maintained. critical roles and individuals identified with future potential. During 2018/19 we will be relaunching our mentoring scheme to support these individuals. We continue to invest in apprenticeship programmes to provide a pipeline of talent into key skill areas. The Eden programme, a dairy industry-led apprenticeship, develops competence in the core areas of dairy processing, manufacturing and engineering. We currently support three technology apprentices and three engineering apprentices. In addition to the Eden programme, we have also sponsored engineering qualifications for employees at our Davidstow site. In 2017/18 we have employees pursuing a number of courses including Engineering for Operators, BTEC level 3 and HNCs.

Dairy Crest Annual Report 2017/18 23 Corporate Responsibility continued

Consumers Dairy Crest CR icons (spot colour) Dairy Crest is proud to create healthy, tasty and sustainable foods. We are committed to Climate providing a range of products that make it easier for consumers to choose healthier foods and to play our part in helping to improve the nation’s health.

Consumers 9 Improving health & nutrition

Colleagues To deliver a year-on-year increase in the volume of lower fat products sold and introduce a programme of salt reduction initiatives across our portfolio

Community We like to give our consumers choice through producing naturally healthy dairy Frylight further expanded its product range during the year and is products as well as free from now used by one in four UK households. % artificial ingredients, dairy- Our dedicated, state of the art Innovation Centre located on 4increase in volume sales of free and lighter options. We the Harper Adams University campus gives us the opportunity to lighter products, including have continued to expand further develop the range and health credentials of our products, Frylight, year-on-year and invest in our portfolio of as well as improve packaging. lower fat options. Volumes of the lower fat variants of our cheese, butter and spreads brands, To continue to innovate and grow our portfolio of together with sales of Frylight, our one calorie cooking spray, functional ingredients that support infant nutrition and grew by 4% year-on-year and now account for 15% of our overall other markets that may benefit from the physiological branded sales volumes. dietary benefits that these materials bring Our Cathedral City cheese brand has expanded its already extensive range of lower fat options to eight variants with the Our plant at Davidstow produces high quality demineralised whey launch of Cathedral City Sliced Mature Lighter. This has helped and GOS. Demineralised whey forms the base of infant formula retail sales of lower fat options from Cathedral City exceed £36 and GOS is a lactose-based prebiotic that helps aid digestive million for the first time. The Cathedral City Lighter range allows health. Through our partner, Fonterra, we have increased our consumers to enjoy a reduction in fat and calories with minimal share of sales of demineralised whey and GOS in the infant compromise on taste. formula market in key geographies, including China. Our lower fat spreads – Clover Light, Utterly Butterly Lightly We are engaging with companies on the potential health andDairy Crest Country CR icons (spot colour) Life Spreadable Lighter – have a collective retail Dairy Crest CR iconsbenefits (spot colour) of GOS through the human life cycle as well as its benefits

salesClimate value of around £20 million, and sales of our ‘No ArtificialClimate in animal feed applications. GOS is known to help support natural Ingredients’ Clover, launched in 2015, have been strong, defences, increase mineral absorption and aid digestive comfort outperforming the spreads market. Frylight remains the UK’s and brings with it exciting growth potential for Dairy Crest. biggest oil brand and enjoyed another impressive year of growth.

Consumers Consumers 10 Sustainable ingredients 11 Reducing our packaging impacts

Colleagues Colleagues To develop a 100% sustainable Enhanced assurance of To deliver a year-on-year increase in the % of recyclable supply of our principal Corporate Responsibility packaging used across our product groups with the ingredients by 2021/22 credentials of suppliers ambition of having 100% recyclable packaging by 2021/22

Community Community Dairy Crest works with its suppliers to exceed best practice in quality and traceability. We can trace milk and raw materials from of consumer-facing farms and suppliers through to finished product. packaging and Thanks to our Davidstow Farm Standards, introduced back % transit packaging is in 2015, all milk supplied to us meets the strict international 8 currently recyclable requirements for the production of infant formula. We recently developed these further to continually improve the level of farm To avoid sending waste to landfill, we are investing in new ways of standards across our milk pool and to ensure we are meeting our packaging our products so they are not only made with less material, customer and consumer demands. but are also made with more recycled material. We have been We are a working member of the Roundtable on Sustainable working with our suppliers to find ways to increase the percentage Palm Oil (RSPO) and all palm oil used in our spreads products of recyclable packaging used across our product groups, whilst comes from RSPO-certified sustainable sources. Our spreads ensuring food safety, quality, and minimising food waste. production facility in Kirkby, Liverpool is also fully certified against We are pleased to report that 80% of our packaging is the RSPO certification standard. recyclable, including all of the tubs used in our spreads business. We have recently refreshed our sustainable and ethical Alongside that, we have a number of work streams in progress sourcing assessment and action planning tool (Ecovadis) to verify to understand current technologies and potential recyclable/ the CR credentials across our network of suppliers. reusable solutions across our product portfolio.

24 Dairy Crest Annual Report 2017/18 Dairy Crest CR icons (spot colour)

Climate

ConsumersCommunity Our community programme is designed to support and enhance the communities in which we work and live. Three of our 14 pledges sit within this Corporate Responsibility pillar – Colleaguessupporting rural communities through working with The Prince’s Countryside Fund, supporting local communities and employee volunteering.

Community 12 Supporting rural communities Strategic report

To raise £50,000 for The Prince’s Countryside Fund each butter. We have a long-standing relationship with the Fund to work year and help to raise awareness of the priorities and with them to protect, improve and promote the British countryside successes of the charity including The Prince’s Farm and the businesses which work within it. Since it was established Resilience Programme in 2010 the Fund has awarded £8.5 million in grants to more than 220 projects. raised for The Prince’s We are also sponsors of The Prince’s Farm Resilience Countryside Fund to Programme. Building on the success of The Prince’s Dairy help support family Initiative, the programme aims to help secure a viable and resilient farm businesses and future for farm businesses, by equipping them with the information Dairy Crest CR icons£ (spot colour) k the quality ofDairy rural Crest CR icons life (spot colour) and confidence to help them succeed. Climate 5 Climate Since The Prince’s Countryside Fund was established in 2010, it has awarded Consumers Dairy Crest recognises that the countryside continues toConsumers face significant challenges across a wide range of complex social and economic issues. Similar views are also held by The Prince’s

Colleagues Countryside Fund, a charity set up by HRH The Prince Colleaguesof Wales to improve the prospects of family farm businesses and the quality of rural life. We donated £50,000 to the Fund in 2017/18 through £8.5million brand partnerships with Davidstow cheddar and Country Life in grants to more than 220 projects

Community Community 13 Supporting local communities 14 Employee volunteering

For all Dairy Crest sites to support local communities by For all Dairy Crest employees to take up their fully paid providing a budget to their Community Committee volunteering day each year. Measured as people days equivalent compared to total number of employees We are committed to supporting local good causes Every employee is Dairy Crest employees are in the communities where we entitled to one fully paid day work and live that improve entitled to a fully of volunteering each year % health, education, youth and everyone is actively 47increase in Charitable engagement & employability paid volunteering encouraged to take up this Giving year-on-year skills, the environment and the day each year opportunity. In 2017/18 countryside. employees completed around Each Dairy Crest site is allocated an annual budget to support its 80 volunteering days, an increase over the previous year. As an local community, in addition to donations which are made by the organisation we currently support Crisis at Christmas, Grocery Group. During 2017/18, we spent in excess of £240,000 (2016/17: Aid and IGD’s Feeding Britain’s Future and employees are also £165,457) supporting over 70 local good causes. We are proud to encouraged to find other local organisations to work with that have supported local schools, care homes, hospices, scout and fall within the scope of the Company’s community policy. During girl guiding groups and health charities, amongst others. the year, our colleagues have helped special needs children and In addition to monetary donations, we also gifted our food supported several environmental projects. products to charitable causes. One such example was Crisis at Christmas to whom we donated over 1,150kg of Cathedral City cheese and 400kg of Country Life butter which helped the charity feed tens of thousands of homeless people across the eight days that the Crisis centres were open. Donations of cheese were also made to the Chelsea Pensioners to enjoy over the holiday season. Dairy Crest operates a staff lottery which is open to all employees. This year staff have supported over 20 charitable causes through financial donations including The Cystic Fibrosis Trust, Children with Cancer UK and the NSPCC.

Dairy Crest Annual Report 2017/18 25 Principal risks and uncertainties

We manage risk to help us achieve our strategic Functional risk registers are reviewed by the Executive Committee objectives and protect our reputation and from them the Group risk register is compiled. It is formally The Group faces a number of risks which, should they reviewed by the Board when the Group sets its budget in April. materialise, could affect our ability to achieve our strategic The Group Internal Audit function reviews the Group risk register at the start of each year. It is a key component of the compilation objectives. The Board has overall responsibility for ensuring the of its annual audit plan. All Group Internal Audit function reports effective management of risk across the Group. It is supported are provided to the Executive and Audit Committees. The Audit by the Audit Committee which reviews the effectiveness Committee reviews the Group’s Internal Audit’s reports and of the Group’s risk management processes and internal progress against its work plan. The Audit Committee reports controls. Responsibility for the day-to-day management of to the Board after each meeting. Group Internal Audit provides risk is delegated to the Executive Committee which reviews independent assurance over the management and mitigation the business’ performance and the risks and threats being mechanisms adopted. This process explicitly recognises the managed at each of its meetings. Executive Committee meeting relationship between Group Internal Audit and risk management. minutes are routinely reviewed by the Board. All functions of the The Audit Committee is satisfied that the processes are adequate Group are represented at the Executive Committee enabling the and appropriate. Further details of the Group’s approach to risk Committee to manage the Group’s risks on an on-going basis. management and internal control are set out in the Corporate Governance report at page 35. Risk appetite: The Board believes that the assumption of informed risks enables the delivery of long-term success. It Risks and uncertainties: Details of the principal risks and determines the nature and extent of significant risks the Company uncertainties faced by the Group and the associated mitigating assumes to achieve its strategic objectives. The Directors have controls are set out on this page and on pages 27 to 29. Although carried out a robust assessment of the principal risks which the the Group has an on-going process for identifying, evaluating and Group faces including those that would threaten the business managing the principal risks and uncertainties facing the Group, model, future performance, solvency or liquidity. additional risks which are not presently known to management could also have an adverse effect on the Group. The risks and Risk management process: Each key function in the Group uncertainties referred to in this Annual Report are not intended to is required to prepare a risk register for its area of accountability. be an exhaustive analysis of all risks facing the Group.

Commercial risks Risk area and potential impact Mitigating controls

Reduced profitability We operate in competitive markets. We set ourselves the target of continually reducing our cost base If we fail adequately to control our and are able to invest in our supply chain to help achieve this. cost base, to compete effectively Despite challenging trading conditions we continue to invest in or are subject to higher input marketing our key brands. Our innovation programme continues to prices that cannot be recovered by generate new products that reinforce our appeal to customers. We raising selling prices without losing recognise the importance of strong customer relationships and the volumes, we could lose sales and executive team plays an active part in maintaining and developing profits. 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 is an important part of our overall proposition to some customers.

Reduced demand from Consumers could move away from Consumers are at the heart of our business and we regularly consumers dairy products for economic, health, monitor consumer trends. We continue to promote the health ethical, or other reasons leading to benefits provided by dairy products and develop healthier products. lower sales and profits. 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 our key brands. We have a direct involvement with government to understand and influence future legislation that could affect future consumer demand.

Inadequate levels of We operate in markets in which We have a strong new product development and innovation innovation our competitors are continually team who are based at our Innovation Centre on the Harper innovating in order to maintain Adams University campus. That team works closely with Harper customer and consumer interest Adams University leveraging the research and other expertise of in their products and to attract the University, including taking students on secondment into our customer and consumer interest innovation team. The innovation team’s brief includes enhancing for new products. If we do not the appeal of existing products, driving product and manufacturing successfully innovate we may lose efficiencies and improvements, and developing new exciting customers and consumers and we products and variants of existing products. Continued investment in may fail to attract new customers innovation enables our business to maintain or outstrip innovation in and consumers. That would result the rest of the market. Focussing an element of senior management in fewer sales, loss of profit and remuneration on innovation through the use of a balanced scorecard failure to meet growth targets. including an innovation target for the Group’s share based long-term incentive plan helps to ensure continued focus on and drive behind innovation as does the publicly adopted target of achieving 10% of revenue from products developed in the last three years.

26 Dairy Crest Annual Report 2017/18 Commercial risks continued Risk area and potential impact Mitigating controls

Input cost volatility Volatile milk and non-milk costs Key input cost trends are continually monitored by our experienced (vegetable oils, diesel, electricity, procurement team and are regularly reviewed by the Executive gas and packaging) could reduce Committee. Milk and vegetable oil are critical inputs for the Group. margins unless we can manage Milk price negotiations are conducted following careful review cost risk, find other cost efficiencies with the Executive Committee which provides the procurement elsewhere or increase selling prices. team with a specific mandate. The use of a balancing contract with direct milk suppliers enables better balancing of milk supply Milk prices could remain volatile and demand thereby reducing the risk of milk oversupply resulting driven by global and European in lower recoveries. The balancing contract helps to reduce our Strategic report commodity market pressures exposure to lower value commodity markets thereby supporting as well as local market and the Group’s strategy of focussing on branded and added-value environmental factors. markets. Vegetable oil is reviewed monthly by a risk committee which monitors and hedges forward vegetable oil purchases as appropriate. We seek to absorb short-term cost movements through supply chain efficiencies. Our procurement 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.

Entry into new product The dynamics of new categories We work with commercial partners who are already established areas or territories may not be in line with our in new categories and markets where the Group is not already expectations resulting in lower than operating or present. Contractual relationships with these anticipated margins, lower than established commercial partners for the sale and distribution of anticipated volumes, longer than products in new categories and markets enable the Group to anticipated payback on investment have certainty over minimum levels of returns and known costs of and higher than expected costs to accessing new markets. access markets.

Operational risks Risk area and potential impact Mitigating controls

Inability to source milk Without milk we would not have a We invest significant resources in maintaining strong relationships business. Restricted milk supply with our milk suppliers by attending forums and discussing could be caused by economic current issues and pressures that affect both the farms and our factors, weather, fuel availability or business. Our milk comes directly from farms on contracts that an epidemic which affects dairy include a notice period of between three months and one year. cows. This could lead to lower sales Our experienced milk procurement team understand milk and profits. Consumer confidence production and are alert to changes in supply. We aim to pay a fair, in dairy products could also be market related milk price and closely monitor the milk price we pay adversely affected. to suppliers. Significant effort is expended by our team of dedicated Farm Business Managers to make the Group an attractive purchaser of milk for our suppliers, including working closely with our direct supplying farmers providing valuable support to them with their businesses. 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 by the Executive Committee.

Failure of a key supplier We are dependent on key suppliers Our procurement team regularly monitors suppliers’ ability to and could lose sales and face supply and puts in place alternative arrangements, including dual financial penalties from customers purchasing, if appropriate. We have taken specific actions to reduce if a supplier’s failure leaves us our dependency on information technology suppliers. unable to supply. Failure of key information technology suppliers could adversely affect our financial systems.

Disruption to production An accident, a fire, product Plans are maintained to respond quickly to incidents and minimise contamination, the failure of any impact to the Group. Our business is committed to the health equipment or systems, a deliberate and safety of all our employees and maintains systems aimed at malicious act, or industrial action ensuring everyone is able to work safely. All of our manufacturing could disrupt production, affect sites have a trained engineering resource, are supported by our food safety, cause injury, and/or major equipment suppliers and hold appropriate stocks of spare cause reputational damage with parts. They also all have fire protection systems and regular fire drills. adverse consequences. We are also Our information technology systems are regularly backed up and reliant on information technology duplicated in the majority of areas. Appropriate safeguards such and are exposed to losses in the as firewalls are in place to thwart cyber attack and the robustness event that systems fail. of those safeguards is regularly and routinely tested as part of our cyber security programme. We are also advised by a reputable insurance broker and maintain insurance cover for public and product liability, product recall and property damage and business interruption risks with reputable insurers. We maintain strong relations and communication with staff organisations and trade unions including at National Officer level. Established grievance and disciplinary procedures are well embedded in the business and compliance with them is managed through a strong Employee Relations function. Pay benchmarking processes and centrally

Dairy Crest Annual Report 2017/18 27 Principal risks and uncertainties continued

Operational risks continued Risk area and potential impact Mitigating controls

Disruption to production controlled pay negotiations are in place to ensure pay remains continued competitive against the market and in line with the Group’s stated remuneration aims. Regular employee engagement surveys enable us to maintain a good on-going understanding of staff satisfaction and to identify emerging issues or trends and understand the effectiveness of actions undertaken to manage them.

Disruption to utilities The reliable supply of gas, electricity Where possible we have installed back up equipment to deal supplies and water to our manufacturing with interruptions to the supply of utilities. However, in relation, sites is essential to our ability to notably, to water, we currently have no back up available to us if run our production processes. our external supply is restricted. We have designed processes to Disruption to those supplies for recycle as much water as possible in order to maximise re-use and whatever reason affects our ability reduce our reliance on external supply and we will continue to do to produce products against plans so in the future. We are also exploring the scope to become self- and in some cases, may cause supplying for process water, where possible, e.g. by maximising variability to product quality (not the exploitation of the use of bore holes for water abstraction direct safety) affecting the returns which from the ground. may be made for these products as they may have to be downgraded from premium quality.

Production capacity In order to meet growing demand We continually monitor and model anticipated future demand on a for our products and to enable five year horizon to ensure we have sufficient production capacity growth into new markets outside to meet demand. Our supply chain team continuously reviews the UK in the longer term, we production efficiency and seeks to identify production innovation need to ensure that we have enabling our existing assets to produce more product with efficient sufficient production capacity at our investment. A project to increase the production capacity at our manufacturing sites, particularly for Davidstow creamery is underway and is intended to increase cheese at our Davidstow creamery. capacity to meet anticipated future demand.

Major projects To remain competitive we We have a good track record of managing projects and use periodically undertake major experienced and appropriately skilled senior managers to lead transformational projects following these. Supervisory governance structures are also put in place strategic reviews or have to to help successful delivery. We are aware that too much change undertake major projects or works concentrated in too short a timescale can be detrimental and in response to the changing manage this by ensuring key project resource is full time with condition of our infrastructure. appropriate backfilling and use of third parties. 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.

Product quality Failure to maintain product quality We have well-established supply chains and a close working could lead to reputational damage relationship with our milk suppliers. We have an independent and loss of sales and profits. quality team, including experienced cheese graders. Customer and consumer complaints are monitored and acted upon. Where possible we have liability caps in our contracts and using the advice of a reputable insurance broker we have product recall liability insurance in place with reputable insurers. Our contractual relationship with Fonterra, who sell the infant formula ingredients we produce, allows us to utilise its experience in this field.

If we don’t meet stringent infant Implementation of and strict adherence to manufacturing formula specifications for added- procedures are designed to ensure product meets specification. value ingredients products we will Assurance over adherence to those procedures is provided by not be able to sell those products internal technical audit, customer audit and external expert audit. for their intended use. That could Our contractual relationship with Fonterra, who sell the infant lead to lower than anticipated sales formula ingredients we produce, allows us to utilise its experience volumes of infant formula grade in producing product which conforms to the required specification. products associated with which Focus on continual enhancement of site team capabilities through would be lower than anticipated technical training and behavioural programmes coupled with profits; customer confidence may ensuring appropriately experienced and skilled people are recruited also be eroded as a result. into and retained in the team. We have a short milk supply chain with good traceability and strict controls to ensure quality. Farm audits ensure supplier compliance with quality requirements.

28 Dairy Crest Annual Report 2017/18 People risks Risk area and potential impact Mitigating controls

Recruitment and retention We need to attract and retain We carry out rigorous selection procedures and benchmark high quality employees to provide pay and benefits to ensure we can attract and retain the best customers and consumers with people. We have a widely applied bonus scheme and a range of safe, high quality products and other incentives to reward good performance. Our share based services. long-term incentive plan aligns the interest of management to shareholders and helps to retain key senior employees. We use a performance review and talent management scheme to identify and develop our own people. We undertake regular surveys to monitor our relationship with our employees and their engagement, Strategic report communicate with them regularly and encourage them to ask questions.

Financial risks Risk area and potential impact Mitigating controls

Pension Fund (Fund) Despite the action we have taken We continue to work closely with the Trustee of the Fund to improve to reduce the risks associated with the Fund’s financial position at an acceptable cash cost to the our Fund including closing the Fund business. We have reduced the Fund’s exposure to equities and to future accrual in 2010 and buying other higher-risk asset classes and aim to do so further. We have insurance to meet the liabilities improved the strength of the Company’s covenant and ability associated with many of our retired to continue to fund contributions, for example by the sale of the members in 2008 and 2009, the Dairies business and the change to CPI for increases to pensions in deficit could continue to increase payment. and we may then have to increase our contributions. The risk of a need for higher cash contributions to the Fund over a longer than anticipated period may be increased by a persisting low gilt yield environment.

Legal and compliance risks Risk area and potential impact Mitigating controls

Compliance with laws Our sector is subject to a number We have a strong in-house legal function supported by external of complex statutory requirements. advisers. We have undertaken Group-wide training in respect of There is a risk of fines or lawsuits competition law and actively monitor and adjust to on-going legal and reputational damage if we fail and regulatory changes. We have Business Conduct and Data to comply. Protection Policies and programmes designed to ensure that all relevant employees understand what is and is not permissible under the Bribery and Data Protection Acts.

Regulatory change Food safety and product We have a strong technical function which routinely monitors specification regulations affecting planned and implemented changes to food and ingredients the UK and other jurisdictions legislation in the UK and other relevant jurisdictions which might where products are sold impact necessitate changes to our production processes or product the products that we manufacture. specifications. Our product development function works in tandem Regulatory authorities regularly with the technical function and key supplier partners and customers enact changes to food safety and to respond to anticipated or implemented legislative changes. product specification legislation. The Group has invested in its technical and product development Changes to legislation could result functions and has its technical and innovation centre at Harper in restrictions on the movement and Adams University with which we have a co-operation agreement sale of the Group’s products and providing access to state of the art academic and technical raw materials between territories or expertise. We are a member of recognised industry bodies who require changes to the production represent our interests, along with others in the food and dairy processes or specification of our industries, and advise and lobby on our behalf. We have close products. links with UK government and government representatives to help represent our interests in jurisdictions outside the UK together with commercial partners already established in other jurisdictions.

The Strategic report on pages 1 to 29 has been approved by the Board and is signed on its behalf by

Robin Miller Company Secretary & General Counsel 22 May 2018

Dairy Crest Annual Report 2017/18 29 Board of Directors, Executive committee and Advisers

Board of Directors Dairy Crest is led by an experienced Board of The Board sets strategy and monitors progress. Day-to-day Directors, which comprises Executive Directors, matters are the responsibility of the Executive Committee, which comprises the three Executive Directors, the one Non-executive Chairman and five Company Secretary & General Counsel, the Group Supply independent Non-executive Directors. Chain Director and the Group HR Director. Together, the Executive Directors have over 50 years’ experience of the business.

Stephen Alexander Richard Macdonald Andrew Carr-Locke Chairman Non-executive Director Non-executive Director Appointed as a Non-executive Director in January Appointed as a Non-executive Director in Appointed as a Non-executive Director and 2011, as Chairman in September 2014 and November 2010, as the Senior Independent Chairman of the Audit Committee in August Chairman of the Nomination Committee in March Director in May 2012 and as Chairman of the 2009. A Fellow of the Chartered Institute of 2015. He is an Operating Partner at OpCapita Remuneration Committee in November 2014, Management Accountants, he has previously LLP. Stephen was Chairman of Immediate prior to which he was Chairman of the Corporate held senior finance positions at Courtaulds Media Company Ltd, Rhubarb Food Design Ltd, Responsibility Committee. Richard had a 30 year Textiles, Diageo, Bowater Scott and Kodak Odeon Cinemas and Maltby Capital Ltd (parent career with the National Farmers Union, serving and was Group Finance Director at George company of EMI Group) as well as the charitable as Director General for 13 years. He is a strategic Wimpey plc until 2007. More recently he was organisation Look Ahead Care, Support and adviser to Moy Park Limited, Vice Chairman Executive Chairman of Countryside Properties. Housing. Previously, he was Chief Executive of of the National Institute of Agricultural Botany He is the Senior Independent Director at Hillsdown Holdings Ltd, Senior Independent and Chairman of Farm Africa. Richard is a Non- Grainger and has previously held Non-executive Director at Devro plc and held senior positions executive Director and Deputy Chairman of the directorships at Royal Mail Holdings, Venture with Allied Domecq plc and Imperial Foods. Environment Agency. Production and AWG.

Sue Farr John Gibney Moni Mannings Non-executive Director Non-executive Director Non-executive Director Appointed as a Non-executive Director in Appointed as a Non-executive Director and Appointed as a Non-executive Director in November 2011 and Chairman of the Corporate a member of the Audit, Remuneration and December 2017 and is a member of the Audit, Responsibility Committee in November Nomination Committees, as well as Audit Nomination and Remuneration Committees. 2014. She is a special advisor to Chime Committee Chairman designate, in May 2018. Moni is a Non-executive Director of Polypipe Communications plc, having previously been a A Chartered Accountant, John had an executive Group plc, where she chairs the Remuneration member of the Executive Management Team. career spanning in excess of 30 years during Committee, and is a Non-executive Director of Sue has extensive marketing communications which he held a variety of operational and Investec Bank plc. Moni also sits on the Advisory experience having served as Marketing Director financial roles, latterly as Chief Financial Officer Board of Aistemos, an intellectual property data of the BBC for seven years, Director of Corporate at Britvic plc, a role he held for 17 years. John analytics company, having been its Director and Affairs, Thames Television for three years and is a Non-executive Director of PureCircle plc Chief Operating Officer until August 2017. In Director of Corporate Communications, Vauxhall a leading producer of stevia ingredients for addition, Moni is a Trustee of children’s charity Motors. Sue is a Non-executive Director of the global food and beverage industry. He Barnardo’s and a Council Member of Cranfield Millennium & Copthorne Hotels plc, Accsys chairs PureCircle’s Audit Committee, is Senior University. Prior to her current appointments, Technologies plc and British American Tobacco Independent Director and is a member of its Moni enjoyed a 30 year career as a finance lawyer, plc. She has previously held positions as a Disclosure Committee. the latter half as Head of Banking and Board Trustee of the Historic Royal Palaces and as a Member at technology law firm Olswang LLP. Non-executive Director of Motivcom Ltd. She was a Non-executive Director of Dolphin Capital Investors Ltd until January 2018.

30 Dairy Crest Annual Report 2017/18 Board of Directors

Advisers: Principal Bankers Registered Office Auditor Lloyds Bank plc Claygate House, Deloitte LLP Rabobank London Littleworth Road, Santander UK plc Esher, Surrey Solicitors The Royal Bank of Scotland plc KT10 9PN Eversheds Sutherland (International) LLP Corporate Brokers Registered in England Peel Hunt LLP No. 3162897 Shore Capital Stockbrokers Ltd Governance

Mark Allen Tom Atherton Adam Braithwaite Chief Executive Deputy Chief Executive & Executive Director Appointed as an Executive Director in 2002 Group Finance Director Appointed as an Executive Director in July and became Chief Executive in January 2007. Appointed as an Executive Director and Group 2016, Adam joined Dairy Crest in 2002 and has Mark joined Dairy Crest in August 1991. He was Finance Director in May 2013 and as Deputy Chief held a number of senior management positions formerly with Shell UK Ltd. He is a Non-executive Executive in January 2018, Tom is a Chartered within the business. He was appointed Group Director of Howdens Joinery Group plc and Accountant who has worked for Dairy Crest since Commercial Director in April 2013. Adam is also Warburtons Ltd. He has been a Trustee for The 2005. Prior to his appointment to the Board he a Trustee of GLF Schools. Prince’s Countryside Fund since 2010. served as Director of Financial Control. He is a member of the Board of Dairy UK and a member of Business in the Community’s Finance and Risk Committee. He has previously held senior finance positions in Logica plc and Thorn plc.

Non-board Executive Committee members

Robin Miller Robin Miller Company Secretary & General Company Secretary & General Counsel # CounselAndy Stickland Robert Willock Appointed in April 2008, he is a solicitor having AppointedGroup inS upplyApril 2008, Chain he is D airector solicitor #having Group HR Director # worked in private practice and in-house in both workedAppointed in private as Group practice Supply and in-houseChain Director in both in Robert joined Dairy Crest 12 years ago as retail and international manufacturing. retailJanuary and international 2018. Before manufacturing. joining Dairy Crest, Andy HR Director, Dairies from The Maersk held a variety of senior supply chain roles Company where he was Director of Human with Unilever plc in both the UK and abroad, Resources. He was appointed to his current latterly that of Vice President Supply Chain for role in April 2013. Unilever Homecare in Europe.

# Not a Board Member

Dairy Crest Annual Report 2017/18 31 Corporate governance

implementation of the Group’s core values which in turn support Chairman’s introduction effective governance. Since my appointment as Chairman in September 2014 the Board Although market conditions continued to be challenging during the has enjoyed a period of great year, the Group’s key brands have seen strong growth. The Group stability with no departures. It has continues to focus on the on-going execution of the Group’s strategy been especially pleasing that we of generating growth in our branded food and functional ingredients have been able to maintain such businesses. In particular we are continuing to build the customer consistency during a period when base for our demineralised whey and GOS products. We do that the Company has been through against the backdrop of a culture informed by our vision and values a process of significant change, and within a strong governance framework which includes sound particularly with the disposal of its and effective risk management, control and mitigation systems Dairies business and the development of its functional ingredients supported by a combination of clear values, appropriate policy and business. Moni Mannings joined the Board as a Non-executive an environment of transparency and accountability. The Board’s Director in December 2017. More details of Moni’s appointment central role is to work alongside the executive team providing can be found at the Nomination Committee’s report on pages 39 support, challenge, guidance and leadership. I believe that the to 40. Board is well balanced with a broad range of skills, diversity, independence, knowledge and experience.

In recognition of his important contribution to the business and the We support the principles laid down in the revised UK Corporate additional responsibilities he had assumed as chairman of Frylight, Governance Code (published in April 2016 by the Financial the strategic leadership of our Butters, Spreads & Oils business and Reporting Council and applying to the Company’s accounting the chairmanship of our Functional Ingredients business, in January periods from 2017/18) (‘Code’). A copy of the Code can be found at 2018 Tom Atherton was promoted to the role of Deputy Chief www.frc.org.uk and I am pleased to report that the Board considers Executive Officer, in addition to his responsibilities as Group Finance that the Group has complied with all relevant provisions of the Code. Director. As this report is finalised, John Gibney joins us as a Non-executive Director and we prepare to say farewell to Andrew Stephen Alexander Chairman Carr-Locke at the forthcoming AGM in July, following which John will 22 May 2018 succeed Andrew as Chairman of the Audit Committee. Andrew has served nine years with the Company and, acknowledging the UK Corporate Governance Code provision on non-executive director independence, he will stand down this year. I would like to take this opportunity personally, on behalf of the Board, the Company, and the Group to thank Andrew for his dedicated service both as a The Board Non-executive Director and as Chairman of the Audit Committee. Role: The Board is collectively responsible for the long-term Andrew’s experience, intellect and sound judgement have been success of the Group and manages corporate governance, strategy, invaluable to the Board, particularly as it has navigated some of the risk management and financial performance. The Board operates biggest changes which the Company has undergone since it listed. within a framework of effective controls and meets regularly We thank Andrew and wish him well in the future. throughout the year to ensure that risk is assessed and managed and that sufficient resources are available to meet the strategic The Board and I are committed to the highest standards of objectives set by the Board. corporate governance and as Chairman I am responsible for leading the Board in the promotion of good governance across our The Board is also responsible for ensuring that the Group achieves business. We believe that good governance is essential to the way in its objectives in accordance with the values, ethics and standards which we run our business. Over the last two decades the focus on required by the Board. Appropriate procedures and training are put governance has become ever greater; however I believe we are in place throughout the Group to ensure the requisite behaviours are experiencing an unprecedented period of accelerated change in the observed. governance sphere. During the year there have been a number of formal governance initiatives influenced by a variety of factors The Board is supported by the Executive Committee, to whom the including political and societal concerns. As an organisation we Board has delegated the day-to-day management and operations of continue to try to meet the governance challenge and promote the Group’s business and execution of the Group’s strategy; and greater diversity at all levels in our business, to address the gender four other Board Committees, details of which are set out below. pay gap and assess the appropriateness of different methods of remuneration, and to enhance employee and stakeholder Board Committees: The Board has delegated authority to five engagement. The details of some of the formal requirements to be Committees: placed on companies in those areas have yet to be finalised and we • Audit Committee continue to work towards proper implementation of governance • Corporate Responsibility (CR) Committee driven changes as the final detail of such requirements becomes • Executive Committee clear. However, good governance is about much more than mere • Nomination Committee compliance and as Chairman I lead the Board in setting the tone for • Remuneration Committee our business. You will have read in our Corporate Responsibility report in the preceding pages of this Annual Report about the The terms of reference of these Committees can be found on the comprehensive corporate responsibility work being undertaken Group’s website and the reports of each Committee are on pages across the Group. Our Corporate Responsibility programme is at the 36 to 62. core of our culture and how we operate as a business. Through the Corporate Responsibility Committee the Board guides the

32 Dairy Crest Annual Report 2017/18 The Board and its Committee structure is set out as follows: Board Composition: The Board consists of three Executive Directors and currently six Non-executive Directors including the Chairman, although the number of Non-executive Directors will Remuneration Nomination reduce to five again as Andrew Carr-Locke will not stand for Committee Group Committee re-election at this year’s AGM following the appointment of John Board Gibney in May 2018. A list of the current Directors, their roles on the Audit CR Committee Committee Board and its Committees and their experience is set out on pages 30 to 31.

Executive Further details on the roles and responsibilities of the Chairman Committee and Chief Executive can be found in the document entitled ‘Chairman/Chief Executive Division of Responsibilities’ on the Company’s website. Demand HR Finance Legal Supply Richard Macdonald is the Company’s Senior Independent Director.

Independence of Directors: The Chairman is committed to The Board believes that effective governance is realised through ensuring that the Board comprises a majority of independent leadership and teamwork and that collaboration across all levels Non-executive Directors. The Board recognises the value Non- within the Board structure drives a culture of continuous executive Directors bring in constructively challenging and Governance improvement in standards and performance across our business. scrutinising performance. The Board considers that all the Non- executive Directors have strong independent oversight and continue Although various matters have been delegated to the Executive to demonstrate independence. The Board recognises the Committee and other Board Committees, the Board retains ultimate recommended term of appointment for Non-executive Directors responsibility for a number of matters which are specifically reserved within the Code and is mindful of the need for suitable succession. for the Board’s approval, including; strategy and management; The Board therefore maintains a clear framework of the time each structure and share capital; corporate governance; approval of Non-executive Director has served the Company and the skill sets dividends; approval of significant transactions, capital expenditure that each provides. and contracts. The Chairman periodically meets individually or collectively with the Non-executive Directors in the absence of the Executive Directors.

Board meetings and Directors’ attendance: A minimum of eight face to face meetings are planned throughout the year to consider, for example, half year and full year announcements and the strategy of the Group. Other ad hoc meetings are held as and when required. Details of the Board and Committee meetings held during the 2017/18 year and Directors’ attendance are set out in the table below. The numbers in brackets show the maximum number of meetings Directors could have attended. The Directors named in the table below held office during the year: Board Audit Remuneration Nomination Corporate Executive Responsibility Committee

Mr M Allen 8(8) – – – 4(4) 33(43)

Mr T Atherton 8(8) – – – 4(4) 38(43)

Mr A Braithwaite 8(8) – – – 4(4) 36(43)

Mr S Alexander 8(8) – – 6(6) – –

Mr A Carr-Locke 8(8) 4(4) 7(7) 6(6) – –

Ms S Farr 8(8) 4(4) 7(7) 6(6) 4(4) –

Mr R Macdonald 8(8) 4(4) 7(7) 6(6) 4(4) –

Ms M Mannings 3(3) 1(1) 3(3) 3(3) – – (From December 2017)

Board effectiveness review: Each year the performance of the Focus areas for the review were grouped into five key areas: Board and its Committees is reviewed. The last externally facilitated strategy, governance and the role of the Board’s Committees, review was carried out during the 2015/16 financial year with the people and composition, culture, and stakeholders. Those five key assistance of Russell Reynolds Associates. In 2017/18 the Directors areas were sub-divided into more specific areas of focus including, conducted a review of the effectiveness of the Board and its amongst other matters; shared clarity of vision among the Board on Committees without external assistance. Using the framework from strategy; whether the Committees’ work is sufficiently visible and the last externally facilitated review to ensure consistency and so adequately reported to the Board; the adequacy of the level of that progress against previous years could be tracked and openness, interaction, debate and challenge amongst the Board; assessed, the Directors conducted their review in March 2018 which whether the Board has succeeded in improving diversity among included a review of the Chairman’s performance led by the Senior Directors; and steps the Board could take to improve focus on Independent Director. relevant stakeholders, especially employees.

Dairy Crest Annual Report 2017/18 33 Corporate governance continued

The effectiveness review concluded that: of interest, the conflicted or potentially conflicted Director is excluded • All Directors perform well and all continue to make valuable from participation in the Board’s consideration of the conflict or contributions to the work of the Board potential conflict situation. • Continued focus should be maintained on further enhancing the experience among the Directors – more detail of the continued As at 11 April 2018 the Directors all confirmed that they had no work of the Nomination Committee in that regard can be found on present or anticipated conflicts of interest. No Director had a material pages 39 to 40 of this Annual Report interest in any significant contract with the Company or any of its • Good progress has been made, initially through the work of the subsidiaries during the year. Nomination Committee, to ensure appropriate refreshment of Non-executive Director appointments and in improving diversity Appointment and re-election of Directors: The Articles provide among Directors that the Directors or the members, by ordinary resolution, may • Additional consideration is required on stakeholder focus and the appoint a Director to fill a vacancy or as an additional Director. In Board’s Companies Act 2016 section 172 accountabilities December 2017 Moni Mannings was appointed as a Non-executive Director and in May 2018 John Gibney was appointed as a Non- The effectiveness review of the Committees concluded that the executive Director. Consistent with the Articles, they will both stand Committees continue to perform well and to fulfil their briefs against for election at the Company’s 2018 Annual General Meeting (‘AGM’). their terms of reference. Progress had been made during the year The Articles require all Directors to be re-elected annually. Andrew against identified enhancements, including: Carr-Locke will not stand for re-election at the 2018 AGM. He will be • Better formal reporting by Committees to the Board succeeded as chair of the Audit Committee by John Gibney after the • Increased emphasis on the importance of the Corporate AGM. All Directors other than those standing for first election, will Responsibility Committee. Quarterly reviews of progress by the stand for re-election at the AGM. Having regard to the roles Group against the four pillars of the CR strategy have been added performed by each of the Directors, the individual input and to the Executive Committee’s work programme (in addition to the contribution they make and their individual expertise and experience, existing regular reviews of health & safety and technical, quality & the Board is satisfied that each Director’s performance justifies environmental performance). On days when the Board has nomination for election or re-election by shareholders. Committee meetings, the Corporate Responsibility Committee is routinely scheduled as the first of the Committee meetings to Diversity policy: The Company interprets diversity in its widest ensure that it receives appropriate focus and that sufficient time is sense. The Company’s approach to Board diversity is set out in the devoted to it Nomination Committee report on pages 39 to 40. The Company’s approach to diversity in the workforce of the Company is set out in Director induction and training: All new Directors undergo a the Corporate Responsibility section on pages 22 to 23. comprehensive induction programme on appointment. In addition to equipping Directors with sufficiently detailed knowledge of the Service agreements and letters of appointment: Details of the operations of the Group’s business to enable them effectively to Executive Directors’ service agreements and the Chairman and carry out their duties, the induction programme is tailored to their Non-executive Directors’ letters of appointment are published on the experience, background and particular areas of focus. Moni Company’s website and appear in the Directors’ Remuneration Mannings’ induction programme included visits to all of the Group’s report on page 48. These documents are available for inspection at sites ensuring that Moni saw the full range of the Group’s operations. the registered office of the Company during normal business hours She met with managers and staff at each of the sites and received or at the AGM. presentations explaining their histories and operations. She undertook tours of the sites to see their activities. Moni also spent Independent advice: Directors are entitled to take independent time individually with each of the Executive Directors, the Investor professional advice at the Company’s expense where they judge it Relations & Corporate Communications Director, the Group necessary, and there is a Board approved procedure in place for this Procurement Director, the Group HR Director, the Group Business purpose. No Director sought such advice during the year. The Development Director, the Head of Group Internal Audit, and the Directors also have direct access to the advice and services of the Company Secretary & General Counsel. In addition, Moni met with Company Secretary & General Counsel. the external audit engagement partner. Shareholder engagement: The Company recognises its At the time of writing, an equally comprehensive induction responsibility for ensuring that a satisfactory dialogue takes place programme is being organised for John Gibney. We will report fully with shareholders. This continued engagement is highly beneficial to on that in next year’s Annual Report. all parties as it helps to build a greater understanding of our investors’ views, opinions and concerns. The Chief Executive and On-going training is provided for the Board by way of site visits, Deputy Chief Executive & Group Finance Director have primary presentations and circulation of updates on, amongst other things, responsibility for investor relations. corporate governance, environmental, legal and regulatory developments and investor relations matters. Throughout the year the Board has continued to maintain an active programme of engagement with investors with regular meetings held Conflicts of interest: Procedures are in place for Directors to with key institutional shareholders to discuss strategy, financial disclose conflicts or potential conflicts of interest. The Company’s performance and investment activities. Following the successful Articles of Association (‘Articles’) allow the Directors, where engagement programme in 2016/17, the Chief Executive and Deputy appropriate, to authorise conflicts or possible conflicts of interest Chief Executive & Group Finance Director again met with over 90 between Directors and the Company. In addition, Non-executive investors in eleven major cities across the UK, Europe, North Directors’ letters of appointment require them to obtain the prior America and Canada. approval of the Board to appointments external to the Company where those appointments might affect the time they are able to devote to their role. When considering conflicts or potential conflicts

34 Dairy Crest Annual Report 2017/18 Analysts and investors are invited to our annual capital markets day Fair balanced and understandable: The Directors are required to and this year it was held at our National Distribution Centre in present a fair, balanced and understandable assessment of the Nuneaton. It focussed on the Company’s strategy and performance, Company’s position and prospects by principle C.1 of the Code. innovation, our strategy for the dairy category and Frylight. It also Since the principle was first introduced to the Code, the Audit included a tour of the distribution facility. The event was attended by Committee adopted a detailed process to enable the Board to the Chief Executive, Deputy Chief Executive & Group Finance report against this principle of the Code. This structured approach Director, Group Commercial Director and other senior management. (see table below) to the preparation of the Report and Accounts has been applied in the production of this Report and Accounts which Presentation slides are made available in the investors section of the the Board formally signed off at its meeting in May 2018. Company’s website along with audio recordings, annual and interim reports, trading updates and company announcements. January/February/March April May Initial content Agree key Review and Formal sign off production messages sign off All the Non-executive Directors, and, in particular, the Chairman and Consider level of Senior Independent Director, are available to meet with Prepare content Start completing Confirmation from assurance not dependent on and collating contributors as to obtained over shareholders. In his capacity as Remuneration Committee year end results, performance completeness of non-financial Chairman, Richard Macdonald wrote prospectively in advance of e.g.: business related content, input. information in the model, strategy, e.g. remuneration ARA. publication of the Remuneration Report to the Company’s largest Appropriate review corporate report. of full content, for Where applicable shareholders, prompting on-going correspondence related to governance Consider new consistency, Audit Committee to sections. questions on remuneration with valuable feedback received from regulations and completeness and formally report to shareholders. Project Manager consistency with messaging: review the Board on how it Governance (‘PM’) considers key messages and and amend. has satisfied itself whether content KPIs. that ARA is FBU. ‘Sign-off’ by Feedback from meetings with shareholders is provided to the Board collated is itself and PM considers section owners. Board minute collectively fair, to ensure that all Directors have a balanced understanding of the whether content consideration of balanced and Bring together all issues and concerns of shareholders. The Board also receives collated is itself and FBU with Board understandable section owners to collectively FBU: paper showing the periodic reports on investor relations and independent feedback (‘FBU’): review and agree that whole review and amend. process and amend. Annual Report and from the Company’s brokers on the views of major shareholders. results. Accounts (‘ARA’) is Identify material FBU. Risk management and internal control: The Board determines events/ performance Consider formal the nature and extent of the significant risks it is willing to take in issues that will sign off from achieving its strategic objectives. It has overall responsibility for need to be section owners to monitoring the Group’s risk management and internal control reported. the Board. systems and the effectiveness of those systems. It is assisted in that task by the Audit Committee and the Group Internal Audit function. The Board’s assessment of the fair, balanced and understandable There is an on-going process for identifying, evaluating and nature of the 2017/18 Annual Report and Accounts is further managing the principal risks facing the Group. The Board has assisted by, amongst other matters, the following: delegated responsibility for management of day-to-day operational • The Annual Report and Accounts is drafted by senior risks to the Executive Committee. The Audit Committee conducts management with overall coordination by the Company Secretary reviews of the internal control systems and the Board reviews them & General Counsel annually. The principal risks and uncertainties identified by the Group • An internal validation process of the information in the Corporate are set out on pages 26 to 29 along with the steps which are taken Responsibility report is undertaken by Group Internal Audit to to mitigate and manage them. The Board has satisfied itself that its ensure factual accuracy systems accord with the FRC’s Guidance on Risk Management, • Comprehensive reviews of the draft Annual Report and Accounts Internal Control and Related Financial and Business Reporting and are undertaken by Executive Committee members and, in relation that satisfactory internal control procedures and systems have been to certain sections, by the Company’s external lawyers, the in place throughout the year and up to and including the date of this external auditor and other advisers Annual Report in compliance with the requirements of the Code. • The drafts of each relevant section are reviewed as they are prepared through an iterative drafting process by the Chairmen of A rolling audit programme conducted by Group Internal Audit across appropriate Committees of the Board and the final draft is the Group forms a key element of the Group’s systems of internal reviewed by those Committees prior to consideration by the Board control. The Head of Group Internal Audit reports independently to the Chairman of the Audit Committee on assurance matters. Under At its May 2018 meeting, the Board reviewed and was satisfied that its terms of reference, the Audit Committee, amongst other matters, the Annual Report and Accounts for financial year 2017/18, taken as approves the appointment or dismissal of the Head of Group Internal a whole, is fair, balanced and understandable and the Board Audit and the Audit Committee Chairman approves the believes that the information contained therein provides the remuneration of the Head of Group Internal Audit. It is not possible to information necessary for shareholders to assess the Company’s eliminate risk entirely. Accordingly, although the Group’s systems are and Group’s performance, position, business model and strategy. designed to manage risks they cannot provide absolute assurance against material misstatement or loss. They provide reasonable Anti-bribery and anti-corruption: In accordance with the Bribery assurance that potential issues can be identified promptly and Act 2010 the Group has a written anti-bribery policy which is remedied appropriately. contained in the Group’s Business Conduct policy and the Supplier’s Corporate Responsibility policy. The Group provides regular anti-corruption training across the management population and does not tolerate bribery or corruption anywhere in its supply chain.

Dairy Crest Annual Report 2017/18 35 Corporate governance continued

Summary of the more significant risks and financial Audit Committee report reporting issues I am pleased to present the Audit The Committee has discussed with management the key Committee’s report for the year estimations and judgements applied to the Group’s financial ended 31 March 2018. statements, as disclosed in the accounting policies, and the impact of significant accounting matters arising during the year. The main During the year, the Committee has items discussed were: continued to play a key role within the Group’s governance framework 1. Exceptional items to support the Board in matters The Group’s accounting policy on exceptional items provides that relating to internal control, risk items of a material, one-off nature are classified as exceptional. The management and financial reporting. Committee considered the nature and levels of exceptional items together with the results of the interim review and the audit In this report I will share the Committee’s activities during the year, conducted by Deloitte. The Committee was satisfied that exceptional including an overview of the significant issues the Committee has items had been appropriately classified and disclosed, treated assessed and the Committee’s opinion on the 2017/18 Annual consistently and that discussions with management were Report as a whole. transparent. See Note 4 to the Accounts where this is identified as a key judgement.

2. Retirement benefit obligations The Committee has overseen a smooth transition to the Group’s The valuation of the Group’s retirement benefit obligations is made at new external auditor Deloitte LLP (‘Deloitte’) following their each reporting date in accordance with IFRS. The valuation is appointment in January 2017, which was approved by shareholders subject to a number of assumptions and estimates and the at the Group’s AGM in July 2017. Committee is satisfied that those made at 31 March 2018 are appropriate. See Note 21 to the Accounts where this is identified as During the year the Committee has received regular updates on IT a key source of estimation uncertainty. security following the disposal of the Dairies business and throughout the phased implementation of the Group’s new IT 3. Dilapidations liability systems. A contingent liability has been disclosed in respect of a potential dilapidation liability relating to Chadwell Heath, a manufacturing site The Financial Reporting Council (‘FRC’) conducted a thematic review disposed of with the Dairies business. The Committee has of the 2016/17 Annual Report in which they raised a number of considered the Group’s position and together with the external minor issues which we have duly considered whilst preparing this auditor is satisfied that the disclosure as a contingent liability is year’s Annual Report. Looking ahead, the Committee will continue to appropriate. See Note 28 to the Accounts where this is identified as focus on the audit, assurance, and risks processes within the a key judgement. business, as well as compliance with the new International Financial Reporting Standards (IFRS) that will become effective for the Group Other items considered over the next two accounting periods. Inventories Inventories are stated at the lower of cost and net realisable value. I’m delighted to welcome Moni Mannings and John Gibney to the Costs include the purchase price of raw materials, direct labour and Committee and the finance and compliance experience that they a proportion of manufacturing overheads. Given the increase in raw both bring. I would also like to thank the other members of the material costs during the year, and therefore the inventory valuation, Committee and the Group’s Internal Audit and Finance teams for the the Committee requested specific reassurance concerning the high quality of their support. This will be my last report to you, as I quantities of inventories held and valuation approach applied. will be standing down from the Board this summer, in line with the Code, having served nine years. It is envisaged that John will take Fair balanced and understandable over as Chairman of the Audit Committee and the timing of his The Committee has considered whether the 2017/18 Report and appointment to the Board will enable a thorough induction and Accounts, taken as a whole, is fair, balanced and understandable smooth transition. I wish him well for the future and the Group’s and provides the information necessary for shareholders to assess continuing success. the Group’s position, performance, business model and strategy. The Committee was satisfied with the process which had been Andrew Carr-Locke Chairman of the Audit Committee followed for the preparation of the 2017/18 Report and Accounts as 22 May 2018 set out on page 35; it has reviewed and provided feedback on the content of the draft Annual Report for consideration by the Board and the Annual Report was amended to incorporate this feedback.

Audit Committee members Following this review, the Committee was of the opinion that the Andrew Carr-Locke, Chairman 2017/18 Report and Accounts is representative of the year and presents a fair, balanced and understandable overview, providing Sue Farr the necessary information for shareholders. Richard Macdonald Moni Mannings (from December 2017) John Gibney (from May 2018)

36 Dairy Crest Annual Report 2017/18 Going concern and viability statement Meetings: The Committee has a regular work programme of The Committee reviewed management’s assessment of the Group’s activity agreed between the Chairman of the Committee, the ability to continue as a going concern in line with the guidance Group’s management and the external auditor. The Committee published by the FRC. The assessment included a review of the undertakes additional work in response to the evolving audit principal risks facing the Group, their financial impact, how they were landscape. A summary of some of the key matters considered at being managed, together with a discussion as to the appropriate each meeting during the year are set out below: period for assessment. The Group’s viability statement is included in the Directors’ report on page 63. Meeting Key matters considered

Risk management and internal control 11 May 2017 • Evaluation of Committee’s performance The Committee reviewed the Group’s overall approach to risk management and control, and its processes, outcomes and • External auditor – EY’s 2016/17 year end final report disclosures are set out on page 35. • Annual Report and Accounts for the year ending 31 March 2017 (including fair, balanced and understandable)

Internal Audit • Going concern and viability statement review The Committee reviewed the Group’s Internal Audit’s audit plan for the year and agreed its budget and resource requirements. It • Group Internal Audit’s report on financial and operational controls audits, whistleblowing notifications and work plan reviewed regular summary reports and management’s response. for 2017/18 The Committee met independently with the Group Internal Auditor during the year and discussed the results of the audits performed • Private meeting with external auditor EY Governance during the year. 11 September • Deloitte’s audit transition update and planning report 2017 Membership: All members of the Committee are considered to be • Group IT security update independent, with a broad range of finance, commercial and • Group Internal Audit’s report on financial and operational marketing experience relevant to the sector in which the Company controls audits and whistleblowing notifications operates. Moni Mannings and John Gibney joined the Committee in • FRC audit quality results 2016/17 December 2017 and May 2018 respectively and bring a wealth of finance and compliance experience. The current members and • Corporate governance training by Deloitte details of their attendance at meetings are set out on page 33. 6 November • Financial controls update 2017 Invitations to attend meetings: A standing invitation is made to • Draft interim financial statements the Chairman of the Board, the Chief Executive, the Deputy Chief • External audit – Deloitte’s interim review report Executive & Group Finance Director and the Group Commercial Director. The Group Financial Controller, Head of Internal Audit and • FRC thematic review of Annual Report and Accounts for the representatives of the external auditor attend all Committee year ending 31 March 2017 meetings during the year. In addition, the internal and external • Group’s tax strategy auditors met privately with the Committee. • Private meeting with external auditor, Deloitte

Role & Responsibilities: The role and responsibilities of the 20 March • Group Internal Audit’s report on financial and operational Committee are set out in written terms of reference, which are 2018 controls audits, whistleblowing notifications and budget for 2018/19 reviewed annually by the Committee, taking into account relevant legislation and recommended good practice. The terms of reference • External audit – Deloitte’s update to planning report can be found on the Company’s website. • Group risk review process

The Committee’s responsibilities include, but are not limited to, the • Committee’s terms of reference and 2018/19 work following matters: programme • Oversight of the integrity of the Group’s financial reporting • Impact of IFRS 9, IFRS 15 and IFRS 16 procedures; • Review of the Group’s Annual Report and Accounts; • Private meeting with Head of Internal Audit • Oversight of risk management and internal control arrangements; • Oversight of compliance with legal and regulatory requirements; • Oversight of the external auditor’s performance, objectivity, qualifications and independence; and • Oversight of the Group’s whistleblowing arrangements.

Dairy Crest Annual Report 2017/18 37 Corporate governance continued

External Auditor Deloitte provided minimal non-audit services in 2017/18 in relation to As reported in the 2016/17 Annual Report, Deloitte was appointed the assurance work carried out in connection with the as external auditor in January 2017, following a formal tender announcement of the Company’s half year results for 2017/18; this is process, and their appointment was approved by shareholders at of direct benefit to shareholders although it is not formally regarded the Company AGM in July 2017. This is the first year of association as ‘audit’ work for reporting purposes. for William Smith as the audit partner. A breakdown of audit and non-audit fees paid to Deloitte in 2017/18 During the year, Deloitte has received a full and comprehensive is summarised in the following table, together with a comparison induction to the Group’s business. This induction programme has with fees paid to Ernst & Young (‘EY’) in 2016/17: included meeting managers and staff at each of the sites and tours 2017/18 2016/17 of the sites to see their activities. This added to their depth of £m £m knowledge achieved from the tendering process during which wide Total audit fees 0.3 0.5 access to the Group was provided. Non-audit fees As part of the review of the effectiveness of the external audit, a Taxation services – 0.1 formal evaluation incorporating views from the Committee and Other non-audit services – 0.1 relevant members of management is considered by the Committee. The Committee also considered the FRC’s latest quality review Total non-audit fees* – 0.2 report for the principal auditing firms. Overall, the Committee is Total fees 0.3 0.7 satisfied with the performance of Deloitte in its first year as the Group’s auditor and agreed that the audit process had been effective. * In 2017/18 other non-audit services comprised £44,000 in respect of the interim review. The Committee recommends that Deloitte be reappointed as the Company’s statutory auditor for the 2018/19 financial year. We believe the independence and objectivity of the external auditor and the effectiveness of the audit process are safeguarded and remain strong. The Committee confirms that the Company has complied throughout the year with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.

Non-audit services The Company has a formal policy, reviewed annually, on whether the Company’s external auditors should be employed to provide services other than audit services. This policy has been updated to reflect the FRC’s Revised Ethical Standard 2016 and the FRC’s Guidance on Audit Committees 2016. As part of that policy, the Committee has determined that the following activities should not be undertaken by the external auditor: • Bookkeeping or other services relating to the preparation of financial information • The provision of advice on large IT systems • Valuation, actuarial and legal services • Internal audit outsourcing services

The Committee has reviewed this policy in light of the new regulation set out in the EU Audit Directive and Audit Regulation 2014 when applied to the Company from 1 April 2017. The regulation substantially curtails those non-audit services which can be provided by the auditor to the Company and in particular prohibits all tax-related services, including compliance services as well as general advice, and all consultancy and advisory services. The Committee is satisfied that, following the above-mentioned review and taking into account the new regulation, this policy will be conducive to the maintenance of good governance, best practice and auditor independence and objectivity.

38 Dairy Crest Annual Report 2017/18 and to contribute valuably to Board discussions. With her Nomination Committee report remuneration committee experience, Moni is a potential successor I am pleased to present my report to Richard Macdonald as chair of the Remuneration Committee for the 2017/18 financial year when Richard steps down in November 2019. as Chairman of the Nomination Committee. It has been a busy John Gibney joined the Board in May 2018 as a Non-executive year for the Committee as it has Director. He will succeed Andrew Carr-Locke as chair of the Audit worked to assist the Board to Committee following the AGM in July. A Chartered Accountant, John address its future needs in relation retired from his role as Chief Financial Officer of Britvic plc in 2016 to developing further our current after 17 years. Prior to his time with Britvic, John spent 10 years with Executive Directors; addressing Bass plc in various finance roles. John brings with him considerable anticipated changes amongst international business experience from his Britvic role and continues our Non-executive Directors; and adding to the breadth and to be involved in the international food industry as a Non-executive experience of our Non-executive Directors. I am pleased to report Director of PureCircle plc a world leading producer and innovator of the successful recruitment of Moni Mannings and John Gibney as stevia ingredients for the global food and beverage industry. Non-executive Directors. We also say goodbye and thank you to Andrew Carr-Locke as he leaves us at this year’s AGM. The Committee is satisfied that it has performed its duties under its terms of reference, including:

Director appointments: The Committee’s primary responsibility is Governance Last year I reported that the Committee had recommended the to consider and recommend to the Board candidates who are appointment of Adam Braithwaite as an Executive Director as part of appropriate for appointment as Executive and Non-executive the process of bringing new talent onto the Board. The Committee Directors. Its objective is to maintain an appropriate balance of skills has subsequently focussed on further developing Adam and Tom and experience on the Board and to ensure progressive refreshment Atherton. Adam has taken on a non-executive directorship at GLF of the Board. Schools, which will help to broaden his experience. Both he and Tom have undertaken 360 degree reviews facilitated by an external Processes for Director appointments: The process for the coach and are continuing their management development, in the appointment of new Directors is rigorous and transparent. The case of Adam through his participation in the CBI Leadership Committee ensures that the recruitment exercise for Directors is Programme, and in Tom’s case through attendance at the INSEAD conducted against a documented brief setting out the requirements business school in May 2018. The Committee will continue to work of the role and the skills and experience required of the person to fill closely with the Chief Executive to develop Tom and Adam’s range it. In the past, the Company has engaged the services of external and breadth of skills and experience. search consultancies and as referred to above, it is anticipated, in the ordinary course, that it would do so in the future. Were it not to Last year the Nomination Committee appointed the Zygos do so, open advertising would be used as an alternative. Prospective Partnership as headhunters to conduct a search for additional appointees are interviewed by the Committee and the Committee Non-executive Directors. It remains the case, as disclosed in the last makes a recommendation to the Board. The Board makes the report, that the Company has used Zygos in the past for other decision whether to appoint the recommended individual. The non-executive searches but that it has no other connections with the Committee reports the outcome of its meetings to the Board. Company. Since Zygos’ appointment, its acquisition by Russell Reynolds Associates has been announced. The Company has no Director commitments: The Committee evaluates the connections with Russell Reynolds Associates, other than in their commitments of individual Directors. The Board believes that it is in capacity as headhunters and recruitment advisors for senior the best interests of the Company that Executive Directors take up executives and Board members and as the external facilitator for the opportunities to act as Non-executive Directors in other appropriate Board’s 2016 effectiveness review. companies. Unless the Board approves otherwise, Executive Directors may serve in a non-executive capacity on the board of one The brief to Zygos contained three parallel tracks, firstly to identify other company. Non-executive Directors may serve as directors, candidates with international experience, preferably in FMCG or executive or otherwise, on the boards of other companies or ingredients businesses. Secondly, to identify candidates who would appropriate organisations. Non-executive Directors’ letters of be able to succeed Andrew Carr-Locke as chair of the Audit appointment require them to seek prior approval from the Board Committee, and thirdly, to identify potential future candidates to before accepting any additional commitment that might affect the succeed Richard Macdonald as chair of the Remuneration time that they are able to devote to their role as a Non-executive Committee. Director of the Company. The Board has the opportunity to satisfy itself that Non-executive Directors’ other commitments allow them to I am delighted to welcome formally Moni Mannings and John Gibney devote adequate time to their commitments to the Company. The to the Board. Moni joined the Board last December. She is a Board approved all new appointments of Directors during the year Non-executive Director of Polypipe plc where she also chairs the and is satisfied that all Directors continue to have sufficient time to remuneration committee and is a Non-executive Director of Investec devote themselves properly to their duties for the Company. Bank plc for whom she also chairs their Irish subsidiary, Investec Holding (Ireland) Limited. She sits on the advisory board of Diversity: The Committee monitors diversity on behalf of the Board. Aistemos, an intellectual property data analytics company, having The Group interprets diversity in its widest sense and aims to been its Director and Chief Operating Officer until August 2017. Prior achieve the best possible leadership for the Group by ensuring an to her current appointments, Moni enjoyed a successful career as a appropriate mix of skills, backgrounds, gender, experience and senior City finance lawyer, latterly as Head of Banking at Olswang knowledge amongst its Directors, senior managers and other LLP. In the short period during which Moni has been on the Board employees. The Committee considers that first and foremost, she has demonstrated an ability quickly to understand our business appointments must be made based on an objective assessment of

Dairy Crest Annual Report 2017/18 39 Corporate governance continued

who is the best person to fill a role, with candidates drawn from a diverse range of backgrounds. The Company has not adopted targets for female representation amongst the Directors. 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.

Board effectiveness: The Board normally undertakes an annual effectiveness review. In accordance with the Code, every three years, it uses the services of an external facilitator to facilitate its effectiveness review. This year the Board conducted a review of its effectiveness, led by me with the assistance of the Company Secretary & General Counsel and the Senior Independent Director, who led the review of my performance. Details of that review can be found at pages 33 to 34.

Stephen Alexander Chairman of the Nomination Committee 22 May 2018

Nomination Committee members Stephen Alexander, Chairman Andrew Carr-Locke Sue Farr Richard Macdonald Moni Mannings (from December 2017)

40 Dairy Crest Annual Report 2017/18 • The proportion of water from recycled sources used in Corporate Responsibility Committee report manufacturing by our business increased to 47% which puts us in I am pleased to present the report a good position to achieve our target of a 50% reduction by of the Corporate Responsibility 2021/22. Committee to shareholders. • Our total accident rate fell by 86% versus the 2013 baseline which Full details of our corporate is ahead of the 50% reduction by 2021/22 which was initially responsibility programme can be targeted. We will be re-assessing this pledge to adjust the target found on pages 20 to 25. The accordingly and ensure it remains suitably stretching. Committee oversees the Group’s • We are proud that, for the second consecutive year, we have had corporate responsibility programme no reportable health and safety incidents as categorised under the and ensures that key social, Reporting of Injuries, Diseases and Dangerous Occurrences ethical and environmental issues Regulations (commonly referred to as RIDDORs). This is a are assessed and prioritised, including reviewing the Group’s significant achievement and driving safety-conscious behaviour corporate responsibility pledges. will remain a priority for us.

A successful approach to corporate responsibility is, we believe, an essential part of securing a sustainable business which thrives both The Group has a long-standing commitment to corporate today and in the future. I am proud therefore to be able to report on responsibility and believes that behaving in an ethical, sustainable another year of real achievement by the Corporate Responsibility manner is essential for running a successful business. team and their colleagues across the business. Governance

Last year we relaunched our Corporate Responsibility strategy to Sue Farr Chairman of the Corporate Responsibility Committee focus our efforts on 14 pledges grouped into four key pillars – 22 May 2018 Climate, Colleagues, Consumers and Community – with the intention of adopting an approach more appropriate for our business. In the first full year of our five-year plan we have made considerable progress towards the targets we set ourselves. We Corporate Responsibility Committee members have also received extremely positive feedback from our employees, Sue Farr, Chairman with 84% considering Dairy Crest as a responsible employer. Mark Allen Tom Atherton I believe that the success of our programme is due to the fact that Adam Braithwaite corporate responsibility runs through the heart of the business. Each of the four pillars is ‘owned’ by a member of the Executive Simon Hewitt (Group Technical Director) Committee which ensures that there is individual accountability for Richard Macdonald each of the pillars to help drive progress. Andy Stickland, our Group Robin Miller Supply Chain Director, has responsibility for the Climate pillar, Robert Willock Colleagues is owned by Robert Willock, our Group HR Director, Adam Braithwaite, our Group Commercial Director, looks after Consumers and Community is owned by Tom Atherton, our Deputy Chief Executive & Group Finance Director.

Each of the 14 pledges covers a specific part of our business and has a target attached to it. On pages 20 to 25 of this report we have provided an overview of each pledge and the progress that has been made within these focus areas to date.

We are committed to providing a range of products that provide choice for our consumers, helping them to adopt a healthy balanced diet. Volumes of the lower fat variants of our cheese, butter and spreads brands, together with sales of Frylight, grew by 4% year-on-year and now represent 15% of total branded sales volumes. We also recognise the growing social imperative to reduce food packaging and waste. Our ambition is to make all of our packaging recyclable by 2021/22, up from the figure of 80% where it stands today. We have a number of work streams in progress to understand current technologies and potential recyclable or reusable solutions across our product portfolio.

Some other key highlights from the year are summarised below: • We reduced our relative greenhouse gas emissions by 10% (i.e. emissions per tonne of throughput) by continuing to invest in energy reduction initiatives. • Around 78% of the heat required by our Davidstow creamery was produced with energy from biomass boilers. We are also reviewing options for further renewable energy sources on this site.

Dairy Crest Annual Report 2017/18 41 Corporate governance continued

Greenhouse Gas Report 2017/18 In line with the requirements of the Companies Act 2006 (Strategic Scope 1 and 2 emissions reduced in 2017/18 by around 9% Report and Directors’ Report) Regulations 2013 (as amended) our compared to the previous year driven by the changes summarised in

greenhouse gas (‘GHG’) emissions are quantified below. the chart below shown in ktonnes CO2e. 2017/18 2016/17 2.6 Scope 1 11,390 11,438 tonnes CO e 0.6 2 39.0 1.2 4.2 35.6 Scope 2 24,240 27,581 tonnes CO2e

Total scope 1&2 35,630 39,019 tonnes CO2e kg CO e per Intensity ratio 57.81 64.40 2 tonne throughput

Emissions from Biomass fuel 26,399 26,102 tonnes CO2e We follow the GHG Protocol Corporate Accounting and Reporting 2016/17 2017/18 Standard to calculate emissions from the combustion of fuels (Scope of Outsourcing primary transport in Increase activity level Operational efficiencies Grid factor 1) and from purchased electricity, heat, steam and cooling (Scope 2). Carbon emission factors are used to convert each activity that gives The reduction in both absolute emissions and the reported emissions

rise to GHG emissions to a carbon dioxide equivalent (CO2e) using the intensity ratio are due to: latest UK Government conversion factors for Company Reporting. – Outsourcing of distribution of finished goods part way through the previous reporting year (June 2016), consequently no emissions from The GHG data reported below relates to emissions from activities in HGV fuel or vehicle refrigeration systems are relevant to the current the operational control of Dairy Crest Group plc from 2 April 2017 to reporting year 31 March 2018, consistent with our financial reporting period. – Increased activity levels for our Davidstow creamery and cheese Scope 1 emissions data includes material sources of fossil fuels packing sites following commissioning of new manufacturing used at manufacturing sites, offices and our national distribution processes in the previous reporting year increased energy activity data centre. Road fuel used in company cars operated by Dairy Crest for for both Scope 1 and 2 emissions business travel is also included. Fugitive losses of refrigerants used in – Continued investment in cost effective emission reductions cooling equipment have been converted to tonnes of carbon dioxide activities which deliver operational efficiencies for our business. These equivalent and are included for completeness. typically comprise energy demand reduction projects increasing the efficiency of refrigeration, steam and air systems, motors and drives Scope 2 emissions data includes purchased electricity used in and lighting. We also focus on maximising the utilisation of on-site manufacturing, distribution and in offices. renewable sources of energy to reduce reliance on fossil fuels. The We employ a ‘per tonne of throughput’ denominator as the most effectiveness of these projects was in part offset during the reporting effective measure of relative performance. This measure is consistent year by emissions of refrigerant gases from equipment which has with our internal target setting process and how we communicate subsequently been replaced. We continue to prioritise cost effective relative performance. energy reduction projects to reduce GHG emissions and reduce supply chain costs Consistent with the GHG Protocol, emissions from biologically – The carbon intensity of electricity imported from the public grid sequestered carbon are reported separate to the other Scopes. These reduced by 15% compared to the previous year (based on annual comprise emissions from combustion of biomass fuel at our creamery emissions factors issued by DEFRA) reducing Scope 2 emissions in Davidstow that significantly reduce Scope 1 emissions from fossil fuels. Emissions from combustion of biomass fuels are not included in The overall effect of the changes described above on the emissions the emissions intensity ratio reported above. intensity metric was a year-on-year decrease of 10%.

Executive Committee

The Chief Executive chairs the Executive Committee which Executive Committee members comprises the other Executive Directors and senior members of the Mark Allen Group’s executive team. The Executive Committee is responsible, amongst other matters, for implementing the Group’s strategic Tom Atherton direction and monitoring the performance of the business and its Adam Braithwaite control procedures on a day-to-day basis, as well as the day-to-day Robin Miller operations of the Group’s business, its performance against Andy Stickland forecasts and budgets, and profitability. The Executive Committee Robert Willock normally meets weekly.

Information included in the Directors’ report Certain information fulfilling the requirements of the Corporate Governance report can be found in the Directors’ report at pages 63 to 65 under the headings ‘Substantial shareholdings’, ‘Rights and obligations attaching to shares’, ‘Articles of association’ and ‘Purchase of own shares’ and is incorporated into this Corporate Governance report by reference.

By order of the Board

Robin Miller Company Secretary & General Counsel 22 May 2018

42 Dairy Crest Annual Report 2017/18 Directors’ remuneration report

2017/18 Company performance Chairman’s statement Dairy Crest delivered a strong branded performance for the 2017/18 On behalf of the Board, I am financial year with all but one of our key brands growing faster than pleased to present the Directors’ the market. We are progressively establishing a customer base of Remuneration Report (‘DRR’) for infant formula manufacturers for demineralised whey and GOS and the 2017/18 financial year. The the animal feed trials we have conducted have generated positive Committee has continued to focus results. Group revenues grew by almost 10% over the year and diligently on our approach to adjusted profit before tax increased by 3%. The Board is remuneration at Dairy Crest over recommending a final dividend of 16.3p per share. As has always the last year and met seven times been the case, the Committee aims to ensure that pay outcomes over the period. The importance of fully reflect the performance of the business over both the long and ongoing quality dialogue with our short term. shareholders and consistently high levels of transparency in our overall We continue to assess annual performance, and therefore bonus approach remains a key part of our work which, again, is reflected outcomes, against three key metrics: profit before tax, free cash flow in this year’s report. and personal objectives. This approach applied to all scheme participants across the Group. 2017/18 was the first year we operated under our revised remuneration policy, which was approved by over 99% of our Whilst the reported results against the targets set would result in a

shareholders at the 2017 AGM. I would like to take the opportunity payout under the profit before tax element of the bonus, the Governance again to thank shareholders for their support, as well as their input Executive Committee, supported by the Remuneration Committee, and helpful guidance over the course of last year’s remuneration determined that this would not be appropriate given the level of policy review. exceptional charges incurred by the Group. Free cash flow The Dairy Crest remuneration policy continues to be based on a performance was outside of the bonus range resulting in no payout core set of principles which supports the strategic and financial for this element. ambitions of the Company. • The remuneration package should support a performance In addition, although recognising the strong branded performance of based culture, attract and retain talented personnel and align the business with revenue and profit growth, the overall financial executives’ and shareholders’ interests. outcome for the year did not meet the stretching internal targets set. • The remuneration structure is both uncomplicated and Given this, the Executive Committee proposed that no payout be transparent and we remain committed to open disclosure. made under the personal objectives element of the bonus scheme • The measures used for incentive plans reflect the strategic for Executive Directors and senior managers, which the priorities which the Company considers critical to the future Remuneration Committee supported. success of the Company. This results in no bonuses being paid to Executive Directors and A copy of the Policy is included after the Chairman’s statement for senior managers for 2017/18. ease of reference. The full Policy, as approved by shareholders, is also available on our website. In this statement I have pulled Vesting of the Transformational Incentive Award out a few key points from the main detail of our remuneration Over the past few years Dairy Crest, under the leadership of Mark work undertaken in 2017/18 and contained in the Directors’ Allen, has transformed into a high margin, added-value and branded Remuneration report. business. In 2014, the Committee determined that the retention of Mark Allen over the following three years, given his unique knowledge of the Group’s business, in-depth insight of the sector in Board changes at Dairy Crest in 2017/18 which it operates and at a time of great change including the sale of Earlier this year, the Board was pleased to appoint Tom Atherton as the Dairies business, was paramount and therefore granted him the Deputy Chief Executive. Tom retains his responsibilities as Group Transformational Incentive Award (‘TIA’), approved by shareholders Finance Director, with this expansion in role recognising a number of at an EGM in 2014. This award vested in December 2017 following additional responsibilities including the chairmanship of Frylight, the the assessment of achievement against stretching performance strategic leadership of our butters and spreads category and, more conditions. recently, the chairmanship of our Functional Ingredients business. The consequent change to Tom’s salary is covered below. We recognised that this remuneration structure was not conventional and committed to being as transparent as possible in relation to I would also like to take this opportunity to welcome Moni Mannings interim updates against the performance conditions under this plan. who joined the Board and the Remuneration Committee in To deliver against this commitment we have aimed to provide best December 2017 and thank Andrew Carr-Locke for his services to practice disclosure, giving detailed performance updates in every the Committee over the last nine years, as he will not seek re- DRR since the plan was approved and have done so again this year election to the Board at this year’s AGM. to help shareholders understand our decision-making in determining the ultimate level of vesting under the plan.

At the end of the three year performance period the Committee assessed the sum of the evaluations of the individual objectives to determine the total level of vesting of the TIA and reviewed Dairy Crest’s performance in the round, including the level of value delivered to shareholders over the period. During the three year performance period Dairy Crest delivered a Total Shareholder Return (‘TSR’) of 14.3% per annum. This is well above the median

Dairy Crest Annual Report 2017/18 43 Directors’ remuneration report continued

TSR of the FTSE250 (excluding financial services and investment On a final note, I would like to thank my fellow Committee members trusts) and is at the upper quartile of the domestically-focused and internal and external teams who supported us with their FTSE250 companies which, like Dairy Crest, would not have commitment and hard work over the past year. We remain benefitted from currency movements in this period. committed to hearing your views as shareholders. If you would like to discuss any aspect of our remuneration further I would welcome The Committee determined that Mark Allen had delivered your comments. outstanding progress with regard to the objectives set under the TIA. Mark’s exceptional performance in delivering the sale of the Dairies Richard Macdonald Chairman of the Remuneration Committee. business and his subsequent work in transforming Dairy Crest has 22 May 2018 resulted in the Company delivering industry leading margins of 16% compared to c.5% before the disposal of the Dairies business. Dairy Crest is in a strong position to deliver sustained future growth. Remuneration Committee members In light of this assessment and the ongoing strength of the business, Richard Macdonald (Chairman) the Committee determined that a multiplier of 2.9x the base award Andrew Carr-Locke (out of a maximum 3x) was appropriate. Full details on the Sue Farr determination of this vesting can be found on pages 53 to 55. Moni Mannings (from December 2017)

Salaries 2018/19 Mark Allen will not receive a salary increase in 2018.

Tom Atherton’s salary was reviewed in light of his change of role and in line with our remuneration policy. The Committee determined that a base salary increase of 14.6% to £400,000 was appropriate taking into account the nature of the role change and additional responsibilities, as well as the required base salary to remain competitive in the market. This was the only change to Tom’s remuneration and he will not be eligible for a salary increase until July 2019 at the earliest.

Adam Braithwaite will receive a salary increase in July 2018 at not more than the rate awarded to the wider employee population.

Gender Pay Gap Reporting In March 2018 the Group published its Gender Pay Gap, taking the decision to report on all parts of the Group and in so doing, providing a higher level of transparency than required by the Regulations. On a mean basis, men earn 9.1% more than women, reflecting the higher number of male employees occupying the most senior roles. The Group, supported by the Remuneration Committee, is committed to reducing this pay difference and has commenced a series of actions focused on diversity training, personal development plans and enhancing recruitment processes.

2018/19 Looking forward, we will continue to operate under the Policy approved by shareholders at the 2017 AGM. This Policy continues to support the delivery of strong financial performance that is strategically aligned to the long term goals of the business. Measures and weightings under the annual bonus remain appropriate to the business strategy and are unchanged from last year.

As part of the Policy approved at the 2017 AGM, the Committee introduced a new Dairy Crest Long Term Incentive Plan (‘LTIP’). Extensive shareholder consultation was undertaken on this structure at the time, which has a maximum opportunity of 150% of salary for all Executive Directors and is based on three year performance conditions. The last grant under the Long Term Alignment Plan (‘LTAP’) was made last year, based on the assessment of In assessing Directors’ performance the Group uses alternative performance performance against the scorecard which was disclosed in the measures such as adjusted profit before tax, free cashflow, ROCE, net debt and EBITDA. Definitions of these measures discussed throughout 2015/16 Directors’ Remuneration report. We are therefore making the Directors’ Remuneration report and a reconciliation to the equivalent the first grant under our new LTIP later this year and this award will statutory measures can be found on pages 123 to 124. All references to vest in 2021. The measures for this award are set out on pages 60 to profit before tax in this Remuneration report refer to the adjusted measure 61 and have been chosen based on their alignment to strategy and as defined and reconciled on pages 123 to 124. This is not a change in the performance metric identified. the creation of shareholder value. They are also widely used and recognised within the business.

44 Dairy Crest Annual Report 2017/18 Directors’ Remuneration Policy (approved by shareholders at the 2017 AGM) Directors’ Remuneration Policy Future policy table We seek to ensure that the remuneration packages contribute to the The remuneration structure for Executive and Non-executive delivery of long-term shareholder value. This is reflected in the Directors (who are paid fees and receive no additional benefits) at Company’s annual bonus scheme and long-term incentive plan, Dairy Crest and the underlying principles on which each element of which are explained in more detail below. The Committee received the package is based are set out below. shareholder approval of the following remuneration policy at the AGM on 18 July 2017 to cover a period of up to three years from that date.

How the element supports our Performance metrics used and time strategic objectives Operation of the element Maximum opportunity under the element period applicable

Base salary Benchmarked against executives with similar Increases will normally be broadly in line with Not applicable. Reflect assessment responsibilities in companies of comparable inflation and the wider employee population. of market practice size and complexity, in particular the based on role and constituent companies of the FTSE 250 index The Committee retains the flexibility to award experience. (excluding financial services and investment higher base salary increases and to position trusts). salaries in such a way that ensures Dairy Crest remains competitive in the market and Paid in 12 equal monthly instalments during to take into account an individual’s personal Governance the year. performance and experience in the role – as such the Committee may apply increases Reviewed annually and any changes are in over time as appropriate to achieve alignment the ordinary course effective from 1 July. with market levels.

Changes may also be made in the case of a change in role or responsibility.

Pension There is a defined contribution scheme and/ Executive Directors receive employer Not applicable. Provide a market or salary supplement in place. No further contributions up to the Annual Allowance on competitive level of service accrual under final salary pension pension contributions plus cash provision with scheme from 1 April 2010. supplements. Overall employer contributions appropriate flexibility (including cash supplements) will not exceed whilst minimising risk 23% of salary. to the Group.

Benefits Includes company car benefit, life assurance All Executive Directors receive a company Not applicable. Provide market- cover, permanent health insurance and car/car allowance and private medical competitive benefits. medical insurance. insurance, commensurate with market levels.

Dairy Crest pays the cost of providing the Executive Directors receive life insurance benefits on a monthly basis, or as required for cover of 7 x annual salary. one-off events.

The Remuneration Committee reserves the right to add to or remove these benefits as required.

Bonus To deliver an appropriate balance between Current maximum award: 100% of salary. Performance is measured by reference to the Ensure that annual long-term and short-term reward, any bonus financial year. reward is consistent earned over 50% of annual salary is deferred Target award: 50% of salary. with successfully into shares (see below). The remainder is paid Metrics used to determine performance achieving the as cash. Threshold award: 0% of salary. under the bonus will be based on a mix of short-term financial financial, operational and personal measures. targets and strategic The cash element of the bonus is ordinarily The Remuneration Committee has discretion The metrics that apply for 2018/19 are set out objectives of the paid three months after the end of the to increase the maximum award to 150% of on page 60 of the Annual Report. Group. financial year to which it relates. Clawback salary in exceptional circumstances. The applies to cash payments for 3 years from the Committee is not aware of any such The Committee has the flexibility to vary the date this element is paid. circumstances and so does not currently performance measures and weighting of expect to make awards above the maximum metrics under this plan. of 100% of salary.

Deferred bonus Any bonus over 50% of annual salary is Policy maximum award: 50% of salary None. Value growth is achieved only through Deliver appropriate deferred for three years, conditional on (maximum potential deferral). change in share price and dividend balance between continued employment until vesting date. equivalents paid. long-term and In the exceptional event the Remuneration short-term reward Delivered in shares. Participants will normally Committee exercises discretion to award a and to build up be entitled to an amount, payable in shares, bonus above 100% of salary, any bonus Directors’ on vesting equal in value to the dividends earned above 50% of salary would be shareholdings in line payable on deferred bonus shares over the deferred into shares. with Policy. deferral period.

Malus applies to deferred bonus.

Dairy Crest Annual Report 2017/18 45 Directors’ remuneration report continued

How the element supports our Performance metrics used and time strategic objectives Operation of the element Maximum opportunity under the element period applicable

Long term Awards will take the form of either nil cost Maximum award: 150% of base salary (other Performance is measured by reference to the incentive plan options to acquire shares or conditional than where an award is made in connection three financial years starting with the year of (‘LTIP’) awards to acquire shares. with recruitment). grant. Encourage and reward continuing The Committee will determine the appropriate Threshold award: 25% of the maximum Metrics used to determine performance improvement in the level of grant each year subject to the award under the LTIP will be based on a mix of Group’s performance maximum award of 150% of base salary. For financial and strategic measures. over the longer term. recruitment purposes only, where there is a need to provide replacement awards, grants The Committee has the flexibility to vary the Alignment of interest can be made in excess of 150% of base performance measures and weighting of between participants salary. metrics under this plan. However, at least and shareholders. 75% of the overall award will be based on Normally, awards will vest 3 years after the financial measures, with at least 50% of the date of grant and the number of shares that overall award based on relative TSR versus a vest will be determined by reference to certain broad comparator group. The remaining part performance conditions. Awards granted for of the award may be based on strategic recruitment purposes may vest before the measures. expiry of 3 years from the date of grant and may not be subject to performance conditions.

A 2 year holding period will normally apply after the vesting period (subject to the Committee’s discretion to reduce or not apply a holding period in exceptional circumstances).

Vested shares accrue dividend equivalents.

Awards (and dividend equivalents) may be settled in shares or cash.

Malus and clawback apply to the LTIP.

Save as you earn The SAYE or Sharesave Scheme is an The maximum participation levels will be set Not applicable. scheme (‘SAYE’) all-employee HMRC approved savings- based on the applicable limits set by HMRC. Encourage share related share option scheme and no ownership across the performance conditions are attached to Company. SAYE options.

Executive Directors are eligible to participate in the all-employee SAYE.

Shareholding Executive Directors are required to build a The shareholding requirement for Executive Not applicable. requirement shareholding in the Company. Such Directors is 200% of salary. Alignment of interest shareholdings exclude unvested options between participants under the LTISP and LTIP but include and shareholders. unvested deferred shares granted to Executive Directors as part payment of bonuses and unvested LTAP awards.

Executive Directors who have not achieved the minimum shareholding will be required to retain 50% of net proceeds from any shares released under the deferred bonus/LTAP/LTIP until the required level of shareholding is reached.

Non-executive Benchmarked against Non-executive The total fees for Non-executive Directors Not applicable. Directors’ fees Directors with similar responsibilities in remain within the limit of £600,000 set out in Remunerates companies of comparable size and the Articles of Association. Non-executive complexity. Directors and attracts Non- The remuneration of the Non-executive executive Directors of Chairman is determined by the Board suitable calibre. following recommendations from the Remuneration Committee and Chief Executive. The remuneration of Non- executive Directors is determined by the Board following recommendations from the Chief Executive having reviewed appropriate market levels.

Non-executive Directors are paid a fee only.

46 Dairy Crest Annual Report 2017/18 Provisions of previous policy that will continue to apply at all times so long as the LTAP awards remain in existence – final grant was made in 2017, no further awards will be made under the LTAP

Long Term Annual grant of share awards. Maximum award: 90% of salary. Achievements over the prior year against a Alignment Plan pre-grant performance scorecard comprising (‘LTAP’) Awards will be subject to a phased vesting If performance falls below a minimum level measures aligned to Dairy Crest’s strategic Encourage and requirement, with 50% of the award vesting in against the scorecard no award will be made. priorities. reward continuing year 4 and 50% in year 5 following grant. improvement in the The Committee has flexibility to amend the Group’s performance Participants will normally be entitled to an relevant measures, weightings and KPIs over the longer term. amount on vesting, paid in shares, equal in which determine the size of the awards value to the dividends payable on shares granted. The weighting of financial KPIs in Alignment of interest awarded. determining annual grant levels will be at least between participants 60% of the scorecard. and shareholders. Malus and clawback apply to the LTAP. The Board may at any time up to and on vesting Vesting is subject to continued employment. Measures identified reduce the number of shares that vest, are central to Dairy should material misstatement or misconduct The level of vesting may be reduced Crest’s strategy and occur. dependent on a dividend underpin over the are considered by first three years of the vesting period. Directors in overseeing the An amount of the award proportional to the operation of the percentage decrease in dividend may not

business. vest in the event of a decline of up to 50%. If Governance the decline exceeds 50%, the Committee will use its discretion to determine the proportion of the award that shall vest. In such circumstances not more than 50% of the award will vest.

Dividend cover must be maintained in a specific range over the three-year measurement period. The Remuneration Committee retains discretion to reduce the vesting of awards as appropriate should dividend cover be outside this range. Vesting of awards could be reduced to zero. The dividend cover range will be determined by the Committee annually and may be adjusted if the Committee determines this to be appropriate.

Notes on Policy table and components of remuneration Performance measures and targets Performance measures for incentive plans and bonus reflect the strategic priorities which the Committee considers critical to the future success of the Company. Targets are set by reference to budgeted financials, wider Group targets, external market consensus and stretching strategic growth outcomes.

Differences in remuneration for all employees All employees participate in some form of bonus plan. The size of award and the weighting of performance conditions vary by grade, with specific measures incorporated where relevant. All employees have the opportunity to participate in a pension arrangement at levels of employer contribution which vary by grade. Members of senior management participate in the LTIP at an award level appropriate to their role.

CEO one-off Transformational Incentive Award At the EGM held in December 2014, shareholders approved the grant of a one-off TIA outside of policy to the CEO, connected to the key business change of the sale of the Dairies business. This one-off award vested in December 2017 and outcomes against the objectives and the resulting vesting are provided on pages 53 to 55.

Statement of consideration of employment conditions elsewhere in the Company As the Committee has oversight of remuneration matters for the broader senior management population, it brings the reward of these individuals into consideration when discussing packages for Executive Directors.

The Committee does not specifically ask employees to comment on matters related to the remuneration of Executive Directors but any comments received are taken into account. The level of salary increases for the general Dairy Crest employee population is considered when setting increases for the Executive Directors. In addition, salary benchmark information for companies of comparable size and complexity within the FTSE250 (excluding financial services and investment trusts) is taken into consideration.

The Committee has oversight of statutory matters in relation to wider employee pay, for example in respect of the National Living Wage and Gender Pay Gap and receives regular updates on such matters.

Dairy Crest Annual Report 2017/18 47 Directors’ remuneration report continued

Approach to remuneration upon recruitment The Committee’s approach to remuneration upon recruitment is to pay a competitive salary as appropriate to attract and motivate the right talent in the role.

The following table sets out the various components which would be considered for inclusion in the remuneration package for the appointment of an Executive Director. In respect of a promotion, any remuneration commitments made prior to such promotion will be honoured. Any new Executive Director’s remuneration package would include the same elements and be subject to the same constraints as those of the existing Executive Directors performing similar roles, as shown below:

Component Policy and principles

Base salary and The salary level will be set taking into account the responsibilities of the individual and the salaries paid for similar roles in comparable benefits companies.

Depending on the circumstances of any particular appointment, the Committee may choose to set base salary above market median to attract the right talent, or below market median with increases applied over a period of time to achieve alignment with market levels for the role with reference to the experience and performance of the individual, all subject to the Company’s ability to pay.

Should relocation of a newly recruited Executive Director be required, reasonable costs associated with this relocation will be met by the Company. Such relocation support could include but not be limited to payment of legal fees, removal costs, temporary accommodation/hotel cost, a contribution to stamp duty and replacement of non-transferrable household items. In addition, the Committee may grant additional support as appropriate.

Other benefits provided will be aligned to those set out on pages 45 to 47.

Pension The Executive Director will be able to participate in the defined contribution scheme up to the annual allowance and receive a cash supplement payment above this. The total benefit will not exceed 23% of basic salary.

Annual bonus The Executive Director will be eligible to participate in the annual bonus scheme as set out in the Remuneration Policy table.

The Policy maximum award under the bonus will be 100% of salary.

The Remuneration Committee has discretion to increase the maximum award to 150% of salary in exceptional circumstances. Any bonus over 50% of salary is deferred into shares for three years as set out in the Remuneration Policy table.

Long term The Executive Director will be eligible to participate in the LTIP at the Remuneration Committee’s discretion. incentive awards The maximum annual award under this scheme is 150% of base salary and associated conditions would apply as set out in the Remuneration Policy table.

Under the rules of the plan, the Committee may grant additional awards under this scheme as replacement awards (see below)

Replacement The Committee may grant additional awards under the LTIP as replacement awards. In such cases the level of award and timing of vesting awards could be different from that in the Remuneration Policy in order to replicate, as practically as possible, the value and timing of the remuneration forgone.

The Committee will seek to structure any replacement awards so that overall they are no more generous in terms of expected value or vesting period than the awards forfeited from a new recruit’s previous employer.

The Committee has the flexibility not to apply performance conditions or a holding period and to use cash and/or shares as the format for delivery of any replacement awards.

Service contracts Service contracts and letters of appointment include the following terms.

Executive Director Date of appointment Notice period

M Allen 18 July 2002 12 months

T Atherton 23 May 2013 12 months

A Braithwaite 19 July 2016 12 months

Executive Directors’ service agreements are available on the Company’s website www.dairycrest.co.uk.

Non-executive Director Date of appointment Notice period

A Carr-Locke 1 August 2009 3 months

R Macdonald 3 November 2010 3 months

S Alexander 1 January 2011 3 months

S Farr 1 November 2011 3 months

M Mannings 1 December 2017 3 months

48 Dairy Crest Annual Report 2017/18 It is the Company’s policy that Non-executive Directors should not normally serve for more than nine years. Non-executive Directors’ letters of appointment are available on the Company’s website www.dairycrest.co.uk.

External Appointments Executive 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. Fees may be retained by Directors for such appointments.

Termination Policy The Remuneration Committee’s approach when considering payments in the event of termination is to take account of the individual circumstances including the reason for termination, contractual obligations of both parties as well as share plan and pension scheme rules (including relevant performance conditions).

The table below summarises the key elements of Executive Directors’ service contracts and policy on payment for loss of office.

Component Policy and principles

Notice period 12 months’ notice from Company.

12 months’ notice from Director. Governance

Compensation for Up to 12 months’ salary plus an additional 3% to account for presumed salary increases from any salary review that may have taken place in loss of office in the notice period. service contracts Payable monthly and subject to mitigation if the Director obtains alternative employment up to 12 months after termination.

Other payments to the Director in question include medical benefits, cost of company car and a sum equivalent to 23% of basic salary representing pension contributions for the unexpired part of the contractual notice period.

Under the terms of Mark Allen’s contract, payments on termination are calculated as 90% of the sum of the following items – annual salary, benefits, pension plus 50% of maximum bonus opportunity for the notice period. This will not be the Company’s policy going forward for other Executive Directors. Contractual provisions in respect of compensation for loss of office for Mark Allen are therefore grandfathered.

In the event of a compromise or settlement agreement, the Remuneration Committee may make payments it considers reasonable in settlement of potential legal claims. This may include an entitlement to compensation in respect of their statutory rights under employment protection legislation in the UK or in other jurisdictions. The Remuneration Committee may also include in such payments reasonable reimbursement of professional fees in connection with such agreements.

The reimbursement of repatriation costs or fees for professional or outplacement advice may also be included in the termination package, as deemed reasonable by the Committee, as may the continuation of benefits for a limited period.

Treatment of If termination is by way of death, injury, illness, disability, redundancy, retirement, or any other circumstances the Committee determines, unvested deferred deferred bonus share awards may be released in full on termination. bonus awards under plan rules Otherwise, the proportion of awards released will be determined at the discretion of the Board.

Treatment of In relation to the LTAP: unvested LTIP/ Any outstanding award will lapse at cessation of employment with the Company, unless the reason for cessation is by way of injury, ill-health, LTAP plan awards disability, redundancy, retirement, the business or company in which the award holder works being sold outside of the Group, or any other under plan rules circumstances the Committee determines, when the award will vest at the normal vesting date with the underpin and other conditions considered at the time of vesting, subject to pro-ration for time served. The Committee may determine not to pro-rate if deemed appropriate. Alternatively, the Committee may determine that a proportion of the award will vest immediately, with the proportion determined by the Committee taking into account satisfaction of the underpin and any other factors the Committee considers relevant.

In relation to the LTIP: Any outstanding award will lapse at cessation of employment with the Company, unless the reason for cessation is by way of injury, ill-health, disability, redundancy, retirement, the business or company in which the award holder works being sold outside of the Group, or any other circumstances the Committee determines, when the award will vest at the normal vesting date with the performance conditions considered at the time of vesting, subject to pro-ration for time served. The Committee may determine not to pro-rate if deemed appropriate. Alternatively, the Committee may determine that a proportion of the award will vest immediately, with the proportion determined by the Committee taking into account satisfaction of the performance conditions and any other factors the Committee considers relevant.

A proportion of the LTIP/LTAP will vest immediately on death, pro-rated for time.

Exercise of Any discretion available in determining treatment of incentives on termination of employment is intended only to be relied upon to provide discretion flexibility in certain circumstances.

The Remuneration Committee’s determination will take into account the particular circumstances of the Director’s departure and the recent performance of the Company.

Dairy Crest Annual Report 2017/18 49 Directors’ remuneration report continued

Component Policy and principles

Change of control Outstanding awards and options would normally vest and become exercisable on a change of control to the extent that any performance condition has been satisfied.

The proportion of awards that vest under the LTIP/LTAP will be determined by the Remuneration Committee. Deferred bonus awards would normally be released in full. Payments under the bonus scheme would be pro-rated for service from the start of the relevant bonus year to the date of the change of control. For SAYE, participants can, at the Board’s discretion, exercise options up to six months after the change of control. Contributions to SAYE can continue up to the date of exercise.

The Committee reserves the right to alter the performance period or the performance measures and targets of the annual bonus plan or of any outstanding awards under the annual bonus plan or the LTIP/LTAP in the event of a change of control, to ensure that the performance conditions remain relevant but challenging.

The Committee has the discretion to test performance at the point of change of control or to allow awards to continue or roll-over in any reasonable manner with agreement of the acquirer, taking into account the circumstances of the change of control.

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

Illustration of application of Remuneration Policy A significant proportion of an Executive 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. The SAYE is excluded.

Director Value of package (£000s)

Maximum 34% 26% 40% (2,121) M Allen Maximum 34% 26% 40% (2,121) Target 51% 20% 29% (1,421) Target 51% 20% 29% (1,421) Minimum (Fixed) 100% (721) Minimum (Fixed) 100% (721) 0 500 1,000 1,500 2,000 2,500 0 500 1,000 1,500 2,000 2,500

Maximum 34% 26% 40% (1,511) T Atherton Maximum 34% 26% 40% (1,511) Target 51% 20% 29% (1,011) Target 51% 20% 29% (1,011) Minimum (Fixed) 100% (511) Minimum (Fixed) 100% (511) 0 500 1,000 1,500 2,000 2,500 0 500 1,000 1,500 2,000 2,500

Maximum 34% 26% 40% (984) A Braithwaite Maximum 34% 26% 40% (984) Target 51% 20% 29% (657) Target 51% 20% 29% (657) Minimum (Fixed) 100% (330) Minimum (Fixed) 100% (330) 0 200 400 600 800 1,000 0 200 400 600 800 1,000

Key: Fixed Remuneration Annual Variable Remuneration Long-term Variable Remuneration Key: Fixed Remuneration Annual Variable Remuneration Long-term Variable Remuneration Notes to the scenarios: Fixed: This element comprises salary for Mark Allen and Tom Atherton as of 1 July 2018 (see page 60), pension benefits (including salary supplement) and other fixed benefits (company car, etc) as per the last known number. Adam Braithwaite’s salary is based upon the salary for 2017/18. His salary will be reviewed with effect from 1 July 2018 and increase at not more than the rate awarded to the wider employee population.

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 LTIP, at 150% of salary in the maximum scenario and 75% of salary in the target scenario. No allowance is made for share price growth and/or dividends and/or dividend equivalents paid, in accordance with the requirements of rules governing disclosure.

Statement of consideration of shareholders views During 2017/18 the Committee consulted extensively with our largest shareholders as well as shareholder representative bodies on the new Long Term Incentive Plan and other remuneration issues. The Committee values highly the quality of input from its engagement with shareholders. Shareholder consultation helps the Committee set meaningful remuneration policies that achieve clear alignment of the interests of shareholders and management. The Committee looks forward to continuing the productive dialogue with the Company’s shareholders.

50 Dairy Crest Annual Report 2017/18 Annual report on remuneration Single total figure of remuneration – subject to audit The 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.

It is important to note that the LTAP award included in the column Long Term Incentives 2017/18 is incorporated in the single total figure of remuneration for regulatory reasons with no shares vesting in the year. The 2015 LTAP vests 50% in 2019/20 and 50% in 2020/21.

Director Base salary/fees Taxable benefits Bonus Long Term incentives i Pension ii Total (£’000s) 2017/18 2016/17 2017/18 2016/17 2017/18 2016/17 2017/18 2016/17 2017/18 2016/17 2017/18 2016/17 Non-executive Chairman S Alexander 155 155 – – – – – – – – 155 155 Executive Directors M Allen 560 545 33 33 – 102 1,949 533 129 125 2,671 1,338 T Atherton 357 340 19 19 – 64 259 268 82 78 717 769 Governance A Braithwaite iii 260 179 8 13 – 28 89 104 60 41 417 365 Non-executive Directors A Carr-Locke 60 49 – – – – – – – – 60 49 R Macdonald 70 55 – – – – – – – – 70 55 S Farr 60 49 – – – – – – – – 60 49 M Mannings iv 17 – – – – – – – – – 17 – i For 2016/17 the values included are for the 2014 LTAP. These shares have not vested, therefore the value of the awards has been calculated using the average middle market price during the final quarter of 2017/18. For 2017/18, the values included are for the 2015 LTAP and Mark Allen’s TIA award. LTAP awards were subject to a dividend underpin over the period April 2015 – March 2018. The conditions under the dividend underpin were met and the awards are not subject to any further performance conditions – they are therefore included in the single figure. The value of the awards has been calculated using the average middle market price during the final quarter of 2017/18. 50% of awards will vest on 26 May 2019 and 50% will vest on 26 May 2020. As the vesting period for this award has not yet been completed, no value will be delivered to participants until 2019/2020. For Mark Allen, Long Term Incentives also include the value of shares vesting under the one-off TIA awarded in December 2014, which vested in December 2017. ii Pension amounts include employer’s pension contribution and salary supplement. Base salary, bonus and LTAP are defined on pages 45 to 47. iii Amounts shown in relation to Adam Braithwaite for 2016/17 relate to the period from 19 July 2016 when he was appointed to the Board. iv Amounts shown in relation to Moni Mannings for 2017/18 relate to the period since 1 December 2017 when she was appointed to the Board.

Notes Tom Atherton – change in base salary as a result of change in role In January 2018 Tom Atherton took up the position of Deputy CEO in addition to his responsibilities of Group Finance Director. Since his appointment to the Board in 2013 as Group Finance Director, Tom has taken on additional responsibilities including Chairman of our Frylight business and the strategic leadership of the Group’s butters and spreads category. Going forward he will also chair the Functional Ingredients Board. The change to Deputy CEO recognises Tom’s continuing commitment to the business and the increasing scope and importance of his role within the Company.

To reflect these enhanced responsibilities Tom’s salary was increased by 14.6% to £400,000 with effect from January 2018. Tom’s salary will next be reviewed in July 2019.

Taxable benefits are valued at the taxable value and include company car/car allowance and private medical insurance.

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 retained fees in association with this work totalling £55,000 (2017: £55,000). From January 2017 he also held the position of Non-executive Director at Warburtons Limited with retained fees in association with this work totalling £37,500 (2017: £9,000).

Additional requirements in respect of the single total figure table – subject to audit Performance against targets for annual bonus Payment 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 Company shares and deferred for a three-year period subject to continued employment.

Dairy Crest Annual Report 2017/18 51 Directors’ remuneration report continued

A summary of some of the key personal bonus objectives set for each of the Executive Directors and their performance against these during the year are provided below:

Mark Allen Performance measure Performance outcome

New Revenue Streams Mark has successfully overseen the development of the Group’s customer base of infant formula manufacturers whilst also leading the production improvements in demineralised whey and GOS.

Organisation Building upon the work delivered in 2016/17, Mark has continued to develop the Executive Directors including preparing Tom Atherton for Development his enhanced responsibilities as Deputy CEO and coaching Adam Braithwaite in his first full year on the Board. In addition, based upon the succession plan for business critical roles, the senior management team has been strengthened by the recruitment of a new Group Supply Chain Director and Group Director of Finance.

Shareholder/Customer Mark continues to develop excellent relationships with the Group’s major customers maintaining regular contact at a senior level through Engagement the year. Mark has continued to engage positively with our major shareholders and broaden our shareholder register including successfully growing the shareholder base in North America.

Tom Atherton Performance measure Performance outcome

Pension Liability Tom delivered a change in indexation on pensions in payment from RPI to CPI reducing the liabilities by £130 million. He also oversaw a further successful Flexible Retirement Options offering to deferred scheme members, reducing scheme liabilities by a further £10 million.

Information Tom led the implementation of the new IT strategy, moving away from the hardware and software required to run our business pre the sale Technology of Dairies. Phase 1 of this programme was successfully completed in the year, moving all financial and payments systems onto the new platform. Successful implementation of phases 2 and 3 in 2018/19 will enable further simplification of head office processes.

Frylight Tom continued to chair Frylight during the year, a business that delivered strong growth in volumes, revenue and profit as well as investing in further manufacturing efficiencies.

Managing the Debt Despite delivering a number of initiatives to reduce debt and tighten control over discretionary expenditure, the overall debt position has Position not improved. This was a result of increased stocks of ingredients and cheese at the year end and capital expenditure on IT projects continuing. Mitigating either of these areas was not considered to be in the best interests of the Group. The resulting final net debt position was higher than anticipated earlier in the year.

Adam Braithwaite Performance measure Performance outcome

Brand Development Under Adam’s leadership our brands continued to develop with three of our four key brands showing strong growth, complemented by continued growth in the balance of the portfolio.

Sales Growth Revenue generation has been positive in the year, driven by the effective management of inflationary costs into the business and continued brand share growth.

Identify new Sales Adam has led the continued diversification of our sales channels to reflect changing consumer habits with growth achieved in both the Channels discounter sector and online.

Bonus payouts for the 2017/18 performance year are set out below:

Maximum Outcome as a % of salary potential Threshold Target Maximum as a % of (0% (50% (100% Measure Details salary payout) payout) payout) Actual M Allen T Atherton A Braithwaite

Profit before Stretching targets based on 50% £60.6m £62.8m £69.1m £62.3m 0% 0% 0% tax budget, with a sliding scale See note See note See note between threshold and below below below maximum.

Free cash Stretching targets based on 25% £31.8m £33.4m £36.7m £15.7m 0% 0% 0% flow budget, with a sliding scale between threshold and maximum.

Personal A range of non-financial 25% See summary of personal bonus objectives above 0% 0% 0% objectives operational and strategic See note See note See note objectives will be assessed below below below by the Committee, with an appropriate award level set under this element with reference to the overall performance of the business.

Total – 100% of 0% 0% 0% salary

Deferred into – – Nil Nil Nil shares

52 Dairy Crest Annual Report 2017/18 A profit before tax performance of £62.3m was within the range for a payment against this bonus target. However, the Executive Committee, supported by the Remuneration Committee, determined that a payout was not appropriate given the level of exceptional charges incurred by the Group.

With regard to bonus related to personal objectives, the Executive Committee proposed that no payment be made to Executive Directors and senior managers under this element of bonus given the broad financial outcome for the year did not meet the stretching internal targets set. The Remuneration Committee supported this proposal. Given that the free cash flow outturn of £15.7 m was outside of the bonus range, no bonus payments will be made to Executive Directors for 2017/18.

LTAP 2015 Awards under the 2015 LTAP were subject to a dividend underpin over the period April 2015 – March 2018. The conditions under the dividend underpin were met and the awards are not subject to any further performance conditions – they are therefore included in the single figure.

Value of Dividend awards at underpin 31 March Face value Number of Dividend underpin conditions 2018 i Director Grant date granted £000s shares granted conditions met? £000s End of vesting period

Mark Allen 26 May 2015 358 71,496 To increase the dividend Yes 448 50% on 26 May 2019 over the period April 2015 50% on 26 May 2020

to March 2018 in line with Governance progressive dividend policy whilst maintaining dividend Tom Atherton 26 May 2015 208 41,437 cover within 1.5-2.5x range Yes 259 50% on 26 May 2019 for the period April 2015 to 50% on 26 May 2020 March 2018.

The actual dividend Adam Braithwaite 26 May 2015 71 14,227 Yes 89 50% on 26 May 2019 increase over this period 50% on 26 May 2020 was 2.3% and the dividend cover is 1.7 times i The value of the awards has been calculated using the average middle market price during the final quarter of 2017/18 and includes the dividends accrued to date over the vesting period

CEO One-off Transformational Incentive Award – determination of final vesting outcome The one-off TIA, related to the sale of the Dairies business and subsequent reshaping of Group, was granted to Mark Allen in December 2014 and vested this year, in December 2017.

This award supported the retention and motivation of Mark Allen through this critical period in which his knowledge and experience were vital to a successful Group outcome.

The one-off TIA was granted as a base award equivalent to 75% of Mark Allen’s salary at grant. Based on performance a multiplier of between 0x and 3x is applied to this base award, the outcome of which is set out below:

Resulting performance multiplier to be applied Objective to base award

Managing the competition approval process 1x relating to the sale of the Dairies business

Appropriately reshaping the Group 1x

Establishing a successful future business 0.9x

Overall 2.9x

In line with the commitment made by the Committee in the 2014/15 Remuneration report and following the comprehensive update provided in the last two years’ report, we have set out detailed information on the performance against the objectives set under this plan as shown below.

1. Managing the competition approval process relating to the sale of the Dairies business Mark took leadership of all main interactions with the Competition and Markets Authority (‘CMA’) which ultimately led to the successful completion of the sale of the Dairies business to Muller UK & Ireland Group LLP (‘Müller’). Mark’s vast experience of Dairy Crest and the dairy sector was applied to the response to the CMA’s review of the sale, providing clear understanding of the impact on the sector and the consumer and the outcome should a deal not receive approval. This knowledge and insight was essential in providing the CMA with appropriate information for their decision to be taken.

Mark led the commercial discussions with Müller, applying his judgement and experience to achieve the optimum outcome for Dairy Crest. He also personally led the communication and engagement process with all other key stakeholders, whilst simultaneously achieving the successful organisational segmentation of Dairies to prepare for transfer.

Dairy Crest Annual Report 2017/18 53 Directors’ remuneration report continued

The sale of the Dairies business has repositioned the Group as a branded and added-value business. This change has been positively received by investors and analysts.

As disclosed in the 2015/16 Remuneration report, the Remuneration Committee determined that all objectives within this category of the TIA had been successfully completed resulting in a maximum performance multiplier of 1 under this objective.

2. Appropriately reshaping the Group Mark has led the reshaping of the Group’s structure in two phases – pre-Dairies sale and post Dairies sale.

Pre-Dairies sale: Mark led a process to segment Dairy Crest into a branded added-value cheese and Butters, Spreads & Oils business and a separate doorstep and predominantly retailer own brand milk business. This segmentation gave clear category focus whilst also paving the way for a clean business transfer should the sale of the Dairies business receive approval.

Post Dairies sale: Mark conducted a strategic review of the post-sale Dairy Crest business, covering all areas of the Group. This process streamlined the Group and delivered a management and administrative structure appropriate to the smaller business. Simultaneously, Mark initiated a review of core operational systems and processes to define a clear roadmap for development over a two year period. Titled “Project Evolve” and delivering change within supply chain, demand and business systems, this project will deliver highly effective systems, improved processes and reduced costs achieving the initial targeted savings of £5 million and putting the Group in an excellent position to further streamline ways of working and reduce costs.

The Remuneration Committee assessed the final performance against this objective, particularly in light of the cost savings achieved and resulting shape of the business to deliver continued value to our customers and shareholders through streamlined, improved ways of working and further cost reductions and determined that all objectives within this category had been met. This resulted in a maximum performance multiplier of 1 under this objective.

3. Establishing a successful future business Developing a successful future business incorporated objectives relating to successful exploitation of existing product streams, delivery of new products and revenue opportunities and developing a robust sustainable business to meet future needs in a challenging sector.

Exploiting existing product streams: Under Mark’s leadership, the business has continued to develop its branded and added-value offering. Cathedral City maintains its position as the UK’s No1 cheese brand and has expanded its range with additional spreadable and snack bar variants. Frylight has grown in both value and volume and is the clear No1 oil brand. Clover’s ‘no artificial ingredients’ reformulation helped the brand grow volume in a declining market, whilst Country Life and particularly Country Life spreadable performed well despite sharp rises in input costs and strong competition.

New products and revenue opportunities: Mark’s objectives also required the delivery of new product streams to enhance the profitability of the business and develop shareholder returns. The development of the Davidstow site to produce GOS and demineralised whey is complete. Mark personally led governance of this project whilst also leading the key commercial relationship with Fonterra. Infant formula standard product is now being produced and sold and opportunities for expanding GOS into the animal feed sector continue with research partnerships with Danisco and Harper Adams University. The timely purchase of the remaining 50% share of Promovita Ingredients Limited gave the Group full ownership of this growth opportunity.

Developing a robust, sustainable business: Following the significant organisational change associated with selling the Dairies business, there was a need to ensure succession plans were refreshed and employees were fully engaged in the future direction of the Company. To this end, Mark has overseen a thorough succession process including development plans for Executive Directors. With regard to the broader population, Mark sponsored and personally led an intensive employee engagement process including a full Group roadshow to which every employee was invited and a refresh of the Group’s Vision and Values. This was a key activity post the sale of the Dairies business in ensuring employees were engaged throughout this period of significant change but, more importantly, remained informed and committed to the future plans and growth of the Company.

The Remuneration Committee assessed the final performance against this objective and recognised that enormous progress had been achieved in developing future growth opportunities for the Company. The Committee also reflected on the broader business performance and the achievements in delivering consistently good results albeit with debt above the desired level. This resulted in a performance multiplier of 0.9 being applied to this objective.

Summary As communicated to shareholders on the grant of the TIA, at the end of the performance period (December 2014 – December 2017) the Remuneration Committee has assessed the sum of the evaluations of the individual objectives to determine the total level of vesting of the TIA and has reviewed Dairy Crest’s performance in the round, including the level of value delivered to shareholders over the period.

During the three year performance period Dairy Crest delivered a TSR of 14.3% per annum. This was well above the median TSR of the FTSE250 (excluding financial services and investment trusts) and at the upper quartile of the domestically-focussed FTSE250 companies which, like Dairy Crest, would not have benefitted from currency movements in this period.

54 Dairy Crest Annual Report 2017/18 The Committee determined that Mark Allen delivered outstanding progress with regard to the objectives set under the TIA. Mark’s exceptional performance in delivering the sale of the Dairies business and his subsequent work in transforming Dairy Crest has resulted in the Company delivering industry leading margins of 16% compared to c.5% before the disposal of the Dairies business. Dairy Crest is in a strong position to deliver sustained future growth.

In light of this assessment and the on-going strength of the business the Committee determined that a multiplier of 2.9x the base award (out of a maximum 3x) was appropriate. The value of the award is shown in the table below:

Base award Multiplier on base award Number of shares vesting Value on vesting

Maximum possible under 3x 269,964 £1,536,095 scheme 75% of salary Actual outcome 2.9x 260,947 £1,484,788

The above figures (as at vesting in December 2017) include reinvested dividends during the performance period.

Current position on outstanding LTAP awards – not subject to audit The outstanding LTAP awards are subject to a dividend underpin for three years following the award being made. The award may be reduced by an amount proportional to the percentage decrease in dividend in the event of a decline of up to 50%. If the decline exceeds 50%, the

Committee will use its discretion to determine the proportion of the award that shall vest. Governance

Dividend cover must also be maintained in the range 1.5 – 2.5 over the three-year measurement period.

LTAP 2016: The dividend increase over the period following the award is currently 2.3% and the dividend cover is 1.6 times.

LTAP 2017: The dividend increase over the period following the award is currently 0.4% and the dividend cover is 1.6 times.

Total pension entitlements – subject to audit Following the closure of the Dairy Crest Group Pension Fund (a defined benefit scheme) to future accruals, there is no increase in accrued pension during the year other than inflationary increases. The scheme closed to future accrual at 31 March 2010. Mark Allen decided to draw benefits from 31 March 2010 and receives an annual pension.

Mark Allen, Tom Atherton and Adam Braithwaite were members of the defined contribution scheme throughout 2017/18. The Company made contributions of £10,000 for Mark Allen, Tom Atherton and Adam Braithwaite respectively incorporating both 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 for Mark Allen, Tom Atherton and Adam Braithwaite.

Payments for loss of office – subject to audit No payments for loss of office were made in the year under review.

Payments to past Directors – subject to audit During the year Martyn Wilks received £72,000 from the vesting of awards granted to him under the first tranche of his LTAP 2013 amounting to 12,478 shares (£5.755 per share at the date of vesting).

His original award was reduced in accordance with the rules of the LTAP to reflect his service in the vesting period.

Scheme interests awarded during the financial year – subject to audit LTAP 2017 award The award made under the LTAP in 2017 was made on 25 May 2017 and was disclosed in full in the 2017 Directors’ Remuneration report. The award level is determined based on achievements over the prior year against the pre-grant performance scorecard, comprising measures aligned to Dairy Crest’s strategic priorities. Outcomes against the 2017 scorecard are summarised in the second table below and detail on these outcomes, against the targets set and context in which decisions were made, is included thereafter.

The outcome against the LTAP scorecard may fall between 0% and 100%, based on assessment of performance against each measure (as determined by the Committee) and the weighting attributable to each in the table below. This scorecard percentage outcome then determines the proportion of the award that will be granted, in the range of 50% to 90% of salary for Executive Directors. As set out in the approved Policy, in any year, in the event of performance below a certain threshold or where the performance against the scorecard for that year is determined not to be a fair reflection of the overall performance of the business, the Committee may determine that no award will be granted. The maximum opportunity under the LTAP (90% of salary) is lower than the typical long-term incentive level in the market, whilst certainty of payout for participants is higher.

Dairy Crest Annual Report 2017/18 55 Directors’ remuneration report continued

Note that this award is subject to a dividend underpin for the first three years of the vesting period and is settled through nil cost share options.

Percentage vesting Level of award Face value on grant at threshold Director % of salary £000s performance Number of shares End of vesting period

Mark Allen 67.2% 376 N/A 60,550 50% 4 years after the award date 50% 5 years after the award date

Tom Atherton 67.2% 228 N/A 36,762 50% 4 years after the award date 50% 5 years after the award date

Adam Braithwaite 67.2% 171 N/A 27,572 50% 4 years after the award date 50% 5 years after the award date

The number of shares was calculated based on the middle market price on 24 May 2017, which was £6.215.

Determination of 2017 grant: Measure KPI Alignment with strategy Weighting Outcome

Profit Adjusted EBITDA target Delivery of profit is core to the business 30% 0% and supports the progressive dividend policy

Balance Sheet ROCE target whilst maintaining net debt/ Ensuring acceptable return on 20% 0% Efficiency EBITDA in the 1-2 range investment within a sustainable level of gearing

Corporate Activity Delivery of annual cost savings targets Ensuring cost savings are delivered on 15% 15% & Efficiencies an on-going basis Delivery of synergies and return on investment following acquisitions or Ensuring that major acquisitions/ successful divestments (when relevant) divestments deliver against relevant synergy and return targets

Brand Growth Key brand value growth over one and Brand growth is key to longer term 20% 14% three years versus markets in which they business growth operate

Revenue Growth Achieve each year the targeted Innovation is a key driver of productivity 10% 10% through Innovation proportion of revenue from innovation in and growth previous three years

Corporate Range of metrics aligned to the CR Delivering results in a sustainable way 5% 4% Responsibility pledges including improvements in which enhances reputation and

accident incident rates, reduced CO2 stakeholder engagement emissions and improved/maintained BITC score

Total 43%

For Executive Directors this converts to an award of 67.2% of salary

1. Profit Weighting: 30%. Outcome: 0% EBITDA for 2016/17 was below the target threshold due to an extended commissioning period in relation to the demineralised whey and GOS plants at Davidstow.

2. Balance sheet efficiency Weighting: 20%. Outcome: 0% The KPI is targeted ROCE (operating profit/average operating assets) with an additional requirement that gearing should be between 1.0 and 2.0 times. With regard to ROCE, the long-term objective is to maintain this above 12% with individual targets and ranges set each year by reference to budget.

For 2016/17 a stretching vesting target of 15.8% ROCE was set. A ROCE of 15.4% was achieved which was just below the vesting level but above the ROCE outcome in 2015/16. In addition, year-end gearing (net debt: EBITDA) was above the upper end of the target range of between 1.0 and 2.0 times. Given both the ROCE target and the gearing range were not met, no award was made under this element.

3. Corporate activity & efficiencies Weighting: 15%. Outcome: 15% The KPI is targeted full year effect of cost efficiency projects initiated in any year and delivery of synergies and returns on acquisitions. Where there is no acquisition activity, the cost efficiency projects can deliver the full 15% award and this was the case in 2016/17.

In 2016/17 success was achieved in removing costs with corporate costs below budget and procurement savings ahead of budget. Overall there was a reduction in Group administrative expenses of £5.4m.

56 Dairy Crest Annual Report 2017/18 With regard to efficiency projects, considerable progress has been made in defining a revised IT strategy which will deliver cost savings and improved ways of working.

On the basis of this performance it was decided that a 15% payout for this element was merited.

4. Brand growth Weighting: 20%. Outcome: 14% Key brand performance was broadly strong in the year. The Remuneration Committee considered robust quantitative IRI data for all brands in reviewing this element. Clover and Frylight grew share over 12 months as did Country Life spreadable. Cathedral City lost value share but strengthened in the second half of the year. Over a three year timeframe, Cathedral City, Clover and Frylight have all grown value share.

On this basis an award of 14% was agreed.

5. Innovation Weighting: 10%. Outcome: 10% The Group’s target for innovation is that 10% of revenue should be from product innovation over the last three years. In the year ended 31 March 2017 product innovation drove the percentage of key brand revenue from innovation in the preceding three years to 13%. The development of Cathedral City spreadable, launch of cheese snack bars and the continued growth of Clover with no artificial ingredients all supported this result.

The Remuneration Committee decided on this basis an award of 10% should be made. Governance 6. Corporate Responsibility Weighting: 5%. Outcome: 4% Our 2016/17 safety record achieved the best performance yet with zero reportable accidents in the year. Customer complaints generally have been low across our brands, albeit we did see some increase in cheese complaints. With regard to energy usage, this improved and better than target performance was achieved as did carbon emissions which were 13% below last year’s level. No employee survey was conducted during 2016/17, however, considerable effort was put into maintaining employee engagement via enhanced communications including a full employee roadshow to which all employees were invited.

The Remuneration Committee assessed that corporate responsibility performance had generally been better than target, especially in the area of health and safety and a payout of 4% was merited.

Dividend underpin The level of vesting of this award may be reduced to the extent that a dividend underpin over the period April 2017 – March 2020 is not met.

The award may be reduced by an amount proportional to the percentage decrease in dividend in the event of a decline of up to 50%. If the decline exceeds 50%, the Remuneration Committee will use its discretion to determine the proportion of the award that shall vest. In such circumstances not more than 50% of the award will vest.

Dividend cover must be maintained in a specific range over the three-year measurement period. The Committee retains discretion to reduce the vesting of awards as appropriate should dividend cover be outside this range.

Shareholder dilution In accordance with the guidelines set by the Investment Association (‘IA’), the Remuneration Committee can satisfy awards under all its share plans with new issue shares or shares issued from treasury up to a maximum of 10% of its issued share capital in a rolling ten year period to employees under all its share plans. Within this 10% limit, the Company can only issue (as newly issued shares or from treasury) 5% of its issued share capital to satisfy awards under discretionary or executive plans. Currently, awards over shares equalling 8.4% of the issued share capital have been made under share plans during a rolling ten year period, with awards over shares equalling 2.8% under discretionary or executive schemes.

Statement of Director’s shareholdings and share interests – subject to audit Executive Directors are required to build a shareholding in the Company equivalent to 200% of salary and to this end are required to retain 50% of net proceeds from share plans and deferred bonus share awards until that shareholding is achieved. Shareholdings include unvested deferred shares granted to Executive Directors as part payment of bonuses and unvested LTAP awards. Mark Allen and Tom Atherton have satisfied the shareholding requirement. Adam Braithwaite has not met the requirement and will continue to grow his shareholding.

Dairy Crest Annual Report 2017/18 57 Directors’ remuneration report continued

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

Number of shares owned outright Deferred Total (including Vested Unvested Unvested Unvested Unvested Unvested annual interest as connected unexercised LTAP 2013 LTAP 2014 LTAP 2015 LTAP 2016 LTAP 2017 bonus at 31 March Director persons) options i options ii options iii options iv options v options vi options vii SAYE viii 2018 ix

M Allen 13,258 393,871 47,124 96,052 80,615 69,462 62,995 – 3,965 767,342

T Atherton 10,884 39,252 18,208 48,245 46,722 43,735 38,246 – 4,044 249,336

A Braithwaite 6,413 – 7,6 82 18,788 16,041 15,062 28,686 – 3,965 96,637

A Carr-Locke 2,000 – – – – – – – – 2,000

R Macdonald 1,000 – – – – – – – – 1,000

S Alexander 2,250 – – – – – – – – 2,250

S Farr 5,405 – – – – – – – – 5,405

M Mannings 0 – – – – – – – – 0

i Vested but unexercised LTISP 2012, TIA awards (nil cost share options), LTAP 2013 vested options and vested deferred annual bonus options ii Long term Alignment Plan 2013 (nil cost share options): The period for the dividend underpin condition ended on 31 March 2016. 50% of awards vested on 15 August 2017 (see note i above) and 50% will vest on 15 August 2018. Amounts shown include grant and options related to accrued dividends to the date of this report iii Long term Alignment Plan 2014 (nil cost share options): The period for the dividend underpin condition ended on 31 March 2017. 50% of awards will vest on 16 December 2018 and 50% will vest on 16 December 2019. Amounts shown include grant and options related to accrued dividends to the date of this report iv Long term Alignment Plan 2015 (nil cost share options): The period for the dividend underpin condition ended on 31 March 2018. 50% of awards will vest on 26 May 2019 and 50% will vest on 26 May 2020. Amounts shown include grant and options related to accrued dividends to the date of this report v Long term Alignment Plan 2016 (nil cost share options): The period for the dividend underpin condition will end on 31 March 2019. 50% of awards will vest on 3 June 2020 and 50% will vest on 3 June 2021. Amounts shown include grant and options related to accrued dividends to the date of this report vi Long term Alignment Plan 2017 (nil cost share options): The period for the dividend underpin condition will end on 31 March 2020. 50% of awards will vest on 25 May 2021 and 50% will vest on 25 May 2022. Amounts shown include grant and options related to accrued dividends to the date of this report vii Deferred bonus scheme (nil cost share options) viii Save As You Earn Scheme 2016 (cost options). The exercise price for these options is 463 pence per share and the exercise period is 9/2019 – 2/2020. There are no applicable performance conditions Save As You Earn Scheme 2017 (cost options). The exercise price for these options is 445 pence per share and the exercise period is 3/2021 – 8/2021. There are no applicable performance conditions ix unvested SAYE awards are not considered when calculating shareholding requirements

There have been no changes in Directors’ shareholdings between 31 March 2018 and 22 May 2018.

Exercise of share options

Director Number of options exercised Option exercise price Market value at exercise date

M Allen 2,393 £3.76 £14,083

T Atherton 4,787 £3.76 £28,172

7,597 £Nil £44,139 A Braithwaite 2,393 £3.76 £14,083

58 Dairy Crest Annual Report 2017/18 Performance graph and table – not subject to audit The graph below sets out for the nine years ended 31 March 2018 the total shareholder return of Dairy Crest Group plc and of the FTSE 250 index (excluding investment trusts) of which the Company is a constituent member.

Dairy Crest – Total Shareholder Returns for £100 invested 450

400 FTSE 250 (excluding Investment Trusts) 350 Dairy Crest Group plc 300

250

200

150

100 Governance

50 March 09 March 10 March 11 March 12 March 13 March 14 March 15 March 16 March 17 March 18

The table below sets out CEO pay over the same period. CEO pay 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Total remuneration 1,018 888 904 937 1,247 991 1,439 1,338 2,671 (£’000s)

Annual bonus (% max) 94% 54% 50% 52.5% 81.7% 18.8% 45% 18.8% 0%

Long term incentive 0% 0% 0% 0% 23.5% 20.8% 89%* 89%** 77%*** (% max)

Transformational – – – – – – – – 97%**** Incentive Award

* This figure represents the LTAP 2013 award as a percentage of the maximum annual award under this plan. 50% of the award vested on 15 August 2017 and 50% will vest on 15 August 2018 ** This figure represents the LTAP 2014 award (as shown in the single figure table) as a percentage of the maximum annual award under this plan. The vesting period for this award has not yet been completed – 50% will vest on 16 December 2018 and 50% will vest on 16 December 2019 *** This figure represents the LTAP 2015 award (as shown in the single figure table) as a percentage of the maximum annual award under this plan. The vesting period for this award has not yet been completed – 50% will vest on 26 May 2019 and 50% will vest on 26 May 2020 **** The increase in total remuneration for the CEO is as a result of the vesting of the 2014 Transformational Incentive Award. The one-off award vested at 97% in December 2017.

Percentage change in CEO’s remuneration – not subject to audit The table below sets out the percentage change in the CEO’s salary, benefits and bonus between 2016/17 and 2017/18, compared with the percentage change in the average of each of these components of pay for those salaried members of the clerical, administrative, supervisory and management population allocated to Hay bands. This group comprises 43% of the total workforce and has been identified as the most appropriate for this table in view of the comparable nature of employment and incentive arrangements:

Salary Taxable benefits Bonus

2017/18 2016/17 % change 2017/18 2016/17 % change 2017/18 2016/17 % change

CEO (£’000s) 560 545 2.8% 33 33 0% 0 102 -100%

Average pay for wider 49 49 0.4% 7.5 6.8 10.2% 1 1.5 -33% employee population (£’000s)

Relative importance of spend on pay – not subject to audit The table below illustrates the relative importance of spend on pay at Dairy Crest, compared with distributions made to shareholders in 2016/17 and 2017/18:

£m 2017/18 2016/17 % change

Employee remuneration 44.4 41.2 7.8% costs

Dividends 31.7 31.1 1.9%

Dairy Crest Annual Report 2017/18 59 Directors’ remuneration report continued

Statement of implementation of Policy in the following financial year – not subject to audit The Directors’ Remuneration Policy will be implemented for the 2018/19 financial year as follows:

Base salary – £’000s Director 2017 2018

Mark Allen* 560 560

Tom Atherton** 349 400

Adam Braithwaite*** 262 262

* Mark Allen will not receive a salary increase in 2018 ** In January 2018 Tom Atherton received a salary increase of 14.6% to £400,000 as a result of his promotion to Deputy CEO. Tom’s salary will next be reviewed in July 2019. More details are given on page 51 *** Base salary increase for Adam Braithwaite will be not more than the rate awarded to the wider employee population and will be effective from 1 July 2018

Non-executive Directors’ fees – £’000s Role Fee

Non-executive Chairman 155

Non-executive Director (base) 50

Audit Committee Chair +10

Corporate Responsibility Chair +10

Remuneration Committee Chair +10

Senior Independent Director +10

The Board last reviewed Non-executive Director fees, effective from 1 December 2016. No further review is planned for 2018/19.

Bonus measures Maximum opportunity for Executive Directors under the 2018/19 bonus remains at 100% of salary.

Recognising the importance of reducing debt, the weightings under the bonus plan have been retained and the proportion of 2018/19 bonus relating to free cash flow generation will remain at 25%. Performance will therefore be assessed against the following measures: • Profit before tax – 50% of award • Free cash flow – 25% of award • Personal objectives – 25% of award

The targets for the 2018/19 annual bonus measures are considered commercially sensitive because of the information that this provides to the Company’s competitors. The targets and payout against them will be disclosed in the 2018/19 report. Categories in respect of the personal objectives include establishing new revenue streams and acquisition opportunities for Mark Allen, completing system change projects, commercial development of the Functional Ingredients business and managing the debt position for Tom Atherton and brand development and sales growth from existing and new sales channels for Adam Braithwaite.

Malus and clawback provisions will operate in respect of the 2018/19 bonus. The malus provision will apply to the deferred share awards up to vesting. The clawback provision will apply to the cash award for three years from the date of payment. Clawback may be operated in the event of gross misconduct on the part of the employee and/or material misstatement in Company or Group financial statements.

2018 Long Term Incentive Plan The first grant under this new incentive structure, which was approved by shareholders at the 2017 AGM, will be made in 2018. The 2018 LTIP is based 60% on a TSR measure, measured against the FTSE250 (excluding financial services and investment trusts) and 40% against a strategic scorecard of financial and non-financial measures. The Committee will review these measures and weightings every year based on the current strategic priorities of Dairy Crest.

For the 60% TSR element, the threshold for 25% vesting will be performance in line with the median of the peer group, with stretch vesting (100%) for performance in line with the upper quartile of the peer group.

60 Dairy Crest Annual Report 2017/18 The table below summarises the remaining measures, which make up the strategic scorecard:

Threshold Stretch Measure Weighting Operation (25% vesting) (100% vesting)

ROCE 15% Operating profit over average operating assets measured as an 13% 20% average over the three year performance period.

Year-end gearing (Net 10% Net Debt/EBITDA ratio measured in 2020/2021 Debt/EBITDA) This measure will pay out in full if the Net Debt/EBITDA ratio is below 2.0 and will not pay out otherwise.

Innovation 5% Percentage of revenue from product innovation (new products 7.5% 12.5% generated in last 3 years).

Brand 5% Brand growth assessed against the market, based on IRI data. Each of our four key brands (Cathedral City, Clover, Country Life, Frylight) will be assessed independently with equal weighting. Each element will pay out if that brand grows above market over the three year period and will not pay out otherwise.

CSR 5% Assessment against our four CR Pillars (Climate, Consumers, Colleagues, Community) each with an equal weighting.

TOTAL 40% Governance

Sharesave Scheme The sharesave scheme is open to all eligible employees and full time Executive Directors. Employees enter into an approved savings contract over a three year term to make monthly contributions up to an overall maximum of £500 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. Options may not be granted at less than 80% of the market price at the time of grant.

Consideration by the Directors of matters relating to remuneration Members of the Remuneration Committee The Board has appointed a Remuneration Committee of independent Non-executive Directors of the Company. During the year the Committee consisted of: • Richard Macdonald (Chairman) • Andrew Carr-Locke • Sue Farr • Moni Mannings (who joined on 1 December 2017)

Stephen Alexander, in his capacity as Company Chairman, and Mark Allen, Chief Executive, attended 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’s activities during the financial year The 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, www.dairycrest.co.uk

In 2017/18, the full Committee met seven times. Attendance at meetings by members of the Committee is shown on page 33. The Committee discussed, amongst other matters, the following:

Meeting Agenda items discussed

April 2017 Directors’ Remuneration report update

May 2017 Approval of 2016/17 bonus, LTAP outcomes

Approval of 2017/18 bonus rules, 2017/18 bonus targets

Approval of Directors’ Remuneration report

Sharesave scheme review

September 2017 Corporate Governance update

Gender Pay Gap

Transformational Incentive Award – review of performance

Dairy Crest Annual Report 2017/18 61 Directors’ remuneration report continued

Meeting Agenda items discussed

November 2017 LTIP design considerations

Executive Directors’ remuneration

December 2017 Transformational Incentive Award – review of performance

Executive Directors’ remuneration

23 December 2017 Transformational Incentive Award – confirmation of vesting (Sub-committee of the Remuneration Committee)

January 2018 LTIP scorecard proposal

Gender Pay Gap review

Directors’ Remuneration report – initial preparation

March 2018 Review of potential bonus outcome

LTIP scorecard confirmation

Gender Pay Gap review and sign-off

Review draft of Directors’ Remuneration report

Advisers to the Remuneration Committee The Remuneration Committee has appointed PricewaterhouseCoopers LLP (‘PwC’) to provide advice on executive remuneration. PwC has provided such advice historically and was originally appointed through a competitive tendering process.

Work undertaken by PwC for the Committee included updates to the Remuneration Committee on remuneration and governance trends and market practice and providing remuneration benchmarking information for Executive Directors. In this financial year, PwC was paid £81,800. This is based on an agreed fee for business as usual support with additional work charged at hourly rates.

During the year, PwC also provided other consultancy services to the Group, predominantly relating to pensions.

The Remuneration Committee reviews the independence and objectivity of the advice it receives from PwC at a private meeting held in May each year. It is satisfied that PwC is providing objective and robust professional advice. PwC is a member of the Remuneration Consultants Group and has signed up to that group’s Code of Conduct.

The Remuneration Committee also received materials, assistance and advice on remuneration policy from Robert Willock, the Group HR Director of Dairy Crest. The Chief Executive attends all meetings by invitation, but is not present at any discussions relating specifically to his own remuneration.

Statement of voting at General Meeting The table below shows the advisory vote on the 2016/17 remuneration report at the 2017 AGM, and the binding vote on the Remuneration Policy at the 2017 AGM.

Resolution Number of votes cast For Against Withheld

Approval of Directors' 81,377,812 79,123,681 2,254,131 57,911 Remuneration report (2017 AGM) 97.23% 2.77%

Approval of Directors' 80,769,212 80,597,288 171,924 666,512 Remuneration Policy (2017 AGM) 99.79% 0.21%

The Remuneration Committee noted the outcome of voting at the 2017 AGM and remains committed to an open dialogue with investors, with engagement planned through the period ahead of the AGM.

By order of the Board

Richard Macdonald Chairman of the Remuneration Committee 22 May 2018

62 Dairy Crest Annual Report 2017/18 Directors’ report

Dairy Crest Group plc (‘Company’) is the holding company of the In making this statement the Board carried out a robust Dairy Crest Group of Companies (‘Group’). The Directors’ report assessment of the principal risks facing the Group, including those for the year ended 31 March 2018 comprises the Strategic report that would threaten its business model, future performance, found on pages 2 to 29, the details of Directors on pages 30 to 31 solvency or liquidity. The Board considers all of the principal risks, and the Corporate Governance report on pages 30 to 65. The the likelihood of crystallisation, the potential net profit impact and above-mentioned sections are expressly incorporated by reference the mitigating controls. In assessing the impact of a risk on the into this, the Directors’ report. viability of the Group, the Board has considered the potential impact that the crystallisation of a severe but plausible risk may Directors: Details of the Directors of the Company are set out on have on the Group meeting its bank covenants. The assumption pages 30 to 31. has been made that the Group will be able to source an appropriate level of funding before the maturity of the £240 million Going concern: In assessing the going concern for the Group, bank facility in October 2020. the Directors have considered the latest budgets and three year strategic plans, the Group’s borrowings and ability to meet its bank Non-Financial Reporting Statement: The Group’s statement covenants. The likelihood and potential impact of the Group’s containing information necessary to give an understanding of the principal risks, as set out on pages 26 to 29 on its ability to Group’s development, performance and position is contained on continue as a going concern have also been considered. The pages 2 to 29 of the Strategic report. Strategic report sets out details of the Group and Company’s business activities, together with factors likely to affect future Group results: The Group’s consolidated income statement is set development, performance and position on pages 2 to 29. The out on page 72 and shows a profit for the financial year of £149.5 Governance financial review on pages 12 to 15 (which also form part of the million compared with a profit of £38.3 million in 2016/17 which Strategic report) describes the financial position, cash flows, followed a loss of £113.0 million in 2015/16. liquidity position and borrowing facilities. In addition, Notes 31 and 32 to the Accounts include the Group and Company’s objectives, Dividends: The Directors are recommending a final dividend of policies and processes for managing its capital; its financial risk 16.3p (2016/17: 16.3p) per ordinary share which, if approved, will management objectives; details of its financial instruments and be paid to members whose name appears on the register at the hedging activities; and its exposures to credit risk and liquidity risk. close of business on 6 July 2018. Together, the final dividend and As highlighted in Note 31, the Company and Group meet day-to- interim dividend (6.3p per ordinary share paid on 25 January 2018) day working capital requirements through syndicated revolving make total dividends for the year of 22.6p per ordinary share credit facilities and cash to ensure that forecast net borrowings (2016/2017: 22.5p). plus reasonable operating headroom are covered by committed facilities which mature at least 12 months after the year end. At 31 Directors’ interests: Details of the Directors’ interests in the March 2018, effective headroom was £81 million. There were no shares of the Company, including those of their immediate families, breaches of bank covenants in the year ended 31 March 2018 and appear in the Directors’ Remuneration report on page 58. The projected covenant compliance based on the latest strategic plans Company maintains liability insurance for its Directors and officers do not indicate any breaches in the foreseeable future. Having and those of its subsidiaries. The Directors, Company Secretary & reviewed and taken into account the Financial Reporting Council’s General Counsel and other officers of the Company and those of Guidance on Risk Management, Internal Control and Related its subsidiaries are indemnified by the Company to the extent Financial and Business Reporting published in 2014, the Directors permitted by company law. That indemnity provision has been in are satisfied that the Company and the Group have adequate place during the year and remains in force. resources to continue operating for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing Disclosure of information to the Auditor: Each Director the financial statements. confirms that as far as he or she is aware, there is no relevant audit information of which the Company’s external auditor, Deloitte LLP, Viability statement: In accordance with provision C.2.2 of the UK is unaware and that each Director has taken all steps he or she Corporate Governance Code 2016, the Directors have assessed ought to have taken as a Director to make himself or herself aware the prospects of the Group and its viability over a three year of any relevant audit information and to establish that the external period. The Directors have determined that a three year period to auditor is aware of that information. This confirmation is given and 31 March 2021 is an appropriate period over which to provide its should be interpreted in accordance with the provisions of section viability statement. This is the period reviewed by the Board in the 418 of the Companies Act 2006. strategic planning process where the Directors consider that reasonable assumptions can be made around future growth for the Future developments: Future developments are described in the existing business together with new market and investment Strategic report on pages 2 to 29. opportunities. This would be the minimum period over which any new funding agreements for the Group are secured. A robust Political Donations: No political donations or expenditures were financial model of the Group’s financial forecast was built and the made during the year ended 31 March 2018. metrics for the Group’s KPIs and bank covenants were reviewed. Financial instruments: Information relating to financial Taking into account the Group’s current position and potential instruments is on pages 115 to 118. impact of the principal risks documented on pages 26 to 29 of the Annual Report and Accounts, the Directors confirm that they have Post balance sheet events: There are no post balance sheet a reasonable expectation that the Company will be able to events to disclose. continue to operate and meet its liabilities as they fall due over the period to 31 March 2021. Research and development: Relevant information is set out in the Strategic report on pages 10 to 11.

Dairy Crest Annual Report 2017/18 63 DIRECTORS’ REPORT continued

Employees: We work hard to keep employees involved Share schemes: Details of the employee Sharesave Scheme are throughout the business. We have a number of communication set out in Note 25 to the financial statements. The Company has a tools which we use to keep employees informed of the Group’s discretionary employees’ benefit trust, The Dairy Crest Employees’ performance and strategy. These include personal briefings, Share Ownership Plan Trust (‘ESOPT’), funded by gifts to acquire regular meetings, a weekly newsletter and the Group’s intranet. shares for the potential benefit of employees. Details of shares held Consistent with previous years, the Chief Executive and the by the ESOPT at 31 March 2018 are set out on page 108. During Executive Committee have held roadshows and employee lunches the year, shares have been released by the ESOPT in respect of at each site during the year. All employees are invited to attend share schemes for employees. The trustee of the ESOPT has the these forums to receive an update on the business’s performance power to exercise all voting rights in relation to any investment and its priorities and to ask any questions. (including ordinary shares) held within the ESOPT.

The Group’s principles of equal opportunities mean that the The ESOPT has elected to waive dividends taking only 0.01p per training, career development and promotion of disabled persons share. should, as far as possible, be the same as for other employees. Issue of shares: At the AGM on 18 July 2017, shareholders The Group has well-established consultation and negotiating renewed the authority for the Board under the Articles to exercise arrangements with established trade unions. all powers of the Company to allot relevant securities up to an aggregate nominal amount of £11,756,024. Share schemes are a long established and successful part of our total reward package, encouraging and supporting employee share Purchase of own shares: At the AGM on 18 July 2017, ownership. Details of the savings-related share option scheme shareholders granted the Company authority to make market (‘Sharesave Scheme’) are set out in Note 27 to the financial purchases of up to 14,107,230 of its issued ordinary shares of 25 statements on pages 109 to 110. pence each, provided that (i) the minimum price which may be paid for any such ordinary share is 25 pence (exclusive of expenses and Issued Share Capital: The authorised and issued share capital of appropriate taxes) and (ii) the maximum price (exclusive of the Company, together with details of movements in the expenses and appropriate taxes) which may be paid for any such Company’s issued share capital during 2017/18, are shown in Note ordinary share shall be not more than 5% above the average of the 25 to the financial statements on page 108. At the date of this middle market prices for an ordinary share in the Company, as Directors’ report there were 141,415,461 ordinary shares of 25 taken from the London Stock Exchange Daily Official List for the pence each in issue, all of which are fully paid up and quoted on five business days immediately preceding the date of purchase. the London Stock Exchange with an aggregate nominal value of The Company did not exercise this authority during the year and £35,358,865. made no market purchases.

Rights and obligations attaching to shares: The holders of Substantial shareholdings: Information provided to the ordinary shares are entitled to receive the Company’s Report and Company pursuant to the Financial Conduct Authority’s Disclosure Accounts; to attend and speak at General Meetings of the and Transparency Rules is published on a Regulatory Information Company; to appoint proxies and to exercise voting rights. To be Service and on the Company’s website. As at 31 March 2018, the effective, electronic and paper proxy appointments and voting Company has been notified of the following interests of 3% or more instructions must be received at the Company’s registered office, in the Company: or such other place in the United Kingdom specified in the relevant notice of meeting, not later than 48 hours before a General Notified percentage of Meeting. None of the shares carry any special rights with regard to Notified No. of issued share control of the Company. There are no known arrangements under shares capital which financial rights are held by a person other than the holder of Black Rock, Inc. 8,672,520 6.13 the shares and no known agreements on restrictions on share transfers or on voting rights. Shares acquired through company Canaccord Genuity Group Inc. 6,017,660 4.27 share schemes and plans rank pari passu with the shares in issue JP Morgan Chase Bank 7,096,220 5.02 and have no special rights. Paradice Investment Management 7,195,820 5.09 Purchase of shares: The Directors have the authority to Pty Ltd purchase up to 14,107,230 of the Company’s ordinary shares. The authority remains valid until the AGM in 2018. No disclosable changes in interests in the share capital of the Company have been notified to the Company between 1 April 2018 Transfer of shares: Subject to applicable laws and regulations, to 22 May 2018. there are no restrictions on transfer or limitations on the holding of any class of shares and no requirements for prior approval of any Articles of association: Changes to the Articles must be transfers. approved by the shareholders in accordance with applicable legislation. The Articles are available on the Company’s website.

64 Dairy Crest Annual Report 2017/18 Significant agreements – change of control: There are a Branch offices outside the UK: The Company has no branch number of agreements to which the Company or its subsidiaries is offices. a party that take effect, alter or terminate upon a change of control of the Company following a takeover bid. Details of the significant Annual general meeting: The AGM will be held at Eversheds agreements of this kind are as follows: Sutherland (International) LLP, One Wood Street, London, EC2V 7WS on Tuesday 17 July 2018 at 12pm. The Notice of Meeting will Borrowing facilities – Non-compliance with the change of control be issued separately, together with details of the business to be clauses in the Group’s funding arrangements, or failure to reach considered and explanatory notes relating to each of the agreement with the parties on revised terms, would require any resolutions being proposed. acquirer to put in place replacement facilities. Auditor: Last year the Group appointed Deloitte LLP as the Supply agreements – Certain supply agreements contain external auditor and a resolution to appoint Deloitte LLP as the provisions whereby on a change of control of the Group, they may Group’s auditor was passed at the 2017 AGM. A resolution to be terminable. Accordingly, a change of control of the Group could re-appoint Deloitte LLP as the Group’s auditor in 2018 will be put result in the need for the Group to source alternative supply for to shareholders at the forthcoming AGM. certain materials or services. By order of the Board No compensation for loss of office: The Company does not have agreements with any Director or employee that would provide Robin Miller Company Secretary & General Counsel compensation for loss of office or employment resulting from a 22 May 2018 Governance takeover, except that provisions of the Company’s share schemes and plans may cause options and awards granted to employees Dairy Crest Group plc under such schemes and plans to vest on a takeover. Company No: 3162897

Pensions: The Company employs only the Executive Directors. Most employees in the Group are employed by the Company’s main subsidiary, Dairy Crest Limited. Relevant companies within the Group became subject to the automatic enrolment regulations on 1 April 2013. Depending on their grade, effective from 1 April 2013 employees either enter the auto enrolled pension arrangements for the Group which are provided by Zurich or into the Group’s defined contribution pension scheme, also provided by Zurich. The Group’s defined benefit pension fund is closed to future accrual and 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. Its assets are held separately from those of the Group and can only be used in accordance with the rules of the fund.

Greenhouse gas emissions: The Company is required to report annually on the quantity of carbon dioxide equivalent emissions in tonnes emitted as a result of activities for which it is responsible. Details of our emissions during the year ended 31 March 2018 and the actions which the Group has taken to reduce them are set out on page 42 and form part of the Directors’ report disclosures.

Directors’ responsibility statement: The responsibility statement required under DTR 4.1 is set out on page 66.

Information to be disclosed under LR 9.8.4R:

Listing Rule Detail Page reference 9.8.4.R (1) Capitalised interest 88

9.8.4.R (2) Unaudited financial 59-61 information 9.8.4R (4-9) (11) Not applicable (13-14) 9.8.4R (10) Significant agreements 64

9.8.4R (12) (13) Share schemes 64

Dairy Crest Annual Report 2017/18 65 Statement of Directors’ responsibilities

Annual Accounts DTR 4.1 Statement The Directors are responsible for preparing the Annual Report and Each of the Directors confirms that to the best of his or her the Group’s and Company’s financial statements in accordance knowledge: with applicable laws and International Financial Reporting • the Group’s 2017/18 Annual Report and Accounts, taken as a Standards (‘IFRS’) as adopted by the EU. whole, is fair and balanced and understandable, and provides the information necessary to shareholders to assess the Group’s Under company law the Directors must not approve the Group’s position and performance, business model and strategy; and Company’s financial statements unless they are satisfied that • the Group’s and Company’s financial statements which have they give a true and fair view of the state of affairs of the Group and been prepared in accordance with IFRS as adopted by the EU Company and of the profit or loss of the Group and Company for give a true and fair view of the assets, liabilities, financial position that period. In preparing the financial statements the Directors are and profit or loss of the Group and the Company included in the required to: consolidation taken as a whole; and • present fairly the financial position, financial performance and • the Strategic report includes a fair review of the development cash flows of the Group and Company; and performance of the business and the position of the Group • select suitable accounting policies and then apply them and Company, included in the consolidation taken as a whole consistently; together with a description of the principal risks and • present information, including accounting policies, in a manner uncertainties that they face. that provides relevant, reliable, comparable and understandable information; The Directors’ Responsibility Statement has been approved by the • state whether the financial statements have been prepared in Board and is signed on its behalf by accordance with IFRS as adopted by the EU; • state whether the financial statements have been prepared in Mark Allen Chief Executive accordance with applicable UK accounting standards subject to Tom Atherton Deputy Chief Executive & Group Finance Director any material departures disclosed and explained in the financial 22 May 2018 statements; and • make judgements and estimates that are responsible and prudent.

The Directors have responsibility for ensuring that the Group and Company keep accounting records which disclose with reasonable accuracy their financial position and which enable the Directors to ensure that the financial statements comply with relevant legislation. They have a responsibility for taking reasonable steps to safeguard the assets of the Group and of the Company to prevent and detect fraud or other irregularities.

The Directors are responsible for preparing a Strategic report, Directors’ report, the Directors’ Remuneration report and the Corporate Governance report in accordance with the Companies Act 2006 and applicable regulations.

A copy of the financial statements of the Group is placed on our website at www.dairycrest.co.uk. The Directors are 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.

66 Dairy Crest Annual Report 2017/18 Independent auditor’s report to the members of Dairy crest group plc

Report on the audit of the financial statements Key audit The key audit matters that we identified in the current year matters were: Opinion • completeness of promotional accruals; In our opinion: • classification and valuation of exceptional items; and • the financial statements give a true and fair view of the state of the • valuation of the pension curtailment gain and valuation Group’s and of the parent company’s affairs as at 31 March 2018 of the pension scheme liabilities. and of the Group’s profit for the year then ended; Within this report, any new key audit matters are identified • the Group financial statements have been properly prepared in with and any key audit matters which are the same as accordance with International Financial Reporting Standards the prior year (as audited by Ernst & Young LLP) identified (IFRSs) as adopted by the European Union; with . • the parent company financial statements have been properly Materiality The materiality that we used for the Group financial prepared in accordance with IFRSs as adopted by the European statements was £3.0 million which was based upon 5% of Union and as applied in accordance with the provisions of the profit before tax before exceptional items. This basis is Companies Act 2006; and consistent with the approach adopted by the previous • the financial statements have been prepared in accordance with auditors. the requirements of the Companies Act 2006 and, as regards the Scoping We completed full, component audits of Dairy Crest Group financial statements, Article 4 of the IAS Regulation. Limited and MH Foods Limited. We also performed additional procedures relating to the audit of the Annual We have audited the financial statements of Dairy Crest Group plc Report. (the ‘parent company’) and its subsidiaries (the ‘Group’) which The two trading entities represent the principal business comprise: units and account for 100% (2017: 100%) of the Group’s • the consolidated income statement; revenue and 99% (2017: 99%) of the Group’s profit before • the consolidated statement of comprehensive income; tax. • the consolidated and parent company balance sheets; Significant The key audit matters we report are in line with those • the consolidated and parent company statements of changes in changes presented by the predecessor auditor, with the following equity; in our exceptions: • the consolidated and parent company cash flow statements; approach • We have identified the valuation of the pension • the statement of accounting policies; and curtailment gain and the valuation of pension scheme liabilities as a key audit matter; and • the related notes 1 to 35 for the combined Group and parent • We have refined the key audit matter relating to revenue company financial statements. recognition to the completeness of all types of promotional accruals. The financial reporting framework that has been applied in their The rationale for the changes in the key audit matters numbers The preparation is applicable law and IFRSs as adopted by the European identified is described below. Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Conclusions relating to going concern, principal risks and viability statement Basis for opinion Going concern We conducted our audit in accordance with International Standards We have reviewed the directors’ statement on page 63 to the on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities financial statements about whether they considered it appropriate to under those standards are further described in the auditor’s adopt the going concern basis of accounting in preparing them and responsibilities for the audit of the financial statements section of our their identification of any material uncertainties to the Group’s and report. parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial We are independent of the Group and the parent company in statements. accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s We are required to state whether we have anything material to add Ethical Standard as applied to listed public interest entities, and we or draw attention to in relation to that statement required by Listing have fulfilled our other ethical responsibilities in accordance with Rule 9.8.6R(3) and report if the statement is materially inconsistent these requirements. We confirm that the non-audit services with our knowledge obtained in the audit. prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach This is the first year in which we have been appointed as the auditors of Dairy Crest Group plc. We have described our approach to the audit below and highlighted any key differences, both in our approach and identification of key audit matters, when compared to the predecessor auditor’s approach (Ernst & Young LLP).

Dairy Crest Annual Report 2017/18 67 Independent auditor’s report to the members of Dairy crest group plc continued

Principal risks and viability statement Based solely on reading the directors’ statements and considering Completeness of promotional accruals whether they were consistent with the knowledge we obtained in Refer to note 22, page 106 (financial statement disclosures) the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the Group’s and the Key audit Revenue of £456.8 million (2017: £416.6 million) is matter recognised net of promotional rebates and arrangements parent company’s ability to continue as a going concern, we are description with key customers. Agreements are in existence with key required to state whether we have anything material to add or draw customers that result in volume-related discounts, attention to in relation to: promotional and marketing fees and various other • the disclosures on pages 26 to 29 that describe the principal risks discounts that act to reduce revenue and the level of and explain how they are being managed or mitigated; profit recognised on an individual sale. • the directors’ confirmation on page 63 that they have carried out a There is judgement in determining the completeness of robust assessment of the principal risks facing the Group, promotional funding accruals recognised at the year end including those that would threaten its business model, future date and ensuring all arrangements have been captured. performance, solvency or liquidity; or If there were arrangements that were not recorded this • the directors’ explanation on page 63 as to how they have would result in an overstatement of revenue and profit. Additionally, these customer agreements span the assessed the prospects of the Group, over what period they have Group’s year end and are not typically settled for a period done so and why they consider that period to be appropriate, and after the year end date. As a result, the accrual their statement as to whether they have a reasonable expectation recognised requires estimation. that the Group will be able to continue in operation and meet its Due to the level of judgement associated with the liabilities as they fall due over the period of their assessment, completeness of the promotion accruals we have including any related disclosures drawing attention to any determined that there was a potential for fraud through necessary qualifications or assumptions. possible manipulation of this balance.

We are also required to report whether the directors’ statement How the In addressing this key audit matter we performed the scope of following procedures: relating to the prospects of the Group required by Listing Rule our audit • we circulated confirmations to a sample of the Group’s 9.8.6R(3) is materially inconsistent with our knowledge obtained in responded to major customers to confirm the completeness of the audit. the key audit promotions recorded by the Group at the year end matter date; We confirm that we have nothing material to report, add or draw • we obtained a sample of post year end invoices attention to in respect of these matters. received from customers (which are in turn matched against the balance owed to the Group) to confirm that an accrual was recorded at year end by the Group; Key audit matters and Key audit matters are those matters that, in our professional • we analysed accounting transactions that resulted in a judgement, were of most significance in our audit of the financial reduction in revenue to determine whether there were statements of the current period and include the most significant any customers where the Group recorded promotions assessed risks of material misstatement (whether or not due to leading up to the year end but did not have an accrual in place. fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of Key Based on the procedures we performed, we consider the resources in the audit; and directing the efforts of the engagement observations promotional accruals balance to be complete and to team. capture the promotional accruals as at 31 March 2018.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Classification and valuation of exceptional items Refer to page 36 (Audit Committee Report), page 78 (critical The key audit matters we report are in line with those presented in accounting judgements and key sources of estimation uncertainty) the prior year with the exception of the matters related to pension and note 4, page 87 (financial statement disclosures) scheme accounting. This is due to the legal change in the rules of Key audit Included and presented separately in the financial the pension scheme which has led to a curtailment gain of £132.4 matter statements are material credits of £134.5 million (2017: million being recognised coupled with the use of judgement. description £2.2 million) and expenses of £16.5 million (2017: £21.3 Additionally, we have refined the revenue recognition key audit million) relating to exceptional items. The total exceptional matter to focus on the completeness of promotional accruals (as credit presented on the face of the Consolidated Income Statement is £118.0m (2017: expense of £19.1 million). opposed to the valuation) due to the complexities associated with identifying arrangements as described in more detail below. The classification of these items will affect the value of adjusted profit before tax in the income statement, which For each key audit matter we assess the design and implementation is a key measure for stakeholders and Management. This is also a key metric in determining Directors’ remuneration of the key controls in place that act to prevent and detect any and for the purposes of assessing bank covenants. potential material misstatement. Determining which expenses to include and disclose separately requires the exercise of judgement in respect of compliance with the Group’s stated accounting policy. There is also judgement involved in estimating the value of items classified as exceptional.

68 Dairy Crest Annual Report 2017/18 How the In relation to each balance that is classified as a scope of non-recurring item we have performed the following Valuation of the pension curtailment gain and valuation of our audit procedures: pension scheme liabilities responded to • we have critically assessed whether each item meets Refer to page 36 (Audit Committee Report), page 78 (critical the key audit the definition of an exceptional item in line with the accounting judgements and key sources of estimation uncertainty) matter Group’s accounting policy, which defines such items and note 21, page 102 (financial statement disclosures) as those that are material and one-off in nature. We have also considered the year-on-year consistency of Key audit The total value of the defined benefit pension scheme at this presentation; and matter the balance sheet date is a net surplus of £93.9 million • we performed procedures to assess the valuation of description (2017: deficit of £109.6 million). The liabilities specifically the exceptional items identified, through agreeing a are valued at £1,089.0 million (2017: £1,301.3 million). sample of these to supporting evidence. The primary Accounting for a defined benefit pension scheme and the items within the non-recurring items are the gain on the value of liabilities is dependent on significant Group’s pension fund, the demineralised whey powder assumptions, including an assessment of the discount and GOS projects, the Kirkby improvement rate, price inflation and key demographic figures including programme, the restructuring costs arising from life expectancy and mortality rates. A change in any of changes to IT systems and disposal costs in relation to these assumptions could cause a material change in the closed manufacturing sites. Each of these categories value of the liabilities overall and the net pension surplus of income or expense has been subject to specific or deficit on the Group’s balance sheet. procedures. As described in note 21 the Group has agreed with the Additionally, we have reviewed the transparency of the Trustee of the Group’s pension fund to formally change disclosures provided in note 4 as to why each income the measurement of inflation used for pension fund and expense is separately disclosed and to what these increases from RPI to CPI. Due to this change a relate. curtailment gain, net of legal costs, of £130.9 million We have also considered the disclosures provided arose. Due to its material size this change is considered throughout the rest of the Annual Report and in to be a key audit matter. particular: • that the information presented throughout the other These accounting judgements are inherently complex, sections of the Annual Report is consistent with values require a high level of Management estimation, and presented in the Financial Statements; specialist actuarial input. • that, considering the exceptional items, the Annual How the In addressing this key audit matter we performed the report when taken as a whole can be considered to be scope of following procedures: fair, balanced and understandable; and our audit • we assessed the competence and objectivity of the • that Management have appropriately disclosed the responded to qualified actuary engaged by the Group to value the calculation of alternative performance measures, the key audit scheme’s defined benefits pension value and the value

explained why alternative performance measures have numbers The matter of the curtailment gain under IAS 19 “Employee been used and provided comparable statutory benefits”. measures. • we engaged our internal actuarial specialists to assess Key Based on the procedures we performed, we found the the appropriateness of the assumptions used to observations valuation of each exceptional item to be reasonable. account for the defined benefit scheme. This included comparison of key data with market benchmarks and For each exceptional item we performed specific to challenge the methodology used by the scheme procedures to assess the accuracy of the value included actuary. We considered whether each of the key in the consolidated income statement with no material assumptions noted above was reasonable in isolation issues identified. Our considerations in relation to the and collectively in determining the pension liability at pension curtailment gain are detailed in the key audit the balance sheet date. Furthermore, we have matter below. For all other exceptional items we traced considered the sensitivity analysis on the key the value to supporting documentation with no material assumptions performed by the Directors set out in differences. note 21 to the financial statements. We are satisfied that each of the individual items classified • we engaged our internal specialists to assess the as exceptional are in line with the Group’s accounting valuation of the curtailment gain calculated due to the policy and consistent with the treatment in prior years. change in the inflation rate applied. We also reviewed We consider that the disclosure throughout the annual the agreement between the parent company and the report and financial statements is sufficiently transparent Trustees agreeing to the change. as to the nature and quantum of each item classified as Key Based on the procedures performed, we concluded that exceptional. We note that there is a higher level of observations the methodology and assumptions used in valuing in the judgement associated with the classification of the gross pension scheme liabilities and curtailment gain are exceptional costs at Davidstow (£8.5 million) as these considered to be within an acceptable range. relate to production issues associated with the extended commissioning period for demineralized whey and GOS. Further detail of these costs are disclosed in note 4 to the financial statements.

Dairy Crest Annual Report 2017/18 69 Independent auditor’s report to the members of Dairy crest group plc continued

Our application of materiality An overview of the scope of our audit We define materiality as the magnitude of misstatement in the Our Group audit was scoped by obtaining an understanding of the financial statements that makes it probable that the economic Group and its environment, including Group-wide controls, and decisions of a reasonably knowledgeable person would be changed assessing the risks of material misstatement at the Group level. or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We performed component audits on Dairy Crest Limited and MH Foods Limited. At the parent entity level we also tested the Based on our professional judgement, we determined materiality for consolidation process and carried out analytical procedures to the financial statements as a whole as follows: confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the Parent company remaining components not subject to audit or audit of specified Group financial statements financial statements account balances. Materiality £3.0 million (2017: £3.0 million) £2.85 million

Basis for 5% of adjusted profit before tax, The basis of materiality The two trading entities represent the principal business units and determining a consistent approach with the is net assets, taking account for 100% (2017: 100%) of the Group’s revenue and 99% materiality prior year. into account the Group (2017: 99%) of the Group’s profit before tax. They were also selected materiality, the materiality is to provide an appropriate basis for undertaking audit work to approximately 1% of address the risks of material misstatement identified above. net assets. Senior members of the audit team visited the sites in Davidstow, Rationale for Pre-tax profit has been adjusted We determined net the benchmark by non-recurring items which are assets as being the Nuneaton, Kirkby, Frome and Erith during the year. At our visits we applied recognised as exceptional costs most appropriate specifically assessed the key controls at the business unit level in the consolidated income benchmark as this related to the financial statement balances into the Group statement. Further detail of the entity’s purpose is to consolidation, performed counts of material inventory balances and non-recurring items can be hold its investments in fixed asset verification testing. found in note 4 to the financial the subsidiary entities. statements. In addition to these trading entities there are a number of holding A pre-tax profit basis is used as and dormant entities. For the purposes of issuing the Group it represents the key underlying statutory audit opinion these are subject to desktop reviews and measure by which stakeholders enquiries of management to address the residual risk of material and management regard the performance of the business. misstatement. In assessing these entities our materialities range The non-recurring items are not from £0.5 million to £2.5 million. included as they do not represent the underlying trading Our scoping of components is consistent with the approach taken performance of the organisation by the previous auditors for the year ended 31 March 2017. but arise from one-off transactions in the year. In determining our overall approach to the Group audit, we did not require the use of component audit teams and the procedures were Adjusted PBT Group materiality £3m performed by the Group audit team. £61.2m Parent company materiality £2.85m Other information The directors are responsible for the other information. The other Component materiality information comprises the information included in the annual report, range £0.5m to £2.55m other than the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other Audit Committee reporting threshold £0.15m information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. We use performance materiality for the Group at £2.1 million (2017: £2.1 million) which represents 70% of materiality (2017: 70%). We use In connection with our audit of the financial statements, our performance materiality to determine the extent of our testing; it is responsibility is to read the other information and, in doing so, lower than planning materiality to reflect our assessment of the risk consider whether the other information is materially inconsistent with of errors remaining undetected by our sample testing or uncorrected the financial statements or our knowledge obtained in the audit or in the financial statements. otherwise appears to be materially misstated.

Reporting threshold If we identify such material inconsistencies or apparent material We agreed with the Audit Committee that we would report to the misstatements, we are required to determine whether there is a Committee all audit differences in excess of £0.15m (2017: £0.15m) material misstatement in the financial statements or a material for the group, as well as differences below that threshold that, in our misstatement of the other information. If, based on the work we have view, warranted reporting on qualitative grounds. We also report to performed, we conclude that there is a material misstatement of this the Audit Committee on disclosure matters that we identified when other information, we are required to report that fact. assessing the overall presentation of the financial statements.

70 Dairy Crest Annual Report 2017/18 In this context, matters that we are specifically required to report to body, for our audit work, for this report, or for the opinions we have you as uncorrected material misstatements of the other information formed. include where we conclude that: • Fair, balanced and understandable – the statement given by the Report on other legal and regulatory requirements directors that they consider the annual report and financial Opinions on other matters prescribed by the Companies Act statements taken as a whole is fair, balanced and understandable 2006 and provides the information necessary for shareholders to In our opinion the part of the directors’ remuneration report to be assess the Group’s position and performance, business model audited has been properly prepared in accordance with the and strategy, is materially inconsistent with our knowledge Companies Act 2006. obtained in the audit; or • Audit committee reporting – the section describing the work of the In our opinion, based on the work undertaken in the course of the audit committee does not appropriately address matters audit: communicated by us to the Audit Committee; or • the information given in the strategic report and the directors’ • Directors’ statement of compliance with the UK Corporate report for the financial year for which the financial statements are Governance Code – the parts of the directors’ statement required prepared is consistent with the financial statements; and under the Listing Rules relating to the company’s compliance with • the strategic report and the directors’ report have been prepared the UK Corporate Governance Code containing provisions in accordance with applicable legal requirements. specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant In the light of the knowledge and understanding of the Group and provision of the UK Corporate Governance Code. the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the We have nothing to report in respect of these matters. strategic report or the directors’ report.

Responsibilities of directors Matters on which we are required to report by exception As explained more fully in the statement of directors’ responsibilities, Adequacy of explanations received and accounting records the directors are responsible for the preparation of the financial Under the Companies Act 2006 we are required to report to you if, statements and for being satisfied that they give a true and fair view, in our opinion: and for such internal control as the directors determine is necessary • we have not received all the information and explanations we to enable the preparation of financial statements that are free from require for our audit; or material misstatement, whether due to fraud or error. • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been In preparing the financial statements, the directors are responsible received from branches not visited by us; or The numbers The for assessing the Group’s and the parent company’s ability to • the parent company financial statements are not in agreement continue as a going concern, disclosing as applicable, matters with the accounting records and returns. related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group We have nothing to report in respect of these matters. or the parent company or to cease operations, or have no realistic alternative but to do so. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in Auditor’s responsibilities for the audit of the financial our opinion certain disclosures of directors’ remuneration have not statements been made or the part of the directors’ remuneration report to be Our objectives are to obtain reasonable assurance about whether audited is not in agreement with the accounting records and returns. the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an We have nothing to report in respect of these matters. auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit Other matters conducted in accordance with ISAs (UK) will always detect a Auditor tenure material misstatement when it exists. Misstatements can arise from Following the recommendation of the Audit Committee, we were fraud or error and are considered material if, individually or in the appointed by the Group’s shareholders at the Annual General aggregate, they could reasonably be expected to influence the Meeting on 18 July 2017 to audit the financial statements for the year economic decisions of users taken on the basis of these financial ending 31 March 2018 and subsequent financial periods. The period statements. of total uninterrupted engagement including previous renewals and reappointments of the firm is therefore one year. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s Consistency of the audit report with the additional report to website at: www.frc.org.uk/auditorsresponsibilities. This description the audit committee forms part of our auditor’s report. Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK). Use of our report This report is made solely to the company’s members, as a body, in William Smith MA FCA (Senior statutory auditor) accordance with Chapter 3 of Part 16 of the Companies Act 2006. For and on behalf of Deloitte LLP Our audit work has been undertaken so that we might state to the Statutory Auditor company’s members those matters we are required to state to them London, United Kingdom 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 22 May 2018 anyone other than the company and the company’s members as a

Dairy Crest Annual Report 2017/18 71 Consolidated income statement Year ended 31 March 2018

2018 2017 Before Before exceptional Exceptional exceptional Exceptional items items* Total items items* Total Note £m £m £m £m £m £m Revenue 1 456.8 – 456.8 416.6 – 416.6 Operating costs 2,4 (387.8) 118.0 (269.8) (351.7) (19.1) (370.8) Other income – property 3 2.4 – 2.4 3.0 – 3.0 Profit on continuing operations 71.4 118.0 189.4 67.9 (19.1) 48.8 Finance costs 5 (9.5) – (9.5) (7.7) – (7.7) Other finance expense – pensions 21 (0.7) – (0.7) (0.8) – (0.8) Profit before tax from continuing operations 61.2 118.0 179.2 59.4 (19.1) 40.3 Tax (expense)/credit 6 (10.6) (19.1) (29.7) (10.7) 3.5 (7.2) Profit from continuing operations 50.6 98.9 149.5 48.7 (15.6) 33.1 Profit/(loss) from discontinued operations 7,30 – – – (1.8) 7.0 5.2 Profit for the year attributable to equity shareholders 50.6 98.9 149.5 46.9 (8.6) 38.3 * Further detail provided in Note 4

Earnings per share 2018 2017 Basic earnings per share from continuing operations (pence) 8 106.6 23.7 Diluted earnings per share from continuing operations (pence) 8 105.6 23.5 Basic earnings per share (pence) 8 106.6 27.4 Diluted earnings per share (pence) 8 105.6 27.1

Dividends 2018 2017 Proposed final dividend (£m) 9 22.9 22.8 Interim dividend paid (£m) 9 8.8 8.7 Proposed final dividend (pence) 9 16.3 16.3 Interim dividend paid (pence) 9 6.3 6.2

72 Dairy Crest Annual Report 2017/18 Consolidated statement of comprehensive income Year ended 31 March 2018

2018 2017 Note £m £m Profit for the year 149.5 38.3

Other comprehensive income which may be reclassified to profit and loss in subsequent years: Cash flow hedges – reclassification adjustment for losses in income statement 32 (10.2) (4.8) Cash flow hedges – gains recognised in other comprehensive income 11.0 1.6 Tax (charge)/credit relating to components of other comprehensive income 6 (0.5) 0.9 0.3 (2.3) Other comprehensive income not to be reclassified to profit and loss in subsequent years: Remeasurement of defined benefit pension plan 21 61.1 (80.4) Tax (charge)/credit relating to components of other comprehensive income 6 (10.3) 10.7 50.8 (69.7) Other comprehensive gain/(loss) for the year, net of tax 51.1 (72.0) Total comprehensive gain/(loss) for the year, net of tax 200.6 (33.7)

All amounts are attributable to owners of the parent company. The numbers The

Dairy Crest Annual Report 2017/18 73 Consolidated and Parent Company balance sheets At 31 March 2018

Consolidated Parent Company 2018 2017 2018 2017 Note £m £m £m £m Assets Non-current assets Property, plant and equipment 11 185.7 198.6 – – Goodwill 12 86.3 86.3 – – Intangible assets 13 20.5 14.4 – – Investments 14 – – 229.9 229.3 Retirement benefit surplus 21 93.9 – – – Deferred tax asset 6 – 29.6 1.6 1.9 Financial assets – Derivative financial instruments 17 1.4 12.3 1.4 12.3 387.8 341.2 232.9 243.5 Current assets Inventories 15 183.5 154.2 – – Trade and other receivables 16 29.3 33.4 353.1 391.3 Financial assets – Derivative financial instruments 17 1.6 – 1.6 – Cash and short-term deposits 18 22.6 20.9 – 0.1 237.0 208.5 354.7 391.4 Non-current assets held for sale 19 3.4 7.4 – –

Total assets 1 628.2 557.1 587.6 634.9

Equity and Liabilities Non-current liabilities Financial liabilities – Long-term borrowings 20 (275.5) (274.2) (117.1) (146.0) – Derivative financial instruments 20 (1.0) – (1.0) – Retirement benefit obligations 21 – (109.6) – – Deferred tax liability 6 (10.0) – – – Deferred income 23 (2.4) (3.0) – – Provisions 24 (2.0) (2.0) – – (290.9) (388.8) (118.1) (146.0) Current liabilities Trade and other payables 22 (72.6) (79.1) (0.8) (1.2) Financial liabilities – Short-term borrowings 20 (18.3) (12.8) (17.8) (11.9) – Derivative financial instruments 20 – (0.3) – (0.1) Current tax liability 6 (0.3) – – – Deferred income 23 (0.6) (1.5) – – Provisions 24 (1.8) (2.7) – – (93.6) (96.4) (18.6) (13.2) Total liabilities (384.5) (485.2) (136.7) (159.2)

Shareholders' equity Ordinary shares 25 (35.4) (35.3) (35.4) (35.3) Share premium 25 (86.8) (85.6) (86.8) (85.6) Interest in ESOP 26 0.5 0.5 – – Other reserves 26 (48.6) (48.3) 2.9 3.8 Retained earnings (73.4) 96.8 (331.6) (358.6) Total shareholders' equity (243.7) (71.9) (450.9) (475.7) Total equity and liabilities (628.2) (557.1) (587.6) (634.9)

As 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 in the accounts of the Company is £3.6 million (2017: £196.9 million), in the prior year this included a profit on the sale of shares held in Dairy Crest Limited of £194.6 million. The financial statements were approved by the directors on 22 May 2018. Mark Allen Chief Executive Tom Atherton Deputy Chief Executive & Group Finance Director

74 Dairy Crest Annual Report 2017/18 Consolidated statement of changes in equity Year ended 31 March 2018

Attributable to owners of the parent Ordinary Share Interest Other Retained Total shares premium in ESOP reserves* earnings Equity 2018 £m £m £m £m £m £m At 31 March 2017 35.3 85.6 (0.5) 48.3 (96.8) 71.9 Profit for the year – – – – 149.5 149.5 Other comprehensive gain/(loss): Cash flow hedges – – – 0.8 – 0.8 Remeasurement of defined benefit pension plan – – – – 61.1 61.1 Tax on components of other comprehensive income – – – (0.5) (10.3) (10.8) Other comprehensive gain – – – 0.3 50.8 51.1 Total comprehensive gain – – – 0.3 200.3 200.6 Issue of share capital 0.1 1.2 – – – 1.3 Share-based payments – – – – 1.6 1.6 Tax on share-based payments – – – – (0.1) (0.1) Equity dividends – – – – (31.6) (31.6) At 31 March 2018 35.4 86.8 (0.5) 48.6 73.4 243.7

2017 At 31 March 2016 35.2 84.3 (0.5) 50.6 (35.4) 134.2 Profit for the year – – – – 38.3 38.3 Other comprehensive gain/(loss): Cash flow hedges – – – (3.2) – (3.2) Remeasurement of defined benefit pension plan – – – – (80.4) (80.4) Tax on components of other comprehensive income – – – 0.9 10.7 11.6 Other comprehensive loss – – – (2.3) (69.7) (72.0) The numbers The Total comprehensive loss – – – (2.3) (31.4) (33.7) Issue of share capital 0.1 1.3 – – – 1.4 Share-based payments – – – – 1.2 1.2 Tax on share-based payments – – – – (0.1) (0.1) Equity dividends – – – – (31.1) (31.1) At 31 March 2017 35.3 85.6 (0.5) 48.3 (96.8) 71.9

* Further details are provided in Note 26.

Dairy Crest Annual Report 2017/18 75 Parent Company statement of changes in equity Year ended 31 March 2018

Ordinary Share Capital Hedging Other Retained Total shares premium reserve reserve reserve* earnings Equity 2018 £m £m £m £m £m £m £m At 31 March 2017 35.3 85.6 – (4.2) 0.4 358.6 475.7 Profit for the year – – – – – 3.6 3.6 Other comprehensive gain/(loss): Cash flow hedges – – – 0.8 – – 0.8 Tax on components of other comprehensive income – – – (0.5) – – (0.5) Other comprehensive gain – – – 0.3 – – 0.3 Total comprehensive gain – – – 0.3 – 3.6 3.9 Issue of share capital 0.1 1.2 – – – – 1.3 Share-based payments – – – – 0.6 1.0 1.6 Equity dividends – – – – – (31.6) (31.6) At 31 March 2018 35.4 86.8 – (3.9) 1.0 331.6 450.9

2017 At 31 March 2016 35.2 84.3 142.7 (1.9) 16.2 33.1 309.6 Profit for the year – – – – – 196.9 196.9 Other comprehensive gain/(loss): Cash flow hedges – – – (3.2) – – (3.2) Tax on components of other comprehensive income – – – 0.9 – – 0.9 Other comprehensive loss – – – (2.3) – – (2.3) Total comprehensive gain/(loss) – – – (2.3) – 196.9 194.6 Issue of share capital 0.1 1.3 – – – – 1.4 Share-based payments – – – – 0.4 0.8 1.2 Sale of shares held in Dairy Crest Limited – – (142.7) – (16.2) 158.9 – Equity dividends – – – – – (31.1) (31.1) At 31 March 2017 35.3 85.6 – (4.2) 0.4 358.6 475.7

* Other reserve represents the share-based payment credit in respect of amounts capitalised as investments (see Note 14).

76 Dairy Crest Annual Report 2017/18 Consolidated and Parent Company statement of cash flows Year ended 31 March 2018

Consolidated Parent Company 2018 2017 2018 2017 Note £m £m £m £m Cash generated from operations 33 33.7 32.8 – – Interest paid (9.7) (12.2) – – Taxation paid (0.5) – – – Net cash inflow from operating activities 23.5 20.6 – – Cash flow from investing activities Capital expenditure (31.2) (25.6) – – Proceeds from disposal of property, plant and equipment 22.1 42.4 – – (Repayment)/proceeds relating to sale of business net of fees 30 – (28.4) – – Amounts received from/(paid to) subsidiaries – – 42.1 69.9 Net cash (used in)/generated from investing activities (9.1) (11.6) 42.1 69.9 Cash flow from financing activities Repayment of loan notes 34 (12.0) (80.2) (11.9) (80.2) Net drawdown under revolving credit facilities 34 31.0 23.0 – – Dividends paid 9 (31.6) (31.1) (31.6) (31.1) Proceeds from issue of shares (net of issue costs) 25 1.3 1.4 1.3 1.4 Finance lease repayments 34 (1.4) (1.5) – – Net cash used in financing activities (12.7) (88.4) (42.2) (109.9) Net increase/(decrease) in cash and cash equivalents 1.7 (79.4) (0.1) (40.0) Cash and cash equivalents at beginning of year 34 20.9 100.3 0.1 40.1 Cash and cash equivalents at end of year 34 22.6 20.9 – 0.1

Net debt at end of year* 34 (265.7) (249.8) (128.2) (140.1)

* Denotes alternative performance measures as described on pages 123 to 124 of the annual report and accounts. numbers The

Dairy Crest Annual Report 2017/18 77 Accounting policies Year ended 31 March 2018

Basis of preparation (iii) Recognition of deferred tax asset – The Group has recognised The consolidated and Company financial statements have been a deferred tax asset in relation to carried forward trading losses on prepared on a historical cost basis, modified in respect of the the basis that these losses, which have arisen from various revaluation to fair value of financial instruments and assets held by unprofitable operations within the Group and rationalisation initiatives defined benefit pension plans. They are presented in sterling and to promote the profitability of the Group as a whole, will be all values are rounded to the nearest 0.1 million (£ million) except available to offset future taxable profits of the Group. See note 6. where otherwise indicated. (iv) Operating segments – Management has judged that the Group The consolidated financial statements of Dairy Crest Group plc comprises one segment under IFRS 8 ‘Operating Segments’. have been prepared in accordance with IFRS as adopted by the Certain product group information is provided voluntarily to assist European Union (‘EU’). The separate Company financial statements the users of the accounts. See note 1. have been prepared in accordance with IFRS as adopted by the EU and as applied in accordance with the provisions of the Changes in accounting policies Companies Act 2006. The Company has taken advantage of the The following accounting standards and interpretations became exemption provided under section 408 of the Companies Act 2006 effective for the current reporting period: not to publish its individual income statement and related notes. International Accounting Standards (IAS/IFRSs) After making enquiries, the Directors have a reasonable •• IAS 7 ‘Disclosure Initiative’ – Amendments to IAS 7 expectation that the Group and Company have adequate •• IAS 12 ‘Recognition of Deferred Tax Assets for Unrealised Losses’ resources to continue in operational existence for the foreseeable – Amendments to IAS 12 future. The financial statements have therefore continued to be prepared on a going concern basis. See Going Concern section on The application of these standards has had no material impact on page 61 of the Directors’ Report. the net assets, results and disclosures of the Group in the year ended 31 March 2018. Areas of estimation and judgment In reassessing the key sources of estimation and areas of The IASB and IFRIC have issued the following standards and judgment, the Directors have removed sources of estimation in interpretations (with an effective date after the date of these respect of promotional accruals and goodwill impairment and financial statements): areas of judgement relating to profit on the disposal of depots, •• IFRS 15 ‘Revenue from Contracts with Customers’ (effective non-current assets held for sale and the contingent liability in 1 January 2018) respect of potential litigation. The Directors do not consider any •• IFRS 9 ‘Financial Instruments’ (effective 1 January 2018) changes in these sources of estimation or judgment would have a •• IFRIC Interpretation 22 ‘Foreign Currency Transactions and material impact on the Group’s financial statements. Advance Consideration’ •• IFRS 16 ‘Leases’ (effective 1 January 2019) Areas of estimation The key sources of estimation uncertainty that have a significant risk The Directors do not anticipate that the adoption of IFRS 9 of causing material adjustments to the carrying amounts of assets ‘Financial Instruments’, IFRS 15 ‘Revenue from Contracts with and liabilities within the next financial year are as follows: Customers’ and IFRIC Interpretation 22 ‘Foreign Currency and (i) Retirement benefit – The Group recognises and discloses its Advance Consideration’ will have a material impact on the Group’s retirement benefit position in accordance with the measurement financial statements, however further disclosure around the and presentational requirement of IAS 19 ‘Retirement Benefit potential impact of IFRS 15 has been provided. Obligations’. The calculations include a number of key assumptions in respect of discount rate, inflation rates and mortality IFRS 15 ‘Revenue from Contracts with Customers’ will replace IAS assumptions amongst others. Changes in these assumptions can 18 ‘Revenue’ with effect from the accounting period beginning 1 have a significant effect on the value of the retirement benefit April 2018 and Management has reviewed the impact of this obligation. See note 21. standard on the Group’s financial statements.

Areas of judgment Under IFRS 15, revenue will be recognised based on a five step The following items are considered by Management to be key areas model which requires, for each contract with a customer, the of judgment: transaction price to be matched against the performance (i) Classification of exceptional items – The Group classifies items obligation arising under the contract or in the case of more than of a material nature, which result from a restructuring of the business one performance obligation, apportioned over those obligations. or some other event or circumstance as exceptional. These are The transaction price will be the amount of consideration the disclosed separately in the consolidated income statement. Group expects to be entitled to in exchange for transferring the Management considers this to be an area of judgment due to the goods or service to the customer. Depending on the particular assumption made that the items are material in size and one-off in contractual arrangements in place, application of the new standard nature. Further disclosure is provided in note 4 and note 7. and consideration of the judgment around variable consideration could change the amount of revenue recognised on a contract (ii) Contingent liability in respect of Chadwell Heath – The Group and/or its timing. has disclosed a contingent liability in relation to a potential dilapidations liability at Chadwell Heath. Management considers The Directors have considered the impact of the standard against this to be an area of judgement due to the uncertainty around the the Group’s contracts with customers and have concluded that intention of the landlord with respect to the future use of the land IFRS 15 will not materially change the way in which the Group following the cessation of the lease. See note 28. accounts for revenue.

78 Dairy Crest Annual Report 2017/18 IFRS 16 ‘Leases’ will apply to annual reporting periods beginning Foreign currency translation on or after 1 January 2019 and will be applicable to the Group in its The functional and presentational currency of Dairy Crest Group financial statements for the year ending 31 March 2020. plc and its subsidiaries is Sterling (£).

IFRS 16 will remove the distinction between Operating Leases and Transactions in foreign currency are initially recorded in the Finance Leases and will require lessees to report operating leases functional currency rate ruling at the date of the transaction. on the balance sheet, similar to the treatment of finance leases Monetary assets and liabilities denominated in foreign currencies under IAS 17. Lessees will recognise an asset and a liability for are translated into Sterling at the balance sheet date. Exchange each lease and will have to recognise an element of each lease differences on monetary items are generally taken to the income payment as an interest charge. statement. However, foreign currency differences arising from the translation of qualifying cash flow hedges to the extent the hedges The effect of this on the Group’s financial statements will be that the are effective are recognised in other comprehensive income. gross assets and gross liabilities will each increase by an equal and opposite amount on initial recognition. There will also be a timing Property, plant and equipment effect on the income statement, as interest on leases will have to be Property, plant and equipment is stated at cost less accumulated charged in a similar way to that in which interest is charged on a depreciation and any impairment losses. Cost comprises the loan, which will result in more interest being charged in early periods purchase price and any costs directly attributable to bringing the of each lease and less interest being charged in the later periods asset to the location and condition necessary for it to be capable of split between operating costs and finance costs. The Directors are operating in the manner intended by management. Depreciation is still assessing the impact of this standard. calculated to write off the cost (less residual value) of property, plant Basis of consolidation and equipment, excluding freehold land, on a straight-line basis over The Group financial statements consolidate the accounts of Dairy the estimated useful lives of the assets as follows: Crest Group plc (the Company) and its subsidiaries (together Freehold buildings: 25 years referred to as the Group). The financial statements are drawn up to Leasehold land and buildings: 25 years or, if shorter, the 31 March each year using consistent accounting policies. period of the lease Vehicles, plant and equipment: 4 to 20 years Subsidiaries are entities that are directly or indirectly controlled by the Group. Subsidiaries are consolidated from the date on which The carrying value of property, plant and equipment is reviewed for the Group obtains control and continue to be consolidated until the impairment when events or changes in circumstances indicate that date control ceases. All intercompany balances and transactions, the carrying value may not be recoverable. If the carrying value including unrealised profits and losses arising from intra-group exceeds the estimated recoverable value, the asset is written down transactions, have been eliminated in full. to its recoverable amount. The recoverable amount of plant and The numbers The equipment is the greater of the fair value less costs to sell or value a) Acquisitions in use. In assessing value in use, the estimated future cash flows Subsidiaries acquired during the year are consolidated from the are discounted to their present value using a pre-tax discount rate date on which control is transferred to the Group. The separable that reflects current market assessments of the time value of net assets, both tangible and intangible, of the newly acquired money and the risks specific to the asset. For an asset that does subsidiary undertakings are incorporated into the financial not generate largely independent cash flows, the recoverable statements on the basis of the fair value as at the effective date of amount is determined for the cash-generating unit to which the control, if appropriate. Acquisition costs incurred are expensed in asset belongs. Impairment losses are charged to the consolidated the income statement. income statement.

If a business acquisition is achieved in stages, the acquisition date An item of property, plant and equipment is derecognised upon carrying amount of the Group’s previously held interest in the disposal or when no future economic benefits are expected to acquiree is remeasured to fair value at the acquisition date through arise from the continued use of the asset. Any gain or loss arising the consolidated profit and loss account. The fair value on derecognition of the asset is included in the consolidated measurement is determined using the hierarchy principles of IFRS income statement in the year that it is derecognised. 13 ‘Fair Value Measurement’. Borrowing costs b) Discontinued operations Borrowing costs directly attributable to the acquisition, Results of subsidiary undertakings disposed of during the financial construction or production of an asset that necessarily takes a year are included in the financial statements up to the effective date substantial period of time to get ready for its intended use are of disposal. Where a business component representing a separate capitalised as part of the cost of the respective assets. major line of business is disposed of, or classified as held for sale, it is classified as a discontinued operation. The post-tax profit or All other borrowing costs are recognised as an expense in the loss of the discontinued operations is shown as a single amount on period they occur. the face of the income statement, separate from the other results of the Group. The comparative consolidated income statement, Goodwill other comprehensive income and associated notes have been Goodwill arising on an acquisition is carried at cost at acquisition restated as if the operation had been discontinued from the start of date less any accumulated impairment losses. the comparative year. Goodwill on acquisition is initially measured as the cost of the acquisition less the fair value of net identifiable assets acquired and the liabilities assumed in exchange for the business combination. The cost of the acquisition is measured as the consideration

Dairy Crest Annual Report 2017/18 79 Accounting policies continued

transferred (measured at acquisition date fair value), the amount of Financial assets and liabilities any non-controlling interest in the acquiree and in the case of Financial assets and liabilities are recognised at fair value on initial business combinations achieved in stages, the acquisition date fair recognition. value of any previous equity interest in the acquiree. The Group and Company classify financial assets on initial Goodwill is tested for impairment annually or more frequently if recognition within the scope of IAS 39 as: events or changes in circumstances indicate that the carrying value – financial assets at fair value through income statement; may be impaired. – loans and receivables; – held-to-maturity investments; or Any goodwill acquired is allocated to the cash-generating unit or – available-for-sale financial assets, as appropriate. groups of cash-generating units expected to benefit from the combination’s synergies as at the acquisition date. Impairment is The Group and Company classify non-derivative financial liabilities determined by assessing the recoverable amount of the cash- into the following categories: generating unit to which the goodwill relates. Where the – financial liabilities at fair value through profit and loss; or recoverable amount of the cash-generating unit is less than the – other financial liabilities carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash generating unit and part of the The Group holds derivative financial instruments to hedge its operation within that unit is disposed of, the goodwill associated foreign currency exposures. with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of A financial asset is derecognised when the rights to receive cash the operation. Goodwill disposed of in this circumstance is flows from that asset have expired. A financial liability is measured on the basis of the relative values of the operation derecognised when the obligation under the liability is discharged, disposed of and the portion of the cash-generating unit retained. cancelled or expires.

Intangible assets a) Trade and other receivables Intangible assets are stated at cost less accumulated amortisation Trade and other receivables are recognised and carried at original and any recognised impairment losses. All intangible assets invoice amount less an allowance for any uncollectable amounts. recognised by the Group have finite useful economic lives and are An estimate for doubtful debts is made when collection of the full being amortised on a straight line basis. amount is no longer probable. Trade receivable debts are written off when there is no expectation of recovery. Intangible assets acquired as part of an acquisition of a business are recognised at fair value separately from goodwill if the fair value b) Cash and cash equivalents can be measured reliably on initial recognition and the future Cash and cash equivalents comprise cash at bank and in hand expected economic benefits flow to the Group. Acquired intangible and short-term deposits with an original maturity of three months assets comprise the Frylight brand which was considered to have or less. For the purposes of the consolidated cash flow statement, a useful life of 15 years at the date of acquisition. cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdrafts. Intangible assets generated internally comprise software and product development where the future recoverability can c) Interest bearing loans and borrowings reasonably be assured under IAS 38 ‘Intangible Assets’. Product Interest bearing loans and borrowings are initially recognised at the development is amortised over a period of up to ten years fair value net of issue costs associated with the borrowing. After dependent on the type of development. Internally generated initial recognition, interest-bearing loans and borrowings are intangible assets that are not yet available for use are tested for subsequently measured at amortised cost using the effective impairment annually either individually or at the cash-generating interest method. Amortised cost is calculated by taking into unit level or more frequently if events or changes in circumstances account any issue costs and any discount or premium on indicate that the carrying value may be impaired. settlement. Gains and losses are recognised in the Consolidated Income Statement when the liabilities are derecognised. Investments The Company recognises its investments in subsidiaries at cost d) Net debt being the fair value of consideration paid, less provisions for The Group and Company define net debt as interest bearing loans impairment where appropriate. and borrowings and finance leases less cash and cash equivalents. The calculation of net debt excludes the fair value of Research and development derivative financial instruments with the exception of cross Expenditure on research is written off as incurred. Development currency swaps to fix foreign currency debt in Sterling where they expenditure is also written off as incurred unless the future are designated as cash flow hedges. In this case the fixed Sterling recoverability of this expenditure can reasonably be assured as debt, not the underlying foreign currency debt retranslated, is required by IAS 38 ‘Intangible Assets’. included in net debt. It includes any cash or borrowings included within disposal groups classified as held for sale and excludes Inventories unamortised upfront facility fees. Inventories are stated at the lower of cost and net realisable value. Cost includes the purchase price of raw materials (on a first in first e) Derivative financial instruments out basis), direct labour and a proportion of manufacturing The Group and Company use derivative financial instruments such overheads based on normal operating capacity incurred in bringing as forward currency contracts, cross-currency swaps to hedge its each product to its present location and condition. Net realisable risks associated with foreign currency fluctuations. Such derivative value is the estimated selling price in the ordinary course of financial instruments are initially recognised at fair value and business less estimated costs of completion and selling costs. subsequently re-measured to fair value at each balance sheet date.

80 Dairy Crest Annual Report 2017/18 For derivative financial instruments that do not qualify for hedge Provisions are estimates and the actual costs and timings of future accounting, any gains or losses arising from changes in fair value cash flows are dependent on future events. Provisions are are taken directly to the income statement for the year. reviewed regularly by management, with any difference between the amounts previously recognised and current estimate or actual f) Cash flow hedges liability being recognised to the income statement. When a derivative financial instrument is designated as a cash flow hedging instrument at inception of the hedge relationship, the Leased assets effective portion of the changes in fair value of the derivative is Assets acquired under finance leases, which transfer to the Group recognised to other comprehensive income and accumulated in substantially all the risks and benefits incidental to ownership of the the hedging reserve. The ineffective portion is recognised in the leased item, are capitalised at the inception of the lease at fair income statement. value of the leased asset or, if lower, the present value of the minimum lease payments. The net present value of future lease The cumulative amount recognised to other comprehensive rentals is included as a liability on the balance sheet. The interest income is reclassified into the income statement out of other element of lease rentals is charged to the income statement in the comprehensive income in the same period or periods during which year. Leases where the lessor retains substantially all the risks and the hedged forecast cash flows affects the income statement or benefits of ownership of the asset are classified as operating the hedged item affects the income statement, for example when leases. the future sale actually occurs, interest payments are made or when debt matures. Assets held under operating leases are not recognised in the Group’s balance sheet, with the operating lease rentals being If the forecast transaction is no longer expected to occur, the charged to the income statement on a straight-line basis over the hedge no longer meets the criteria for hedge accounting, the lease term. hedge instrument expires or is sold, terminated or exercised, or designated as revoked, the hedge accounting is discontinued Non-current assets held for sale prospectively. If the forecast transaction is no longer to occur, then Non-current assets held for sale comprise closed properties the cumulative amount recognised in other comprehensive income owned by the Group that meet the definition of held for sale assets is reclassified to the income statement. under IFRS 5 ‘Non-current assets held for sale and discontinued operations’. Fair value measurement Fair value is the price that would be received to sell an asset or For a property to be classified as held for sale it must be available paid to transfer a liability in an orderly transaction between market for immediate resale in its present condition and the sale must be participants at the measurement date, regardless of whether that highly probable. The following criteria must be met for the sale to The numbers The price is directly observable or estimated using another valuation be ‘highly probable’: technique. In estimating the fair value of an asset or liability, the •• Management must be committed to a plan to sell the asset; Group takes into account the characteristics of the asset or liability •• An active programme to locate a buyer and complete the plan if market participants would take those characteristics into account must be initiated; when pricing the asset or liability at the measurement date. •• The asset must be actively marketed for sale at a price that is reasonable; All assets and liabilities for which fair value is measured or •• The sale should be expected to qualify for recognition as a disclosed in the financial statements are categorised within the fair completed sale within one year from the date of classification; and value hierarchy, described as follows, based on the lowest level •• Actions required to complete the plan should indicate that it is input that is observable and significant to the fair value unlikely that significant changes to the plan will be made or the measurement as a whole: plan withdrawn. •• Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities; Non-current assets held for sale are measured at the lower of •• Level 2 – Valuation techniques for which the lowest level input that carrying value and fair value less costs to sell. is significant to the fair value measurement is directly or indirectly observable; and Retirement benefit obligations •• Level 3 – Valuation techniques for which the lowest level input that The Group operates two types of pension arrangements, a defined is significant to the fair value measurement is unobservable. benefit scheme and a defined contribution scheme.

For assets and liabilities that are recognised in the financial a) Defined benefit scheme statements on a recurring basis, the Group determines whether The net asset or liability recognised in the balance sheet in respect transfers have occurred between levels in the hierarchy by of the defined benefit pension scheme is the fair value of scheme re-assessing categorisation (based on the lowest level input that is assets less the present value of the defined benefit obligations at significant to the fair value measurement as a whole) at the end of the balance sheet date as adjusted for unrecognised past service each reporting period. cost. Any asset resulting from the calculation is limited to past service cost, plus the present value of available refunds and Provisions reductions in future contributions to the scheme. Where the Group A provision is a liability of uncertain timing or amount that is is considered to have a contractual obligation to fund the scheme recognised when the Group or Company has a present obligation above the accounting value of the liabilities, an onerous obligation (legal or constructive) where, as a result of a past event, it is more is recognised as an unrecoverable notional surplus. The defined likely than not that payment will be required to settle the obligation benefit obligation is calculated annually by independent actuaries and the amount can be estimated. If the effect is material, using the projected unit credit method. Key assumptions made expected future cash flows are discounted using the current when valuing the defined benefit obligation include the discount pre-tax rate that reflects the risks specific to the liability.

Dairy Crest Annual Report 2017/18 81 Accounting policies continued

rate, inflation assumptions, the rate of increase in salaries, and b) Employees’ Share Ownership Plan (‘ESOP’) mortality, amongst others. The shares in the Company held by the Dairy Crest Employees’ Share Ownership Plan Trust to satisfy Long Term Incentive Share Actuarial gains and losses arising from experience adjustments Plan awards are presented as a deduction from equity in arriving at and changes in actuarial assumptions are recognised in full to the shareholders’ equity. Consideration received from the sale of such statement of comprehensive income as they arise. shares is also recognised in equity with no gain or loss recognised in the consolidated income statement. The Company has closed its defined benefit scheme and therefore no current service costs are required to be charged to income Revenue statement. Past service costs are recognised in the income Revenue on the sale of food related products is recognised on statement at the earlier of the date of the plan amendment or delivery. Revenue comprises the invoiced value for the sale of curtailment, and the date that the Group recognises related goods net of value added tax, rebates and discounts and after restructuring costs. eliminating sales within the Group.

Scheme administration costs that are not directly related to Discounts comprise mainly promotional accruals, overriding investment activities are charged to the income statement. discounts and customer terms. Promotional accruals are made in Administration costs that are directly related to investment are respect of customer claims, where a discount is claimed following recognised as part of the re-measurement exercise through the completion of the promotion based on the redemption rate of that Statement of Comprehensive Income. promotion. The accruals are calculated based on the expected in-store redemption rate for the particular promotional mechanic The net interest charge is calculated by applying the discount rate (e.g ‘buy one get one free’ or ‘25% off’) against the delivered to the net defined benefit liability or asset. volume. The redemption rate used considers known historical data on the performance of that mechanic and is adjusted for actual b) Defined contribution scheme performance. An overriding discount is a discount given across all These pension arrangements do not constitute a future obligation sales of a particular product, providing the sales exceed agreed to the Group. Members of these schemes will contribute a volumes. The overriding discounts are calculated as a proportion percentage of their salary into the scheme and the Company will of the level of customer sales in the period. A customer term is pay an additional amount into the scheme. The size of an where the Group has agreed to pay a customer a sum of money individual’s pension on retirement is based on the performance of based on that customer delivering an agreed sales and the asset portfolio and is not linked to salary. Company promotional plan. These terms are generally paid for in arrears, contributions to the scheme are charged to the income statement following delivery of the plan, and are accrued for over the period in the same period as services are rendered by the relevant to which they relate. employee. Revenue for warehousing and distribution services is recognised in Share-based payments the period during which the service is provided. a) Equity-settled performance payments The Group and Company have issued equity instruments for which Dividend income is recognised when the Company’s right to they receive services from employees in consideration for these receive payment is established. equity instruments. All of the awards granted under existing plans are classified as equity-settled awards. The Group and Company Other income recognise a compensation expense that is based on the fair value Other income comprises the profit on disposal of depots as a of the awards measured at grant date using an appropriate pricing result of rationalisation. model. Fair value is not subsequently remeasured unless relevant conditions attaching to the award are modified. Exceptional items Certain items are recorded separately in the income statement as Fair value reflects any market performance conditions and all exceptional. Only items of a material, one-off nature, which result non-vesting conditions. Adjustments are made to the from a restructuring of the business or some other event or compensation expense to reflect actual and expected forfeitures circumstance, are disclosed in this manner in order to give a better due to failure to satisfy service conditions or non-market understanding of the underlying operational performance of the performance conditions. Group. The profits arising on disposal of closed sites, other than closed Dairies depots retained by the Group following disposal of The compensation expense is generally recognised to the income the Dairies operation, are reported within exceptional items. statement on a straight-line basis over the vesting period and a corresponding credit is recognised in equity. Government and other grants Government grants are initially recognised at their fair value where Where an equity-settled award is cancelled it is treated as if it had there is reasonable assurance that the grant will be received and all vested on the date of cancellation, and any cost not yet recognised attaching conditions will be complied with. When the grant relates in the income statement for the award is expensed immediately. to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs Rights granted to employees of subsidiary undertakings over that it is intended to compensate. Where the grant relates to an equity instruments of the Company are treated as an investment in asset, the fair value is credited to a deferred income account and is the Company’s balance sheet. released to the income statement over the expected useful life of the relevant asset in equal annual installments.

82 Dairy Crest Annual Report 2017/18 Income tax Income tax expense comprises current and deferred tax. It is recognised to the income statement except to the extent it relates to items recognised directly to equity or other comprehensive income.

Current 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 in the consolidated financial statements, except as indicated below. Deferred tax is not recognised in respect of: •• Temporary differences arising from the 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 •• 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 they can be utilised. The carrying amount of deferred income tax assets is reviewed at each The numbers The 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.

Dairy Crest Annual Report 2017/18 83 Notes to the financial statements

1 segmental analysis IFRS 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 business is managed centrally by functional teams (Demand, Supply, Procurement and Finance) that have responsibility for the whole of the Group’s product portfolio. Although some discrete financial information is available to provide insight to the management team of the key performance drivers, the product group profit is not part of the CODM’s review. Management has judged that the continuing Group comprises one operating segment under IFRS 8. As such, disclosures required under IFRS 8 for the financial statements are shown on the face of the consolidated income statement and balance sheet. To assist the readers of the financial statements, management considers it appropriate to provide voluntary disclosure on a basis consistent with historical reporting of the cheese and functional ingredients product group and the butters, spreads and oils product group results included within the consolidated income statement. In disclosing the product group profit for the year, certain assumptions have been made when allocating resources which are centralised at a group level. The ‘Other’ product group comprises revenue earned from distributing products for third parties and certain central costs net of recharges to the other product groups. Generally, central costs less external ‘Other’ revenue is recharged back into the product groups such that their result reflects the total cost base of the Group. ‘Other’ operating profit therefore is nil. The results under the historical segmentation basis for the Group included in the financial information are as follows: 2018 2017 Note £m £m External revenue Cheese and Functional Ingredients 277.2 254.8 Butters, Spreads and Oils 174.2 150.7 Other 5.4 11.1 Total product group external revenue – continuing operations 456.8 416.6

Product group profit* Cheese and Functional Ingredients 50.1 42.8 Butters, Spreads and Oils 21.7 25.5 Total product group profit – continuing operations 71.8 68.3 Finance costs 5 (9.5) (7.7) Adjusted profit before tax – continuing operations* 62.3 60.6 Acquired intangible amortisation 2 (0.4) (0.4) Exceptional items 4 118.0 (19.1) Other finance expense – pensions 21 (0.7) (0.8) Group profit before tax – continuing operations 179.2 40.3

2018 2017 £m £m Total assets Cheese and Functional Ingredients 344.3 305.8 Butters, Spreads and Oils 133.2 150.5 Other 150.7 100.8 Total assets 628.2 557.1 * Denotes alternative performance measures as described on pages 123 to 124 of the annual report and accounts. .

84 Dairy Crest Annual Report 2017/18 1 segmental analysis continued Year ended 31 March 2018 2017 Note £m £m Product group depreciation and amortisation (excluding amortisation of acquired intangible assets) Cheese and Functional Ingredients (12.1) (8.6) Butters, Spreads and Oils (4.0) (4.0) Other (2.3) (2.8) Total (18.4) (15.4)

Product group additions to non-current assets Cheese and Functional Ingredients 22.7 21.6 Butters, Spreads and Oils 4.7 6.4 Other 1.9 2.6 Total 29.3 30.6

Product group exceptional items Cheese and Functional Ingredients (7.4) (19.0) Butters, Spreads and Oils (6.2) – Unsegmented 131.6 (0.1) Total exceptional operating costs 4 118.0 (19.1)

Interest income and expense are not included in the measure of product group profit. Group treasury has always been centrally managed and external interest income and expense are not allocated to product groups. Further analysis of the Group interest expense is provided in Note 5.

Tax costs are not included in the measure of product group profit. numbers The Product group assets comprise property, plant and equipment, goodwill, intangible assets, inventories, receivables and cash and cash equivalents. They exclude derivative financial assets and deferred tax assets. Other product group assets comprise certain property, plant and equipment that is not reported in product groups. Product group depreciation and amortisation excludes amortisation of acquired intangible assets of £0.4 million (2017: £0.4 million) as these costs are not charged in the product group result. Product group additions to non-current assets comprise additions to goodwill, intangible assets and property, plant and equipment through capital expenditure and acquisition of businesses.

Geographical information – continuing operations 2018 2017 External revenue attributed on basis of customer location £m £m UK 443.6 404.7 Rest of world 13.2 11.9 Total revenue 456.8 416.6

Non-current assets* based on location UK 389.8 336.3 Rest of world – – Total 389.8 336.3

* Comprises property, plant and equipment, goodwill, intangible assets, investments, deferred tax asset and assets held for sale.

The Group has three customers which individually represent more than 10% of revenue from continuing operations in the year ended 31 March 2018 (2017: three) with each customer accounting for £51.0 million, £54.3 million and £98.3 million (2017: £54.2 million, £56.2 million, and £92.7 million) of revenue from continuing operations being 11.2%, 11.9% and 21.5% (2017: 13.0%, 13.5% and 22.3%).

Dairy Crest Annual Report 2017/18 85 Notes to the financial statements continued

2 operating costs – continuing operations

2018 2017 Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total £m £m £m £m £m £m Cost of sales 337.1 (118.0) 219.1 287.5 19.1 306.6 Distribution costs 22.2 – 22.2 31.6 – 31.6 Administrative expenses 28.5 – 28.5 32.6 – 32.6 387.8 (118.0) 269.8 351.7 19.1 370.8

2018 2017 Profit from continuing operations before exceptional items is stated after (charging)/crediting £m £m Release of grants 1.5 1.6 Depreciation (17.7) (14.9) Amortisation of intangibles – acquired (0.4) (0.4) Amortisation of intangibles – internally generated (0.7) (0.5) Operating lease rentals (7.7) (3.9) Research and development expenditure (2.3) (2.6) Cost of inventories recognised as an expense (337.1) (287.5) Including: movement in inventory provision 0.9 0.9

2018 2017 Remuneration paid to auditors £m £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 0.2 0.4 Taxation services – 0.1 Other non-audit services** – 0.1 0.3 0.7

* £10,000 (2017: £10,000) of this relates to the Company. ** In 2018, other non-audit services paid to Deloitte LLP comprised £44,000 in respect of the interim review

Fees paid to Deloitte LLP for the year ended 31 March 2018 and Ernst & Young LLP for the year ended 31 March 2017 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 Fund. Fees paid by the Fund for audit services are not included in the above table.

3 other income – property Other income of £2.4 million (2017: £3.0 million) relates to the profits from the disposal of closed Dairies depots retained by Dairy Crest.

86 Dairy Crest Annual Report 2017/18 4 exceptional items Exceptional items comprise those items that are material in nature that the Group believes should be separately disclosed to assist in the understanding of the underlying financial performance of the Group. The exceptional items charge to the operating costs of the continuing operations are analysed below. The exceptional items charged in relation to discontinued operations are analysed in Note 7.

2018 2017 Operating costs £m £m Demineralised whey powder and GOS projects (5.6) (19.0) Kirkby improvement programme (5.4) – Restructuring costs resulting from changes to IT systems (2.6) – Gain on the Group's Pension Fund 130.9 – Profit on sale/(disposal costs) in relation to closed manufacturing sites 0.7 (2.3) 118.0 (21.3) Settlement gain in relation to Farmright Limited and Quadra Foods Limited – 2.2 118.0 (19.1) Tax (charge)/relief on exceptional items (19.1) 2.8 Release of deferred tax liability in respect of industrial buildings – 0.7 98.9 (15.6)

Demineralised whey powder and GOS projects During the year ended 31 March 2017, the Group completed an investment in its cheese creamery at Davidstow, Cornwall enabling the Group to manufacture demineralised whey powder, a base ingredient of infant formula, and galacto-oligosaccharides (GOS), widely used in infant formula. In the year ended 31 March 2018, £8.5 million of costs were charged to the income statement offset by £2.9 million received in settlement of project related litigation. Costs were incurred in two areas. £3.8 million relating to commissioning production costs and £4.7 million resulting from the write-down of stock. Demineralised whey and GOS production has stabilised over the course of the year, however the production of GOS to exacting standards was impacted by post-commissioning issues which has led to the write-down and rework of some inventory during the year. Production

volumes of GOS have increased as the year has progressed, which has been necessary to ensure the consistent production of high quality numbers The product. However we have experienced delays in establishing our customer base due to the complexity of product formulation and the customers’ qualification and audit requirements. As we build our customer base in both demineralised whey and GOS, we have offered pricing incentives to establish new customers. This has been reflected in the net realisable value of the inventory held at the year end. This level of exceptional spend was higher than anticipated at the start of the year, albeit significantly below the £19.0 million incurred in the year ended 31 March 2017. We do not expect further exceptional items in 2018/19. The tax credit relating to this exceptional charge was £0.9 million (2017: £3.1 million).

Kirkby improvement programme In April 2017, the Group commenced a restructuring project to improve the flexibility and efficiency of the Butters and Spreads manufacturing facility in Kirkby, Liverpool. In a challenging UK Butters and Spreads market, it is important that the Group’s facility is as efficient as it can be. In the year ended 31 March 2018, costs of £5.4 million were incurred, as a result of headcount restructuring and project management at the site as well as some project consultancy costs. The tax credit in respect of this charge is £0.9 million. Management considers the costs to be exceptional due to the materiality of the costs and one-off nature of the project and expects further costs of between £1.0 million and £2.0 million in the year ending 31 March 2019. In the medium term, the costs of restructuring should be partly offset by the proceeds from the sale of surplus land on the site. Any future profits resulting from the sale of land will also be treated as an exceptional item.

Restructuring costs resulting from changes to IT systems In 2016, the Group undertook a project to replace its manufacturing, purchasing and financial systems. The implementation of the new systems began in November 2017 and will be phased gradually throughout 2018 and 2019. As a result of this, during the year ended 31 March 2018, the Group impaired intangible assets of £2.5 million associated with the old systems. As the project continues, costs that relate to the restructuring of the departments required to support the new systems will be incurred and charged to the project. £0.1 million of restructuring costs have been incurred in the year ended 31 March 2018. The tax credit in respect of this charge was £0.5 million. Management considers these costs to be exceptional due to the materiality of the costs and the one-off nature of the project to which they relate and expects further costs to be incurred in respect of this project in the year ending 31 March 2019.

Gain on the Group’s Pension Fund On 31 August 2017, the Group and the Trustee of the Group’s Pension Fund (the Fund) finalised the 31 March 2016 funding valuation. As part of the overall package of funding, the Group and the Trustee formally agreed to change the measurement of inflation used for Fund pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI). CPI will therefore apply for Fund pension increases from 25 March 2018 onwards. This has been factored into the IAS19 valuation of the retirement benefit obligation as at 31 March 2018 resulting in an exceptional gain, net of costs, of £130.9 million. The tax charge in respect of this gain was £(22.1) million. Management considers this gain to be exceptional due to the materiality and one-off nature of the gain.

Dairy Crest Annual Report 2017/18 87 Notes to the financial statements continued

4 exceptional items continued Profit on sale/(disposal costs) in relation to closed manufacturing sites In the year ended 31 March 2018, the Group disposed of a closed manufacturing facility in Fenstanton, Cambridgshire resulting in a profit on disposal of £1.0 million. In addition, the Group has impaired two leasehold properties for which management has determined there to be no future economic benefit, resulting in an impairment of £0.3 million. The net gain has been treated as an exceptional item consistent with the historical closure costs of manufacturing sites which were considered to be exceptional due to the materiality and one-off nature of the costs. The tax in respect of this gain was £nil. In the prior year, the Group incurred costs of £2.3 million relating to the disposal of closed manufacturing sites that were determined as held for sale as at 31 March 2017. The tax credit in relation to these costs was £0.1 million.

Prior Year

Settlement gain in relation to Farmright Limited and Quadra Foods Limited On 9 May 2016, the Group paid £1.0 million in full and final settlement of claims arising out of the debt originally owed to Farmright Limited. Claims between the Group, Farmright Limited and Quadra Foods Limited (and any assignees of the claims) are now resolved. Following settlement, £2.1 million plus a provision for professional fees of £0.1 million which was no longer required, were released. Management considered this credit to be exceptional due to it being one-off in nature and in relation to the debt of Quadra Foods Limited, for which £4.3 million was provided for under an exceptional impairment provision in the year ended 31 March 2012. The tax charge in relation to this release was £0.4 million.

5 finance costs and other finance income

2018 2017 Finance costs £m £m Bank loans and overdrafts (at amortised cost) (9.4) (7.6) Finance charges on finance leases (0.1) (0.1) Total net finance costs – continuing operations (9.5) (7.7) Interest payable on bank loans and overdrafts is stated after capitalising £0.3 million (2017: £3.1 million) of interest on expenditure on capital projects at a rate of 4.0% (2017: 4.0%). The tax impact of the capitalised interest was £0.1 million (2017: £0.6 million).

6 tax expense Continuing operations The major components of income tax expense for continuing operations for the years ended 31 March 2018 and 2017 are:

2018 2017 Consolidated income statement £m £m Current income tax 1.0 –

Deferred income tax Origination and reversal of temporary differences 32.4 8.5 Effect of change in tax rate (2.1) (0.5) Adjustment in respect of previous years – deferred tax (1.6) (0.8) 29.7 7.2

Analysed: Before exceptional items 10.6 10.7 Exceptional items 19.1 (3.5) 29.7 7.2

Reconciliation between the tax charge and the profit before tax multiplied by the statutory rate of corporation tax in the UK:

2018 2017 £m £m Profit before tax 179.2 40.3

Tax at UK statutory corporation tax rate of 19% (2017: 20%) 34.0 8.1 Adjustments in respect of previous years (1.6) (0.8) Adjustment for change in UK corporation tax rate* (2.1) (0.5) Non-deductible expenses 0.8 1.2 Profits offset by available tax relief (1.4) (0.8) 29.7 7.2

The effective pre-exceptional rate of tax on the Group’s profit before tax from continuing operations is 17.3% (2017: 18.0%).

88 Dairy Crest Annual Report 2017/18 6 tax expense continued The total Group effective tax rate is below the headline rate of UK corporation tax at 16.6% (2017: 17.9%) the reasons for which are explained in the table above. Further reasons include the availability of capital losses for which no deferred tax asset has been recognised against profits of £3.4 million on the disposal of properties and £21.8 million of the Group’s revenues falling within the patent box regime. We expect these factors to continue to keep the effective tax rate below the headline rate of UK corporation tax next year.

* A further reduction in the UK Corporation tax rate was enacted in September 2016, bringing the rate down to 17% 1 from April 2020. Accordingly, deferred tax has been provided on all temporary differences at the rate in force when they are anticipated to reverse.

Discontinued Operations The total income tax credit in respect of discontinued operations for the year ended 31 March 2018 was £nil (2017: £9.8 million). Tax relief on exceptional costs incurred by discontinued operations in the year ended 31 March 2018 was £nil (2017: £5.7 million). In the prior year a £3.8 million tax credit was recognised in respect of the disposal of St Hubert SAS. Tax attributable to discontinued operations is disclosed in Note 7.

2018 2017 Tax charge/(credit) relating to components of consolidated other comprehensive income £m £m Deferred income tax related to items charged to other comprehensive income Pension deferred tax movement taken directly to reserves 10.3 (10.7) Valuation of financial instruments 0.5 (0.9) Tax charge/(credit) 10.8 (11.6)

Tax on items recognised directly to equity Deferred tax of £0.1 million relating to share-based payments was charged directly to equity in the year ended 31 March 2018 (2017: £0.1 million). Deferred income tax Deferred income tax at 31 March 2018 and 2017 relates to the following:

2018 2017 Deferred tax liability £m £m Accelerated depreciation for tax purposes (2.0) – Goodwill and intangible assets (8.2) (7.8)

Pensions (15.9) – numbers The (26.1) (7.8)

Deferred tax asset Accelerated depreciation for tax purposes – 1.1 Government grants 0.6 0.9 Share – based payments 1.2 1.0 Pensions – 18.6 Financial instruments valuation 0.7 1.2 Trading losses 13.2 14.0 Other 0.4 0.6 16.1 37.4

Net deferred tax (liability)/asset (10.0) 29.6

The recognition of the deferred tax asset relating to trading losses is based on the expectation that the business will continue to be profitable going forward. The Company has a deferred tax asset of £1.6 million at 31 March 2018 (2017: £1.9 million). This relates to temporary differences in respect of financial instruments valuations and share-based payments.

Dairy Crest Annual Report 2017/18 89 Notes to the financial statements continued

6 tax expense continued The movement in net deferred tax asset shown below:

Deferred tax asset/(liability) Goodwill and Accelerated Other intangible tax temporary assets Pensions depreciation differences Total £m £m £m £m £m Balances at 31 March 2017 (7.8) 18.6 1.1 17.7 29.6 Charge to income statement: continuing operations (0.4) (24.2) (3.1) (1.0) (28.7) Credit to other comprehensive income – (10.3) – (0.5) (10.8) Charge taken directly to reserves – – – (0.1) (0.1) Balances at 31 March 2018 (8.2) (15.9) (2.0) 16.1 (10.0) Balances at 31 March 2016 (7.9) 12.5 (4.5) 19.2 19.3 (Charge)/credit to income statement: continuing operations 0.1 (4.6) 5.6 (8.3) (7.2) Credit to income statement: discontinued operations – – – 6.0 6.0 Credit to other comprehensive income – 10.7 – 0.9 11.6 Charge taken directly to reserves – – – (0.1) (0.1) Balances at 31 March 2017 (7.8) 18.6 1.1 17.7 29.6

The Group has capital losses which arose in the UK of £115.3 million (2017: £121.2 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 £28.9 million (2017: £22.6 million) for which rollover relief claims have been or are intended to be made.

7 Discontinued operations On 26 December 2015, the Group completed the disposal of its Dairies operation to Muller UK & Ireland Group LLP. The Dairies operation has been classified as a discontinued operation since the year of disposal. The results of the Dairies operation which have been included in the consolidated income statement within discontinued operations can be analysed as follows:

2018 2017 £m £m Revenue – – Operating costs – (2.1) Other income – property – – Operating loss before exceptional operating items and tax attributable to discontinued operations – (2.1)

Exceptional operating items – – Operating loss before tax attributable to discontinued operations – (2.1) Attributable tax – 0.8 Tax credit in relation to the disposal of St Hubert – 3.8 Profit/(loss) after tax from discontinued operations – 2.5 Loss on disposal – (2.5) Attributable tax on disposal – 5.2 Profit/(loss) for the period from discontinued operations – 5.2

Earnings per share from discontinued operations Basic (pence) n/a 3.7 Diluted (pence) n/a 3.7

The operating costs of £2.1 million in 2017 comprised £1.6 million relating to certain costs in respect of the Dairies operation that had not been accrued for at the point of sale and as such were the liability of the Group in line with the sale and purchase agreement with Muller UK & Ireland Group LLP. A further £0.5 million was charged in respect of the Group’s investment in HEICO Limited which was fully impaired in the period. The investment related to the Dairies operation and as such the impairment was recognised within discontinued operations.

90 Dairy Crest Annual Report 2017/18 7 Discontinued operations continued

2018 2017 a. Exceptional items £m £m Exceptional operating items after attributable tax – 4.3 Profit/(loss) on disposal after attributable tax (Note 30) – 2.7 Exceptional items after tax – 7.0

2018 2017 Exceptional operating costs £m £m Rationalisation of operating sites – – Costs associated with the separation and proposed sale of the Dairies operation – – Exceptional operating costs – discontinued operations – – Tax relief on exceptional items – 0.5 Tax credit in relation to the disposal of St Hubert – 3.8 – 4.3

Tax relief on exceptional items In 2016 the Group incurred £8.9 million of separation costs such as one-off systems costs and professional fees. A tax credit of £0.5 million was recognised in 2017. Tax credit in relation to the disposal of St Hubert A tax provision of £3.8 million was created when St Hubert SAS was disposed of in August 2012. In 2017, a tax credit was recognised in respect of this because the period during which the French authorities can raise tax assessments had expired. This was recognised within discontinued operations consistent with the results of St Hubert SAS following disposal. b. Net cash flows attributable to discontinued operations Net cash flows attributable to the Dairies operation in the period and comparative period are as follows:

2018 2017 £m £m

Cash flow from operating activities – (2.1) numbers The Cash used in investing activities – – Net cash flows attributable to discontinued operations – (2.1)

8 earnings per share The basic earnings per share (EPS) measures for the year have been calculated by dividing the profit attributable to equity shareholders from the relevant operations (continuing, discontinued and total Group) by the weighted average number of ordinary shares in issue during the period, excluding those held by the Dairy Crest Employees’ Share Ownership Plan Trust which are held as treasury shares and treated as cancelled. The weighted average number of shares used in the calculation of basic EPS is detailed below along with the diluted weighted average number of ordinary shares used for the calculation of diluted EPS. The diluted weighted average number of ordinary shares reflects the dilutive impact of share options exercisable under the Group’s share option schemes. Note that in the circumstances where there is a basic loss per share from continuing operations, share options are anti-dilutive and therefore are not included in the calculation of any other EPS measures.

Dairy Crest Annual Report 2017/18 91 Notes to the financial statements continued

8 earnings per share continued

Year ended 31 March 2018 Year ended 31 March 2017 Weighted Weighted average average number of Per share number of Per share Earnings shares amount Earnings shares amount £m million pence £m million pence Basic EPS from continuing operations 149.5 140.2 106.6 33.1 139.8 23.7 Effect of dilutive securities: Share options – 1.3 (1.0) – 1.3 (0.2) Diluted EPS from continuing operations 149.5 141.5 105.6 33.1 141.1 23.5

Adjusted EPS from continuing operations* Profit from continuing operations 149.5 140.2 106.6 33.1 139.8 23.7 Exceptional items (net of tax) (98.9) – (70.5) 15.6 – 11.2 Amortisation of acquired intangible assets (net of tax) 0.3 – 0.2 0.3 – 0.2 Pension interest expense (net of tax) 0.6 – 0.4 0.7 – 0.5 Adjusted basic EPS from continuing operations 51.5 140.2 36.7 49.7 139.8 35.6 Effect of dilutive securities: Share options – 1.3 (0.3) – 1.3 (0.4) Adjusted diluted EPS from continuing operations 51.5 141.5 36.4 49.7 141.1 35.2

Basic earnings per share from discontinued operations – 140.2 – 5.2 139.8 3.7 Effect of dilutive securities: Share options – 1.3 – – 1.3 – Diluted earnings per share from discontinued operations – 141.5 – 5.2 141.1 3.7

Basic earnings per share for the year 149.5 140.2 106.6 38.3 139.8 27.4 Effect of dilutive securities: Share options – 1.3 (1.0) – 1.3 (0.3) Diluted earnings per share for the year 149.5 141.5 105.6 38.3 141.1 27.1

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of signing of these financialstatements.

* Denotes an alternative performance measure as described on pages 123 to 124 of the annual report and accounts.

9 Dividends paid and proposed

2018 2017 Declared and paid during the year £m £m Equity dividends on ordinary shares: Final dividend for 2017: 16.3 pence (2016: 16.0 pence) 22.8 22.4 Interim dividend for 2018: 6.3 pence (2017: 6.2 pence) 8.8 8.7 31.6 31.1

Proposed for approval at AGM (not recognised as a liability at 31 March) Equity dividends on ordinary shares: Final dividend for 2018: 16.3 pence (2017: 16.3 pence) 22.9 22.8

92 Dairy Crest Annual Report 2017/18 10 Remuneration of employees and key management personnel

2018 2017 Number of employees (continuing operations) – Group number number Average number of employees: Production 673 668 Sales, distribution and administration 424 455 Total employees 1,097 1,123

Remuneration of employees, including key management personnel

2018 2017 Continuing operations £m £m Wages and salaries 44.4 41.2 Social security costs 5.7 4.9 Equity settled share-based payments expense (Note 27) 1.6 1.2 Pension costs (Note 21) 2.0 2.0 53.7 49.3

The above costs include amounts paid to the Company’s Executive and Non-executive Directors. Aggregate directors emoluments Key management is represented by the Company’s Executive and Non-executive Directors.

2018 2017 Directors £000 £000 Salaries and benefits 1,501 1,371 Bonuses – 194 Fees and benefits to Non-executive Directors 362 308 Emoluments 1,863 1,873 Employer payments to defined contribution pension scheme 7 2 numbers The

The above figures represent amounts paid to key management personnel of the Company, which comprises three Executive Directors and five Non-Executive Directors. The employer payments to the defined contribution pension scheme are in respect of two Executive Directors. The Executive Directors did exercise share options during the year. Aggregate gains made by the Directors on the exercise of share options in 2018 were £64,482 (2017:£nil). The amount of the gain relating to highest paid director was £5,085 (2017: £nil).

2018 2017 Highest paid director £000 £000 Salary and benefits 722 703 Bonus – 102 Emoluments 722 805

Further information relating to Directors’ remuneration for the year ended 31 March 2018 is provided in the Directors’ Remuneration Report on pages 43 to 62.

Dairy Crest Annual Report 2017/18 93 Notes to the financial statements continued

11 Property, plant and equipment

Vehicles, Assets in Land and plant and the course of buildings equipment construction Total Consolidated 2018 £m £m £m £m Cost At 1 April 2017 75.0 252.9 13.4 341.3 Additions 1.8 13.5 4.8 20.1 Disposals – (23.2) – (23.2) Transfers and reclassifications 21.9 (11.9) (10.0) – At 31 March 2018 98.7 231.3 8.2 338.2 Accumulated depreciation At 1 April 2017 25.6 117.1 – 142.7 Charge for the year – continuing 3.7 14.7 – 18.4 Disposals – (8.6) – (8.6) At 31 March 2018 29.3 123.2 – 152.5 Net book amount at 31 March 2018 69.4 108.1 8.2 185.7

Consolidated 2017 Cost At 1 April 2016 82.0 197.9 96.2 376.1 Additions 4.9 9.3 12.2 26.4 Disposals (1.3) (44.8) – (46.1) Transfers and reclassifications 4.0 91.0 (95.0) – Transfer to non-current assets held for sale (14.6) (0.5) – (15.1) At 31 March 2017 75.0 252.9 13.4 341.3 Accumulated depreciation At 1 April 2016 30.3 111.9 – 142.2 Charge for the year – continuing 2.6 12.3 – 14.9 Disposals – (6.7) – (6.7) Transfer to non-current assets held for sale (7.3) (0.4) – (7.7) At 31 March 2017 25.6 117.1 – 142.7 Net book amount at 31 March 2017 49.4 135.8 13.4 198.6

2018 During the year, the Group disposed of £14.7 million of plant and equipment under a sale and leaseback agreement with Lombard Business Leasing Limited. The sale and leaseback was for certain plant and equipment relating to the butter packing facility at Kirkby (see Note 28). 2017 On 31 March 2017, £7.3 million of land and buildings and £0.1 million of plant and equipment was transferred to non-current assets held for sale (see Note 19). During the year, the Group disposed of £37.9 million of plant and equipment under two sale and leaseback agreements with Lombard Business Leasing Limited. The sale and leaseback was for certain plant and equipment relating to the Demineralised Whey and GOS facility at Davidstow (see Note 28). 2018 2017 Capitalised leases included in vehicles, plant and equipment comprise: £m £m Cost 28.0 28.0 Accumulated depreciation (24.5) (21.7) Net book amount 3.5 6.3

94 Dairy Crest Annual Report 2017/18 12 Goodwill

£m Cost At 31 March 2016 86.9 At 31 March 2017 and 31 March 2018 86.9

Accumulated impairment At 31 March 2016 (0.6) At 31 March 2017 and 31 March 2018 (0.6)

Net book amount at 31 March 2017 and 31 March 2018 86.3

Impairment testing of goodwill Acquired goodwill has been allocated for impairment testing purposes to three groups of cash-generating units (‘CGUs’): Butters and Spreads, MH Foods, and Cheese and Functional Ingredients. Goodwill recognised on the acquisition of Promovita Ingredients Limited is included in the Cheese and Functional Ingredients CGU as the business is directly linked to the Cheese and Functional Ingredients product group. 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. The discount rate applied to the projections was 8.4% for Butters and Spreads, MH Foods, and Cheese and Functional Ingredients (2017: 6.5%). The growth rate used to extrapolate cash flows beyond the three-year period for Butters and Spreads, MH Foods and Cheese and Functional Ingredients is nil (2017: nil). The carrying amount of goodwill allocated to groups of CGUs at 31 March 2018 is: MH Foods £6.7 million (2017: £6.7 million)

Butters and Spreads £65.5 million (2017: £65.5 million) numbers The Cheese and Functional Ingredients £14.1 million (2017: £14.1 million)

Key assumptions on which management has based its cash flow projections 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 – Discount 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. 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. 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. 2018 and 2017 Sensitivity to changes in assumptions With regard to the assessment of value in use of the Butters and Spreads, MH Foods and Cheese and Functional Ingredients 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.

Dairy Crest Annual Report 2017/18 95 Notes to the financial statements continued

13 intangible assets

Assets in the course of Internally Acquired construction generated intangibles Total £m £m £m £m Cost At 31 March 2016 3.5 5.4 8.7 17.6 Additions 4.2 – – 4.2 Disposals – (3.5) – (3.5) Transfers and reclassifications (3.5) 6.1 (2.6) – At 31 March 2017 4.2 8.0 6.1 18.3 Additions 9.2 – – 9.2 Disposals – – – – Transfers and reclassifications – – – – At 31 March 2018 13.4 8.0 6.1 27.5

Accumulated amortisation At 31 March 2016 – 2.2 4.3 6.5 Amortisation for the year – continuing – 0.5 0.4 0.9 Disposals – (3.5) – (3.5) Transfers and reclassifications – 2.3 (2.3) – At 31 March 2017 – 1.5 2.4 3.9 Amortisation for the year – continuing – 2.7 0.4 3.1 Disposals – – – – Transfers and reclassifications – – – – At 31 March 2018 – 4.2 2.8 7.0 Net book amount at 31 March 2018 13.4 3.8 3.3 20.5 Net book amount at 31 March 2017 4.2 6.5 3.7 14.4

In the year ending 31 March 2018, additions to assets in the course of construction of £9.2 million (2017: £4.2 million) comprised third party system support costs relating to a new enterprise planning system of £8.7 million (2017: £3.7 million) and product development costs of £0.5 million (2017: £0.5 million). Internally generated intangible assets comprise software development and implementation costs across manufacturing sites and head office and product development where the future recoverability can be reasonably assured under IAS 38 ‘Intangible Assets’. Acquired intangibles comprise 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 Limited) in June 2011. A useful life of 15 years has been assumed for this brand, with eight years remaining. The carrying value of the Frylight brand at 31 March 2018 is £3.3 million (2017: £3.7 million).

14 Investments Consolidated In the prior year a charge of £0.5 million was incurred following an impairment of the investment in HEICO Limited. This investment related to the Dairies operation and the charge was therefore recognised within discontinued operations. Company Share grants Shares in awarded in subsidiary subsidiaries undertakings Total £m £m £m Cost At 1 April 2016 16.2 468.1 484.3 Share-based payment charge in subsidiary companies 0.4 – 0.4 Disposal of shares (16.2) (239.2) (255.4) At 31 March 2017 0.4 228.9 229.3 Share-based payment charge in subsidiary companies 0.6 – 0.6 Disposal of shares – – – At 31 March 2018 1.0 228.9 229.9

96 Dairy Crest Annual Report 2017/18 14 investments continued Shares in subsidiary undertakings comprise an investment in Dairy Crest UK Limited of £228.9 million. In the prior year the shares held in Dairy Crest Limited of £255.4 million (including £16.2 million of share grants awarded in subsidiaries) were sold to Dairy Crest UK Limited for a consideration of £450.0 million. Share grants awarded in subsidiaries represent the cumulative cost of the Company’s grant of equity instruments, under share-based payment awards, to employees of subsidiary undertakings. At 31 March 2018 the subsidiary undertakings were:

Percentage of ordinary Parent Business share capital held All Subsidiary undertakings: Dairy Crest UK Limited Dairy Crest Group plc Holding Company 100% Dairy Crest France Holdings 1 Limited Dairy Crest Limited Holding Company 100% Dairy Crest (Jersey) Limited Dairy Crest Limited Holding Company 100% Dairy Crest (Services) Limited Dairy Crest France Holdings 1 Limited Holding Company 100%

Trading: Dairy Crest Limited Dairy Crest UK Limited Manufacture of dairy products 100% MH Foods Limited Dairy Crest Limited Manufacture of cooking oils 100% Promovita Ingredients Limited Dairy Crest Limited Development and sales of 100% galacto-oligosaccharides

Non-Trading: Dairy Crest Dairy Products Limited Dairy Crest Limited Non-Trading 100% DC Quest Trustees Limited Dairy Crest Group plc Non-Trading 100% Dairy Crest Facilities Limited Dairy Crest UK Limited Non-Trading 100% Dairy Crest Food Ingredients Limited Dairy Crest Limited Non-Trading 100% Dairy Crest Investments Limited Dairy Crest Limited Non-Trading 100%

Dairy Crest Pension Trustees Limited Dairy Crest Limited Non-Trading 100% numbers The Dairy Crest Share Trustees Limited Dairy Crest Limited Non-Trading 100% Dairy Crest France Holdings 2 Limited Dairy Crest France Holdings 1 Limited Non-Trading 95% Dairy Crest (Services) Limited Non-Trading 5% Unigate Dairies Limited Dairy Crest (Jersey) Limited Non-Trading 100% Cressdene Limited Dairy Crest (Jersey) Limited Non-Trading 100% Morehands IP Limited MH Foods Limited Non-Trading 100%

Being Dissolved: Morehands Limited Magnuss & Usher Limited Dormant 100% Magnuss & Usher Limited Dairy Crest Limited Holding Company 100% Coombe Farm Dairies Limited Dairy Crest Limited Non-Trading 100% Dairy Crest (Foston) Limited Dairy Crest Limited Non-Trading 100%

The principal place of operation and country of incorporation of all subsidiary undertakings is England and Wales except Dairy Crest (Jersey) Limited whose country of incorporation is Jersey. The registered office of all subsidiary undertakings incorporated in England and Wales is Claygate House, Littleworth Road, Esher, Surrey, KT10 9PN. The registered office of Dairy Crest (Jersey) Limited is 44 Esplanade, St Helier, Jersey, JE4 9WG.

Dairy Crest Annual Report 2017/18 97 Notes to the financial statements continued

15 Inventories

Consolidated 2018 2017 £m £m Raw materials and consumables 16.8 13.0 Finished goods 166.7 141.2 183.5 154.2 Cheese inventories at 31 March 2018 totalled £148.6 million (2017: £123.8 million). This matures over an average of 11 months, and up to a maximum of 50 months. At 31 March 2018 a provision for impairment has been made of £2.9 million (2017: £3.8 million) against product with a carrying value of £6.1 million (2017: £7.6 million) where the expected net realisable value of the product was below carrying value. 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

Consolidated Parent Company 2018 2017 2018 2017 £m £m £m £m Trade receivables 21.7 27.4 – – Amounts owed by subsidiary undertakings – – 353.1 391.3 Other receivables 4.2 1.5 – – Prepayments 3.4 4.5 – – 29.3 33.4 353.1 391.3 All amounts above, with the exception of prepayments and accrued income, are financial assets. Trade receivables are denominated in the following currencies:

Consolidated 2018 2017 £m £m Sterling 20.6 25.7 Euro 1.1 1.7 21.7 27.4

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 2018, trade receivables of £0.2 million have been impaired and provided for (2017: nil). At 31 March, the analysis of trade receivables that were past due but not impaired is as follows:

Past due, not impaired Neither past due nor Total impaired 30 – 60 days 60 – 90 days > 90 days £m £m £m £m £m 31 March 2018 21.7 17.3 3.4 1.0 – 31 March 2017 27.4 22.6 4.3 0.5 –

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.

98 Dairy Crest Annual Report 2017/18 17 financial assets

Derivative financial instruments

2018 2017 Consolidated Note £m £m Current Cross currency swaps (cash flow hedges) 31 1.6 – Non-current Cross currency swaps (cash flow hedges) 31 1.4 12.3

2018 2017 Company £m £m Current Cross currency swaps (cash flow hedges) 31 1.6 – Non-current Cross currency swaps (cash flow hedges) 31 1.4 –

All derivative financial instruments are fair valued at each balance sheet date and all comprise Level 2 valuations under ‘IFRS 13: Fair Value Measurement’, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).

18 cash and short-term deposits

Consolidated Parent Company 2018 2017 2018 2017 £m £m £m £m Cash and short-term deposits 22.6 20.9 – 0.1

Cash and short-term deposits earn interest at floating rates based on daily bank deposit rates. Counterparty risk and the Group’s policy for managing deposits are described in Note 31. The numbers The 19 Non-current assets held for sale

Consolidated Parent Company 2018 2017 2018 2017 £m £m £m £m Non-current assets held for sale 3.4 7.4 – –

Non-current assets held for sale of £3.4 million represent properties owned by the Group, comprising closed production facilities, that management has committed to sell and where the completion of the sale within twelve months of the classification date is highly probable. The held for sale value represents the lower of carrying value and fair value less costs to sell. Any future profit on disposal of the closed depots will be recognised as Other Income – property within the Income Statement. Any future profit on disposal of the closed production facilities will be recognised under exceptional items within the Income Statement.

Dairy Crest Annual Report 2017/18 99 Notes to the financial statements continued

20 Financial liabilities

2018 2017 Consolidated Note £m £m Current Obligations under finance leases 32 1.1 1.5 Loan notes (at amortised cost) 32 17.8 11.9 Debt issuance costs (0.6) (0.6) Financial liabilities – Borrowings 18.3 12.8 Cross currency swaps (cash flow hedges) – 0.1 Forward currency contracts (at fair value: cash flow hedge) 32 – 0.2 Financial liabilities – Derivative financial instruments – 0.3 Current financial liabilities 18.3 13.1 Non-current Obligations under finance leases 32 – 1.0 Loan notes (at amortised cost) 32 117.1 146.0 Bank loans (at amortised cost) 32 159.0 128.0 Debt issuance costs (0.6) (0.8) Financial liabilities – Borrowings 275.5 274.2 Cross currency swaps (cash flow hedges) 1.0 – Financial liabilities – Derivative financial instruments 1.0 – Non-current financial liabilities 276.5 274.2

All derivative financial instruments are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 13: ‘Fair Value Measurement’, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices). Interest bearing loans and borrowings The effective interest rates on loans and borrowings at the balance sheet date were as follows:

Effective Effective 2018 Interest rate 2017 Interest rate Maturity £m at March 2018 £m at March 2017 Current Loan notes: Euro swapped into £ April 2017 – 5.53% 9.1 5.53% Sterling April 2017 – 5.84% 2.8 5.84% US$ swapped into £ November 2018 17.8 3.87% 20.0 3.87% Finance leases 1.1 3.61% 1.5 3.61% Debt issuance costs (0.6) (0.6) 18.3 32.8 Non-current Revolving credit facilities: Sterling floating October 2020 80.0 LIBOR + 160bps 80.0 LIBOR + 150bps Sterling floating October 2020 79.0 LIBOR + 190bps 48.0 LIBOR + 170bps

Loan notes: US$ swapped into £ November 2021 40.1 4.52% 45.0 4.52% US$ swapped into £ March 2023 32.0 3.33% 36.0 3.33% Sterling March 2026 45.0 3.34% 45.0 3.34% Finance Leases – 3.61% 1.0 3.61% Debt issuance costs (0.6) (0.8) 275.5 254.2

100 Dairy Crest Annual Report 2017/18 20 Financial liabilities continued On 4 April 2017, the Group repaid €10.7 million (£9.2 million) and £2.8 million of 2007 fixed coupon loan notes on maturity. On 25th September 2017 the Group extended the three year £80 million tranche of its 2015 revolving credit facility for a further two years. All tranches of the £240 million facility will expire on 6 October 2020. The upfront debt issuance costs in respect of this facility amounted to £1.6 million and these are being charged to the consolidated income statement over the expected life of the facility. There were no debt issuance costs charged to the income statement relating to the cancelled facility in the prior year. 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 2018 (2017: None). Details of the Group’s interest rate management strategy and interest rate swaps are included in Notes 31 and 32.

2018 2017 Company £m £m Current Loan notes (at amortised cost) 17.8 11.9 Financial liabilities – Borrowings 17.8 11.9 Cross currency swaps (cash flow hedges) 0.1 Financial liabilities – Derivative financial instruments – 0.1 Current financial liabilities 17.8 12.0 Non-current Loan notes (at amortised cost) 117.1 146.0 Financial liabilities – Borrowings 117.1 146.0 Cross currency swaps (cash flow hedges) 1.0 – Financial liabilities – Derivative financial instruments 1.0 – Non-current financial liabilities 118.1 146.0

All derivative financial instruments are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 13: ‘Fair Value Measurement’, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices). The numbers The Interest bearing loans and borrowings The effective interest rates on loans and borrowings at the balance sheet date were as follows:

Effective Effective Interest rate Interest rate 2018 at March 2017 at March Maturity £m 2018 £m 2017 Current Loan notes: Euro swapped into £ April 2017 – – 9.1 5.53% Sterling April 2017 – – 2.8 5.84% US$ swapped into £ November 2018 17.8 3.87% 20.0 3.87% 17.8 31.9 Non-current Loan notes: US$ swapped into £ November 2021 40.1 4.52% 45.0 4.52% US$ swapped into £ March 2023 32.0 3.33% 36.0 3.33% Sterling March 2026 45.0 3.34% 45.0 3.34% 117.1 126.0

Dairy Crest Annual Report 2017/18 101 Notes to the financial statements continued

21 Retirement benefit obligations The Group has a defined benefit pension scheme (Dairy Crest Group Pension Fund), which is closed to future service accrual and a defined contribution scheme (Dairy Crest Group defined contribution scheme). Defined Benefit Pension Scheme The Dairy Crest Group Pension Fund (‘the Fund’) is a final salary defined benefit pension scheme, which was closed to future service accrual from 1 April 2010 and had been closed to new joiners from 30 June 2006. This pension scheme is a final salary scheme. The Fund is administered by a corporate trustee which is legally separate from the Company. The Trustee’s directors comprise representatives of both the employer and employees, plus a professional trustee. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits. The Company and Trustee have agreed a long-term strategy for reducing investment risk as and where appropriate. This includes an asset-liability matching policy which aims to reduce the volatility of the funding level of the pension plan by investing in assets which perform in line with the liabilities of the plan so as to protect against inflation being higher than expected. In December 2008 and June 2009, certain obligations relating to retired members were hedged by the purchase of annuity contracts. During the financial year, a Flexible Retirement Option (‘FRO’) exercise was carried out. This enabled deferred pensioners aged 55 and over to take cash equivalent transfer values (or trivial commutation lump sums, where applicable), with financial advice paid for by the Company. Transfer values totalling £11.7 million were accepted. This resulted in a settlement gain before costs of £1.6 million, representing IAS19 liabilities extinguished of £13.3 million less amounts paid of £11.7 million. In the prior year, an FRO exercise was carried out which resulted in a settlement gain before costs of £2.0 million, representing IAS 19 liabilities extinguished of £18.8 million less amounts paid of £16.8 million. UK legislation requires that pension schemes are funded prudently. On 31 August 2017, the Group and the Trustee of the Fund finalised the 31 March 2016 funding valuation. The full actuarial valuation was carried out 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 £100.0 million compared to the IAS19 deficit of £42.5 million reported at that date. Under the latest schedule of contributions, which was signed on 31 August 2017, the level of contributions is £10 million per annum from April 2017 to March 2018, then £15 million per annum until March 2019 and then £20 million per annum until March 2022. As part of the overall package of funding, the Group and the Trustee formally agreed to change the measurement of inflation used for Fund pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI). CPI will therefore apply for Fund pension increases from 25 March 2018 onwards. It was calculated that as at 31 August 2017, the Fund’s defined benefit obligation was reduced from £1,323.0 million to £1,191.5 million, a reduction of £131.5 million. This has been factored into the IAS19 valuation of the retirement benefit obligation as at 31 March 2018 and has been treated as a negative past service cost. The Fund duration is an indicator of the weighted-average time until benefit payments are made. For the Fund as a whole, the duration is around 19 years reflecting the approximate split of the defined benefit obligation (including insured pensioners) between deferred members (duration of 25 years), current non-insured pensioners (duration of 14 years) and insured pensioners (duration of 10 years).

The principal risks associated with the Group’s defined benefit pension arrangements are as follows: Asset Volatility The liabilities are calculated using the discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. The Fund holds a significant proportion in a range of return-seeking assets which, though expected to outperform corporate bonds in the long-term, create volatility and risk in the short-term. The allocation to growth assets is monitored to ensure it remains appropriate given the Fund’s long-term objectives. Changes in Bond Yields A decrease in corporate bond yields will increase the value placed on the Fund’s liabilities for accounting purposes, although this will be partially offset by an increase in the value of the Fund’s bond holdings. Inflation Risk A significant portion of the Fund’s benefit obligations are linked to inflation, and higher expected future inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are either unaffected by or only loosely correlated with inflation, meaning that an increase in expected future inflation will also increase the deficit. Longevity Risk The majority of the Fund’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in liabilities. A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (‘GMP’). The UK Government intends to implement legislation which could result in higher benefits for some members. This would increase the defined benefit obligation of the Fund. At this stage, it is not possible to quantify the impact of this change.

102 Dairy Crest Annual Report 2017/18 21 Retirement benefit obligations continued The following tables summarise the components recognised in the consolidated balance sheet, consolidated income statement and consolidated statement of comprehensive income.

2018 2017 Defined benefit obligation £m £m Fair value of scheme assets: – Equities – – – Bonds and cash 779.9 747.0 – Equity return swaps valuation* (0.5) 18.6 – Property and other 115.4 115.5 – Insured retirement obligations 288.1 310.6 1,182.9 1,191.7 Defined benefit obligation: – Uninsured retirement obligations** (825.8) (994.0) – Insured retirement obligations (263.2) (307.3) Total defined benefit obligation (1,089.0) (1,301.3)

Net surplus/(liability) recognised in the balance sheet 93.9 (109.6) Related deferred tax (liability)/asset (8.7) 18.6 Net pension surplus/(liability) 85.2 (91.0)

* Comprises a positive synthetic equity exposure of £42.7 million (2017: £157.5 million) and a negative LIBOR exposure of £43.2 million (2017: £138.9 million). ** Includes obligations to deferred members of £542.0 million (2017: £676.9 million) and non-insured members of £283.8 million (2017: £317.1 million). The Trust Deed provides the Group with an unconditional right to a refund of surplus assets assuming the full settlement of plan liabilities in the event of a plan wind-up. Furthermore, in the ordinary course of business the Trustee has no rights to unilaterally wind up, or otherwise augment the benefits due to members of the scheme. Based on these rights, any net surplus in the Plan is recognised in full.

2018 2017 Amounts recognised in consolidated income statement £m £m

Administration expenses (1.0) (1.0) numbers The Settlement gain 1.6 2.0 Past service cost (change from RPI to CPI) 131.5 – Other finance costs – pensions (0.7) (0.8) Gain before tax 131.4 0.2 Deferred tax (25.0) (0.3) Gain/(loss) for the year 106.4 (0.1)

2018 2017 Amounts recognised in other comprehensive income £m £m Return on plan assets (excluding amounts included in net interest) 9.5 152.5 Experience (losses)/gains arising on scheme liabilities (10.9) 30.6 Actuarial gains due to changes in the demographic assumptions 25.9 – Actuarial gains/(losses) due to changes in the financial assumptions 36.6 (275.6) Net actuarial gain/(loss) 61.1 (92.5) Movement in liability for unrecoverable notional surplus – 12.1 Recognised in other comprehensive income 61.1 (80.4) Related tax (10.3) 10.7 Net actuarial gain/(loss) recognised in other comprehensive income 50.8 (69.7) Actual returns on plan assets were £37.7 million (2017: £188.4 million).

Dairy Crest Annual Report 2017/18 103 Notes to the financial statements continued

21 Retirement benefit obligations continued

2018 2017 Movement in the present value of the defined benefit obligations are as follows: £m £m Opening defined benefit obligation (1,301.3) (1,074.8) Interest cost (28.8) (36.7) Actuarial gains arising from changes in demographic assumptions 25.9 – Actuarial gains/(losses) arising from changes in financial assumptions 36.6 (275.6) Actuarial (losses)/gains arising from experience (10.9) 30.6 Benefits paid 56.4 53.2 Past service costs (including curtailments) 131.5 – Settlement gains 1.6 2.0 Closing defined benefit obligation (1,089.0) (1,301.3)

2018 2017 Movement in the fair value of Fund assets are as follows: £m £m Opening fair value of Fund assets 1,191.7 1,044.4 Interest income on Fund assets 28.2 35.9 Remeasurement gains on Fund assets 9.5 152.5 Contributions by employer 10.9 13.1 Administration costs incurred (1.0) (1.0) Benefits paid out (56.4) (53.2) Closing fair value of Fund assets 1,182.9 1,191.7 The Fund’s assets are invested in the following asset classes (all assets have a quoted market value in an active market with the exception of property, annuity policy, which is valued based on the corresponding liability, and cash).

2018 2017 2016 Assets £m £m £m Equities: United Kingdom 2.8 42.8 35.0 North America 26.8 62.4 46.3 Europe (ex UK) 5.1 22.8 17.9 Japan 3.9 17.9 12.2 Asia (ex Japan) 4.1 11.6 8.5 Emerging Markets – – 15.4 Global Small Cap – – 16.1 Cash/LIBOR Synthetic Equity (43.2) (138.9) (105.8)

Emerging Market Debt* – 55.0 52.3 Multi Asset Credit** 71.8 69.1 62.0 Insurance Linked Securities*** 31.1 37.6 31.7 Absolute Return Bonds**** 33.7 33.5 32.5

Bonds: Corporate Bonds 209.0 203.9 123.8

Liability Driven Investments***** 349.0 305.9 225.3 Annuity Policy 288.1 310.6 291.3 Property 84.3 77.9 82.9 Cash 116.4 79.6 97.0 Total 1,182.9 1,191.7 1,044.4

Equities are a combination of a positive synthetic equity exposure of £42.7 million (2017: £157.5 million) and a negative LIBOR exposure of £43.2 million (2017: £138.9 million).

104 Dairy Crest Annual Report 2017/18 21 Retirement benefit obligations continued The Group does not use any of the pension fund assets.

* This is debt issued by emerging market countries denominated in the emerging market’s domestic currency. The debt is almost entirely issued by governments and not by corporations. Investors benefit from higher yields on the bonds due to the additional risks of investing in emerging market countries, compared to developed countries and it is also expected that emerging market currencies will appreciate over time relative to developed countries.

** Multi Asset Credit strategies invest globally in a wide range of credit-based asset classes which include bank loans, high yield bonds, securitised debt, emerging market debt and distressed debt of non-investment grade. The investment strategies will also allocate amounts in investment grade credit, sovereign bonds and cash for defensive reasons. The strategies are opportunistic and allocate dynamically to the best opportunities within the credit market from an asset allocation and individual security selection perspective.

*** Insurance linked securities are event-linked investments which allow investors outside the insurance industry to access insurance premiums for assuming various forms and degrees of insurance risk. The underlying risk premium is a type of investment risk where the event is linked to natural or man-made catastrophes. The premium paid to the investor represents compensation for the “expected loss” due to the uncertainty around the size and timing of the insured event.

**** Absolute Return Bond strategies are designed to deliver a positive return in all market environments and will take advantage of numerous alpha opportunities within the fixed income universe. The objective of the strategy is to capture returns from active management in a number of areas within fixed income including interest rates, currencies, asset allocation and security selection. The strategy will have long and short positions and employ a degree of leverage. The strategies tend to have low sensitivity to the direction of interest rates and credit.

***** Insight have been appointed to manage the Liability Driven Investment (‘LDI’) portfolio for the Fund. The objective is to hedge a proportion of the Fund’s liabilities against changes in interest rates and inflation expectations by investing in assets that are similarly sensitive to changes in interest rates and inflation expectations. Insight will seek to add interest and inflation exposure to the LDI portfolio over time in line with parameters that have been set by the Trustee. Insight are permitted to use a range of swaps and gilt based derivative instruments as well as physical bonds to structure the liability hedge for the Fund. In addition, Insight are responsible for monitoring market yields against a number of pre-set yield triggers and will increase the level of hedging as and when the triggers are met. The principal assumptions used in determining retirement benefit obligations for the Fund are shown below:

2018 2017 2016 % % % Key assumptions: Price inflation (RPI) 3.3 3.3 3.2 Price inflation (CPI) 2.2 2.2 2.1 Pension increases (Pre 1993 – RPI to 7%/annum) 3.3 3.3 3.2 Pension increases (Pre 1993 – CPI to 7%/annum) 2.2 – – Pension increases (1993 to 2006 – RPI to 5%/annum) 3.2 3.2 3.1 The numbers The Pension increases (1993 to 2006 – CPI to 5%/annum) 2.2 – – Pension increases (Post 2006 – RPI to 4%/annum) 3.0 3.0 2.9 Pension increases (Post 2006 – CPI to 4%/annum) 2.2 – – Life expectancy at 65 for a male currently aged 50 (years) 24.5 24.1 24.0 Average expected remaining life of a 65 year old retired male (years) 21.9 22.5 22.4 Life expectancy at 65 for a female currently aged 50 (years) 26.5 27.0 26.9 Average expected remaining life of a 65 year old retired female (years) 23.4 24.8 24.7 Discount rate 2.6 2.4 3.5

The financial assumptions reflect the nature and term of the Fund’s liabilities. From March 2018, the Fund moved to CPI indexation for pensions in payment; RPI increase assumptions have been shown above for comparison. The mortality assumptions are based on analysis of the Fund members, and allow for expected future improvements in mortality rates. It has been assumed that members exchange 25% of their pension for a cash lump sum at retirement, on terms 15% lower than the technical provisions basis. (An assumption of 10% lower than the technical provisions basis was used at 31 March 2017 and 31 March 2016). 30% of deferred members are assumed to take the PIE option at retirement.

Dairy Crest Annual Report 2017/18 105 Notes to the financial statements continued

21 Retirement benefit obligations continued Sensitivity to changes in assumptions The key assumptions used for IAS 19 are discount rate, inflation and mortality. If different assumptions were used, this could have a material effect on the results disclosed. The sensitivity of the results to these assumptions is as follows:

Expected Expense for 2018/19 Service Net Total P&L March 2018 Cost Interest Charge Surplus £m £m £m £m Current Figures 1.0 (2.6) (1.6) 93.9 Effect of a 0.1% decrease in the discount rate – 0.5 0.5 (17.4) Recalculated value 1.0 (2.1) (1.1) 76.5

Effect of a 0.1% increase in the inflation assumption – 0.3 0.3 (12.5) Recalculated value 1.0 (2.3) (1.3) 81.4

Effect of a 1 year increase in life expectancy – 0.8 0.8 (30.4) Recalculated value 1.0 (1.8) (0.8) 63.5

The above sensitivities assume that, with the exception of the annuity contracts, the Fund’s assets remain unchanged due to changes in assumptions, but in practice changes in market interest and inflation rates will also affect the value of the Fund’s assets. The Company and Trustee have agreed a long-term strategy for reducing investment risk as and when appropriate. This includes an asset-liability matching policy which aims to reduce the volatility of the funding level of the Fund by investing in assets which perform in line with the liabilities of the Fund. In December 2008 and June 2009, certain obligations relating to retired members were fully hedged by the purchase of annuity contracts. The Fund’s other investments include matching assets which protect against changes in bond yields and against inflation risk. The respective interest rate and inflation hedge ratios for these assets as at 31 March 2018 were both 55% of those obligations not covered by annuity contracts. The 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 Fund. The legal sponsor of the Fund is Dairy Crest Limited. Defined Contribution Pension Scheme The Group has charged £2.0 million in respect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2018 (2017: £2.0 million). The Company has made no charge in respect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2018 (2017: nil).

22 Trade and other payables

Consolidated Parent Company 2018 2017 2018 2017 £m £m £m £m Trade payables* 41.4 45.8 – – Other tax and social security 1.3 1.2 – 0.1 Other creditors* 3.0 6.4 – – Accruals* 26.9 25.7 0.8 1.1 72.6 79.1 0.8 1.2

* Financial liabilities at amortised cost. Included within accruals is £7.3 million in relation to promotional funding which is subject to a degree of estimation uncertainty (2017: £7.6 million). The accruals relating to promotional funding are calculated based on an estimated redemption rate of the promotion. The customer will claim the funding retrospectively based on the performance of the promotion. There has been a reduction in accruals relating to promotional funding in the period reflecting a growing trend towards off-invoice promotional funding from retrospective promotional funding.

106 Dairy Crest Annual Report 2017/18 23 Deferred income

2018 2017 Current £m £m Grants 0.6 1.5

Non-current Grants 2.4 3.0 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. During 2012/13 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 the consolidation of the spreads manufacturing into a single site at Kirkby, Liverpool. This grant was conditional upon certain conditions over a five year term, principally the project being completed and the creation or safeguarding of an agreed number of jobs. At 31 March 2018 there was no deferred income in respect of this grant.

24 Provisions

Site restructuring and Dairies disposal Dilapidation rationalisation provision provision Total £m £m £m £m As at 1 April 2017 2.3 0.2 2.2 4.7 Utilised during the year (0.5) (0.2) (0.2) (0.9) At 31 March 2018 1.8 – 2.0 3.8 Current 1.8 – – 1.8 Non-Current – – 2.0 2.0

At 1 April 2016 5.0 3.0 2.0 10.0 numbers The Utilised during the year (2.7) (2.8) – (5.5) Charged during the year – – 0.2 0.2 At 31 March 2017 2.3 0.2 2.2 4.7 Current 2.3 0.2 0.2 2.7 Non-Current – – 2.0 2.0

Restructuring and rationalisation of operating sites In 2016, the Group provided through exceptional operating items, decommissioning and demolition costs in relation to the closure of the Chard site of £4.3 million. The Group has paid £0.5 million of these costs in the year ending 31 March 2018 (2017: £2.7 million) and expects the remaining provision to be utilised in the year ending 31 March 2019. Dairies disposal provision At 31 March 2016, the Group held a provision of £3.0 million for future expected costs in relation to the disposal of the Dairies operation to Muller UK & Ireland Group LLP on 26 December 2015. The Group has paid £0.2 million of these costs in the year ending 31 March 2018 (2017: £2.8 million) utilising the remainder of this provision in the year. Dilapidation provision At 31 March 2017, the Group held a provision relating to leasehold property dilapidation liabilities on properties where the Group considers there to be a high likelihood of exiting when the lease term expires. The payment of this provision would occur following vacation of the respective properties. The Group has paid £0.2 million of these costs in the year ended 31 March 2018. The remaining £2.0 million relates to properties where the lease term expires in the year ending 31 March 2020.

Dairy Crest Annual Report 2017/18 107 Notes to the financial statements continued

25 Share capital

2018 2017 Authorised Thousands Thousands Ordinary shares of 25 pence each 240,000 240,000

Issued and fully paid Thousands £m At 31 March 2016 140,691 35.2 Issued for cash on exercise of share options 380 0.1 Issued to ESOP at par for nil consideration – – At 31 March 2017 141,071 35.3 Issued for cash on exercise of share options 344 0.1 At 31 March 2018 141,415 35.4

During the year ended 31 March 2018 344,027 shares were issued at a premium of £1.2 million for an aggregate consideration of £1.3 million (2017: 380,281 shares at a premium of £1.3 million for an aggregate consideration of £1.4 million). Exercises of management share options are fulfilled by the transfer of existing shares from The Dairy Crest Employees’ Share Ownership Plan Trust (‘ESOP’) – see Note 27.

26 Notes to statement of changes in equity Consolidated The shares held by the ESOP are available to satisfy awards under the Company’s management share option schemes (see Note 27). At 31 March 2018 the ESOP held 1,038,035 shares (2017:1,132,532 shares) in the Company at a cost of £0.3 million (2017: £0.3 million). The ESOP was established in August 1996 to acquire shares in the Company in order to hedge certain future obligations of the Group including shares awarded under the Company’s management share option schemes. During the year the Trustee of the ESOP transferred 94,497 (2017: 71,035) shares following exercises of options and subscribed for nil shares (2017:200 shares) at 25 pence per share. The market value of the shares held by the ESOP, which are listed on the London Stock Exchange was £5.3 million at 31 March 2018 (2017: £6.3 million).

Merger Hedging Translation Other reserve reserve reserve reserves £m £m £m £m At 31 March 2017 55.9 (6.1) (1.5) 48.3 Total recognised in other comprehensive income – 0.3 – 0.3 At 31 March 2018 55.9 (5.8) (1.5) 48.6 At 31 March 2016 55.9 (3.8) (1.5) 50.6 Total recognised in other comprehensive income – (2.3) – (2.3) At 31 March 2017 55.9 (6.1) (1.5) 48.3

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 (2017: £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. Parent Company As 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 £3.6 million (2017: £196.9 million), in the prior year this included a profit on the sale of shares held in Dairy Crest Limited of £194.6 million. Dividends paid amounted to £31.6 million (2017: £31.1 million) which, along with a debit for share-based payments of £1.0 million (2017: £0.8 million) and a transfer between reserves of £nil (2017: £158.9 million) resulted in a £27.0 million decrease in retained earnings (2017: £325.5 million increase). Not all the retained earnings are distributable at this point as this is dependent on the proceeds for the sale being settled in cash, as is the Company’s intention in the future. 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. In the prior year these shares were sold to Dairy Crest UK Limited.

108 Dairy Crest Annual Report 2017/18 27 Share-based payment plans Consolidated The Group has five share option schemes in operation. The Dairy Crest Long Term Alignment Plan (‘LTAP’) The LTAP 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. The vesting period for grants made under this scheme is 50% of the award after four years and 50% after five years. Pre-grant performance criteria determine the amount of any initial grant after which there are no significant performance conditions prior to vesting. As such, these options are fair valued at 100% of the price at the date of the grant. The Transformational Incentive Award (‘TIA’) The TIA was granted, under the rules of the LTISP, in December 2014. The TIA is a nil price option to acquire ordinary shares subject to certain performance objectives being met in addition to continuing employment. The performance objectives relate to three categories detailed below: 1) managing the competition approval process relating to the sale of the Dairies business; 2) appropriate reshaping of the Group; and 3) establishing a successful future business, by reference to the development of the Group, including delivering value to shareholders. The vesting period was three years from the date of grant and this award vested in December 2017, following the assessment of performance against stretching performance conditions. There are no cash settlement alternatives. Deferred Bonus Plan (‘DBP’) Any bonus in excess of 50% of basic annual salary is deferred in share options with a vesting period of three years. The only vesting condition is continuing employment. The cost of these share options is based on the number of shares issued and the share price at the date of grant, spread over the vesting period. During the year ended 31 March 2018, no deferred shares were awarded in relation to the year ended 31 March 2017 (2017: none). 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 returns (‘TSR’) over a three year period versus comparator companies and (ii) growth in adjusted basic earnings per share. The TSR element represents 60% of the awards granted. The vesting period for grants made under this scheme is three years with an exercise period of seven years. There were no awards granted in the year ended 31 March 2018 (2017: nil). There are no cash settlement alternatives. The LTISP was replaced by the LTAP in the year ended 31 March 2014. The numbers The Dairy Crest Sharesave Scheme All 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. During the current year no options were granted (2017: 629,639 options granted at 463 pence). There are no cash settlement alternatives. The number of share options and weighted average exercise price for each of the principal schemes is set out as follows:

LTAP* TIA* DBP* LTISP* Sharesave Scheme weighted average exercise price number number number number number (pence) Options outstanding at 1 April 2017 1,071,194 262,374 73,533 130,393 941,136 431.1 Options granted during the year 217,007 – – – – – Reinvested dividends 71,116 10,495 2,782 5,186 – – Options exercised during the year (86,465) – – (6,959) (344,027) 377.2 Options forfeited during the year – (9,017) – – (70,241) 456.6 Options outstanding at 31 March 2018 1,272,852 263,852 76,315 128,620 526,868 462.8 Exercisable at 31 March 2018 73,188 263,852 76,315 128,620 957 –

Options outstanding at 1 April 2016 877,831 252,558 71,123 131,569 991,800 367.8 Options granted during the year 216,927 – – – 629,639 463.0 Reinvested dividends 40,077 9,816 2,410 6,218 – – Options exercised during the year (63,641) – – (7,394) (380,281) 358.1 Options forfeited during the year – – – – (300,022) 381.5 Options outstanding at 31 March 2017 1,071,194 262,374 73,533 130,393 941,136 431.1 Exercisable at 31 March 2017 – – 2,875 130,393 – –

* LTAP, TIA, DBP and LTISP options are nil cost options.

Dairy Crest Annual Report 2017/18 109 Notes to the financial statements continued

27 Share-based payment plans continued LTAP options are exercisable at varying dates up to May 2027 (March 2017: June 2026). TIA options are exercisable up to December 2024 (March 2017: December 2024). DBP options are exercisable at varying dates up to December 2024 (March 2017: December 2024). LTISP options are exercisable at varying dates up to July 2022 (March 2017: July 2022). Sharesave scheme options are exercisable up to February 2020 at prices ranging from 376 pence to 463 pence (March 2017: exercisable up to February 2020 at prices ranging from 376 pence to 463 pence). The remaining weighted average contractual life of options outstanding at March 2018 is 7.3 years for the LTAP, 6.7 years for the TIA, 6.7 years for the DBP, 4.1 years for the LTISP and 1.9 years for the Sharesave Scheme (2017: LTAP 7.8 years, TIA 7.7 years, DBP 7.7 years, LTISP 5.1 years and Sharesave Scheme 2.2 years). The fair value factor of the Sharesave Scheme options issued in May 2016 was 19.0% giving a fair value of 106 pence per option granted. This has been computed using a Black-Scholes option pricing model. The key assumptions used in the valuation model were expected share price volatility 24%, risk free rate of interest 0.61% and dividend yield 3.57%. 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 option. The fair value of TIA options issued on 23 December 2014 was 491 pence per option granted. This has been computed using a Black-Scholes option pricing model. The key assumptions used in the valuation model were expected share– price volatility 24% and a risk free rate of interest 0.85%. 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 option. The Group expense arising from share option plans for continuing operations for the year ended 31 March 2018 was £1.6 million (2017: £1.2 million). Company The number of share options and weighted average exercise price for each of the schemes for employees of the Company is set out as follows:

LTAP TIA DBP LTISP Sharesave Scheme weighted average exercise price number number number number number (pence) Options outstanding at 1 April 2017 626,870 262,374 53,994 52,835 17,795 404.5 Options granted during the year 137,807 – – – – – Reinvested dividends 23,096 10,495 2,013 2,057 – – Options exercised during the year (8,738) – – (6,959) (11,966) – Options forfeited during the year – (9,017) – – – – Options outstanding at 31 March 2018 779,035 263,852 56,007 47,933 5,829 404.5 Exercisable at 31 March 2018 65,332 263,852 56,007 47,933 – –

Options outstanding at 1 April 2016 424,375 252,558 52,251 50,859 12,775 352.2 Options granted during the year 118,668 – – – 3,886 463.0 Reinvested dividends 23,452 9,816 1,743 1,976 – – Adjustment for change of director during the year 60,375 – – – 4,336 – Options exercised during the year – – – – (3,202) – Options forfeited during the year – – – – – – Options outstanding at 31 March 2017 626,870 262,374 53,994 52,835 17,795 404.5 Exercisable at 31 March 2017 – – 2,875 52,835 – –

LTAP options are exercisable at varying dates up to May 2027 (March 2017: June 2026). TIA options are exercisable up to December 2024 (March 2017: December 2024). DBP options are exercisable at varying dates up to December 2024 (March 2017: December 2024). LTISP options are exercisable at varying dates up to July 2022 (March 2017: July 2022). Sharesave Scheme options are exercisable up to February 2020 at prices ranging from 376 pence to 463 pence (March 2017: exercisable up to February 2020 at prices ranging from 376 pence to 463 pence). The remaining weighted average contractual life of options outstanding at March 2018 is 7.3 years for the LTAP, 6.7 years for the TIA, 6.7 years for the DBP, 4.3 years for the LTISP and 1.9 years for the Sharesave Scheme (2017: LTAP 7.8 years, TIA 7.7 years, DBP 7.7 years, LTISP 5.3 years and Sharesave Scheme 1.6 years). The Company expense arising from share option plans for the year ended 31 March 2018 was £1.0 million (2017: £0.8 million).

110 Dairy Crest Annual Report 2017/18 28 Commitments and contingencies Operating Leases The 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. Future minimum rentals payable under non-cancellable operating leases as at 31 March are as follows:

2018 2017 £m £m Within one year 10.0 7.5 After one year but not more than five years 35.5 25.3 More than five years 6.4 8.0

During the year, the Group entered into a sale and leaseback agreement with Lombard Business Leasing Limited. The sale and leaseback was for certain plant and equipment relating to the butter packing facility at Kirkby. The future minimum rentals at 31 March 2018 in respect of this operating lease agreement was £13.9 million. Finance leases On 23 June 2015 the Group recognised a finance lease for certain assets at Nuneaton. The lease term is for 3.75 years. Future minimum payments under finance leases together with the present value of the net minimum lease payments are as follows:

2018 2017 Present Present Minimum value of Minimum value of payments payments payments payments £m £m £m £m Within one year 1.1 1.1 1.6 1.5 After one year but not more than five years – – 1.0 1.0 More than five years – – – – Total minimum lease payments 1.1 1.1 2.6 2.5

Less: amounts representing finance charges – – (0.1) – numbers The Present value of minimum lease payments 1.1 1.1 2.5 2.5

Guarantees The Company has provided guarantees and indemnities to Lombard Business Leasing Limited in relation to the obligations of Dairy Crest Limited under three lease agreements. The future lease rentals payable under these agreements at 31 March 2018 were £42.7 million and the maximum amount payable by the Company under these guarantees is capped at £106.0 million plus interest. There were no guarantees and indemnities in the prior year. Capital commitments

Consolidated 2018 2017 £m £m Future capital expenditure contracted on property, plant and equipment 10.5 13.0

Contingent liabilities Dilapidations liability of Chadwell Heath Under the terms of the sale and purchase agreement of the Dairies operation, the Group has a potential dilapidations liability to 26 December 2015 in relation to the Chadwell Heath site. The lease does not end until July 2032, with break clauses in July 2022 and July 2027. Muller UK & Ireland Group LLP have announced they intend to close the site in 2018, however any obligations are dependent on the intentions of the landlord in respect of the site. The Directors are not quantifying the potential liability in respect of this obligation because to do so may be prejudicial to the interests of the Group as the matter may be subject to negotiation or judicial proceedings. There has been no change on the Group’s position on this contingent liability in the year ended 31 March 2018. Litigation in relation to the capital project at Davidstow At 31 March 2017, there were a number of contractual disputes outstanding in respect of the demineralised whey and GOS capital project at Davidstow. In a number of instances, claims were made by the Group and in others, claims were made against the Group. In the year ended 31 March 2018, settlement agreements were put in place in respect of a number of the most significant disputes. At 31 March 2018 there was one outstanding claim against the Group. The Group has rebutted this claim but nonetheless accrued for professional fees in respect of it. The Group is not disclosing detail of either the claims settled or the outstanding claim, due to the legal sensitivity of the matter. It is the opinion of the Directors that there is no significant liability that would require being provided for as at 31 March 2018.

Dairy Crest Annual Report 2017/18 111 Notes to the financial statements continued

29 Related party transactions The Group had no significant related parties.

2018 2017 Compensation of key management personnel of the Group and Company £m £m Short-term employee benefits 2.0 2.0 Share-based payments 1.0 0.8 Total compensation paid to key management personnel* 3.0 2.8

* 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 Directors of Dairy Crest Group plc. The senior management team is small and all key decisions are made by either the three Executive Directors or by the Group Board which meets regularly.

Company Dairy Crest Limited, a subsidiary company, incurred costs of £2.0 million (2017: £2.0 million) from the Company for the provision of management and administrative services carried out on its behalf. Dairy Crest Limited received £1.9 million (2017: £1.9 million) for the remuneration of the Company’s employees which had been paid by Dairy Crest Limited. Interest charges of £2.9 million (2017: £2.5 million) were incurred by the Company from Dairy Crest Limited on loans reflecting an interest rate of LIBOR+100 basis points. Interest income of £7.4 million (2017: £5.7 million) was received by the Company from Dairy Crest Limited on loans reflecting an interest rate of 3.0% (2017: 4.5%) and a further £4.5 million was received by the Company from Dairy Crest UK Limited on floating rate loans paying LIBOR plus margin (2017: £5.4 million). The Company paid no interest (2017: £nil) to Dairy Crest Limited on cross-currency swaps paying LIBOR and receiving EURIBOR.

30 Business combinations and disposals (i) Disposal of Discontinued Operations On 26 December 2015, the Group completed the disposal of its Dairies operation to Muller UK & Ireland Group LLP (‘Müller’). The Dairies operation has therefore been classified as discontinued operations in the comparative year. The final consideration for the Dairies operation of £23.5 million comprised £54.5 million received in cash during the year ended 31 March 2016 net of £25.9 million that was provided for in the year ended 31 March 2016 but repaid to Müller in the year ended 31 March 2017. The final consideration adjustment of £2.5 million was agreed in the year ended 31 March 2017. The disposal resulted in a net cash outflow in the prior year of £28.4 million.

Year ended Year ended 31 March 31 March 2018 2017 £m £m Property, plant and equipment – – Intangible assets – – Inventories – – Trade and other receivables – – Trade and other payables – – Net assets and liabilities disposed – – Consideration – (2.5) Disposal costs – – Loss on disposal before tax – (2.5) Attributable tax – 5.2 Profit/(loss) on disposal of discontinued operations – 2.7

(ii) Acquisitions There were no business acquisitions during the year.

112 Dairy Crest Annual Report 2017/18 31 Financial risk management objectives and policies The 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 2017 and 2018, 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 risk The 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 20. At 31 March 2018 the Group’s total credit facilities amounted to £374.9 million (2017: £397.9 million) excluding finance leases of £1.1 million (2017: £2.5 million) and the impact of cross-currency swaps on US Dollar and Euro loan notes of £2.0 million (2017: £12.2 million). The facilities at 31 March 2018 and 31 March 2017 consisted of: March 2018 •• £240 million revolving credit facility which will expire on 6 October 2020. •• loan notes totalling £134.9 million repayable between November 2018 and March 2026. The numbers The March 2017 •• £240 million revolving credit facility of which £80 million will expire on 6 October 2018 and £160 million on 6 October 2020. •• loan notes totalling £157.9 million repayable between April 2017 and March 2026. Undrawn revolving credit facilities at 31 March 2018 amounted to £81.0 million (2017: £112.0 million). Effective headroom including cash and short term deposits amounted to £103.6 million (2017: £132.9 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. Interest 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 2018, 46% of the Group’s borrowings were at a fixed rate of interest (2017: 55%). On 4 April 2017, the Group repaid €10.7 million (£9.2 million) and £2.8 million of 2007 fixed coupon loan notes on maturity. In the medium term we expect the fixed proportion of borrowings to continue to be in 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 32.

Dairy Crest Annual Report 2017/18 113 Notes to the financial statements continued

31 Financial risk management objectives and policies continued Foreign currency risk 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. The Group’s exposure to Euro/Sterling is increasing due to the production of demineralised whey and GOS which is predominantly sold in Euros. The Group’s policy is to match foreign currency transaction exposures where possible and where appropriate the Group will use financial instruments in the form of forward foreign currency contracts to hedge future transaction and cash flows denominated in currencies other than Sterling. The majority of the Group’s transactions are carried out in the entity’s functional currency and therefore transaction exposures are currently limited. It can be seen in Note 16 that the only significant non-Sterling trade receivables are in Euros. At 31 March 2018 the trade receivables denominated in Euros was £1.1 million (2017: £1.7 million). We expect this to increase further in 2018/19 as we continue to grow the sales in demineralised whey and GOS. 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 2011 and 2016 the Group issued loan notes denominated either in $US or £. Cross-currency swaps were implemented as required 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 note 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. Price risk The 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. Credit 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. 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 £51.5 million at 31 March 2018 (2017: £62.1 million). All revolving credit facility borrowings are through banks with long term credit ratings of A or above. Funds temporarily surplus to business requirements are invested 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 long periods, 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.

114 Dairy Crest Annual Report 2017/18 31 Financial risk management objectives and policies continued Capital management The 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 though the Directors target a ratio of below 2 times. At 31 March 2018 the ratio of net debt to EBITDA was 2.90 times (March 2017: 2.94 times). The Group’s capital structure comprises share capital and retained reserves. 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 2018 or the prior year. 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 34. The gearing ratio at 31 March 2018 and 31 March 2017 can be analysed as follows: 2018 2017 £m £m Net debt 265.7 249.8 Shareholders’ funds 243.7 71.9 Gearing ratio 109% 347%

Dividends Details of dividends paid and proposed during the year are given in Note 9. The dividend policy 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 in respect of the year ended 31 March 2018 is 16.3 pence, in line with last year (2017: 16.3 pence). Total dividends paid and proposed in respect of the year ended 31 March 2018 amount to 22.6 pence (2017: 22.5 pence).

32 Financial instruments An explanation of the Group’s financial instrument risk management objectives, policies and strategies is set out in the discussion of Treasury policies in Note 31. The numbers The 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.

< 1 year >1 <2 years >2 <3 years >3 <4 years >4 <5 years > 5 years Total At 31 March 2018 £m £m £m £m £m £m £m Fixed rate Loan notes* (17.8) – – (40.1) (32.0) (45.0) (134.9) Finance leases (1.1) – – – – – (1.1) Cross currency swaps 1.6 – – 1.4 (1.0) – 2.0 Floating rate Bank loans – – (159.0) – – – (159.0) Cash at bank and in hand 22.6 – – – – – 22.6

At 31 March 2017 Fixed rate Loan notes* (11.9) (20.0) – – (45.0) (81.0) (157.9) Forward currency contracts (0.2) – – – – – (0.2) Finance leases (1.5) (1.0) – – – – (2.5) Cross currency swaps (0.1) 3.6 – – 6.2 2.5 12.2 Floating rate Bank loans – (80.0) – (48.0) – – (128.0) Cash at bank and in hand 20.9 – – – – – 20.9

* Classified as fixed rate after taking into account the effect of interest rate swaps.

Dairy Crest Annual Report 2017/18 115 Notes to the financial statements continued

32 Financial instruments continued 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 risk The 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 material 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 2018, 46% of Group borrowings were at fixed rates of interest (2017: 55%) (see Note 31). The sensitivity analysis below 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.

Effect on Increase/ profit Effect on decrease in before tax equity basis points £m £m 2018 Sterling +100 1.6 – Sterling –50 (0.8) – 2017 Sterling +100 1.5 – Sterling –50 (0.7) –

Equity price risk The Group holds no listed equity investments and is not subject to equity price risk other than through the pension scheme (see Note 21).

Credit risk There 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 31).

Liquidity risk The Group’s policy on managing its liquidity risk is set out in Note 31. The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2018 and 2017 based on contractual undiscounted payments of interest and principal.

< 1 year >1 <2 years >2 <3 years >3 <4 years >4 <5 years > 5 years Total At 31 March 2018 £m £m £m £m £m £m £m Loan notes (22.5) (4.2) (4.2) (44.2) (34.6) (49.5) (159.2) Cross-currency swaps (on loan notes): payment leg (19.3) (2.6) (2.6) (38.8) (32.1) – (95.4) receipt leg 21.0 2.6 2.6 42.8 33.1 – 102.1 Bank loans – – (159.0) – – – (159.0) Finance leases (1.1) – – – – – (1.1)

At 31 March 2017 Loan notes (17.1) (24.8) (4.5) (4.5) (48.6) (88.1) (187.6) Cross-currency swaps (on loan notes): payment leg (12.4) (19.0) (2.6) (2.6) (37.9) (32.2) (106.7) receipt leg 12.7 23.3 3.0 3.0 47.1 37.2 126.3 Bank loans – (80.0) – (48.0) – – (128.0) Finance leases (1.5) (1.0) – – – – (2.5)

Short-term payables all mature within one year.

116 Dairy Crest Annual Report 2017/18 32 Financial instruments continued Fair values of financial assets and financial liabilities The carrying amounts and the fair values of all of the Group’s financial instruments that are carried in the financial statements are the same, with the exception of the loan notes. The carrying amount of the loan notes was £134.9 million (2017: £157.9 million) and the fair value was £134.0 million (2017: £156.4 million). The fair value of borrowings has been calculated based on the principles of IFRS 13 ‘Fair Value Measurement’ under Hierachy Level 2, by discounting the expected future cash flows at prevailing interest rates. Cross currency swaps The notional principal amount of the outstanding $US/GBP cross currency swap contracts at 31 March 2018 was $126.3 million (£89.9 million) (2017: $126.3 million (£101.0 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 2018 the fixed interest rates varied from 3.227% to 4.516% (2017: 3.227% to 4.516%). Any gains/losses arising from fair value adjustments deferred in equity will reverse in the income statement (finance costs) during the next five years (being the life of the swaps). Following the repayment of €10.7 million (£9.2 million) 2007 loan notes on 4 April 2017, there were no EUR/GBP cross currency swap contracts in place at 31 March 2018. At 31 March 2017, the notional principal amount of the outstanding EUR/GBP cross currency swap contracts was €10.7 million (£9.2 million). These cross currency swaps had both legs at fixed interest rates, were designated as cash flow hedges and met the criteria for hedge accounting. The fixed interest rates varied from 5.47% to 5.60%. Forward currency contracts The Group enters into certain forward currency contracts in order to hedge the Sterling cost of currency-denominated future purchases and receipts. At 31 March 2018 there were no forward currency contracts in place. The forward currency contracts in place at 31 March 2017 did not meet the criteria for hedge accounting and the loss in respect of these was recognised within the income statement. Borrowing facilities The Group has undrawn committed long term borrowing facilities available at 31 March 2018 of £81.0 million (2017: £112.0 million) in respect of which all conditions precedent had been met at that date. The undrawn facilities of £81.0 million expire on 6 October 2020 (2017: 6 October 2020). Company Interest rate maturity profile of financial assets and liabilities The 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. The numbers The < 1 year >1 <2 years >2 <3 years >3 <4 years >4 <5 years > 5 years Total At 31 March 2018 £m £m £m £m £m £m £m Fixed rate Loan notes* (17.8) – – (40.1) (32.0) (45.0) (134.9) Intercompany receivables 149.6 – – – – – 149.6 Intercompany payables (49.1) – – – – – (49.1) Cross currency swaps 1.6 – – 1.4 (1.0) – 2.0 Floating rate Intercompany receivables 462.9 – – – – – 462.9 Intercompany payables (210.4) – – – – – (210.4)

At 31 March 2017 Fixed rate Loan notes* (11.9) (20.0) – – (45.0) (81.0) (157.9) Intercompany receivables 152.9 – – – – – 152.9 Intercompany payables (48.8) – – – – – (48.8) Cross currency swaps (0.1) 3.6 – – 6.2 2.5 12.2 Floating rate Intercompany receivables 456.4 – – – – – 456.4 Intercompany payables (169.2) – – – – – (169.2)

* These have been classified as fixed rate after taking into account the effect of interest rate swaps.

Interest rate risk The 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 cross-currency swaps used as a cash flow hedge on $US loan notes. The impact on equity is nil over the life of the instruments as these swaps comprise an effective hedge.

Dairy Crest Annual Report 2017/18 117 Notes to the financial statements continued

32 Financial instruments continued 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 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.

Effect on Increase/ profit before Effect on decrease in tax equity basis points £m £m 2018 Sterling +100 – – Sterling –50 – – 2017 Sterling +100 – – Sterling –50 – –

Equity price risk The Company holds no listed equity investments and is not subject to equity price risk. Credit risk The maximum exposure to credit risk is the carrying amount of financial assets. There are no significant concentrations of credit risk within the Company unless otherwise disclosed. The maximum credit risk exposure relating to financial assets is represented by carrying value of £3.0 million (2017: £12.4 million) as at the balance sheet date. Liquidity risk The Company’s policy on managing its liquidity risk is set out in Note 31. The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2018 and 2017 based on contractual undiscounted payments of interest and principal.

< 1 year >1 <2 years >2 <3 years >3 <4 years >4 <5 years > 5 years Total At 31 March 2018 £m £m £m £m £m £m £m Loan notes (22.5) (4.2) (4.2) (44.2) (34.6) (49.5) (159.2) Cross-currency swaps (on loan notes): payment leg (19.3) (2.6) (2.6) (38.8) (32.1) – (95.4) receipt leg 21.0 2.6 2.6 42.8 33.1 – 102.1

At 31 March 2017 Loan notes (17.1) (24.8) (4.5) (4.5) (48.6) (88.1) (187.6) Cross-currency swaps (on loan notes): payment leg (12.4) (19.0) (2.6) (2.6) (37.9) (32.2) (106.7) receipt leg 12.7 23.3 3.0 3.0 47.1 37.2 126.3

Fair values of financial assets and financial liabilities The carrying amounts and the fair values of all of the Company’s financial instruments that are carried in the financial statements are the same, with the exception of the loan notes. The carrying amount of the loan notes was £134.9 million (2017: £157.9 million) and the fair value was £134.0 million (2017: £156.4 million). The fair value of borrowings has been calculated based on the principles of IFRS 13 ‘Fair Value Measurement’ under Hierachy Level 2, by discounting the expected future cash flows at prevailing interest rates. Cross currency swaps External The notional principal amount of the outstanding $US/GBP cross currency swap contracts at 31 March 2018 was $126.3 million (£89.9 million) (2017: $126.3 million (£101.0 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 2018 the fixed interest rates varied from 3.227% to 4.516% (2017: 3.227% to 4.516%). Any gains/losses arising from fair value adjustments deferred in equity will reverse in the income statement (finance costs) during the next five years (being the life of the swaps). Following the repayment of €10.7 million (£9.2 million) 2007 loan notes on 4 April 2017, there were no EUR/GBP cross currency swap contracts in place at 31 March 2018. At 31 March 2017, the notional principal amount of the outstanding EUR/GBP cross currency swap contracts was €10.7 million (£9.2 million). These cross currency swaps had both legs at fixed interest rates, were designated as cash flow hedges and met the criteria for hedge accounting. The fixed interest rates varied from 5.47% to 5.60%.

118 Dairy Crest Annual Report 2017/18 33 Cashflow from operating activities

Year ended Year ended 31 March 31 March 2018 2017 £m £m Profit before taxation – continuing operations 179.2 40.3 Loss before taxation – discontinued operations – (4.6) Finance costs and other finance income – continuing operations 10.2 8.5 Loss on disposal of Dairies operation – 2.5 Profit on operations 189.4 46.7 Depreciation 17.7 14.9 Amortisation of internally generated intangible assets 0.7 0.5 Amortisation of acquired intangible assets 0.4 0.4 Impairment of investment – 0.5 Difference between cash outflow on exceptional items and amounts recognised in the income statement (excluding (127.2) (6.5) disposal of Dairies operation) Release of grants (1.5) (1.6) Share-based payments 1.6 1.2 Profit on disposal of depots (2.4) (3.0) Difference between pension contributions paid and amounts recognised in the income statement (11.5) (14.1) R&D tax credits (0.6) (0.1) Increase in inventories (34.4) (10.5) Decrease in receivables 4.4 9.3 Decrease in payables (2.9) (4.9) Cash generated from operations 33.7 32.8

No cash was generated from operations for the Company in the year ended 31 March 2018 (2017: nil). The numbers The

Dairy Crest Annual Report 2017/18 119 Notes to the financial statements continued

34 Analysis of net debt

At 1 April Cash Non-cash Exchange At 31 March 2017 flow movement movement 2018 Consolidated £m £m £m £m £m Borrowings (current)** (11.9) 11.9 (17.8) – (17.8) Borrowings (non-current) (274.0) (31.0) 17.8 11.1 (276.1) Finance leases*** (2.5) 1.4 – – (1.1) Debt issuance costs 1.4 0.4 (0.6) – 1.2 Financing liabilities (287.0) (17.3) (0.6) 11.1 (293.8) Less: Debt issuance costs excluded (1.4) (0.4) 0.6 – (1.2) Impact of cross-currency swaps* 17.7 0.1 – (11.1) 6.7 Net financing liabilities (270.7) (17.6) – – (288.3) Add: Cash and cash equivalents 20.9 1.7 – – 22.6 Net debt (249.8) (15.9) – – (265.7)

At 1 April Cash Non-cash Exchange At 31 March 2016 flow movement movement 2017 £m £m £m £m £m Borrowings (current)** (95.6) 95.6 (11.3) (0.6) (11.9) Borrowings (non-current) (249.2) (23.0) 11.3 (13.1) (274.0) Finance leases*** (3.9) 1.5 (0.1) – (2.5) Debt issuance costs 1.9 0.4 (0.9) – 1.4 Financing liabilities (346.8) 74.5 (1.0) (13.7) (287.0) Less: Debt issuance costs excluded (1.9) (0.4) 0.9 – (1.4) Impact of cross-currency swaps* 19.4 (15.4) – 13.7 17.7 Net financing liabilities (329.3) 58.7 (0.1) – (270.7) Add: Cash and cash equivalents 100.3 (79.4) – – 20.9 Net debt (229.0) (20.7) (0.1) – (249.8)

* The Group has $126.3 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (March 2017: $126.3 million and €10.7 million). Under IFRS, currency borrowings are retranslated into Sterling at year end exchange rates. The cross-currency swaps are recorded at fair value 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 £6.7 million adjustment included in the above (March 2017: £17.7 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£89.9 million (March 2017: £110.1 million)) to the fixed Sterling liability of £83.2 million (March 2017: £92.3 million). ** During the year the Group repaid €10.7 million (£9.2 million) and £2.8 million of 2007 fixed coupon loan notes on maturity. The £11.9 million cash flow in respect of the repayment is reflected in the table under borrowings (current) of £11.9 million and the impact of cross-currency swaps of £nil million. *** Finance lease non-cash movement in 2017 relates to the recognition of the agreement of a secondary lease term for assets at Nuneaton.

120 Dairy Crest Annual Report 2017/18 34 Analysis of net debt continued

At 1 April Cash Non-cash Exchange At 31 March 2017 flow movement movement 2018 Company £m £m £m £m £m Borrowings (current) (11.9) 11.9 (17.8) – (17.8) Borrowings (non-current) (146.0) – 17.8 11.1 (117.1) Financing liabilities (157.9) 11.9 – 11.1 (134.9) Less: Impact of cross-currency swaps 17.7 0.1 – (11.1) 6.7 Net financing liabilities (140.2) 12.0 – – (128.2) Add: Cash and cash equivalents 0.1 (0.1) – – – Net debt (140.1) 11.9 – – (128.2)

At 1 April Cash Non-cash Exchange At 31 March 2016 flow movement movement 2017 £m £m £m £m £m Borrowings (current) (95.6) 95.6 (11.3) (0.6) (11.9) Borrowings (non-current) (144.2) – 11.3 (13.1) (146.0) Financing liabilities (239.8) 95.6 – (13.7) (157.9) Less: Impact of cross-currency swaps 19.4 (15.4) – 13.7 17.7 Net financing liabilities (220.4) 80.2 – – (140.2) Add: Cash and cash equivalents 40.1 (40.0) – – 0.1 Net debt (180.3) 40.2 – – (140.1) The numbers The

35 Corporate information The consolidated accounts of Dairy Crest Group plc for the year ended 31 March 2018 were authorised for issue in accordance with a resolution of the Directors on 22 May 2018 and the consolidated and Company balance sheets were signed on the Board’s behalf by Mr M Allen and Mr T Atherton. 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.

Dairy Crest Annual Report 2017/18 121 Group financial history

Restated Restated 2014 2015 2016 2017 2018 Consolidated income statement summary – continuing operations £m £m £m £m £m Product group revenue Cheese and Functional Ingredients 264.6 274.4 263.7 254.8 277.2 Butters, Spreads and Oils 177.4 170.0 152.6 150.7 174.2 Other 4.2 3.8 6.0 11.1 5.4 Group 446.2 448.2 422.3 416.6 456.8 Product group profit* Cheese and Functional Ingredients 39.3 33.1 36.4 42.8 50.1 Butters, Spreads and Oils 16.8 33.8 29.6 25.5 21.7 Associate 0.3 – – – – Total product group profit – continuing operations 56.4 66.9 66.0 68.3 71.8 Finance costs (9.9) (8.1) (8.3) (7.7) (9.5) Adjusted profit before tax – continuing operations* 46.5 58.8 57.7 60.6 62.3 Amortisation of acquired intangibles (0.4) (0.4) (0.4) (0.4) (0.4) Exceptional items (8.4) (19.8) (11.3) (19.1) 118.0 Other finance expense – pensions (0.3) (1.8) (0.6) (0.8) (0.7) Group profit before tax – continuing operations 37.4 36.8 45.4 40.3 179.2

Balance sheet summary Property, plant & equipment, goodwill, intangibles and investments 391.9 428.9 331.8 299.3 292.5 Inventories, receivables, payables and non-current assets held for sale 121.1 126.9 75.0 115.9 143.6 Total operating assets* 513.0 555.8 406.8 415.2 436.1 Financial instruments excluding amounts included in net debt, provisions (8.7) (12.0) (16.6) (13.5) (10.3) and deferred income Tax (15.0) (13.9) 15.5 29.6 (10.3) Retirement benefit surplus/(obligations) (57.7) (41.4) (42.5) (109.6) 93.9 Net debt* (142.2) (198.7) (229.0) (249.8) (265.7) Shareholders' equity 289.4 289.8 134.2 71.9 243.7

Cash flow summary Generated from/(used in) operations (13.8) 35.3 31.3 32.8 33.7 Fixed asset investments (net of grants) (58.8) (80.1) (66.8) (25.6) (31.2) (72.6) (44.8) (35.5) 7.2 2.5 Interest paid (14.0) (10.5) (12.8) (12.2) (9.7) Taxation (paid)/repaid 2.1 – – – (0.5) Dividends paid (28.5) (29.2) (30.0) (31.1) (31.6) Purchase of businesses and investments – (0.1) (6.0) – – Other items (principally business and asset disposals) 30.5 28.1 54.0 15.3 23.4 Movement in net debt (82.5) (56.5) (30.3) (20.8) (15.9)

* Denotes alternative performance measures as described on pages 123 to 124 of the annual report and accounts.

The Consolidated Income Statement Summary – Continuing Operations has been restated in all years to reclassify the results of the sold Dairies operation to discontinued operations.

122 Dairy Crest Annual Report 2017/18 Alternative performance measures

The group uses a number of alternative performance measures (APMs) to assess the performance of the Group which are not defined under IFRS. The Directors use these performance measures to assess the underlying performance of the Group and they are used to set targets as disclosed in the Directors Remuneration Report. As such these measures should be considered alongside the IFRS measures. Reconciliations from statutory performance measures to the APMs are shown below.

Adjusted profit before tax Adjusted profit before tax represents the Group’s profit before tax from continuing operations, before exceptional items, other finance expense – pensions and amortisation from acquired intangible assets. The Directors consider this measure appropriate because it reports the underlying performance of the Group excluding the material values that can be associated with exceptional items and volatility of the pension interest. This allows the Directors to measure the longer-term performance of the Group on a comparable basis. Reconciliation of profit before tax from continuing operations to adjusted profit before tax

2018 2017 £m £m Profit before tax from continuing operations Face of consolidated income statement 179.2 40.3 Adjust for: Exceptional items Note 4 (118.0) 19.1 Adjust for: Amortisation of acquired intangible assets Note 2 0.4 0.4 Adjust for: Other finance expense – pensions Note 21 0.7 0.8 Adjusted profit before tax 62.3 60.6

Product group profit Product group profit represents the Group’s operating profit or profit from continuing operations, before exceptional items. It is adjusted to remove acquired intangible asset amortisation. The Directors consider this an appropriate measure for the Group because it represents the underlying profitability of the Group excluding the impact of any changes to the Group’s financing structure thus making it an appropriate measure to communicate internally where the majority of employees are not able to influence decisions around the Group’s financing structure or acquisition decisions. Reconciliation of profit on continuing operations to product group profit

2018 2017 £m £m

Profit on continuing operations Face of consolidated income statement 189.4 48.8 numbers The Adjust for: Exceptional items Note 4 (118.0) 19.1 Adjust for: Amortisation from acquired intangible assets Note 2 0.4 0.4 Product group profit 71.8 68.3

Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA is a widely used performance measure which the Directors consider appropriate to compare the performance of the Group with other companies excluding variable factors such as tax and depreciation rates. The Group is required to be within a certain net debt: EBITDA ratio under its bank covenants and therefore it becomes an important measure for the Group. The Directors are required to meet EBITDA targets under their long term incentive plans. Reconciliation of profit on continuing operations to EBITDA

2018 2017 £m £m Profit on continuing operations Face of consolidated income statement 189.4 48.8 Adjust for: Exceptional items Note 4 (118.0) 19.1 Adjust for: Depreciation and amortisation Note 2 18.8 15.8 Earnings before interest, tax, depreciation and amortisation 90.2 83.7

Adjusted earnings per share Adjusted earnings per share represents the earnings per share adjusted for exceptional items, amortisation of acquired intangible assets and pension interest. The Directors consider this measure to be appropriate because it measure the underlying earnings per share of the Group excluding the material values that can be associated with exceptional items and volatility of the pension interest. This allows the Directors to measure the longer-term earnings per share on a comparable basis. A reconciliation of profit from continuing operations to adjusted earnings per share can be found in note 8: earnings per share on pages 91 to 92.

Dairy Crest Annual Report 2017/18 123 Alternative performance measures continued

Net debt Net debt represents the Group’s borrowings and is made up of interest bearing loans and borrowings and finance leases less cash and cash equivalents. 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. The Directors consider this to be the key performance measure of the Group’s debt position and balance sheet efficiency. The Directors are required to meet net debt targets under their long term incentive plans. A reconciliation of financial liabilities to net debt can be found in note 34: Analysis of net debt on pages 120 to 121.

Free cash flow Free cash flow represents the movement in net debt excluding dividend paid and cash flows associated with business acquisitions and disposals. The Directors consider this to be a key performance measure of the underlying cash generation of the business. The Directors are required to meet free cash flow targets under their bonus and long term incentive plans.

Reconciliation of movement in net debt to free cash flow

2018 2017 £m £m Opening net debt (249.8) (229.0) Closing net debt (265.7) (249.8)

Movement in net debt Note 34 (15.9) (20.8) Adjust for: Dividend paid Note 9 31.6 31.1 Adjust for: Repayment associated with sale of business Note 30 – 28.4 Free cash flow 15.7 38.7

Return on Capital Employed (ROCE) ROCE is a widely used performance measure that the directors consider appropriate to measure the balance sheet efficiency of the Group. The Directors are required to meet ROCE targets under their long term incentive plans ROCE is calculated by dividing the product group profit by the average net operating assets.

Reconciliation of total assets to operating assets

2018 2017 £m £m Total Assets Face of consolidated balance sheet 628.2 557.1 Adjust for: Retirement benefit surplus Note 21 (93.9) – Adjust for: Deferred tax asset Note 6 – (29.6) Adjust for: Financial assets Note 17 (3.0) (12.3) Adjust for: cash and short-term deposits Note 18 (22.6) (20.9) Add: Trade and other payables Note 22 (72.6) (79.1) Net operating assets 436.1 415.2 Average net operating assets (13 month average) 445.5 444.1 Return on capital employed 16.1% 15.4%

124 Dairy Crest Annual Report 2017/18 Contents About us Shareholders’ information

Strategic report Dairy Crest is a producer of leading British Company Registrar and Shareholder Enquiries Low cost share dealing service 1 Highlights If you have administrative enquiries concerning your shareholdings If you do not have share dealing arrangements in place, Dairy Crest 2 At a glance food brands and value-added ingredients. in the Company, such as the loss of share certificates, change of has a low cost share dealing service arranged by Link Share Dealing 4 Our business address, dividend payment arrangements or amalgamation of Services. Shareholders wishing to use the service should either visit 6 Our strategy and The company’s success is driven by a strong portfolio of market- accounts, please contact the Company’s registrar by writing to, the Link Share Dealing website at www.linksharedeal.com or call key performance indicators Link Asset Services, The Registry, 34 Beckenham Road, 0371 664 0445. Calls are charged at the standard geographical rate 8 Chairman’s statement leading brands including Cathedral City cheese, Clover dairy Beckenham, Kent BR3 4TU or by telephone on 0371 664 9266. and will vary by provider. Calls from outside the UK are charged at 9 Chief Executive’s review spread, Country Life butter and Frylight, the original one calorie the applicable international rate. Lines are open 8.00am to 4.30pm 12 Financial review cooking spray. Calls are charged at the standard geographical rate and will vary by Monday to Friday. 16 Cheese & Functional Ingredients provider. Calls from outside the UK are charged at the applicable 18 Butters, Spreads & Oils We also produce ingredients for the high growth global infant international rate. Lines are open 9.00am to 5.30pm Monday to Friday. Gifting shares to charity 20 Corporate responsibility Shareholders who have a small holding of shares on the register 26 Principal risks and uncertainties formula market – demineralised whey powder, a by-product from Link Asset Services also provides online facilities for shareholders to whereby their value makes them uneconomic to sell, may donate the cheese-making process, and galacto-oligosaccharides (GOS), check their holdings and update their details. Registering is easy, and these shares to charity under the Sharegift Scheme – administered Governance a lactose-based prebiotic which helps to improve gut health. there is no fee involved, simply access www.dairycrestshares.com. by the Orr Mackintosh Foundation – a registered charity. Information 30 Board of Directors, Executive can be found at www.sharegift.org or telephone: 020 7930 3737. Committee and Advisers Payment of dividends 32 Corporate governance We strive constantly to innovate, bringing new products to market Shareholders may arrange to have their dividends paid directly into 43 Directors’ remuneration report and introducing new ways of working across the business. a bank or building society account using the Bankers Automated 63 Directors’ report Clearing System (BACS). Bank mandate forms are available from 66 Statement of Directors’ Our success has been built on our links to the countryside, our Link Asset Services whose details appear above or you can register responsibilities dairy heritage and our people and we continue to ensure we are your mandate details online at www.dairycrestshares.com. The numbers setting the standard for responsible business practice. 67 Independent auditor’s report 72 Consolidated income statement Holders 73 Consolidated statement Analysis of ordinary shareholders at 22 May 2018 number % Shares % of comprehensive income Category 74 Consolidated and Parent Individuals and other holders 16,229 88.31 26,827,648 18.97 Company balance sheets 75 Consolidated statement Insurance companies, pension funds, banks, 2,149 11.69 114,587,813 81.03 of changes in equity nominees and limited companies 76 Parent Company statement 18,378 100.00 141,415,461 100.00 of changes in equity Size of holdings 77 Consolidated and Parent Up to 5,000 shares 17,013 92.572 22,954,113 16.23 Company statement of cash flows 78 Accounting policies 5,001 – 20,000 shares 1,142 6.214 8,539,344 6.04 84 Notes to the financial statements 20,001 – 100,000 shares 103 0.561 4,383,539 3.10 122 Group financial history Over 100,000 shares 120 0.653 105,538,465 74.63 123 Alternative performance measures 18,378 100.00 141,415,461 100.00 125 Shareholders’ information

Alternative performance measures: The Group uses alternative performance General information Financial calendar measures (APMs) as key financial performance General information about Dairy Crest can be found on our Dividends Final indicators to assess the underlying corporate website, www.dairycrest.co.uk Ex-dividend 5 July 2018 performance of the Group. The APMs are Investors who have questions relating to the Group’s business Record date 6 July 2018 widely used industry measures and form the measurement basis of key targets. Definitions activities should contact: Payment date 10 August 2018 of the APMs discussed throughout this Annual Investor Relations, Dairy Crest Group plc, Claygate House, Report and Accounts and a reconciliation to Littleworth Road, Esher, Surrey KT10 9PN. Group results (Anticipated) the equivalent statutory measure are detailed on pages 123 to 124. Telephone: 01372 472200 Half Year (Interims) November 2018 e-mail: [email protected] Preliminary Announcement of 2018/19 results May 2019 Notice: Limitations on Director liability – The purpose of the Annual Report Directors in connection with those reports shall be subject to the limitations 2018/19 Report and Accounts and Accounts is to provide information to members of the Company and it and restrictions provided by such law. circulation June 2019 has been prepared for, and only for, the members of the Company as a body. The Company, its Directors, employees, agents and advisers do not accept or Cautionary statement regarding forward-looking statements – assume responsibility to any other person to whom this document is shown The Group’s reports including this Annual Report and Accounts and written or into whose hands it may come and any such responsibility is expressly information released or oral statements made to the public in the future, by disclaimed. Under the Companies Act 2006, a safe harbour limits the liability of or on behalf of the Company and the Group, may contain forward-looking Directors in respect of statements in and omissions from the Directors’ report statements. By their nature, these statements involve uncertainty since future contained on pages 2 to 42 and 63 to 65 and from the Directors’ remuneration events and circumstances can cause results to differ materially from those report at pages 43 to 62. Under English law the Directors would be liable to the anticipated. The forward-looking statements reflect knowledge and information Company (but not to any third party) if the Directors’ report contained errors as available at the time of their preparation and, except to the extent required by a result of recklessness or knowing misstatement or dishonest concealment applicable regulations or by law, the Company and the Group undertake no This report is printed on Chorus Lux Silk paper. Printed at Pureprint. of a material fact, but they would not otherwise be liable. The Directors’ report obligation to update these forward-looking statements. Nothing in this Annual This paper has been independently certified as meeting Designed and produced by Tor Pettersen & Partners. and the Directors’ remuneration report have been drawn up and presented in Report and Accounts should be construed as a profit forecast. the standards of the Forest Stewardship Council® (FSC) Photographic direction by Hudson Wright Easton. accordance with and in reliance upon English company law. Liabilities of the and was manufactured at a mill that is certified to the ISO14001 Board photography by Ed Hill. and EMAS environmental standards. The inks used are all vegetable based.

Dairy Crest Annual Report 2017/18 125 Dairy plc Group Crest Annual Report 2017/18 FUTURE Feeding the

Dairy Crest Group plc Annual Report 2017/18 Visit our website at www.dairycrest.co.uk Dairy Crest Group plc House Claygate Littleworth Road Esher Surrey KT10 9PN Company No: 3162897