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

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

2 Contents About us Strategic report 1 Highlights 2 At a glance 4 Our business 6 Our strategy and key performance indicators 8 Chairman s statement 9 Chief Executive s review 12 Financial review 16 Cheese & Functional Ingredients 18 Butters, Spreads & Oils 20 Corporate responsibility 26 Principal risks and uncertainties Governance 30 Board of Directors, Executive Committee and Advisers 32 Corporate governance 43 Directors remuneration report 63 Directors report 66 Statement of Directors responsibilities The numbers 67 Independent auditor s report 72 Consolidated income statement 73 Consolidated statement of comprehensive income 74 Consolidated and Parent Company balance sheets 75 Consolidated statement of changes in equity 76 Parent Company statement of changes in equity 77 Consolidated and Parent Company statement of cash flows 78 Accounting policies 84 Notes to the financial statements 122 Group financial history 123 Alternative performance measures 125 Shareholders information Dairy Crest is a producer of leading British food brands and value-added ingredients. The company s success is driven by a strong portfolio of marketleading brands including Cathedral City cheese, Clover dairy spread, Country Life butter and Frylight, the original one calorie cooking spray. We also produce ingredients for the high growth global infant formula market demineralised whey powder, a by-product from the cheese-making process, and galacto-oligosaccharides (GOS), a lactose-based prebiotic which helps to improve gut health. We strive constantly to innovate, bringing new products to market and introducing new ways of working across the business. Our success has been built on our links to the countryside, our dairy heritage and our people and we continue to ensure we are setting the standard for responsible business practice. Alternative performance measures: The Group uses alternative performance measures (APMs) as key financial performance indicators to assess the underlying performance of the Group. The APMs are widely used industry measures and form the measurement basis of key targets. Definitions of the APMs discussed throughout this Annual Report and Accounts and a reconciliation to the equivalent statutory measure are detailed on pages 123 to 124. Notice: Limitations on Director liability The purpose of the Annual Report and Accounts is to provide information to members of the Company and it 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 assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility is expressly disclaimed. Under the Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Directors report contained on pages 2 to 42 and 63 to 65 and from the Directors remuneration report at pages 43 to 62. Under English law the Directors would be liable to the Company (but not to any third party) if the Directors report contained errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but they would not otherwise be liable. The Directors report and the Directors remuneration report have been drawn up and presented in accordance with and in reliance upon English company law. Liabilities of the Directors in connection with those reports shall be subject to the limitations and restrictions provided by such law. Cautionary statement regarding forward-looking statements The Group s reports including this Annual Report and Accounts and written information released or oral statements made to the public in the future, by or on behalf of the Company and the Group, may contain forward-looking statements. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the time of their preparation and, except to the extent required by applicable regulations or by law, the Company and the Group undertake no obligation to update these forward-looking statements. Nothing in this Annual Report and Accounts should be construed as a profit forecast.

3 /18 Highlights Group revenue up 10% to 456.8m Cathedral City revenue grows by 6% Spreads brands increase revenue by 10% Sales channels developing for GOS beyond infant formula Adjusted profit before tax 1 rises 3% to 62.3m; reported profit before tax (after net exceptional items 2 ) up 345% to 179.2m EBITDA 1 increases 8% to 90.2m Pension surplus of 93.9m an improvement of more than 200m Net debt 1 of 265.7m to fund higher value stock Innovation* accounts for 14% of total revenue Strategic report Revenue () 456.8m Adjusted profit before tax 1 () 62.3m Net debt 1 () 265.7m Total dividends per share (pence) 22.6p The numbers Governance 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 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 /18 1

4 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 team focussed on executing a clear and consistent strategy World class, well invested supply chain enables us to provide unrivalled quality and consistency across the product portfolio Culture of corporate responsibility which runs throughout the organisation High quality portfolio of market-leading food brands and ingredients generating growth and increasing market share Constantly striving to innovate, bringing new products to market and introducing new ways of working across the business Financially strong business with stable margins and progressive dividend policy Supply chain Butters & Spreads Kirkby 500 million litres of milk from 330 farmers Cheese & Functional Ingredients Davidstow Innovation Centre Harper Adams Nuneaton Cheese maturation, packing & distribution Head Office Claygate Frome Versatile cheese packing Erith Oils 2 Dairy Crest Annual Report /18

5 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 1 To generate growth by building strong positions in branded and addedvalue markets 2 To simplify, make more resilient and reduce costs Strategic report 3 To generate cash and reduce risk 4 To make acquisitions where they will 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 our supply chain on the environment To provide a safe, diverse and inclusive workplace that offers employees the opportunity to grow To create healthy, tasty and sustainable foods To support and enhance the communities in which we work and live Dairy Crest Annual Report /18 3

6 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 brand, and the premium Davidstow cheddar brand at our highly automated creamery in Davidstow, Cornwall. Our functional ingredients operation produces ingredients for the high-growth global infant formula market demineralised whey powder, Cheddar and demineralised whey a by-product from the cheese-making process, and galactooligosaccharides (GOS), a lactose-based prebiotic. Dairy Crest is well positioned to produce premium demineralised whey due to its high quality, traceable milk supply. Galacto-oligosaccharides Milk c500m litres Cream Lactose, water and heat Starter and adjunct cultures Whey Whey butter Enzymatic reaction Filtration and evaporation Removal of 90% of minerals Galacto-oligosaccharides (GOS) 13,500t capacity Cheddar 50,000t Demineralised whey (D90) 24,000t Infant nutrition Adult nutrition Animal nutrition Annual production Our retail markets Cheese Functional Ingredients The UK cheese market generates 2.7 billion of sales each year, approximately half of which are cheddar. Cheddar volumes grew by 2% last year. Cathedral City is the largest cheddar brand, accounting for 20% of total cheddar sales but 55% of the branded market. With retail sales of approximately 280 million, Cathedral City sells more than all of the other cheddar brands combined, and is three times larger than the number two brand. Private label still dominates, however, which presents us with further opportunities to UK cheddar market* expand both in the UK and abroad. Cathedral City 20% 1.3bn Pilgrim s Choice 6% Seriously Strong 3% Wyke Farms 1% Other 5% Dairy Crest has made a significant investment at its Davidstow creamery to manufacture demineralised whey for use in infant Global infant formula market $47bn ** formula products. This is a global market that is expected to grow at a compound annual rate of 9% from 2015 to The Asia Pacific region is the largest consumer of infant formula as population growth and urbanisation fuel demand. Consumers are willing to pay for safety and quality more than ever before. Dairy Crest also manufactures GOS, a prebiotic derived from the lactose in cow s milk, which is used in infant formula. We are exploring additional uses for GOS as an ingredient in the adult food market and in animal feed. Private label 65% 4 Dairy Crest Annual Report /18

7 Revenue Profit Cheese & Functional Ingredients 61% Butters, Spreads & Oils 39% Butters, Spreads & Oils Cheese & Functional Ingredients 70% Butters, Spreads & Oils 30% Contribution to Group (% of total Group): Revenue excludes other revenue. Profit is product group profit. This information is presented in Note 1 to the Accounts. 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 and oils Oils Block butter Spreadable Dairy spreads Dairy-free spreads Cooking spray Butters & Spreads Oils The UK butters and spreads market totals 1.3 billion of retail sales. Dairy Crest s five brands make up 17% of that market by volume. Our four spreads brands represent 30% of the standalone spreads market. Over the past decade butter has profited from the growing consumer trend to eat more natural products. Over the past two years, however, this has increased global demand for dairy fats which, coupled with a reduced milk supply, has led to butter prices rising by more than 20% on shelf. This has helped to slow the decline of the spreads market which has been contracting in recent years. Clover is the No1 dairy spread with market share of 20% *** Frylight household penetration **** Spray oils represent around 13% of total cooking oil retail volumes in the UK and grew by 8% over the past 12 months. Frylight, with its one calorie spray, is the number one oil brand across the total category (including pouring oils), and makes up 88% of spray oil sales, making it the stand out market leader. Over the past two years, spray oils have doubled their presence on supermarket shelves, driven predominantly by the increased breadth of Frylight s product range. With a household penetration rate of 25% there is still considerable potential for Frylight to grow. * IRI Kantar 52 weeks ended 24 March ** Euromonitor estimate *** IRI Kantar 52 weeks ended 24 March, spreads market **** Kantar Worldpanel 52 weeks ended 25 February 25% Dairy Crest Annual Report /18 5

8 Clear and consistent Strategy Dairy Crest has a clear and consistent strategy against which we continue to make progress. 1 To generate growth by building strong positions in branded and added-value markets 2 To simplify, make more resilient and reduce costs Progress /18 Progress /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. 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 Focus will remain on growing market share of our key brands Cathedral City, Clover, Country Life and Frylight Continued investment in advertising and promotion Further advance our strong pipeline of innovation Work with Fonterra, our sales partner, to accelerate returns from our demineralised whey and GOS products in the infant formula sector Continue marketing our GOS business to the adult and animal nutrition markets Future priorities To complete the programme to replace core IT systems to deliver a less costly and simpler IT infrastructure more appropriate for the business Roll out revised milk pricing schedule which will be simpler to manage and, over time, will reward farmers who supply milk of a composition most appropriate for the manufacture of cheese and demineralised whey Continue to seek cost reductions and drive operational efficiency improvements throughout the business Key performance indicators and performance in the year ended 31 March Our key performance indicators ( KPIs ) are summarised below. These KPIs are also used as measures for our Long Term Alignment Plan ( LTAP ) for Directors and senior employees. Grow earnings before interest, tax and depreciation (EBITDA 1 ) and adjusted profit before tax (adjusted PBT 1 ) In the year ended 31 March EBITDA rose by 7.8% and adjusted PBT increased by 2.8%. Deliver an acceptable return on capital employed (ROCE 1 ) ROCE for the year ended 31 March was 16.1%. Reduce net debt/ebitda 1 to the range 1 2 times At 31 March net debt/ EBITDA was 2.9 times (31 March : 2.9 times). Grow our four key brands ahead of the market In the year ended 31 March Cathedral City, Clover and Frylight grew ahead of the market although Country Life did not (31 March : three of our key brands grew ahead of the market). 1 These APMs are defined and reconciled on pages 123 to Dairy Crest Annual Report /18

9 3 To generate cash and reduce risk 4 To Progress /18 Progress /18 Future annual increases for pensions in payment now linked to CPI rather than RPI, thereby reducing estimate of future benefit costs and consequently cash 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 make acquisitions where they will generate value Focus has been on organic growth and we have not made any acquisitions during the year ended 31 March Strategic report Future priorities Free cash flow expected to increase as cost pressures ease, pension liabilities reduce and capital expenditure 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 Future priorities Continue to look for value-enhancing acquisitions which meet our stringent requirements Deliver cost saving initiatives Cost reduction projects initiated in the year ended 31 March have delivered substantial benefits ahead of plan. Achieve innovation revenue targets for products developed in the last three years In the year ended 31 March around 14% of our revenue came from such sales against a target of 10% (31 March : 13% of revenue). Improve corporate responsibility measures During the year we focussed our corporate responsibility efforts on 14 pledges grouped under the four pillars of Climate, Colleagues, Consumers and Community. See the Corporate Responsibility section on pages 20 to 25 for more detail. Dairy Crest Annual Report /18 7

10 Chairman s statement Review of the year This year we have delivered a strong set of results despite volatile market conditions. This performance demonstrates the underlying robustness of our business, which today is predominantly branded and value-added. Adjusted profit before tax increased by 3% to 62.3 million on revenues that have increased by 10%. After net exceptional items of million, reported profit before tax was million. In the first half of the year, dairy markets were inflationary. Our input costs rose markedly as we increased the price we paid our supplying farmers for milk and unprecedentedly high prices in cream and butter markets put pressure on input costs in our butters business. However, in the second half of the year, these pressures eased and we ended the year with milk and butter costs approximately 10% and 30% respectively off their highs. Dairy market volatility is not unusual. In the last five years we have seen pronounced swings in dairy markets, which are increasingly global. We must expect that volatility is here to stay. However Dairy Crest has delivered consistently high margins throughout this period. This is due to the underlying business model which focusses on investing in a high-quality, efficient supply chain. This focus on investment in quality and efficiency allows us to pay leading prices for our milk, to invest in innovation and brand marketing and to reward shareholders with high margins and a progressive dividend policy. It is a model that will continue to drive our growth in the future, irrespective of volatility in dairy markets. Developing brands Developing brands is at the heart of our business and /18 saw good progress across our portfolio. Cathedral City grew sales by 6%, with innovation and consumer marketing again driving this growth. One of our recent innovations Cathedral City Spreadable was voted Product of the Year in the UK cheese category of the world s largest online consumer survey. The brand also sponsored a new family quiz show on ITV1 in the final quarter. Our portfolio of spreads brands delivered an impressive 10% increase in sales helped by clear positioning in the category and Frylight enjoyed its sixth consecutive year of double-digit sales growth since we acquired the business in Innovation is critical in order to continue to grow our business and 14% of the Group s revenue in /18 resulted from products that are less than three years old. This is well ahead of the challenging 10% target we set ourselves. 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 Value-added ingredients We have completed our investment at our creamery at Davidstow, Cornwall and we are producing demineralised whey, an addedvalue by-product of the cheese-making process. Whey is used as the base ingredient for infant formula and together with our sales partner Fonterra we have been building the customer base. Furthermore, we are manufacturing GOS at Davidstow. GOS is a prebiotic which is added into infant formula to help aid digestion and growth in babies. Sales of this product are growing. We also continue to research other potential applications for GOS in both adult nutrition and animal feed. This work could potentially broaden the market for GOS beyond infant formula. Our culture and values Dairy Crest remains committed to doing the right thing in the way we conduct ourselves and do business. We have 14 corporate responsibility pledges across Climate, Colleagues, Consumers and Community. We have made these pledges specific and measurable in order to continuously improve, as we passionately believe that success will benefit our business performance as well as our culture and values. We report on each of these pledges in the Corporate Responsibility section of this report. Increased dividend recommended The Board is recommending a final dividend of 16.3 pence per share, making a full year dividend of 22.6 pence per share. In 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 earnings per share. A key part of our strategy remains to continue to increase dividends each year, aiming for a target cover range of 1.5 to 2.5 times. Summary Our performance this year is not only a result of the Group s longterm strategy but also a reflection of the significant contribution and dedication of all of our employees, for which I would like to sincerely thank them. The Board remains confident in the future prospects for Dairy Crest. 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. Stephen Alexander Chairman 22 May 8 Dairy Crest Annual Report /18

11 Chief Executive s review Highlights Group revenue up 10% to 456.8m Cathedral City revenue grows by 6% Spreads brands increase revenue by 10% Sales channels developing for GOS beyond infant formula Adjusted profit before tax rises 3% to 62.3m; reported profit before tax (after net exceptional items) up 345% to 179.2m EBITDA increases 8% to 90.2m Pension surplus of 93.9m an improvement of more than 200m Net debt of 265.7m to fund higher value stock Innovation* accounts for 14% of total revenue * Revenue from new products launched within the past three years 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 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 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 to reach 2.85 per litre. They fell back to just below 2.00 per litre by the end of the financial year although they have started to firm again. As a comparison, the average cream price over the previous three years was 1.20 per litre. We were able to partially offset the cost impact on our Butters, Spreads & Oils division by selling excess cream and whey butter generated in our Cheese & Functional Ingredients business. The input cost inflation resulted in considerable increases in the retail price of butter over the period. Spreads, and Clover in particular, were the major beneficiaries as consumers switched to cheaper alternatives. Retail prices also started to increase for cheese in the second half of the year. Healthy brand revenue growth In aggregate, revenues of our four key brands (Cathedral City, Clover, Country Life and Frylight) grew by 6% during /18. Positive volume growth for Cathedral City, Clover and Frylight was offset by Country Life which we chose not to promote for most of the year to protect margins. Brand Market Volume* Value* Cheese +3% +6% Strategic report I am pleased to report that our brands have delivered a strong 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 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 secured and we are also making progress in selling GOS to the adult and animal nutrition markets under our brands, Promovita and Nutrabiotic. Managing fluctuations in input costs is part of the normal 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 testament to the resilience of our business model. We have made significant progress in reducing our pension liabilities so the fund is now in surplus on an accounting basis, due largely to the agreed change to the indexation of pensions in payment. Cheese stocks, which have risen significantly in value due to the increase in the input cost of milk, built up during the year which led to net debt increasing to million. The stock will be sold through this year and working capital requirements are starting to ease as milk and cream costs have reduced. Spreads +3% +7% Butters -20% 0% Oils +12% +13% Total 0% +6% * Dairy Crest volume and value sales 12 months to 31 March vs 12 months to 31 March Cathedral City revenues increase Cathedral City delivered a strong performance over the year, generating volume growth of 3%, revenue growth of 6% and an increase in market share. In comparison, IRI Kantar data for the 52 weeks ended 24 March showed that the total everyday cheese market grew by 2% in volume and 5% in value terms. Cathedral City is a top 20 food grocery brand in the UK. It can be found in more than half of all fridges across the country and represents 55% of branded cheddar sales. It is by far the 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 /18 9

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

13 a substantial amount of empirical data to illustrate these aspects which is leading to significant interest from potential customers. Our research on pigs shows that weight gain continued after GOS was withdrawn from the feed, indicating that GOS only needs to be included in the early stages of an animal s diet, and not throughout its lifetime, to obtain the desired results. This helps to reduce the feed cost for the producer which is a key consideration in our conversations with potential customers. GOS-fed chickens outperformed the control groups in terms of weight gain and were also more efficient in converting feed. In addition, we have research that demonstrates the benefits that GOS brings in supporting the resilience of bird health. Additional studies on calves and fish have started recently. We are working in conjunction with a number of academic institutions and commercial partners to conduct trials, including Danisco Animal Nutrition part of DuPont. We also have interest from a number of global feed manufacturers, with the level of attention continuing to grow. Promovita GOS is the brand we use for human nutrition. The global digestive health food market is worth over 44 billion and growing. There are a number of major food companies looking into the potential of including GOS in their products to promote gut health, increase fibre content and replace sugar. Our primary focus at the moment is on yoghurt, dairy beverage and cereal manufacturers which we think are best suited to GOS s dairy foundations. Innovating for growth groups, with the goal to be 100% recyclable by 2021/22. At present, 80% of all our packaging is recyclable. As signatories of Courtauld and working members of WRAP 2, we are working to improve packaging, manufacturing efficiencies and reduce consumer food waste. We are also acutely aware of the need to provide responsible packaging with on-pack advice to consumers regarding storage and recycling. With one in three tonnes of food produced globally being wasted, the effect of household food waste is a pressing issue. Our innovation team is looking at ways in which we can reduce the packaging of our products whilst maintaining freshness, hygiene and food safety, while also increasing the percentage of our packaging that is fully recyclable. Driving efficiencies We are a simple, lean and efficient business. We have five wellinvested operating sites employing around 1,100 people. At the end of we moved production at our butters and spreads site in Kirkby onto a 24/7 manufacturing schedule which allows us to be more flexible in the face of changing market conditions. The restructuring has resulted in one-off exceptional costs of approximately 5 million but will reduce the annual cost base by 2.5 million from the next financial year onwards. We intend to sell surplus land on the site for redevelopment which should cover these exceptional costs. The project to replace our bespoke IT systems with a standardised product is progressing well. We completed the first phase in early which incorporated our finance and payment 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. Strategic report Prebiotics feed friendly bacteria found within the large intestine, encouraging them to thrive and helping to maintain a healthy gut. Dairy Crest manufactures galacto-oligosaccharides (GOS) which is a unique prebiotic derived from lactose, a natural ingredient in cow s milk, and is similar to the prebiotics found in human breast milk. It helps support the body s natural defences, improve the absorption of key minerals in our diet and promote digestive comfort. Already an existing ingredient in infant formula, our research has shown that GOS can also be added to a wide range of adult and animal formulations to help improve gut health. Focus on innovation Innovation is at the heart of our business. Our innovation centre is now firmly established on the campus of agricultural university, Harper Adams. 14% of our revenue this year came from innovations developed during the previous three years, driven 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 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. In 2016, as part of the review of our Corporate Responsibility programme, we committed to deliver annual increases in the percentage of recyclable packaging used across our product 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 industry-leading brand. We have seen good momentum in revenue growth going into the new financial year. With much of the groundwork now complete, we expect sales of demineralised whey at infant formula grade to accelerate further over the coming year. We have already established ourselves as a leading supplier for organic GOS and we are also making good progress in developing a market for GOS beyond infant formula, 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 infrastructure to ensure that we are well positioned to capitalise on future growth opportunities. Mark Allen Chief Executive 22 May 1 Courtauld 2025 is a voluntary agreement that brings together organisations across the food system from producer to consumer to make food and drink production and consumption more sustainable. 2 WRAP is a charity focussed on maximising the value of waste by increasing the quantity and quality of materials collected for re-use and recycling. Dairy Crest Annual Report /18 11

14 Financial review Product group profit* () 71.8m Pensions** () 93.9m surplus Overall, the financial performance of the Group during the year has been robust /14 14/15 15/16 16/17 17/18 * This information is presented in Note 1 to the Accounts Butters, Spreads & Oils Cheese & Functional Ingredients Sep-16 (120.5) Mar-17 (109.6) 39.9 Sep Mar-18 ** This information is presented in Note 21 to the Accounts Overview We have continued to make progress in /18. We have managed the business through a period of high input cost increases and delivered broadly stable margins compared to the prior year. More importantly, we have also continued to invest in the future: our functional ingredients business is growing and we are developing opportunities for GOS beyond infant formula markets; we have delivered significant operational changes at our butters and spreads site in Kirkby that deliver increased flexibility and efficiency; and we have delivered the first phase of an IT transformation project that will allow us to reduce complexity and costs These initiatives further develop the business and will support future growth. Overall, the financial performance of the Group during the year has been robust despite significant price inflation in the first nine months of the year. Revenue increased by 10% and product group profit increased by 5% to 71.8 million. Reported profit before tax increased 345% to million due to the exceptional income of million recognised in relation to the reduction in pension scheme liabilities. We continue to tightly manage the balance sheet, although the scale of input cost inflation has temporarily inflated stock valuations and levels of debt at 31 March. Other working capital has generated cash and the pension fund has moved from a million deficit at 31 March to a 93.9 million surplus at 31 March, primarily as a result of moving the basis of indexation for pensions in payment from RPI to CPI. This is a permanent reduction in future scheme liabilities that would otherwise have to be funded by the Group. Revenue We continue to provide product group analysis consistent with prior years to assist the users of the Financial Statements, although the Group continued to operate as one segment throughout the year ended 31 March. Change Change % Cheese & Functional Ingredients Butters, Spreads & Oils Other (5.7) (51.4) Group Revenue increased by 10% to million with increases across all parts of the business except Other which comprises third party warehousing revenue. Cheese revenues were up 4% as we started to recover increases in the cost of milk. In the second half of the year we focussed on pricing in a market where milk input costs were high. We chose not to discount too heavily, especially in the final quarter, as we are confident of selling year end cheese stocks in /19. The Group benefitted from increased sales of our Davidstow by-products, cream and whey butter, as well as D90 and GOS, which saw Functional Ingredients revenue increase 51%. Butter revenue was up 25%, reflecting cost price increases achieved to mitigate the unprecedented increase in butter input costs across 2016 and. In this environment, Country Life volumes fell as promotional activity was scaled back, however other own-label and bulk butter sales increased. Spreads revenue 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 /18

15 Profit on continuing operations Change Change % Cheese & Functional Ingredients Butters, Spreads & Oils (3.8) (14.9) Total product group profit Acquired intangible amortisation (0.4) (0.4) Group profit on continuing operations (pre-exceptional items) Overall product group profit increased by 3.5 million to 71.8 million and the margin decreased slightly to 15.7% (: 16.4%). This margin is after charging all central corporate costs and includes 2.4 million profit (: 3.0 million) on the sale of closed 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 sales will not repeat in future years. Their treatment as operating income is consistent with the treatment in previous years of the related closure costs. Future sales of ex-manufacturing sites such as Crudgington, Shropshire will be classified as exceptional, consistent with the historic treatment of the related closure costs. Cheese & functional ingredients product group profits increased by 17.1% and the margin increased to 18.1% (: 16.8%). This reflects an improved functional ingredients performance and a rising dairy market where selling price increases were achieved. However, the full impact of milk input cost increases will not be felt in cost of sales until /19 given the year-long average maturation cycle of our cheese. Butters, spreads & oils product group profits of 21.7 million (: 25.5 million) were 3.8 million lower than with profit margins of 12.5% (: 16.9%) reflecting the competitive butters and spreads market and significantly higher butter input costs. However, margins in the second half increased markedly versus the 3.7% delivered in the first six months of the year as cost pressures abated somewhat. product formulation results in long lead times for customers switching their ingredients suppliers. We have prudently written down the carrying value of certain formulations recognising these factors. This level of exceptional spend is higher than anticipated at the start of the year, albeit significantly below the 19.0 million incurred in the year ended 31 March. There will not be any further exceptional items in /19 in relation to this project. Finally, we have recognised a non-cash write down of 2.6 million for certain legacy IT assets that are being replaced as part of a two year programme to upgrade our core IT infrastructure. This work will enable a significant reduction in the complexity and costs of the Group s core processes and should deliver savings of approximately 5 million per annum following its completion in early Exceptional items in the year ended 31 March related predominantly to the building and commissioning of the demineralised whey and GOS facilities at the Davidstow creamery in Cornwall. Finance costs Finance costs of 9.5 million increased by 1.8 million in the year. This reflects lower levels of interest capitalisation following the completion of the building of the demineralised whey and GOS facilities at Davidstow. Capitalised interest costs in the year amounted to 0.3 million (: 3.1 million) and the charge in the income statement is now broadly equal to cash costs. Interest cover excluding pension interest calculated on total product group profit was 7.8 times (: 9.1 times). This is comfortably above the 3.0 times minimum requirement in the Group s banking covenants. Other finance expenses, which comprise the net expected return on pension fund assets after deducting the interest cost on the defined benefit obligation, decreased slightly to 0.7 million (: 0.8 million). These costs are dependent upon the pension fund position at 31 March each year and are volatile, being subject to market fluctuations. We therefore exclude this item from adjusted profit before tax. Profit before tax continuing operations Strategic report Exceptional items Pre-tax exceptional gains from continuing operations amounted to million (: 19.1 million charge). Exceptional income of million was recognised in relation to the reduction in pension fund liabilities resulting from the change in the indexation benchmark for pensions in payment from RPI to CPI. Exceptional income of 0.7 million has also been recognised on the sale of a closed dairy facility in Fenstanton, Cambridgeshire. Exceptional income was partly offset by certain exceptional charges. Firstly, the Group incurred 5.4 million of restructuring costs at the butters and spreads facility in Kirkby where a number of initiatives have been implemented in order to improve efficiency across the site. These one-off costs should, in time, be broadly offset by the sale of surplus land on the site. Secondly, we have recognised a net exceptional charge of 5.6 million with respect to the functional ingredients facility at Davidstow. This comprises 8.5 million of costs partly offset by 2.9 million received in settlement of project related litigation. Demineralised whey and GOS production stabilised over the course of the year, however 3.8 million of exceptional commissioning production costs were incurred, of which 2.9 million were in the first half of the year. In addition, sales of both demineralised whey and GOS have been underpinned by promotional activity in infant formula markets where complex Change Change % Total product group profit Finance costs (9.5) (7.7) (1.8) (23.4) Adjusted profit before tax Amortisation of acquired intangibles (0.4) (0.4) Exceptional items (19.1) n/a Other finance expense pensions (0.7) (0.8) Reported profit before tax continuing operations Adjusted profit before tax increased by 2.8% to 62.3 million. Reported profit before tax of million represents a million increase from, predominantly due to the exceptional gain in relation to the pension fund of million. Taxation The Group s effective pre-exceptional tax rate on continuing operations was 17.3% (: 18.0%). The effective tax rate is slightly below the headline rate of UK corporate tax as we sold a small number of properties, the profits on which are offset by brought forward capital losses or roll over relief. Dairy Crest Annual Report /18 13

16 Financial review continued Earnings per share The Group s adjusted basic earnings per share from continuing operations increased by 3% to 36.7 pence (: 35.6 pence) reflecting the increase in post-tax profits. Basic earnings per share from continuing operations, which includes the impact of exceptional items, pension interest expense and the amortisation of acquired intangibles, amounted to pence (: 23.7 pence). Discontinued operations There was no discontinued gain or loss recorded in the year ended 31 March. The post-tax profit on discontinued operations in the previous year totalled 5.2 million and related to previously sold businesses in the UK and France. Group result for the year The reported Group profit for the year from continuing operations was million (: 33.1 million). The profit for the year attributable to equity shareholders was million (: 38.3 million). Dividends The proposed final dividend of 16.3 pence per share is in line with the previous year. Together with the interim dividend of 6.3 pence per share (: 6.2 pence per share) the total dividend for the year is 22.6 pence per share (: 22.5 pence per share). This represents a 0.4% increase in line with our progressive dividend policy. The final dividend will be paid on 10 August to shareholders on the register on 6 July. Dividend cover of 1.6 times is within the Board s target range of 1.5 to 2.5 times (: 1.6 times). Pensions At 31 March the Group had a pension surplus of 93.9 million. This represents a million improvement compared to the deficit in March of million. The March position now reflects an agreed change to the indexation of pensions in payment. Following detailed negotiations with the Trustee, future annual increases will be linked to CPI rather than RPI. CPI is already used by the Fund for calculating 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 /18

17 Higher milk cost is the principal reason for a stock value of million at 31 March, approximately 30 million higher than the year before. This stock will be sold in /19 and we have achieved selling price increases in the market that have helped the 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 (: 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 (: 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 (: 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 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 (: 42.4 million) and comprised 7.4 million in relation to previously closed properties (: 4.5 million) and a further 14.7 million through the sale and leaseback of certain equipment at Kirkby (: 37.9 million at Davidstow). Strategic report 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 to extend 80 million of the facility by two years. At 31 March the Group had a swapped Sterling equivalent of million of loan notes outstanding maturing between and This change was agreed as part of a broader package to put the Fund on a stronger foundation for the future. This package includes continuing to move to lower-risk investments over time. A new schedule of contributions has been agreed and this resulted in cash contributions of 10.7 million in /18 (: 12.9 million) and will result in 14.2 million in /19. Beyond that, contributions will revert to 20 million per annum, although the new triennial valuation in March 2019 will determine contributions beyond then when agreed. We continue to manage pension fund liabilities and during the year a Flexible Retirement Option programme was undertaken resulting in 13.3 million of liabilities being permanently removed from the fund (: 18.8 million). Treasury policies The Group operates a centralised treasury function which controls cash management and borrowings and the Group s financial risks. The main treasury risks faced by the Group are liquidity, interest rates and foreign currency. The Group only uses derivatives to manage its foreign currency and interest rate risks arising from underlying business and financing activities. Transactions of a speculative nature are prohibited. The Group s treasury activities are governed by policies approved and monitored by the Board. Tom Atherton Deputy Chief Executive & Group Finance Director 22 May 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 /18 15

18 Performance Cheese & Functional Ingredients THE Number one cheese brand and growing million / /17 Revenue Product group profit Margin (%) Market background Fundamental to our business is the high quality milk supplied exclusively to us by approximately 330 farmers in Cornwall and Devon. After almost two years of falling milk prices, brought welcome relief to farmers as prices continued the ascent that had started in August During the financial year the price we paid to our farmers for their milk reached a peak of 32 pence per litre (ppl) in December. We paid an average price of 30.1ppl during /18 compared with 24.6ppl for the prior year. We always aim to pay a fair, market-leading price for our milk. The maturation process means we sell cheese made with milk purchased approximately one year earlier. Therefore the impact of the rising milk price was only reflected in the profit and loss account in the second half of the year, although the effect was seen in higher working capital balances for cheese throughout the /18 period. 16 Dairy Crest Annual Report /18

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

20 Performance continued 18 Dairy Crest Annual Report /18

21 Butters, Spreads & Oils Increasing market share million / /17 Revenue Product group profit Margin (%) Butter prices rise /18 has been a challenging year for the butter market as input costs, in the form of bulk butter (based on cream pricing), soared by 65% to reach record highs in September of almost 3 per litre before falling to just below 2 per litre by the end of the financial year. Retailers increased butter prices on shelf and promotional activity was reduced so, while the butter category increased revenues strongly by more than 20%, this disrupted the long-term growth in volumes which fell by 1% over the year. The ongoing decline in spreads volumes slowed as a result, decreasing by 2% while revenues were flat. Frylight performing well Frylight achieved double digit growth in both volumes and revenues for the sixth consecutive year since its acquisition in The brand benefitted from an additional 5,000 new distribution points and is now listed in all the major supermarkets and discounters. Itsu, the Asian-inspired food chain, is also now using Frylight in all of its 70 UK shops. The start of the New Year and Pancake Day are the most important periods in Frylight s calendar. This year the brand was well promoted by all stockists. Volumes consequently increased by 20% in the fourth quarter compared to the same period last year. More than 18% of total Frylight turnover in /18 was generated by innovations launched in the previous three years. Recent additions to the range avocado and coconut have been well received and sales are gaining momentum. A further new variant was launched in April. As we seek to raise awareness of the brand we have been partnering with health influencers such as dieticians and food bloggers to extol its virtues. We are also starting to engage with the NHS to promote the health benefits of using Frylight. Investment was made during the year to improve the capacity and efficiency of the production site in Erith which positions us well for future growth. Strategic report Spreads brands grow share Each of our butters and spreads brands has a well-defined place in the market and the portfolio as a whole covers the full spectrum of consumers needs. In the face of rising cream costs we pulled back on promotions for Country Life for most of the year to help manage profitability. We refreshed the packaging to further emphasise its British heritage which has resonated well with customers. Promotions were introduced again at the end of the year as input costs fell. The Dairy Crest spreads brands delivered a strong performance resulting in 10% uplift in revenue for the year compared with the overall spreads market, which, excluding our brands, contracted by 2% over the same period. Following on from its success in winning the spreads category Product of the Year award, Clover delivered another robust year of both volume and revenue growth. As the only major spreads brand with no artificial ingredients it has clearly solidified its position as the leading UK dairy spread with 20% of the spreads market. Our other spreads brands also performed extremely well and all gained market share. Vitalite and Willow both generated high double digit volume and revenue growth. Increasing efficiencies Having consolidated our butters and spreads production into a single manufacturing site in Kirkby, we successfully introduced a 24/7 working schedule at the end of. This new way of working, together with a revised site agreement, line improvements and a voluntary leavers scheme, are expected to greatly improve flexibility and efficiency at the site while reducing operating costs by around 2.5 million a year. These changes, combined with improvements in brand performance, will enable continued investment into this highmargin category and underpin ongoing cash generation. Vitalite UK s No1 dairy-free spread Vitalite has been an established brand for over 30 years. Two years ago Dairy Crest recognised the growing demand for dairy-free products and refreshed the branding to highlight its dairy-free credentials. During /18 Vitalite grew both volumes and revenues by around 25%, propelling it to the number one selling dairy-free spread in the UK. We are looking to further capitalise on the strong brand to expand our dairy-free offer. Dairy Crest Annual Report /18 19

22 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 of progress in delivering our ambitious CR strategy which we launched during the previous reporting year. In this section we report on our advancements in achieving the qualitative and quantitative objectives which we set out in our five year programme. We, like many organisations, recognise the benefits of a shared focus in addressing global environmental challenges. To this end we have aligned our pledges to a number of the United Nations Sustainable Development Goals (SDGs) and, as a producer of consumer foods and functional ingredients, we consider the most relevant of which to be SDG12 Responsible Consumption and Production. During the year we once again took part in the Business in the Community s annual Corporate Responsibility Index in order to ensure that our strategy is meeting the expectations of a wide range of stakeholders. We are proud to have achieved a score of 95% the highest of the participating companies in the Food & Beverage benchmarking sector. We have embraced the feedback that the benchmarking process provides and incorporated this into the ongoing management and measurement of our CR strategy. Within our Climate pillar we have made good progress in reducing our energy and water consumption and minimising waste, while we also launched our revised Davidstow Farm Standards. Under our Colleagues pillar we are rolling out a new Diversity and Inclusion agenda which focuses on improved education and awareness amongst all employees. Reducing the use of plastic has dominated the headlines in recent times. Our Consumer pledges commit us to increase the recyclability of our packaging and our innovation team are working hard to do just that. 80% of our packaging is recyclable and we are working on further ways to improve that percentage. Finally, within the Community pillar we continued to support The Prince s Countryside Fund and other worthwhile causes during the year. 4 pillars 14 pledges Dairy Crest CR icons (spot colour) Climate Climate To reduce the impacts of our supply chain on the environment Dairy Crest CR icons (spot colour) Climate Consumers Consumers Colleagues Dairy Crest CR icons (spot colour) To provide a safe, diverse and inclusive workplace Climate that offers employees the opportunity to grow Climate Responsible stewardship on farm Low carbon manufacturing Water stewardship Reducing waste Dairy Crest CR icons (spot colour) Colleagues 5 Consumers Colleagues 6 Community Consumers Colleagues Dairy Crest CR icons (spot colour) 7 Community Climate Colleagues Dairy Crest CR icons (spot colour) 8 Community Climate Consumers Dairy Crest CR icons (spot colour) Community Employee engagement Holistic approach to health & safety Diversity and inclusion Employee development Climate Consumers To create healthy, tasty and sustainable foods Consumers Consumers Colleagues Community Colleagues To support and enhance the communities in which we work and live 9 Improving health & nutrition 10 Sustainable ingredients Colleagues 12 Community Community Supporting rural communities 13 Supporting local communities Community 11 Reducing our packaging impacts 14 Employee volunteering 20 Dairy Crest Annual Report /18

23 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 by our Environmental Management System (EMS) which we have redesigned and centralised to increase our focus on environmental risks and opportunities for our business. We are pleased to have achieved certification of our EMS to the stretching new international standard ISO14001:2015. In order to raise understanding of our CR programme we designed a bespoke awareness course in which around 700 colleagues have now participated. We were pleased that this initiative was recognised by Asda s Save and Sustain Exchange community which awarded us the winner of their Internal Engagement category. Each year we provide an annual disclosure of our carbon management plans via CDP s (formerly the Carbon Disclosure Project) Investor Index. Despite increasingly challenging requirements, in we maintained our rating of B Management which recognises that we are taking coordinated action on climate change mitigation and adaptation issues. 1 We have refreshed the Davidstow Farm Standards for our supplying dairy farms, reflecting the changing priorities since they were first introduced in Our aim is to support our supplying dairy farmers to go above and beyond the Red Tractor assured farm standards to ensure we can deliver the highest quality products. Examples include an additional emphasis on antibiotic management and the impact on-farm protocols have on health & safety and the environment. During we engaged with the West Country Rivers Trust to increase our understanding of the impact of farming on the environment and which farm protocols deliver the greatest level of environmental assurance. 2 Responsible stewardship on farm Use the Davidstow Farm Standards to drive continuous improvement in animal husbandry and farm environmental standards. We will target a year-on-year increase in the percentage of farms achieving the highest level of the Davidstow Farm Standards 72% of farms achieving the highest level of our Davidstow Farm Standards Low carbon manufacturing 20% reduction in relative carbon emissions from our direct operations by 2021/22 vs. 2016/17 baseline. Achieved by building on our previous successes 40% of energy now comes from renewable sources in energy efficiency and low carbon technologies and by ensuring that a minimum of one third of our energy comes from on-site renewables Relative CO 2 emissions reduced by 10% vs. 2016/17 We are committed to reducing greenhouse gas emissions by using less, and cleaner, energy. During the year we continued to invest in projects to reduce our energy usage which helped contribute to a 10% reduction in our relative greenhouse gas (GHG) emissions intensity. GHG reduction opportunities will remain a priority for years to come. We maintained a high (c.78%) utilisation of the biomass boilers at our Davidstow creamery in Cornwall which led to us exceeding our pledge for a minimum of one third of the total energy that we use to come from on-site renewables. We continue to assess the feasibility of additional sources of on-site renewable energy. 3 47% of water utilised from recycled sources During the period we reduced our relative freshwater abstractions by 8% to around 620,000m 3 per year. We engaged specialists to identify opportunities to reduce our demand for water. We also increased utilisation of our waste water recovery plant at Davidstow where we target a daily recovery rate of up to 1.5 million litres of water. The proportion of water used from recycled sources increased to 47% which is an increase over last year and indicates good progress towards our target of 50%. 4 Water stewardship To recycle more than 50% of the water required to manufacture our products while further reducing relative freshwater abstraction by 10% by 2021/22 vs. 2016/17 baseline Reducing waste Deliver a year-on-year increase in the value generated from unavoidable non-edible wastes. Achieved by reduction at source, converting wastes into by-products and moving materials up the waste hierarchy We continue to play an active role in the Courtauld 2025 Dairy Working Group which is facilitated by WRAP and Dairy UK. The group focuses on waste reduction and resource efficiency, and aims to improve education of the sector as a whole. WRAP s support to our CR strategy has included advising on manufacturing efficiencies, understanding the processes of municipal recycling and shared insights of the varying attitudes and behaviours towards household food waste of different consumer groups. We continue to work to reduce non-edible operational waste which totals 2,850 tonnes per year. We met our target of a minimum of 80% waste to be segregated on-site to optimise recycling. Engagement with WRAP through Courtauld 2025 to reduce waste Strategic report Dairy Crest Annual Report /18 21

24 Corporate Responsibility continued Colleagues At Dairy Crest we continually work to improve the excellent safety record we have achieved and engage with our people to fully utilise their expertise and experience. /18 has seen a high level of activity on employee engagement with a new employee survey, enhanced employee communications and development opportunities. We have further developed our people plan with a refreshed emphasis on Diversity and Inclusion. 5 Employee engagement To survey the organisation regularly and achieve increasing employee engagement To provide our Colleagues with the opportunity to invest in our company via Company Sharesave Schemes We continue to invest in the development of our teams, finding new ways to promote learning in the workplace. In April we refreshed our approach to surveying our employees and introduced our re-designed employee survey. Measuring employee engagement and identifying ways to improve what we do are key to developing our business. In the two surveys conducted a high participation rate has been achieved, with the 92% response in the survey being our highest rate ever. Comparing and surveys, we have seen improvements across all categories, notably in leadership, communicating with employees and involving our teams in problem solving and improving our work 6 Holistic approach to health & safety To target a 50% reduction in accident/ incident rate by 2021/22 Total Accident Rate reduced by 86% We have seen over the years that a commitment to health & safety (H&S) is fundamental for developing a great business. We continue to build upon the excellent progress made during 2016/17, demonstrating a further reduction in accidents and a strong ongoing performance. We have achieved two full financial years without a reportable accident. We also reduced our lost time accident (LTA) frequency rate from 0.65 to 0.10, delivering an 84% reduction in the number of lost time incidents against the 2013 baseline. Having set ourselves what appeared to be a challenging objective of a 50% reduction in the total accident rate by versus the 2013 baseline, we have already achieved an 86% reduction by the end of March. Encouraging employees to report safety concerns and have meaningful conversations that drive safety-conscious behaviour are important if we want to achieve a sustainable long-term improvement in H&S. Against our target of 100:1 ratio of hazard concerns and behavioural conversations versus all types of accidents by end of March, we achieved a ratio of 954:1, an improvement on last year s 423:1 performance. Another important way of engaging our teams in safety is through our cultural change programme, encouraging employees to Stop, Think, Assess, Review (STAR) and complete STAR cards where they see safety-related situations or actions. By discussing 92% participation in the employee survey and commitment to run a survey every year practices. Improving on collaboration is an area highlighted for focus in. We have made the commitment to run the survey on an annual basis going forward. /18 saw the continuation of our Executive Committee-led employee roadshows. Conducted twice during the year (June and November), 79% of the workforce participated in the roadshows, discussing our values, CR pledges, business performance and important initiatives. 80% of those attending thought the content was good or excellent. Our plan is to run similarly timed roadshows again in /19 to further improve communication and collaboration within the Group. and addressing these issues, we have created greater levels of dialogue, involvement and a safety first culture. To build on this programme, this year we introduced the STAR safe system of work (SSoW) review conversation, where front line managers initiate a conversation with work colleagues and third parties to confirm their recognised safe system of working is correct. Through this discussion, better and safer ways of working have been identified, further reducing risk of injury. Scope of wellbeing checks extended to include mental health with year-on-year increase in the proportion of employees attending voluntary consultations One of the significant activities within our occupational health programme is our attention to employee wellbeing. Every year we complete health campaigns and wellbeing days across the business, which include stress and mental health questionnaires and involve as many colleagues as possible. Our programme aims to encourage colleagues to take ownership of their own health by putting into place changes to their lifestyle where they are needed. To further improve our occupational health programme, we are moving to an outsourced service, which will increase geographical cover across the Group. As we went through this transitional period, we saw 210 employees go through our voluntary wellbeing checks, which is down on the 256 involved last year. We are developing our approach to mental wellbeing and have internal presentations to improve management awareness and online mental health training for employees. These will be rolled out during. 22 Dairy Crest Annual Report /18

25 7 Diversity and inclusion To develop employment policies and working practices that encourage a diverse and inclusive workforce In /18 we have been working on fully refreshing our employment policies and working practices to focus our diversity and inclusion efforts on: Addressing talent needs Improving insight and understanding Developing a high performance culture Role modelling and embedding our values Refreshed Diversity & Inclusion programme developed and being rolled out across the business Focus groups involving a cross section of employees have worked together to produce actions plans that will be delivered during /19. These plans include recruitment and diversity training for managers, mentoring for high potential employees and working with our recruitment providers to deliver a diverse range of candidates to our business. Gender profile All employees Male 69% (787) Female 31% (351) Senior management Male 77% (31) Female 23% (9) In March, the Company published its Gender Pay Gap for both Dairy Crest Limited and the broader Group. On a mean basis, men earn 9.1% more than women, reflecting the higher number of male employees occupying the most senior roles. This gap is significantly lower than the national average of circa 18% and Dairy Crest is committed to reducing this pay difference. On a median basis, women earn 2.9% more than men. Further details of our gender pay gap and our action plan to reduce it can be found on our Company website. Strategic report 8 Employee development Every business-critical role to have a clear succession plan in place drawing on internal and external talent Develop policies to retain high potential employees and those with specialist skills 5x more e-learning courses completed during /18 compared to previous year We continue to offer development opportunities to our employees, finding new ways to deliver learning in the workplace. An important emphasis this year has been on embedding the management development programme which was rolled out during 2016/17. This training focussed on achieving high performance from individuals and teams and included coaching skills, giving feedback, objective setting and development planning. 97% of attendees felt their leadership skills had improved as a result of the programme. Follow-up group coaching sessions were also arranged for the original attendees from all disciplines within the business, from first line manager to Director level. During /18 we have also designed and delivered a training programme for new managers to ensure this momentum is maintained. We continue to encourage our employees to access the wide range of development materials in our learning management system mydevelopment. This has resulted in five times more courses being completed this year compared to last year. This platform incorporates e-learning programmes on a diverse range of business topics, including our proprietary environmental awareness module, for which we were proud to win an Asda sustainability award. The Dairy Crest talent management review is undertaken annually and is the foundation of our talent assessment process and succession planning. As recognised in the CR pledges, there has been additional emphasis this year on creating individual development plans and succession action plans for the businesscritical roles and individuals identified with future potential. During /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 /18 we have employees pursuing a number of courses including Engineering for Operators, BTEC level 3 and HNCs. Dairy Crest Annual Report /18 23

26 Corporate Responsibility continued Consumers Dairy Crest is proud to create healthy, tasty and sustainable foods. We are committed to 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. 9 Improving health & nutrition 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 4% increase in volume sales of lighter products, including Frylight, year-on-year We like to give our consumers choice through producing naturally healthy dairy products as well as free from artificial ingredients, dairyfree and lighter options. We have continued to expand and invest in our portfolio of lower fat options. Volumes of the lower fat variants of our cheese, butter and spreads brands, together with sales of Frylight, our one calorie cooking spray, grew by 4% year-on-year and now account for 15% of our overall branded sales volumes. Our Cathedral City cheese brand has expanded its already extensive range of lower fat options to eight variants with the launch of Cathedral City Sliced Mature Lighter. This has helped retail sales of lower fat options from Cathedral City exceed 36 million for the first time. The Cathedral City Lighter range allows consumers to enjoy a reduction in fat and calories with minimal compromise on taste. Our lower fat spreads Clover Light, Utterly Butterly Lightly and Country Life Spreadable Lighter have a collective retail sales value of around 20 million, and sales of our No Artificial Ingredients Clover, launched in 2015, have been strong, outperforming the spreads market. Frylight remains the UK s biggest oil brand and enjoyed another impressive year of growth. 10 Sustainable ingredients 11 Frylight further expanded its product range during the year and is now used by one in four UK households. Our dedicated, state of the art Innovation Centre located on the Harper Adams University campus gives us the opportunity to further develop the range and health credentials of our products, as well as improve packaging. To continue to innovate and grow our portfolio of functional ingredients that support infant nutrition and other markets that may benefit from the physiological dietary benefits that these materials bring Our plant at Davidstow produces high quality demineralised whey and GOS. Demineralised whey forms the base of infant formula and GOS is a lactose-based prebiotic that helps aid digestive health. Through our partner, Fonterra, we have increased our share of sales of demineralised whey and GOS in the infant formula market in key geographies, including China. We are engaging with companies on the potential health benefits of GOS through the human life cycle as well as its benefits in animal feed applications. GOS is known to help support natural defences, increase mineral absorption and aid digestive comfort and brings with it exciting growth potential for Dairy Crest. Reducing our packaging impacts To develop a 100% sustainable supply of our principal ingredients by 2021/22 Enhanced assurance of Corporate Responsibility credentials of suppliers To deliver a year-on-year increase in the % of recyclable packaging used across our product groups with the ambition of having 100% recyclable packaging by 2021/22 Dairy Crest works with its suppliers to exceed best practice in quality and traceability. We can trace milk and raw materials from farms and suppliers through to finished product. Thanks to our Davidstow Farm Standards, introduced back in 2015, all milk supplied to us meets the strict international requirements for the production of infant formula. We recently developed these further to continually improve the level of farm standards across our milk pool and to ensure we are meeting our customer and consumer demands. We are a working member of the Roundtable on Sustainable Palm Oil (RSPO) and all palm oil used in our spreads products comes from RSPO-certified sustainable sources. Our spreads production facility in Kirkby, Liverpool is also fully certified against the RSPO certification standard. We have recently refreshed our sustainable and ethical sourcing assessment and action planning tool (Ecovadis) to verify the CR credentials across our network of suppliers. 8 % currently of consumer-facing packaging and transit packaging is recyclable To avoid sending waste to landfill, we are investing in new ways of packaging our products so they are not only made with less material, but are also made with more recycled material. We have been working with our suppliers to find ways to increase the percentage of recyclable packaging used across our product groups, whilst ensuring food safety, quality, and minimising food waste. We are pleased to report that 80% of our packaging is recyclable, including all of the tubs used in our spreads business. Alongside that, we have a number of work streams in progress to understand current technologies and potential recyclable/ reusable solutions across our product portfolio. 24 Dairy Crest Annual Report /18

27 Community 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 supporting rural communities through working with The Prince s Countryside Fund, supporting local communities and employee volunteering. 12 Supporting rural communities Strategic report To raise 50,000 for The Prince s Countryside Fund each year and help to raise awareness of the priorities and successes of the charity including The Prince s Farm Resilience Programme 5 raised for The Prince s Countryside Fund to k help support family farm businesses and the quality of rural life Dairy Crest recognises that the countryside continues to face significant challenges across a wide range of complex social and economic issues. Similar views are also held by The Prince s Countryside Fund, a charity set up by HRH The Prince of Wales to improve the prospects of family farm businesses and the quality of rural life. We donated 50,000 to the Fund in /18 through brand partnerships with Davidstow cheddar and Country Life 13 Supporting local communities For all Dairy Crest sites to support local communities by providing a budget to their Community Committee 47% increase in Charitable Giving year-on-year We are committed to supporting local good causes in the communities where we work and live that improve health, education, youth engagement & employability skills, the environment and the countryside. Each Dairy Crest site is allocated an annual budget to support its local community, in addition to donations which are made by the Group. During /18, we spent in excess of 240,000 (2016/17: 165,457) supporting over 70 local good causes. We are proud to have supported local schools, care homes, hospices, scout and girl guiding groups and health charities, amongst others. In addition to monetary donations, we also gifted our food 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. butter. We have a long-standing relationship with the Fund to work with them to protect, improve and promote the British countryside and the businesses which work within it. Since it was established in 2010 the Fund has awarded 8.5 million in grants to more than 220 projects. We are also sponsors of The Prince s Farm Resilience Programme. Building on the success of The Prince s Dairy Initiative, the programme aims to help secure a viable and resilient future for farm businesses, by equipping them with the information and confidence to help them succeed. Since The Prince s Countryside Fund was established in 2010, it has awarded 8.5million in grants to more than 220 projects 14 Employee volunteering For all Dairy Crest employees to take up their fully paid volunteering day each year. Measured as people days equivalent compared to total number of employees Every employee is entitled to a fully paid volunteering day each year Dairy Crest employees are entitled to one fully paid day of volunteering each year and everyone is actively encouraged to take up this opportunity. In /18 employees completed around 80 volunteering days, an increase over the previous year. As an organisation we currently support Crisis at Christmas, Grocery Aid and IGD s Feeding Britain s Future and employees are also encouraged to find other local organisations to work with that fall within the scope of the Company s community policy. During the year, our colleagues have helped special needs children and supported several environmental projects. Dairy Crest Annual Report /18 25

28 Principal risks and uncertainties We manage risk to help us achieve our strategic objectives and protect our reputation The Group faces a number of risks which, should they materialise, could affect our ability to achieve our strategic objectives. The Board has overall responsibility for ensuring the effective management of risk across the Group. It is supported by the Audit Committee which reviews the effectiveness of the Group s risk management processes and internal controls. Responsibility for the day-to-day management of risk is delegated to the Executive Committee which reviews the business performance and the risks and threats being managed at each of its meetings. Executive Committee meeting minutes are routinely reviewed by the Board. All functions of the Group are represented at the Executive Committee enabling the Committee to manage the Group s risks on an on-going basis. risk appetite: The Board believes that the assumption of informed risks enables the delivery of long-term success. It determines the nature and extent of significant risks the Company assumes to achieve its strategic objectives. The Directors have carried out a robust assessment of the principal risks which the Group faces including those that would threaten the business model, future performance, solvency or liquidity. Risk management process: Each key function in the Group is required to prepare a risk register for its area of accountability. Functional risk registers are reviewed by the Executive Committee and from them the Group risk register is compiled. It is formally reviewed by the Board when the Group sets its budget in April. The Group Internal Audit function reviews the Group risk register at the start of each year. It is a key component of the compilation of its annual audit plan. All Group Internal Audit function reports are provided to the Executive and Audit Committees. The Audit Committee reviews the Group s Internal Audit s reports and progress against its work plan. The Audit Committee reports to the Board after each meeting. Group Internal Audit provides independent assurance over the management and mitigation mechanisms adopted. This process explicitly recognises the relationship between Group Internal Audit and risk management. The Audit Committee is satisfied that the processes are adequate and appropriate. Further details of the Group s approach to risk management and internal control are set out in the Corporate Governance report at page 35. Risks and uncertainties: Details of the principal risks and uncertainties faced by the Group and the associated mitigating controls are set out on this page and on pages 27 to 29. Although the Group has an on-going process for identifying, evaluating and managing the principal risks and uncertainties facing the Group, additional risks which are not presently known to management could also have an adverse effect on the Group. The risks and uncertainties referred to in this Annual Report are not intended to be an exhaustive analysis of all risks facing the Group. Commercial risks Risk area and potential impact Mitigating controls Reduced profitability Reduced demand from consumers Inadequate levels of innovation We operate in competitive markets. If we fail adequately to control our cost base, to compete effectively or are subject to higher input prices that cannot be recovered by raising selling prices without losing volumes, we could lose sales and profits. Consumers could move away from dairy products for economic, health, ethical, or other reasons leading to lower sales and profits. We operate in markets in which our competitors are continually innovating in order to maintain customer and consumer interest in their products and to attract customer and consumer interest for new products. If we do not successfully innovate we may lose customers and consumers and we may fail to attract new customers and consumers. That would result in fewer sales, loss of profit and failure to meet growth targets. We set ourselves the target of continually reducing our cost base and are able to invest in our supply chain to help achieve this. Despite challenging trading conditions we continue to invest in marketing our key brands. Our innovation programme continues to generate new products that reinforce our appeal to customers. We recognise the importance of strong customer relationships and the executive team plays an active part in maintaining and developing these. They are also involved in major customer negotiations. We conduct customer surveys to benchmark our performance and we continuously monitor the service and quality levels provided to our customers and consumers, and have procedures in place to react quickly to any issues. Our commitment to corporate responsibility is an important part of our overall proposition to some customers. Consumers are at the heart of our business and we regularly monitor consumer trends. We continue to promote the health benefits provided by dairy products and develop healthier products. We also continue to maintain our focus on developing a compelling new product development pipeline, enabling us to react to consumer trends, for example with more environmentally-friendly packaging, and healthier variants of our key brands. We have a direct involvement with government to understand and influence future legislation that could affect future consumer demand. We have a strong new product development and innovation team who are based at our Innovation Centre on the Harper Adams University campus. That team works closely with Harper Adams University leveraging the research and other expertise of the University, including taking students on secondment into our innovation team. The innovation team s brief includes enhancing the appeal of existing products, driving product and manufacturing efficiencies and improvements, and developing new exciting products and variants of existing products. Continued investment in innovation enables our business to maintain or outstrip innovation in the rest of the market. Focussing an element of senior management remuneration on innovation through the use of a balanced scorecard 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 /18

29 Commercial risks continued Risk area and potential impact Mitigating controls Input cost volatility Volatile milk and non-milk costs (vegetable oils, diesel, electricity, gas and packaging) could reduce margins unless we can manage cost risk, find other cost efficiencies elsewhere or increase selling prices. Milk prices could remain volatile driven by global and European commodity market pressures as well as local market and environmental factors. Key input cost trends are continually monitored by our experienced procurement team and are regularly reviewed by the Executive Committee. Milk and vegetable oil are critical inputs for the Group. Milk price negotiations are conducted following careful review with the Executive Committee which provides the procurement team with a specific mandate. The use of a balancing contract with direct milk suppliers enables better balancing of milk supply and demand thereby reducing the risk of milk oversupply resulting in lower recoveries. The balancing contract helps to reduce our exposure to lower value commodity markets thereby supporting the Group s strategy of focussing on branded and added-value 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. Strategic report Entry into new product areas or territories The dynamics of new categories may not be in line with our expectations resulting in lower than anticipated margins, lower than anticipated volumes, longer than anticipated payback on investment and higher than expected costs to access markets. We work with commercial partners who are already established in new categories and markets where the Group is not already operating or present. Contractual relationships with these established commercial partners for the sale and distribution of products in new categories and markets enable the Group to have certainty over minimum levels of returns and known costs of accessing new markets. Operational risks Risk area and potential impact Mitigating controls Inability to source milk Failure of a key supplier Disruption to production Without milk we would not have a business. Restricted milk supply could be caused by economic factors, weather, fuel availability or an epidemic which affects dairy cows. This could lead to lower sales and profits. Consumer confidence in dairy products could also be adversely affected. We are dependent on key suppliers and could lose sales and face financial penalties from customers if a supplier s failure leaves us unable to supply. Failure of key information technology suppliers could adversely affect our financial systems. An accident, a fire, product contamination, the failure of equipment or systems, a deliberate malicious act, or industrial action could disrupt production, affect food safety, cause injury, and/or cause reputational damage with adverse consequences. We are also reliant on information technology and are exposed to losses in the event that systems fail. We invest significant resources in maintaining strong relationships with our milk suppliers by attending forums and discussing current issues and pressures that affect both the farms and our business. Our milk comes directly from farms on contracts that include a notice period of between three months and one year. Our experienced milk procurement team understand milk production and are alert to changes in supply. We aim to pay a fair, market related milk price and closely monitor the milk price we pay to suppliers. 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. Our procurement team regularly monitors suppliers ability to supply and puts in place alternative arrangements, including dual purchasing, if appropriate. We have taken specific actions to reduce our dependency on information technology suppliers. Plans are maintained to respond quickly to incidents and minimise any impact to the Group. Our business is committed to the health and safety of all our employees and maintains systems aimed at ensuring everyone is able to work safely. All of our manufacturing sites have a trained engineering resource, are supported by our major equipment suppliers and hold appropriate stocks of spare parts. They also all have fire protection systems and regular fire drills. Our information technology systems are regularly backed up and duplicated in the majority of areas. Appropriate safeguards such as firewalls are in place to thwart cyber attack and the robustness 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 /18 27

30 Principal risks and uncertainties continued Operational risks continued Risk area and potential impact Mitigating controls Disruption to production continued Disruption to utilities supplies Production capacity Major projects Product quality The reliable supply of gas, electricity and water to our manufacturing sites is essential to our ability to run our production processes. Disruption to those supplies for whatever reason affects our ability to produce products against plans and in some cases, may cause variability to product quality (not safety) affecting the returns which may be made for these products as they may have to be downgraded from premium quality. In order to meet growing demand for our products and to enable growth into new markets outside the UK in the longer term, we need to ensure that we have sufficient production capacity at our manufacturing sites, particularly for cheese at our Davidstow creamery. To remain competitive we periodically undertake major transformational projects following strategic reviews or have to undertake major projects or works in response to the changing condition of our infrastructure. 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. Failure to maintain product quality could lead to reputational damage and loss of sales and profits. If we don t meet stringent infant formula specifications for addedvalue ingredients products we will not be able to sell those products for their intended use. That could lead to lower than anticipated sales volumes of infant formula grade products associated with which would be lower than anticipated profits; customer confidence may also be eroded as a result. controlled pay negotiations are in place to ensure pay remains 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. Where possible we have installed back up equipment to deal with interruptions to the supply of utilities. However, in relation, notably, to water, we currently have no back up available to us if our external supply is restricted. We have designed processes to recycle as much water as possible in order to maximise re-use and reduce our reliance on external supply and we will continue to do so in the future. We are also exploring the scope to become selfsupplying for process water, where possible, e.g. by maximising the exploitation of the use of bore holes for water abstraction direct from the ground. We continually monitor and model anticipated future demand on a five year horizon to ensure we have sufficient production capacity to meet demand. Our supply chain team continuously reviews production efficiency and seeks to identify production innovation enabling our existing assets to produce more product with efficient investment. A project to increase the production capacity at our Davidstow creamery is underway and is intended to increase capacity to meet anticipated future demand. We have a good track record of managing projects and use experienced and appropriately skilled senior managers to lead these. Supervisory governance structures are also put in place to help successful delivery. We are aware that too much change concentrated in too short a timescale can be detrimental and manage this by ensuring key project resource is full time with appropriate backfilling and use of third parties. We have well-established supply chains and a close working relationship with our milk suppliers. We have an independent 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. Implementation of and strict adherence to manufacturing procedures are designed to ensure product meets specification. Assurance over adherence to those procedures is provided by internal technical audit, customer audit and external expert audit. Our contractual relationship with Fonterra, who sell the infant formula ingredients we produce, allows us to utilise its experience in producing product which conforms to the required specification. Focus on continual enhancement of site team capabilities through technical training and behavioural programmes coupled with ensuring appropriately experienced and skilled people are recruited 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 /18

31 People risks Risk area and potential impact Mitigating controls Recruitment and retention We need to attract and retain high quality employees to provide customers and consumers with safe, high quality products and services. We carry out rigorous selection procedures and benchmark pay and benefits to ensure we can attract and retain the best people. We have a widely applied bonus scheme and a range of other incentives to reward good performance. Our share based 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, communicate with them regularly and encourage them to ask questions. Strategic report Financial risks Risk area and potential impact Mitigating controls Pension Fund (Fund) Despite the action we have taken to reduce the risks associated with our Fund including closing the Fund to future accrual in 2010 and buying insurance to meet the liabilities associated with many of our retired members in 2008 and 2009, the deficit could continue to increase and we may then have to increase our contributions. 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. We continue to work closely with the Trustee of the Fund to improve the Fund s financial position at an acceptable cash cost to the business. We have reduced the Fund s exposure to equities and other higher-risk asset classes and aim to do so further. We have improved the strength of the Company s covenant and ability to continue to fund contributions, for example by the sale of the Dairies business and the change to CPI for increases to pensions in payment. Legal and compliance risks Risk area and potential impact Mitigating controls Compliance with laws Regulatory change Our sector is subject to a number of complex statutory requirements. There is a risk of fines or lawsuits and reputational damage if we fail to comply. Food safety and product specification regulations affecting the UK and other jurisdictions where products are sold impact the products that we manufacture. Regulatory authorities regularly enact changes to food safety and product specification legislation. Changes to legislation could result in restrictions on the movement and sale of the Group s products and raw materials between territories or require changes to the production processes or specification of our products. We have a strong in-house legal function supported by external advisers. We have undertaken Group-wide training in respect of competition law and actively monitor and adjust to on-going legal and regulatory changes. We have Business Conduct and Data 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. We have a strong technical function which routinely monitors planned and implemented changes to food and ingredients legislation in the UK and other relevant jurisdictions which might necessitate changes to our production processes or product specifications. Our product development function works in tandem with the technical function and key supplier partners and customers to respond to anticipated or implemented legislative changes. The Group has invested in its technical and product development functions and has its technical and innovation centre at Harper Adams University with which we have a co-operation agreement providing access to state of the art academic and technical expertise. We are a member of recognised industry bodies who represent our interests, along with others in the food and dairy industries, and advise and lobby on our behalf. We have close 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 Dairy Crest Annual Report /18 29

32 Board of Directors, Executive committee and Advisers Board of Directors Dairy Crest is led by an experienced Board of Directors, which comprises Executive Directors, one Non-executive Chairman and five independent Non-executive Directors. Together, the Executive Directors have over 50 years experience of the business. The Board sets strategy and monitors progress. Day-to-day matters are the responsibility of the Executive Committee, which comprises the three Executive Directors, the Company Secretary & General Counsel, the Group Supply Chain Director and the Group HR Director. Stephen Alexander Chairman Appointed as a Non-executive Director in January 2011, as Chairman in September 2014 and Chairman of the Nomination Committee in March He is an Operating Partner at OpCapita LLP. Stephen was Chairman of Immediate Media Company Ltd, Rhubarb Food Design Ltd, Odeon Cinemas and Maltby Capital Ltd (parent company of EMI Group) as well as the charitable organisation Look Ahead Care, Support and Housing. Previously, he was Chief Executive of Hillsdown Holdings Ltd, Senior Independent Director at Devro plc and held senior positions with Allied Domecq plc and Imperial Foods. Richard Macdonald Non-executive Director Appointed as a Non-executive Director in November 2010, as the Senior Independent Director in May 2012 and as Chairman of the Remuneration Committee in November 2014, prior to which he was Chairman of the Corporate Responsibility Committee. Richard had a 30 year career with the National Farmers Union, serving as Director General for 13 years. He is a strategic adviser to Moy Park Limited, Vice Chairman of the National Institute of Agricultural Botany and Chairman of Farm Africa. Richard is a Nonexecutive Director and Deputy Chairman of the Environment Agency. Andrew Carr-Locke Non-executive Director Appointed as a Non-executive Director and Chairman of the Audit Committee in August A Fellow of the Chartered Institute of Management Accountants, he has previously held senior finance positions at Courtaulds Textiles, Diageo, Bowater Scott and Kodak and was Group Finance Director at George Wimpey plc until More recently he was Executive Chairman of Countryside Properties. He is the Senior Independent Director at Grainger and has previously held Non-executive directorships at Royal Mail Holdings, Venture Production and AWG. Sue Farr Non-executive Director Appointed as a Non-executive Director in November 2011 and Chairman of the Corporate Responsibility Committee in November She is a special advisor to Chime Communications plc, having previously been a member of the Executive Management Team. Sue has extensive marketing communications experience having served as Marketing Director of the BBC for seven years, Director of Corporate Affairs, Thames Television for three years and Director of Corporate Communications, Vauxhall Motors. Sue is a Non-executive Director of Millennium & Copthorne Hotels plc, Accsys Technologies plc and British American Tobacco plc. She has previously held positions as a Trustee of the Historic Royal Palaces and as a Non-executive Director of Motivcom Ltd. She was a Non-executive Director of Dolphin Capital Investors Ltd until January. John Gibney Non-executive Director Appointed as a Non-executive Director and a member of the Audit, Remuneration and Nomination Committees, as well as Audit Committee Chairman designate, in May. A Chartered Accountant, John had an executive career spanning in excess of 30 years during which he held a variety of operational and financial roles, latterly as Chief Financial Officer at Britvic plc, a role he held for 17 years. John is a Non-executive Director of PureCircle plc a leading producer of stevia ingredients for the global food and beverage industry. He chairs PureCircle s Audit Committee, is Senior Independent Director and is a member of its Disclosure Committee. Moni Mannings Non-executive Director Appointed as a Non-executive Director in December and is a member of the Audit, Nomination and Remuneration Committees. Moni is a Non-executive Director of Polypipe Group plc, where she chairs the Remuneration Committee, and is a Non-executive Director of Investec Bank plc. Moni also sits on the Advisory Board of Aistemos, an intellectual property data analytics company, having been its Director and Chief Operating Officer until August. In addition, Moni is a Trustee of children s charity Barnardo s and a Council Member of Cranfield University. Prior to her current appointments, Moni enjoyed a 30 year career as a finance lawyer, the latter half as Head of Banking and Board Member at technology law firm Olswang LLP. 30 Dairy Crest Annual Report /18

33 Advisers: Auditor Deloitte LLP Solicitors Eversheds Sutherland (International) LLP Principal Bankers Lloyds Bank plc Rabobank London Santander UK plc The Royal Bank of Scotland plc Corporate Brokers Peel Hunt LLP Shore Capital Stockbrokers Ltd Registered Office Claygate House, Littleworth Road, Esher, Surrey KT10 9PN Registered in England No Governance Mark Allen Chief Executive Appointed as an Executive Director in 2002 and became Chief Executive in January Mark joined Dairy Crest in August He was formerly with Shell UK Ltd. He is a Non-executive Director of Howdens Joinery Group plc and Warburtons Ltd. He has been a Trustee for The Prince s Countryside Fund since Tom Atherton Deputy Chief Executive & Group Finance Director Appointed as an Executive Director and Group Finance Director in May 2013 and as Deputy Chief Executive in January, Tom is a Chartered Accountant who has worked for Dairy Crest since Prior to his appointment to the Board he 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. Adam Braithwaite Executive Director Appointed as an Executive Director in July 2016, Adam joined Dairy Crest in 2002 and has held a number of senior management positions within the business. He was appointed Group Commercial Director in April Adam is also a Trustee of GLF Schools. Non-board Executive Committee members Robin Miller Company Secretary & General Counsel # Appointed in April 2008, he is a solicitor having worked in private practice and in-house in both retail and international manufacturing. Robin Miller Company Secretary & General Counsel Andy Stickland Appointed Group in Supply April 2008, Chain he is Director a solicitor # having worked Appointed private as Group practice Supply and in-house Chain Director in both in retail January and international. Before manufacturing. joining Dairy Crest, Andy held a variety of senior supply chain roles with Unilever plc in both the UK and abroad, latterly that of Vice President Supply Chain for Unilever Homecare in Europe. Robert Willock Group HR Director # Robert joined Dairy Crest 12 years ago as HR Director, Dairies from The Maersk Company where he was Director of Human Resources. He was appointed to his current role in April # Not a Board Member Dairy Crest Annual Report /18 31

34 Corporate governance Chairman s introduction Since my appointment as Chairman in September 2014 the Board has enjoyed a period of great stability with no departures. It has been especially pleasing that we have been able to maintain such consistency during a period when the Company has been through a process of significant change, particularly with the disposal of its Dairies business and the development of its functional ingredients business. Moni Mannings joined the Board as a Non-executive Director in December. More details of Moni s appointment can be found at the Nomination Committee s report on pages 39 to 40. In recognition of his important contribution to the business and the additional responsibilities he had assumed as chairman of Frylight, the strategic leadership of our Butters, Spreads & Oils business and the chairmanship of our Functional Ingredients business, in January Tom Atherton was promoted to the role of Deputy Chief Executive Officer, in addition to his responsibilities as Group Finance Director. As this report is finalised, John Gibney joins us as a Non-executive Director and we prepare to say farewell to Andrew Carr-Locke at the forthcoming AGM in July, following which John will 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 Non-executive Director and as Chairman of the Audit Committee. Andrew s experience, intellect and sound judgement have been invaluable to the Board, particularly as it has navigated some of the biggest changes which the Company has undergone since it listed. We thank Andrew and wish him well in the future. The Board and I are committed to the highest standards of corporate governance and as Chairman I am responsible for leading the Board in the promotion of good governance across our business. We believe that good governance is essential to the way in which we run our business. Over the last two decades the focus on governance has become ever greater; however I believe we are experiencing an unprecedented period of accelerated change in the governance sphere. During the year there have been a number of formal governance initiatives influenced by a variety of factors including political and societal concerns. As an organisation we continue to try to meet the governance challenge and promote greater diversity at all levels in our business, to address the gender pay gap and assess the appropriateness of different methods of remuneration, and to enhance employee and stakeholder engagement. The details of some of the formal requirements to be placed on companies in those areas have yet to be finalised and we continue to work towards proper implementation of governance driven changes as the final detail of such requirements becomes clear. However, good governance is about much more than mere compliance and as Chairman I lead the Board in setting the tone for our business. You will have read in our Corporate Responsibility report in the preceding pages of this Annual Report about the comprehensive corporate responsibility work being undertaken across the Group. Our Corporate Responsibility programme is at the core of our culture and how we operate as a business. Through the Corporate Responsibility Committee the Board guides the implementation of the Group s core values which in turn support effective governance. Although market conditions continued to be challenging during the year, the Group s key brands have seen strong growth. The Group continues to focus on the on-going execution of the Group s strategy of generating growth in our branded food and functional ingredients businesses. In particular we are continuing to build the customer base for our demineralised whey and GOS products. We do that against the backdrop of a culture informed by our vision and values and within a strong governance framework which includes sound and effective risk management, control and mitigation systems supported by a combination of clear values, appropriate policy and an environment of transparency and accountability. The Board s central role is to work alongside the executive team providing support, challenge, guidance and leadership. I believe that the Board is well balanced with a broad range of skills, diversity, independence, knowledge and experience. We support the principles laid down in the revised UK Corporate Governance Code (published in April 2016 by the Financial Reporting Council and applying to the Company s accounting periods from /18) ( Code ). A copy of the Code can be found at and I am pleased to report that the Board considers that the Group has complied with all relevant provisions of the Code. Stephen Alexander Chairman 22 May The Board Role: The Board is collectively responsible for the long-term success of the Group and manages corporate governance, strategy, risk management and financial performance. The Board operates within a framework of effective controls and meets regularly throughout the year to ensure that risk is assessed and managed and that sufficient resources are available to meet the strategic objectives set by the Board. The Board is also responsible for ensuring that the Group achieves its objectives in accordance with the values, ethics and standards required by the Board. Appropriate procedures and training are put in place throughout the Group to ensure the requisite behaviours are observed. The Board is supported by the Executive Committee, to whom the Board has delegated the day-to-day management and operations of the Group s business and execution of the Group s strategy; and four other Board Committees, details of which are set out below. Board Committees: The Board has delegated authority to five Committees: Audit Committee Corporate Responsibility (CR) Committee Executive Committee Nomination Committee Remuneration Committee The terms of reference of these Committees can be found on the Group s website and the reports of each Committee are on pages 36 to Dairy Crest Annual Report /18

35 The Board and its Committee structure is set out as follows: Remuneration Committee Audit Committee Group Board Nomination Committee CR Committee 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 reduce to five again as Andrew Carr-Locke will not stand for re-election at this year s AGM following the appointment of John Gibney in May. A list of the current Directors, their roles on the Board and its Committees and their experience is set out on pages 30 to 31. Demand HR Finance Executive Committee Legal Supply The Board believes that effective governance is realised through leadership and teamwork and that collaboration across all levels within the Board structure drives a culture of continuous improvement in standards and performance across our business. Although various matters have been delegated to the Executive Committee and other Board Committees, the Board retains ultimate responsibility for a number of matters which are specifically reserved for the Board s approval, including; strategy and management; structure and share capital; corporate governance; approval of dividends; approval of significant transactions, capital expenditure and contracts. Further details on the roles and responsibilities of the Chairman and Chief Executive can be found in the document entitled Chairman/Chief Executive Division of Responsibilities on the Company s website. Richard Macdonald is the Company s Senior Independent Director. Independence of Directors: The Chairman is committed to ensuring that the Board comprises a majority of independent Non-executive Directors. The Board recognises the value Nonexecutive Directors bring in constructively challenging and scrutinising performance. The Board considers that all the Nonexecutive Directors have strong independent oversight and continue to demonstrate independence. The Board recognises the recommended term of appointment for Non-executive Directors within the Code and is mindful of the need for suitable succession. The Board therefore maintains a clear framework of the time each Non-executive Director has served the Company and the skill sets that each provides. The Chairman periodically meets individually or collectively with the Non-executive Directors in the absence of the Executive Directors. Governance 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 /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 Responsibility Executive 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 (From December ) 3(3) 1(1) 3(3) 3(3) Board effectiveness review: Each year the performance of the Board and its Committees is reviewed. The last externally facilitated review was carried out during the 2015/16 financial year with the assistance of Russell Reynolds Associates. In /18 the Directors conducted a review of the effectiveness of the Board and its Committees without external assistance. Using the framework from the last externally facilitated review to ensure consistency and so that progress against previous years could be tracked and assessed, the Directors conducted their review in March which included a review of the Chairman s performance led by the Senior Independent Director. Focus areas for the review were grouped into five key areas: strategy, governance and the role of the Board s Committees, people and composition, culture, and stakeholders. Those five key areas were sub-divided into more specific areas of focus including, amongst other matters; shared clarity of vision among the Board on strategy; whether the Committees work is sufficiently visible and adequately reported to the Board; the adequacy of the level of openness, interaction, debate and challenge amongst the Board; whether the Board has succeeded in improving diversity among Directors; and steps the Board could take to improve focus on relevant stakeholders, especially employees. Dairy Crest Annual Report /18 33

36 Corporate governance continued The effectiveness review concluded that: All Directors perform well and all continue to make valuable contributions to the work of the Board Continued focus should be maintained on further enhancing the experience among the Directors more detail of the continued work of the Nomination Committee in that regard can be found on pages 39 to 40 of this Annual Report Good progress has been made, initially through the work of the Nomination Committee, to ensure appropriate refreshment of Non-executive Director appointments and in improving diversity among Directors Additional consideration is required on stakeholder focus and the Board s Companies Act 2016 section 172 accountabilities The effectiveness review of the Committees concluded that the Committees continue to perform well and to fulfil their briefs against their terms of reference. Progress had been made during the year against identified enhancements, including: Better formal reporting by Committees to the Board Increased emphasis on the importance of the Corporate Responsibility Committee. Quarterly reviews of progress by the Group against the four pillars of the CR strategy have been added to the Executive Committee s work programme (in addition to the existing regular reviews of health & safety and technical, quality & environmental performance). On days when the Board has Committee meetings, the Corporate Responsibility Committee is routinely scheduled as the first of the Committee meetings to ensure that it receives appropriate focus and that sufficient time is devoted to it Director induction and training: All new Directors undergo a comprehensive induction programme on appointment. In addition to equipping Directors with sufficiently detailed knowledge of the operations of the Group s business to enable them effectively to carry out their duties, the induction programme is tailored to their experience, background and particular areas of focus. Moni Mannings induction programme included visits to all of the Group s sites ensuring that Moni saw the full range of the Group s operations. She met with managers and staff at each of the sites and received presentations explaining their histories and operations. She undertook tours of the sites to see their activities. Moni also spent time individually with each of the Executive Directors, the Investor Relations & Corporate Communications Director, the Group Procurement Director, the Group HR Director, the Group Business Development Director, the Head of Group Internal Audit, and the Company Secretary & General Counsel. In addition, Moni met with the external audit engagement partner. At the time of writing, an equally comprehensive induction programme is being organised for John Gibney. We will report fully on that in next year s Annual Report. On-going training is provided for the Board by way of site visits, presentations and circulation of updates on, amongst other things, corporate governance, environmental, legal and regulatory developments and investor relations matters. Conflicts of interest: Procedures are in place for Directors to disclose conflicts or potential conflicts of interest. The Company s Articles of Association ( Articles ) allow the Directors, where appropriate, to authorise conflicts or possible conflicts of interest between Directors and the Company. In addition, Non-executive Directors letters of appointment require them to obtain the prior 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 of interest, the conflicted or potentially conflicted Director is excluded from participation in the Board s consideration of the conflict or potential conflict situation. As at 11 April the Directors all confirmed that they had no present or anticipated conflicts of interest. No Director had a material interest in any significant contract with the Company or any of its subsidiaries during the year. Appointment and re-election of Directors: The Articles provide that the Directors or the members, by ordinary resolution, may appoint a Director to fill a vacancy or as an additional Director. In December Moni Mannings was appointed as a Non-executive Director and in May John Gibney was appointed as a Nonexecutive Director. Consistent with the Articles, they will both stand for election at the Company s Annual General Meeting ( AGM ). The Articles require all Directors to be re-elected annually. Andrew Carr-Locke will not stand for re-election at the AGM. He will be succeeded as chair of the Audit Committee by John Gibney after the AGM. All Directors other than those standing for first election, will stand for re-election at the AGM. Having regard to the roles performed by each of the Directors, the individual input and contribution they make and their individual expertise and experience, the Board is satisfied that each Director s performance justifies nomination for election or re-election by shareholders. Diversity policy: The Company interprets diversity in its widest sense. The Company s approach to Board diversity is set out in the Nomination Committee report on pages 39 to 40. The Company s approach to diversity in the workforce of the Company is set out in the Corporate Responsibility section on pages 22 to 23. Service agreements and letters of appointment: Details of the Executive Directors service agreements and the Chairman and Non-executive Directors letters of appointment are published on the Company s website and appear in the Directors Remuneration report on page 48. These documents are available for inspection at the registered office of the Company during normal business hours or at the AGM. Independent advice: Directors are entitled to take independent professional advice at the Company s expense where they judge it necessary, and there is a Board approved procedure in place for this purpose. No Director sought such advice during the year. The Directors also have direct access to the advice and services of the Company Secretary & General Counsel. Shareholder engagement: The Company recognises its responsibility for ensuring that a satisfactory dialogue takes place with shareholders. This continued engagement is highly beneficial to all parties as it helps to build a greater understanding of our investors views, opinions and concerns. The Chief Executive and Deputy Chief Executive & Group Finance Director have primary responsibility for investor relations. Throughout the year the Board has continued to maintain an active programme of engagement with investors with regular meetings held with key institutional shareholders to discuss strategy, financial performance and investment activities. Following the successful engagement programme in 2016/17, the Chief Executive and Deputy Chief Executive & Group Finance Director again met with over 90 investors in eleven major cities across the UK, Europe, North America and Canada. 34 Dairy Crest Annual Report /18

37 Analysts and investors are invited to our annual capital markets day and this year it was held at our National Distribution Centre in Nuneaton. It focussed on the Company s strategy and performance, innovation, our strategy for the dairy category and Frylight. It also included a tour of the distribution facility. The event was attended by the Chief Executive, Deputy Chief Executive & Group Finance Director, Group Commercial Director and other senior management. Presentation slides are made available in the investors section of the Company s website along with audio recordings, annual and interim reports, trading updates and company announcements. All the Non-executive Directors, and, in particular, the Chairman and Senior Independent Director, are available to meet with shareholders. In his capacity as Remuneration Committee Chairman, Richard Macdonald wrote prospectively in advance of publication of the Remuneration Report to the Company s largest shareholders, prompting on-going correspondence related to questions on remuneration with valuable feedback received from shareholders. Feedback from meetings with shareholders is provided to the Board to ensure that all Directors have a balanced understanding of the issues and concerns of shareholders. The Board also receives periodic reports on investor relations and independent feedback from the Company s brokers on the views of major shareholders. Risk management and internal control: The Board determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. It has overall responsibility for monitoring the Group s risk management and internal control systems and the effectiveness of those systems. It is assisted in that task by the Audit Committee and the Group Internal Audit function. There is an on-going process for identifying, evaluating and managing the principal risks facing the Group. The Board has delegated responsibility for management of day-to-day operational risks to the Executive Committee. The Audit Committee conducts reviews of the internal control systems and the Board reviews them annually. The principal risks and uncertainties identified by the Group are set out on pages 26 to 29 along with the steps which are taken to mitigate and manage them. The Board has satisfied itself that its systems accord with the FRC s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and that satisfactory internal control procedures and systems have been in place throughout the year and up to and including the date of this Annual Report in compliance with the requirements of the Code. A rolling audit programme conducted by Group Internal Audit across the Group forms a key element of the Group s systems of internal control. The Head of Group Internal Audit reports independently to the Chairman of the Audit Committee on assurance matters. Under its terms of reference, the Audit Committee, amongst other matters, approves the appointment or dismissal of the Head of Group Internal Audit and the Audit Committee Chairman approves the remuneration of the Head of Group Internal Audit. It is not possible to eliminate risk entirely. Accordingly, although the Group s systems are designed to manage risks they cannot provide absolute assurance against material misstatement or loss. They provide reasonable assurance that potential issues can be identified promptly and remedied appropriately. Fair balanced and understandable: The Directors are required to present a fair, balanced and understandable assessment of the Company s position and prospects by principle C.1 of the Code. Since the principle was first introduced to the Code, the Audit Committee adopted a detailed process to enable the Board to report against this principle of the Code. This structured approach (see table below) to the preparation of the Report and Accounts has been applied in the production of this Report and Accounts which the Board formally signed off at its meeting in May. January/February/March April May Initial content production Prepare content not dependent on year end results, e.g.: business model, strategy, corporate governance sections. Project Manager ( PM ) considers whether content collated is itself and collectively fair, balanced and understandable ( FBU ): review and amend. Identify material events/ performance issues that will need to be reported. Agree key messages Start completing and collating performance related content, e.g. remuneration report. Consider new regulations and consistency with key messages and KPIs. PM considers whether content collated is itself and collectively FBU: review and amend. Review and sign off Confirmation from contributors as to completeness of input. Appropriate review of full content, for consistency, completeness and messaging: review and amend. Sign-off by section owners. Bring together all section owners to agree that whole Annual Report and Accounts ( ARA ) is FBU. Consider formal sign off from section owners to the Board. Formal sign off Consider level of assurance obtained over non-financial information in the ARA. Where applicable Audit Committee to formally report to the Board on how it has satisfied itself that ARA is FBU. Board minute consideration of FBU with Board paper showing the process and results. The Board s assessment of the fair, balanced and understandable nature of the /18 Annual Report and Accounts is further assisted by, amongst other matters, the following: The Annual Report and Accounts is drafted by senior management with overall coordination by the Company Secretary & General Counsel An internal validation process of the information in the Corporate Responsibility report is undertaken by Group Internal Audit to ensure factual accuracy Comprehensive reviews of the draft Annual Report and Accounts are undertaken by Executive Committee members and, in relation to certain sections, by the Company s external lawyers, the external auditor and other advisers The drafts of each relevant section are reviewed as they are prepared through an iterative drafting process by the Chairmen of appropriate Committees of the Board and the final draft is reviewed by those Committees prior to consideration by the Board At its May meeting, the Board reviewed and was satisfied that the Annual Report and Accounts for financial year /18, taken as a whole, is fair, balanced and understandable and the Board believes that the information contained therein provides the information necessary for shareholders to assess the Company s and Group s performance, position, business model and strategy. Anti-bribery and anti-corruption: In accordance with the Bribery Act 2010 the Group has a written anti-bribery policy which is 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. Governance Dairy Crest Annual Report /18 35

38 Corporate governance continued Audit Committee report I am pleased to present the Audit Committee s report for the year ended 31 March. During the year, the Committee has continued to play a key role within the Group s governance framework to support the Board in matters relating to internal control, risk management and financial reporting. In this report I will share the Committee s activities during the year, including an overview of the significant issues the Committee has assessed and the Committee s opinion on the /18 Annual Report as a whole. The Committee has overseen a smooth transition to the Group s new external auditor Deloitte LLP ( Deloitte ) following their appointment in January, which was approved by shareholders at the Group s AGM in July. During the year the Committee has received regular updates on IT security following the disposal of the Dairies business and throughout the phased implementation of the Group s new IT systems. The Financial Reporting Council ( FRC ) conducted a thematic review of the 2016/17 Annual Report in which they raised a number of minor issues which we have duly considered whilst preparing this year s Annual Report. Looking ahead, the Committee will continue to focus on the audit, assurance, and risks processes within the business, as well as compliance with the new International Financial Reporting Standards (IFRS) that will become effective for the Group over the next two accounting periods. I m delighted to welcome Moni Mannings and John Gibney to the Committee and the finance and compliance experience that they both bring. I would also like to thank the other members of the Committee and the Group s Internal Audit and Finance teams for the high quality of their support. This will be my last report to you, as I 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 over as Chairman of the Audit Committee and the timing of his appointment to the Board will enable a thorough induction and smooth transition. I wish him well for the future and the Group s continuing success. Andrew Carr-Locke Chairman of the Audit Committee 22 May Audit Committee members Andrew Carr-Locke, Chairman Sue Farr Richard Macdonald Moni Mannings (from December ) John Gibney (from May ) Summary of the more significant risks and financial reporting issues The Committee has discussed with management the key estimations and judgements applied to the Group s financial statements, as disclosed in the accounting policies, and the impact of significant accounting matters arising during the year. The main items discussed were: 1. Exceptional items The Group s accounting policy on exceptional items provides that items of a material, one-off nature are classified as exceptional. The Committee considered the nature and levels of exceptional items together with the results of the interim review and the audit conducted by Deloitte. The Committee was satisfied that exceptional items had been appropriately classified and disclosed, treated consistently and that discussions with management were transparent. See Note 4 to the Accounts where this is identified as a key judgement. 2. Retirement benefit obligations The valuation of the Group s retirement benefit obligations is made at each reporting date in accordance with IFRS. The valuation is subject to a number of assumptions and estimates and the Committee is satisfied that those made at 31 March are appropriate. See Note 21 to the Accounts where this is identified as a key source of estimation uncertainty. 3. Dilapidations liability A contingent liability has been disclosed in respect of a potential dilapidation liability relating to Chadwell Heath, a manufacturing site disposed of with the Dairies business. The Committee has considered the Group s position and together with the external auditor is satisfied that the disclosure as a contingent liability is appropriate. See Note 28 to the Accounts where this is identified as a key judgement. Other items considered Inventories Inventories are stated at the lower of cost and net realisable value. Costs include the purchase price of raw materials, direct labour and a proportion of manufacturing overheads. Given the increase in raw material costs during the year, and therefore the inventory valuation, the Committee requested specific reassurance concerning the quantities of inventories held and valuation approach applied. Fair balanced and understandable The Committee has considered whether the /18 Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group s position, performance, business model and strategy. The Committee was satisfied with the process which had been followed for the preparation of the /18 Report and Accounts as 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. Following this review, the Committee was of the opinion that the /18 Report and Accounts is representative of the year and presents a fair, balanced and understandable overview, providing the necessary information for shareholders. 36 Dairy Crest Annual Report /18

39 Going concern and viability statement The Committee reviewed management s assessment of the Group s ability to continue as a going concern in line with the guidance published by the FRC. The assessment included a review of the principal risks facing the Group, their financial impact, how they were being managed, together with a discussion as to the appropriate period for assessment. The Group s viability statement is included in the Directors report on page 63. Risk management and internal control The Committee reviewed the Group s overall approach to risk management and control, and its processes, outcomes and disclosures are set out on page 35. Internal Audit The Committee reviewed the Group s Internal Audit s audit plan for the year and agreed its budget and resource requirements. It reviewed regular summary reports and management s response. The Committee met independently with the Group Internal Auditor during the year and discussed the results of the audits performed during the year. Membership: All members of the Committee are considered to be independent, with a broad range of finance, commercial and marketing experience relevant to the sector in which the Company operates. Moni Mannings and John Gibney joined the Committee in December and May respectively and bring a wealth of finance and compliance experience. The current members and details of their attendance at meetings are set out on page 33. Invitations to attend meetings: A standing invitation is made to the Chairman of the Board, the Chief Executive, the Deputy Chief Executive & Group Finance Director and the Group Commercial Director. The Group Financial Controller, Head of Internal Audit and representatives of the external auditor attend all Committee meetings during the year. In addition, the internal and external auditors met privately with the Committee. Role & Responsibilities: The role and responsibilities of the Committee are set out in written terms of reference, which are reviewed annually by the Committee, taking into account relevant legislation and recommended good practice. The terms of reference can be found on the Company s website. The Committee s responsibilities include, but are not limited to, the following matters: Oversight of the integrity of the Group s financial reporting procedures; Review of the Group s Annual Report and Accounts; 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. Meetings: The Committee has a regular work programme of activity agreed between the Chairman of the Committee, the Group s management and the external auditor. The Committee undertakes additional work in response to the evolving audit landscape. A summary of some of the key matters considered at each meeting during the year are set out below: Meeting Key matters considered 11 May Evaluation of Committee s performance 11 September 6 November 20 March External auditor EY s 2016/17 year end final report Annual Report and Accounts for the year ending 31 March (including fair, balanced and understandable) Going concern and viability statement review Group Internal Audit s report on financial and operational controls audits, whistleblowing notifications and work plan for /18 Private meeting with external auditor EY Deloitte s audit transition update and planning report Group IT security update Group Internal Audit s report on financial and operational controls audits and whistleblowing notifications FRC audit quality results 2016/17 Corporate governance training by Deloitte Financial controls update Draft interim financial statements External audit Deloitte s interim review report FRC thematic review of Annual Report and Accounts for the year ending 31 March Group s tax strategy Private meeting with external auditor, Deloitte Group Internal Audit s report on financial and operational controls audits, whistleblowing notifications and budget for /19 External audit Deloitte s update to planning report Group risk review process Committee s terms of reference and /19 work programme Impact of IFRS 9, IFRS 15 and IFRS 16 Private meeting with Head of Internal Audit Governance Dairy Crest Annual Report /18 37

40 Corporate governance continued External Auditor As reported in the 2016/17 Annual Report, Deloitte was appointed as external auditor in January, following a formal tender process, and their appointment was approved by shareholders at the Company AGM in July. This is the first year of association for William Smith as the audit partner. During the year, Deloitte has received a full and comprehensive induction to the Group s business. This induction programme has included meeting managers and staff at each of the sites and tours of the sites to see their activities. This added to their depth of knowledge achieved from the tendering process during which wide access to the Group was provided. As part of the review of the effectiveness of the external audit, a formal evaluation incorporating views from the Committee and relevant members of management is considered by the Committee. The Committee also considered the FRC s latest quality review report for the principal auditing firms. Overall, the Committee is satisfied with the performance of Deloitte in its first year as the Group s auditor and agreed that the audit process had been effective. The Committee recommends that Deloitte be reappointed as the Company s statutory auditor for the /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 Deloitte provided minimal non-audit services in /18 in relation to the assurance work carried out in connection with the announcement of the Company s half year results for /18; this is of direct benefit to shareholders although it is not formally regarded as audit work for reporting purposes. A breakdown of audit and non-audit fees paid to Deloitte in /18 is summarised in the following table, together with a comparison with fees paid to Ernst & Young ( EY ) in 2016/17: / /17 Total audit fees Non-audit fees Taxation services 0.1 Other non-audit services 0.1 Total non-audit fees* 0.2 Total fees * In /18 other non-audit services comprised 44,000 in respect of the interim review. 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 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. 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 /18

41 Nomination Committee report I am pleased to present my report for the /18 financial year as Chairman of the Nomination Committee. It has been a busy year for the Committee as it has worked to assist the Board to address its future needs in relation to developing further our current Executive Directors; addressing anticipated changes amongst our Non-executive Directors; and adding to the breadth and experience of our Non-executive Directors. I am pleased to report the successful recruitment of Moni Mannings and John Gibney as Non-executive Directors. We also say goodbye and thank you to Andrew Carr-Locke as he leaves us at this year s AGM. Last year I reported that the Committee had recommended the appointment of Adam Braithwaite as an Executive Director as part of the process of bringing new talent onto the Board. The Committee has subsequently focussed on further developing Adam and Tom Atherton. Adam has taken on a non-executive directorship at GLF Schools, which will help to broaden his experience. Both he and Tom have undertaken 360 degree reviews facilitated by an external coach and are continuing their management development, in the case of Adam through his participation in the CBI Leadership Programme, and in Tom s case through attendance at the INSEAD business school in May. The Committee will continue to work closely with the Chief Executive to develop Tom and Adam s range and breadth of skills and experience. Last year the Nomination Committee appointed the Zygos Partnership as headhunters to conduct a search for additional Non-executive Directors. It remains the case, as disclosed in the last report, that the Company has used Zygos in the past for other non-executive searches but that it has no other connections with the Company. Since Zygos appointment, its acquisition by Russell Reynolds Associates has been announced. The Company has no connections with Russell Reynolds Associates, other than in their capacity as headhunters and recruitment advisors for senior executives and Board members and as the external facilitator for the Board s 2016 effectiveness review. The brief to Zygos contained three parallel tracks, firstly to identify candidates with international experience, preferably in FMCG or ingredients businesses. Secondly, to identify candidates who would be able to succeed Andrew Carr-Locke as chair of the Audit Committee, and thirdly, to identify potential future candidates to succeed Richard Macdonald as chair of the Remuneration Committee. I am delighted to welcome formally Moni Mannings and John Gibney to the Board. Moni joined the Board last December. She is a Non-executive Director of Polypipe plc where she also chairs the remuneration committee and is a Non-executive Director of Investec Bank plc for whom she also chairs their Irish subsidiary, Investec Holding (Ireland) Limited. She sits on the advisory board of Aistemos, an intellectual property data analytics company, having been its Director and Chief Operating Officer until August. Prior to her current appointments, Moni enjoyed a successful career as a senior City finance lawyer, latterly as Head of Banking at Olswang LLP. In the short period during which Moni has been on the Board she has demonstrated an ability quickly to understand our business and to contribute valuably to Board discussions. With her remuneration committee experience, Moni is a potential successor to Richard Macdonald as chair of the Remuneration Committee when Richard steps down in November John Gibney joined the Board in May as a Non-executive Director. He will succeed Andrew Carr-Locke as chair of the Audit Committee following the AGM in July. A Chartered Accountant, John retired from his role as Chief Financial Officer of Britvic plc in 2016 after 17 years. Prior to his time with Britvic, John spent 10 years with Bass plc in various finance roles. John brings with him considerable international business experience from his Britvic role and continues to be involved in the international food industry as a Non-executive Director of PureCircle plc a world leading producer and innovator of stevia ingredients for the global food and beverage industry. The Committee is satisfied that it has performed its duties under its terms of reference, including: Director appointments: The Committee s primary responsibility is to consider and recommend to the Board candidates who are appropriate for appointment as Executive and Non-executive Directors. Its objective is to maintain an appropriate balance of skills and experience on the Board and to ensure progressive refreshment of the Board. Processes for Director appointments: The process for the appointment of new Directors is rigorous and transparent. The Committee ensures that the recruitment exercise for Directors is conducted against a documented brief setting out the requirements of the role and the skills and experience required of the person to fill it. In the past, the Company has engaged the services of external 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 do so, open advertising would be used as an alternative. Prospective appointees are interviewed by the Committee and the Committee makes a recommendation to the Board. The Board makes the decision whether to appoint the recommended individual. The Committee reports the outcome of its meetings to the Board. Director commitments: The Committee evaluates the commitments of individual Directors. The Board believes that it is in the best interests of the Company that Executive Directors take up opportunities to act as Non-executive Directors in other appropriate companies. Unless the Board approves otherwise, Executive Directors may serve in a non-executive capacity on the board of one other company. Non-executive Directors may serve as directors, executive or otherwise, on the boards of other companies or appropriate organisations. Non-executive Directors letters of appointment require them to seek prior approval from the Board before accepting any additional commitment that might affect the time that they are able to devote to their role as a Non-executive Director of the Company. The Board has the opportunity to satisfy itself that Non-executive Directors other commitments allow them to devote adequate time to their commitments to the Company. The Board approved all new appointments of Directors during the year and is satisfied that all Directors continue to have sufficient time to devote themselves properly to their duties for the Company. Diversity: The Committee monitors diversity on behalf of the Board. The Group interprets diversity in its widest sense and aims to achieve the best possible leadership for the Group by ensuring an appropriate mix of skills, backgrounds, gender, experience and knowledge amongst its Directors, senior managers and other employees. The Committee considers that first and foremost, appointments must be made based on an objective assessment of Governance Dairy Crest Annual Report /18 39

42 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 Nomination Committee members Stephen Alexander, Chairman Andrew Carr-Locke Sue Farr Richard Macdonald Moni Mannings (from December ) 40 Dairy Crest Annual Report /18

43 Corporate Responsibility Committee report I am pleased to present the report of the Corporate Responsibility Committee to shareholders. Full details of our corporate responsibility programme can be found on pages 20 to 25. The Committee oversees the Group s corporate responsibility programme and ensures that key social, ethical and environmental issues are assessed and prioritised, including reviewing the Group s corporate responsibility pledges. The Group has a long-standing commitment to corporate responsibility and believes that behaving in an ethical, sustainable manner is essential for running a successful business. The proportion of water from recycled sources used in manufacturing by our business increased to 47% which puts us in a good position to achieve our target of a 50% reduction by 2021/22. Our total accident rate fell by 86% versus the 2013 baseline which is ahead of the 50% reduction by 2021/22 which was initially targeted. We will be re-assessing this pledge to adjust the target accordingly and ensure it remains suitably stretching. We are proud that, for the second consecutive year, we have had no reportable health and safety incidents as categorised under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (commonly referred to as RIDDORs). This is a significant achievement and driving safety-conscious behaviour 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 today and in the future. I am proud therefore to be able to report on another year of real achievement by the Corporate Responsibility team and their colleagues across the business. Governance Last year we relaunched our Corporate Responsibility strategy to focus our efforts on 14 pledges grouped into four key pillars 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 have also received extremely positive feedback from our employees, with 84% considering Dairy Crest as a responsible employer. I believe that the success of our programme is due to the fact that corporate responsibility runs through the heart of the business. Each of the four pillars is owned by a member of the Executive Committee which ensures that there is individual accountability for each of the pillars to help drive progress. Andy Stickland, our Group Supply Chain Director, has responsibility for the Climate pillar, 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. Sue Farr Chairman of the Corporate Responsibility Committee 22 May Corporate Responsibility Committee members Sue Farr, Chairman Mark Allen Tom Atherton Adam Braithwaite Simon Hewitt (Group Technical Director) Richard Macdonald Robin Miller Robert Willock 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 /18 41

44 Corporate governance continued Greenhouse Gas Report /18 In line with the requirements of the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 (as amended) our greenhouse gas ( GHG ) emissions are quantified below. / /17 Scope 1 11,390 11,438 tonnes CO 2 e Scope 2 24,240 27,581 tonnes CO 2 e Total scope 1&2 35,630 39,019 tonnes CO 2 e kg CO Intensity ratio e per tonne throughput Emissions from Biomass fuel 26,399 26,102 tonnes CO 2 e We follow the GHG Protocol Corporate Accounting and Reporting Standard to calculate emissions from the combustion of fuels (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2). Carbon emission factors are used to convert each activity that gives rise to GHG emissions to a carbon dioxide equivalent (CO 2 e) using the latest UK Government conversion factors for Company Reporting. The GHG data reported below relates to emissions from activities in the operational control of Dairy Crest Group plc from 2 April to 31 March, consistent with our financial reporting period. Scope 1 emissions data includes material sources of fossil fuels used at manufacturing sites, offices and our national distribution centre. Road fuel used in company cars operated by Dairy Crest for business travel is also included. Fugitive losses of refrigerants used in cooling equipment have been converted to tonnes of carbon dioxide equivalent and are included for completeness. Scope 2 emissions data includes purchased electricity used in manufacturing, distribution and in offices. We employ a per tonne of throughput denominator as the most effective measure of relative performance. This measure is consistent with our internal target setting process and how we communicate relative performance. Consistent with the GHG Protocol, emissions from biologically sequestered carbon are reported separate to the other Scopes. These comprise emissions from combustion of biomass fuel at our creamery in Davidstow that significantly reduce Scope 1 emissions from fossil fuels. Emissions from combustion of biomass fuels are not included in the emissions intensity ratio reported above. Scope 1 and 2 emissions reduced in /18 by around 9% compared to the previous year driven by the changes summarised in the chart below shown in ktonnes CO 2 e / Outsourcing of primary transport 2.6 Increase in activity level The reduction in both absolute emissions and the reported emissions intensity ratio are due to: Outsourcing of distribution of finished goods part way through the previous reporting year (June 2016), consequently no emissions from HGV fuel or vehicle refrigeration systems are relevant to the current reporting year Increased activity levels for our Davidstow creamery and cheese packing sites following commissioning of new manufacturing processes in the previous reporting year increased energy activity data for both Scope 1 and 2 emissions Continued investment in cost effective emission reductions activities which deliver operational efficiencies for our business. These typically comprise energy demand reduction projects increasing the efficiency of refrigeration, steam and air systems, motors and drives and lighting. We also focus on maximising the utilisation of on-site renewable sources of energy to reduce reliance on fossil fuels. The effectiveness of these projects was in part offset during the reporting year by emissions of refrigerant gases from equipment which has subsequently been replaced. We continue to prioritise cost effective energy reduction projects to reduce GHG emissions and reduce supply chain costs The carbon intensity of electricity imported from the public grid reduced by 15% compared to the previous year (based on annual emissions factors issued by DEFRA) reducing Scope 2 emissions The overall effect of the changes described above on the emissions intensity metric was a year-on-year decrease of 10%. 0.6 Operational efficiencies 4.2 Grid factor 35.6 /18 Executive Committee The Chief Executive chairs the Executive Committee which comprises the other Executive Directors and senior members of the Group s executive team. The Executive Committee is responsible, amongst other matters, for implementing the Group s strategic direction and monitoring the performance of the business and its control procedures on a day-to-day basis, as well as the day-to-day operations of the Group s business, its performance against forecasts and budgets, and profitability. The Executive Committee normally meets weekly. Executive Committee members Mark Allen Tom Atherton Adam Braithwaite Robin Miller Andy Stickland Robert Willock 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 42 Dairy Crest Annual Report /18

45 Directors remuneration report Chairman s statement On behalf of the Board, I am pleased to present the Directors Remuneration Report ( DRR ) for the /18 financial year. The Committee has continued to focus diligently on our approach to remuneration at Dairy Crest over the last year and met seven times over the period. The importance of ongoing quality dialogue with our shareholders and consistently high levels of transparency in our overall approach remains a key part of our work which, again, is reflected in this year s report. /18 was the first year we operated under our revised remuneration policy, which was approved by over 99% of our shareholders at the AGM. I would like to take the opportunity again to thank shareholders for their support, as well as their input and helpful guidance over the course of last year s remuneration policy review. The Dairy Crest remuneration policy continues to be based on a core set of principles which supports the strategic and financial ambitions of the Company. The remuneration package should support a performance based culture, attract and retain talented personnel and align executives and shareholders interests. The remuneration structure is both uncomplicated and transparent and we remain committed to open disclosure. The measures used for incentive plans reflect the strategic priorities which the Company considers critical to the future success of the Company. A copy of the Policy is included after the Chairman s statement for ease of reference. The full Policy, as approved by shareholders, is also available on our website. In this statement I have pulled out a few key points from the main detail of our remuneration work undertaken in /18 and contained in the Directors Remuneration report. Board changes at Dairy Crest in /18 Earlier this year, the Board was pleased to appoint Tom Atherton as Deputy Chief Executive. Tom retains his responsibilities as Group Finance Director, with this expansion in role recognising a number of additional responsibilities including the chairmanship of Frylight, the strategic leadership of our butters and spreads category and, more recently, the chairmanship of our Functional Ingredients business. The consequent change to Tom s salary is covered below. I would also like to take this opportunity to welcome Moni Mannings who joined the Board and the Remuneration Committee in December and thank Andrew Carr-Locke for his services to the Committee over the last nine years, as he will not seek reelection to the Board at this year s AGM. /18 Company performance Dairy Crest delivered a strong branded performance for the /18 financial year with all but one of our key brands growing faster than the market. We are progressively establishing a customer base of infant formula manufacturers for demineralised whey and GOS and the animal feed trials we have conducted have generated positive results. Group revenues grew by almost 10% over the year and adjusted profit before tax increased by 3%. The Board is recommending a final dividend of 16.3p per share. As has always been the case, the Committee aims to ensure that pay outcomes fully reflect the performance of the business over both the long and short term. We continue to assess annual performance, and therefore bonus outcomes, against three key metrics: profit before tax, free cash flow and personal objectives. This approach applied to all scheme participants across the Group. Whilst the reported results against the targets set would result in a payout under the profit before tax element of the bonus, the Executive Committee, supported by the Remuneration Committee, determined that this would not be appropriate given the level of exceptional charges incurred by the Group. Free cash flow performance was outside of the bonus range resulting in no payout for this element. In addition, although recognising the strong branded performance of the business with revenue and profit growth, the overall financial outcome for the year did not meet the stretching internal targets set. Given this, the Executive Committee proposed that no payout be made under the personal objectives element of the bonus scheme for Executive Directors and senior managers, which the Remuneration Committee supported. This results in no bonuses being paid to Executive Directors and senior managers for /18. Vesting of the Transformational Incentive Award Over the past few years Dairy Crest, under the leadership of Mark Allen, has transformed into a high margin, added-value and branded 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 which it operates and at a time of great change including the sale of the Dairies business, was paramount and therefore granted him the Transformational Incentive Award ( TIA ), approved by shareholders at an EGM in This award vested in December following the assessment of achievement against stretching performance conditions. We recognised that this remuneration structure was not conventional and committed to being as transparent as possible in relation to interim updates against the performance conditions under this plan. To deliver against this commitment we have aimed to provide best practice disclosure, giving detailed performance updates in every DRR since the plan was approved and have done so again this year to help shareholders understand our decision-making in determining the ultimate level of vesting under the plan. Governance 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 /18 43