Dairy Crest Group plc Preliminary results For the year ended 31 March 2018
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AGENDA Investing for future growth Mark Allen Chief Executive 2017/18 review Tom Atherton Deputy CEO & Group Finance Director GOS update Richard Jones Managing Director, Functional Ingredients Looking ahead Mark Allen Chief Executive Q&A 3
DAIRY CREST: LONG-TERM FOCUS ON QUALITY Experienced management team World class, well invested supply chain Culture of corporate responsibility High quality portfolio of market-leading food brands and ingredients Constantly striving to innovate Stable margins and progressive dividend policy 4
INVESTING FOR FUTURE GROWTH POSITION FOR GROWTH Expand capacity Systems and process improvements Upgrade existing assets manufacturing and packing FIT FOR THE FUTURE Self-sufficiency in water supply Improve energy resilience Reduce environmental impact Support growth of the UK s number one cheese brand and premium quality Davidstow brand 5
CATHEDRAL CITY OFFERS CONSIDERABLE GROWTH OPPORTUNITIES Market growing at c.2% a year 65% of UK cheddar market still private label Future demand in Europe, China, US and Far East for high quality, mature cheddar Growth opportunities in snacking and convenience UK cheddar market* * Source: IRI Kantar 52 weeks ended 24 March 2018 6
CHEESE AND WHEY CAPACITY INCREASES THROUGH DAVIDSTOW INVESTMENT Increase pasteurisation Install two new vats Upgrade cheddar-making machine and add new block formers Replace remaining vats Replace five vats and install one more Cheese packing improvements Process changes to optimise throughput Annual cheese capacity increases to 77,000t. Pace of spend subject to demand Annual production of D90 increases from 24,000t in 2017/18 to 29,000t Additional whey produced to be sold as whey concentrate or whey protein concentrate to increase flexibility and opportunity for whey sales 7
PHASED EXPANSION PROGRAMME PHASE 1 Process changes to optimise existing capacity Increase whey processing capacity Upgrade effluent plant and water recovery Energy resilience PHASE 2 Increase pasteurisation capacity Install two new vats PHASE 3 Replace five existing vats and install one more Packaging improvements PHASE 4 Replace remaining six vats Complete all utilities work PHASE 5 Upgrade cheddar-making machine Add two new block formers Pace and spend of expansion can be adjusted dependent on demand growth Total project cost 85 million to be spread over 4-5 years 8
2017/18 review Tom Atherton Deputy CEO & Group Finance Director
2017/18: A STRONG PERFORMANCE Group revenue Adjusted profit EBITDA ** Net Pension surplus Innovation^ +10% 456.8m before tax * +3% +8% 62.3m 90.2m debt 94m +6% 265.7m to fund higher stock value > 200m improvement 14% of revenue * Before exceptional items (material and one-off in nature), amortisation of acquired intangibles and pension interest ** Profit on continuing operations adjusted for exceptional items, depreciation and amortisation ^ Revenue from new products launched within the past three years Full year dividend up 0.4% to 22.6p 10
GOOD PERFORMANCE FROM KEY BRANDS Key Brand Market Volume* Value* Market data** Cheese +3% +6% Everyday cheese volumes and value grew by 2% and 5% respectively Spreads +3% +7% Spread volumes fell by 2% while values were flat Butters +2% -20% 0% Butter volumes fell by 1% while value grew by 21% Oil +12% +13% Oil volumes grew by 3% and value by 6% *** Combined 0% +6% * Source: Dairy Crest volume and value: 12 months to 31 March 2018 vs 12 months to 31 March 2017 ** Source: IRI Kantar data 52 weeks ended 24 March 2018 vs 52 weeks ended 25 March 2017 *** Source: IRI Kantar data 52 weeks ended 25 February 2018 vs 52 weeks ended 26 February 2017 11
DEALT WELL WITH INPUT COST PRESSURE Year ended 31 March 2018 Cheese & Functional Ingredients Butters, Spreads & Oils Other Group Revenue ( m) 277.2 +9% 174.2 +16% 5.4 456.8 +10% EBITDA* ( m) 63.8 +19% 26.4-13% 90.2 +8% Profit**( m) 50.1 +17% 21.7-15% 71.8 +5% Margin 18.1% +120bps 12.5% -440bps 15.7% -70bps * Profit on continuing operations adjusted for exceptional items, depreciation and amortisation ** Product group profit before pension interest, intangible amortisation and exceptional items 12
CATHEDRAL CITY: THE NATION S FAVOURITE CHEESE Increasing share in sliced, grated and snacking with more launches expected in the year ahead Major TV sponsorship campaign attracting 4 million weekly viewers Dairy Crest* Cathedral City revenues up 6% Market everyday cheese revenues** up 5% Clear market leader with retail sales more than 3x the number two cheddar brand * Source: Dairy Crest volume and value: 12 months to 31 March 2018 vs 12 months to 31 March 2017 ** Source: IRI Kantar data 52 weeks ended 24 March 2018 vs 52 weeks ended 25 March 2017 13
BUTTERS AND SPREADS: A WELL BALANCED PORTFOLIO Dairy Crest* spreads revenue up 10% Market spreads revenue** ^ down 2% ^excluding Dairy Crest brands Continuing to gain market share; Lighter version to be launched later this year Exceptional volume and value growth Dairy Crest brands represent 30% of UK spreads market by volume** Pure 1% I Can't Believe 8% Private Label 22% Bertolli 10% Flora 29% Clover 20% Vitalite 2% Utterly Butterly 6% Willow 2% Promotional activity reduced due to high input costs but re-introduced in the final quarter * Source: Dairy Crest 12 months to 31 March 2018 ** Source: IRI Kantar data 52 weeks ended 24 March 2018 vs 52 weeks ended 25 March 2017 14
FRYLIGHT: DOUBLE DIGIT GROWTH CONTINUES Household penetration rate increased by 11% to 25% Frylight leading oil brand by sales value** DC growth* Market growth** Volume 12% Volume 3% Value 13% Value 6% Now listed in all major supermarkets and discounters Additional 5,000 distribution points Investment made during the year to improve capacity considerable headroom at existing facility New variety launched in April 2018 * Source: Dairy Crest 12 months to 31 March 2018 ** Source: Kantar oils data 52 weeks to 25 February 2018 vs. 52 weeks to 26 February 2017 15
ktonnes D90: CUSTOMER BASE DEVELOPING AND MARKET DYNAMICS BECOMING MORE FAVOURABLE 24,000t of demineralised whey sold in 2017/18 Global infant formula (IF) consumption CAGR 9% (2015-2020) 4000 Quality and traceability of utmost importance for customers key strengths for Dairy Crest Multiple customer audits completed very positive feedback Successfully growing sales to infant formula customers across the major global markets 3500 3000 2500 2000 1500 1000 500 0 2013 2014 2015 2016 2017 F2018 F2019 F2020 Source: Euromonitor 16
BALANCE SHEET IMPROVING PENSIONS m >200m improvement year on year Move from RPI to CPI removed 132m of liabilities Further liability reduction programmes undertaken 17
CAPEX DRIVING FURTHER EFFICIENCIES Evolve IT project 8.6m c. 5m savings p.a. post implementation Carried forward CAPEX 3.9m Accrued Davidstow expenditure from 2016/17 Underlying CAPEX 18.7m Improvements to water treatment facility Kirkby production line improvements initiative programme Buyout of Frylight property full ownership of operating facilities 18
TIGHT CONTROL OVER WORKING CAPITAL Cash generated from debtors & creditors Debtor days Debtors less creditors 1.5m 2016/17: 4.4m 12 days 2016/17: 16 days (43.3)m 2016/17: (45.7)m Helps to fund higher stock value: Cash outflow into stock (34.4)m 19
Net debt INCREASED STOCK VALUES IMPACTING NET DEBT Net debt and net debt:ebitda ratio Net debt above stock value m x 400 4 m 350 300 250 200 150 2.7x 2.9x 2.9x 3 2 Net debt: EBITDA 100 1 50 0 Mar-16 Sept-16 Mar-17 Sept-17 Mar-18 0 20
EXPECTED IMPACT OF THE PLACING Net debt / EBITDA ratio Pro forma reduction from 2.9x at 31 March 2018 to c.2.1x Earnings per share Expected short-term dilution of c.6% in 2018/19 but enables long-term earnings growth opportunity through increased cheese and whey capacity Dividend Policy remains unchanged Final dividend for 2017/18 flat, resulting in a full year dividend increase of 0.1p. New shares will be eligible for final dividend Committed to continuing our progressive dividend policy with a minimum cover of 1.5x 21
GOS Update Richard Jones Managing Director, Functional Ingredients
GOS: PROGRESSING AS EXPECTED IN INFANT FORMULA; OPPORTUNITIES IN FEED/FOOD Infant formula sales growing via Fonterra s NZMP Surestart brand Leading supplier in organic GOS Strong research partnerships with several universities for animal feed applications Leading animal feed companies now approaching us to carry out trials Trademarked brands - Promovita and Nutrabiotic - developed for use in human and animal nutrition 23
GOS: WHAT MAKES OUR DAIRY PREBIOTIC SO SPECIAL? HMO GOS FOS Inulin More similar to mammalian (e.g. human) milk oligosaccharides than competitive products A complex molecular structure that stimulates a wide range of health-promoting bacteria Supports natural defences, enhances mineral absorption and provides digestive comfort Very stable in processing and in the stomach so delivers its full prebiotic activity in the gut Can be used in conjunction with other preand pro-biotics A source of fibre and an option for sugar reduction HMO: human milk oligosaccharides, GOS: galacto-oligosaccharides, FOS: fructo-oligosaccharides 24
TRENDS IN HUMAN NUTRITION AND ANIMAL HUSBANDRY SUPPORT GOS POTENTIAL HUMAN NUTRITION ANIMAL FEED Products targeted at digestive health represent almost 10% of 500bn* global health food market Fastest growing segment within health positioning is digestive/gut health related Yoghurts, milk drinks, fermented beverages and cereals are the fastest growing consumer product segments Major market drivers and challenges of the meat industry include: Rise in global meat consumption Increasing awareness of meat quality and safety Increasing mass production of meat Livestock disease outbreaks Rising raw material costs Regulatory changes and restrictions on use of antibiotics * Source: Innova market insights 25
POULTRY TRIALS ILLUSTRATE BENEFITS OF NUTRABIOTIC GOS Multiple trials in different conditions/scale, all showing: increase in weight gain vs control improvement in feed efficiency, i.e. lower feed conversion ratio (FCR*) Potential uplift in output/profitability for producer Not just performance, also extensive scientific research able to illustrate the impact of GOS on physical aspects known to be positive for health/growth Weight of control birds FCR* of control birds Live weight of GOS-fed birds FCR* of GOS-fed birds Observed that GOS-fed birds are more resilient when impacted by disease Further work underway to explore synbiotic product opportunities (ongoing patent applications) * FCR = Feed Conversion Ratio. The ratio of feed an animal requires to put on body mass. 26
Weight PIGLET TRIALS ILLUSTRATE A SIMILAR UPLIFT IN PERFORMANCE FROM NUTRABIOTIC GOS Improvement in weight gain led to 6% increase in final weight Weight development during lifetime Impact on weight gain continued after GOS was withdrawn from feed Attractive return on investment for farmer Supports the hypothesis that a healthy gut leads to increased final performance Currently investigating if same applies to other species as well 14 26 61 130 Days GOS Control 27
STRONG VALUE PROPOSITION BEING MARKETED GLOBALLY Build on successful high-quality proposition for D90/GOS with Fonterra for growth in infant formula Utilise the growing momentum of commercial trials to establish the benefits of GOS in the animal feed market across a range of species Develop options for product applications for GOS in food work already underway with a number of major international food businesses Launch a GOS product that can be sold directly to the consumer to address the increased interest in good gut health www.gosguthealth.com 28
Looking ahead Mark Allen Chief Executive
2018/19 PRIORITIES TO DRIVE GROWTH To generate growth by building strong positions in branded and added value markets To simplify, make more resilient and reduce costs To generate cash and reduce risk To make acquisitions where they will generate value Focus attention on expansion of Davidstow Further brand share gains Develop GOS opportunity and drive demand for D90 Waste and cost reduction Finalise Evolve I.T. transition Complete Kirkby restructuring Drive volumes and release working capital from stock Next pension valuation due March 2019 Continue to look for opportunities against strict criteria Results in improved margins and cash delivery 30
Thank you Q&A 31