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Trading in the first half of the year has remained challenging and our profits, having adjusted for the disposal of our French spreads business, St Hubert, will be lower than the same period last year.  However, our profit expectations for the full year ending 31 March 2013 remain unchanged.

Strong momentum in Brands

Our four key UK brands (Cathedral City, Country Life, Clover and Frijj) have continued to perform strongly in the first half.  Increased marketing expenditure behind these brands is supporting this growth. All four have been advertised on television in the period - the first time that has ever happened. 

Innovation remains a focus in our ongoing drive for added value sales.  For example, Chedds, natural cheese for children (whose annual retail sales now exceed £7 million), Frijj Incredibles and Cathedral City Selections are all performing strongly.  Further innovations are planned for the second half, including a long-life variant of Frijj.  This is aimed at the convenience market and provides a significant opportunity for further growth.

As part of our continued drive to grow and improve efficiency across our business, we have decided to consult with employees on plans to consolidate our spreads production into a single UK location, our existing facility at Kirkby, Merseyside. As a result of the consolidation our site in Crudgington, Shropshire, will potentially close in 2014. 

Decisive action in Dairies

Our Dairies business has been facing unprecedented market conditions but we remain focused on achieving a 3% return on sales in this business in the medium term. We continue to take a number of decisive actions to achieve this, including implementing milk selling price increases, closing our Aintree creamery, consolidating milk rounds to allow the closure of 23 depots in the six months and reducing overheads.  Plans are on track to close our Fenstanton dairy, as previously announced, this autumn. 

We increased the price we pay our non-aligned supplier farmers for milk by 1.85 pence per litre from 1 October 2011, but a steep fall in cream prices led to a price reduction of 2 pence per litre from 1 May 2012.  A second planned reduction, due to take place on 1 August 2012 was postponed while we negotiated price increases with our customers and this had a small adverse effect on profits in the period.

We have today announced higher farmgate milk prices for our suppliers.  These reflect the expectations of improving returns from commodity markets and higher selling prices.

Improved financial position

Following the sale of St Hubert, our financial position is much improved.  We received €430 million on 28August 2012 which has been used in part to repay drawdowns from our revolving credit facility.  The balance has been placed on short-term deposits, with the position for the longer term currently under review.  Our aim in deploying cash will be to preserve the Group's capacity to make acquisitions, while providing appropriate long-term funding for the pension fund and driving towards a more efficient debt structure.

Mark Allen, Chief Executive, commented: 'We are pleased with our first half performance despite the significant pressures on our business.  Although we expect these to continue into the second half our first half performance together with our plans for the second half means that our profit expectations for the full year remain unchanged.  At the same time we have continued to move the business forward and the proceeds from the sale of St Hubert leave us much stronger financially.'

Milk Price increase

Dairy Crest announced today that the prices it pays its farmers on both a non-aligned liquid milk contract and a Davidstow cheese contract will increase to 29 pence per litre from 1 November 2012. Non-aligned liquid farmers will also benefit from an earlier increase on 1 October to 28.25 pence per litre. These increases are in addition to Dairy Crest's decision to set aside the August price cut and mean that the company's milk prices are now higher than they were before prices started to come down from May.

Dairy Crest hopes that this news will help restore confidence at the end of a difficult summer for farmers and processors alike and, going forward, has committed to strive for further milk price increases.

The increases reflect the expectations of improving returns from commodity markets and higher selling prices that Dairy Crest is seeking from its customers. They are much needed to reflect the higher on-farm costs that all dairy farmers are currently experiencing following the difficult weather conditions this summer.

Communication of these price increases is being sent to around 1,000 farmers supplying Dairy Crest.

Help beyond milk price increases Dairy Crest has led the way this summer by being the first milk purchaser to implement the new voluntary code of practice for milk contracts. It was also the first of the three major processors to embark on the difficult process of finding a more predictable, formulaic way to determine milk prices. These are clear indicators of the company's commitment to working with its farmers to resolve the difficulties faced across the sector this summer.

Farmers supplying Dairy Crest continue to benefit from their milk price not being subject to capital deductions, which some milk buyers enforce on their milk suppliers to pay for investment in their processing factories, and they don't have to pay for haulage or the cost of milk balancing. They will also continue to benefit from free farm consultancy funded by the company.

Mike Sheldon, Group Milk Procurement Director, explained the process Dairy Crest has been through in the pastfew months:

"Poor markets and weather have combined over the summer to make it very difficult for our farmers.

"We have responded by adopting the terms of the voluntary code, working on a formula based pricing model, setting aside planned price cuts and now we are increasing prices at the first affordable opportunity, as we committed to do. Our milk price is competitive, as we do not expect our farmers to pay for investment in our dairies or apply other hidden charges. We are also continuing to support our farmers with a free on-farm consultancy service.

"As the only major processor in British ownership Dairy Crest's future is strongly linked to that of our farmers. We want and need our farmers to be successful. This is a partnership and today's announcement reflects our determination to make Dairy Crest the milk buyer of choice."

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