Performance
Sales in 1997 were US$6,888 million, marginally below the prior year as steady growth achieved in underlying local currencies was offset by exchange rate movements, particularly the strengthening United States Dollar.

Profit before interest from continuing activities of US$209 million was 3% ahead of last year. This result reflects the significant improvement in Australia, partly offset by continuing start-up losses in Asia, higher corporate overheads and investment in systems. Non-recurring items of US$55 million in respect of discontinued activities were, however, significantly below the 1996 figure of US$111 million. As a result, profit before interest for the year ended 31st December 1997 was US$154 million, an increase of 70%. The consolidated net profit for the year, after taxation and minority interests, was US$129 million, compared with US$42 million in 1996.

Earnings per ordinary share were US¢6.45, being four times greater than last year. If the non-recurring items in both 1996 and 1997 were excluded, the earnings per share would have increased by 8% to US¢8.59.

In view of the Group's strong cash flow and the outlook for future years, the Directors believe it appropriate to maintain the dividend at the same level as 1996. A final dividend of US¢4.35 per ordinary share is therefore recommended, payable in cash with a scrip alternative, which, together with the interim dividend of US¢1.65 per ordinary share, will make a total annual dividend of US¢6.00 per ordinary share.

A dividend at the rate of 6.5% per annum will be payable on the Company's outstanding convertible preference shares on 8th May 1998 to holders registered at the close of business on 29th April 1998.

Group Review
Over the course of the year the Group advanced its core strategy of focus on retail in the Asia-Pacific Region and took steps to position itself to compete more effectively in an environment of increasing competition and difficult economic circumstances. The new Dairy Farm management team is working towards two main objectives.

The first is to ensure that the Group has the right blend of organizational structure and core competencies. As a result, a number of senior staff have been recruited for new roles both in the operating companies and in the corporate office. We are confident that this initiative will deliver future benefits, although it has an immediate impact on costs and accounts for much of the increase in corporate overheads.

The second objective is to improve the shopping experience in our stores. This will require upgrading the quality of our outlets, improving service and product ranges and, in particular, upgrading the standards of our fresh food offer, which we believe is a key element for success in modern supermarketing.

During the year, the Group has redeployed certain of its assets, selling its 49% share in the manufacturing joint venture with Nestlé and its Spanish supermarket subsidiary, Simago, the latter transaction being completed in February 1998. Following detailed reviews of performance and potential, we also decided to discontinue our drugstore operations in Taiwan and our Japanese supermarket joint venture with Seiyu. On a more positive note, in February 1998, we acquired an effective interest of 31% in PT Hero Supermarket, the leading supermarket chain in Indonesia, at a cost of US$36 million. This investment represents an excellent opportunity for the Group to expand its interests in Indonesia.

Capital expenditure in 1997 was US$235 million. During the year the Group opened 109 new stores, giving a year-end total (excluding discontinued activities) of 1,352, with a gross retail area of over 11.5 million sq. ft, an increase of 5%. Investment in infrastructure and information technology systems is a high priority which, together with store conversions in Australia and refurbishments in Hong Kong, will continue to represent the bulk of future spending.

In Australia, the repositioning of Franklins' business resulted in a profit before interest of US$15 million compared with the US$8 million loss in 1996. This improvement reflects the higher margins and productivity gains generated by the Fresh formats, which now account for over 52% of total sales. Based on this success, the programme of converting "No Frills" stores into the "Fresh" formats continues. Franklins is also well down the path of improving its business processes and merchandising practices, which will provide further efficiency gains. In New Zealand, Woolworths had another good year of steady growth in sales and profit.

In Hong Kong, our principal retail businesses, Wellcome Supermarkets, 7-Eleven convenience stores and Mannings drugstores, achieved a 5% increase in total sales. Wellcome had a steady profit performance, and a much improved profit at 7-Eleven reflected the benefits of the recent systems upgrade. The Group will further enhance its fresh food offer with the completion of our US$50 million Fresh Food Processing Centre in the middle of this year.

Maxim's Caterers, our 50% restaurant associate, produced another good result, achieving sales and profit growth in the difficult conditions which prevailed in the second half. The company now has 274 outlets in Hong Kong where it is the market leader, and 36 outlets in Mainland China.

In Taiwan, Wellcome supermarkets suffered a decline in sales as this competitive market continued to be influenced by a growing number of hypermarkets. The chain was, nevertheless, able to improve its profit performance. Our own hypermarket joint venture with Casino S.A. is expected to open its first store towards the end of 1998.

In South Asia, our Singapore businesses performed well, and our supermarket joint venture in Malaysia continued to seek expansion opportunities. Our drugstore joint ventures in Malaysia and India progressed well, while in Indonesia, where we provide technical assistance to two retail chains, Mitra supermarkets and Guardian drugstores, trading was adversely affected by the economic situation.

In March 1998, the Group accepted a share offer from Somerfield PLC for its 29% interest in Kwik Save Group. The Somerfield shares were subsequently sold for the equivalent of some US$290 million, before expenses, producing a profit of some US$80 million which will be included in the Group's 1998 accounts. The sale completes the refocus of the Group's activities on the Asia-Pacific Region.

People
Ronald J. Floto joined the Board as Joint Managing Director in June 1997. Gregory J. Terry and C. I. Cowan retired from the Board upon leaving the Group and we are grateful for their advice and guidance. They were succeeded by James Watkins and Norman Lyle. Chris Nelson retired from the Board on 16th March 1998 and we would like to express our appreciation for the significant contribution he made in the development of the Group during his 12 years service. George Joseph Ho was appointed as a Director on 16th March 1998.

At the end of 1997, the Group employed 45,600 people. The professionalism and commitment of our staff has been, and will continue to be, a key element in bringing about successfully the significant change we are making in our businesses. On behalf of the Directors, I would like to thank them all.

Outlook
The difficult economic conditions in Asian markets will inevitably affect Dairy Farm's performance, though they will also create opportunities for new investment. The results being achieved from our new formats in Australia, and the investments being made throughout the Group in systems and infrastructure should provide a sound base for future profit growth.

Simon Keswick
Chairman
26th March 1998