Benchmark Holdings plc Annual Report 2018

Plain-text annual report

DRIVING SUSTAINABILITY IN FOOD PRODUCTION Benchmark Holdings plc Annual Report 2018 CONTENTS 01. Strategic Report 04 2018 Highlights 08 Benchmark at a Glance 10 Chairman’s Statement 12 Market Overview 14 Investment Case 16 Business Model 18 Strategy and Progress 20 Strategy in Action 22 Chief Executive’s Statement 28 Business Review 28 Genetics 30 Advanced Nutrition 32 Animal Health 34 Knowledge Services 36 Chief Scientific Officer’s Statement 40 Financial Review 46 Sustainability 54 Our People 60 Risk Management 62 Principal Risks and Uncertainties 02. Governance 66 Introduction to the Board 70 Leadership 73 Effectiveness 76 Accountability 79 Remuneration 84 Shareholders 85 Directors’ Report 89 Directors’ Responsibility Statement 03. Financial Statements 92 Independent Auditor’s Report 98 Consolidated Income Statement 99 Consolidated Statement of Comprehensive Income 100 Consolidated Balance Sheet 101 Company Balance Sheet 102 Consolidated Statement of Changes in Equity 103 Company Statement of Changes in Equity 104 Consolidated Statement of Cash Flows 105 Company Statement of Cash Flows 106 Notes Forming Part of the Financial Statements 04. Additional Information 156 Glossary 157 Advisers Registered office: Benchmark Holdings plc Benchmark House 8 Smithy Wood Drive Sheffield S35 1QN Registered number: 04115910 2018 HIGHLIGHTS Financial highlights • Revenue increased by 8% to £151.5m. Revenue increased by 13% using the same foreign exchange rates experienced in 2017. • Adjusted EBITDA1 increased by 68% to £17.0m (2017: £10.1m). Margin increased to 11% (2017: 7%). • Total investment in R&D (expensed and capitalised) of £19.4m. Driven by investment in next generation sea lice treatment. • Operating loss for the period increased to £(9.1m) (2017: £(7.6m)). • Loss for the period reduced to £(4.4m) (2017: £(7.1m)). • Increase in net debt1 to £55.7m (2017: £23.9m), primarily due to £32.7m capital investment. Growth in revenues and Adjusted EBITDA1 Operational highlights Market leading positions #1 GLOBALLY • Genomically selected salmon eggs • Genetics services for global aquaculture breeding programmes • Enhanced and enriched live feed (artemia) • Specialist diets for early-stage shrimp and sea bass/bream • Probiotics for early-stage shrimp and sea bass/bream Animal Health • Successful field trials of next generation sea lice treatment with three of the world’s largest salmon producers showing 99%+ efficacy and no environmental impact. Genetics • Successful trials of disease resistant shrimp in Vietnam, Thailand and China. • Joint venture with AquaChile to accelerate penetration into world’s second largest salmon market. • Start of production at new land-based salmon egg production facility in Norway. Advanced Nutrition • Four new products launched and excellent progress made in the development of artemia replacement diets. Revenue £151.5m Adjusted EBITDA1 £17.0m +8% (+13% constant currency1) +68% 2018 2017 2016 £151.5m £140.2m £109.4m £17.0m 2018 2017 2016 £10.1m £9.2m Adjusted EBITDA margin 11% Operating Loss £(9.1m) 2018 2017 2016 11% 7% 8% £(9.1m) 2018 £(7.6m) 2017 £(20.5m) 2016 Total invested in R&D (expensed and capitalised) £19.4m Loss after tax £(4.4m) 2018 2017 2016 £19.4m £(4.4m) 2018 £15.2m £13.2m £(7.1m) 2017 £(18.3m) 2016 1 See financial review for definition of adjusted measures. Gross margin 49% 2018 2017 2016 49% 45% 46% 05 STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON 01 STRATEGIC REPORT 04 2018 Highlights 08 Benchmark at a Glance 10 Chairman’s Statement 12 Market Overview 14 Investment Case 16 Business Model 18 Strategy and Progress 20 Strategy in Action 22 Chief Executive’s Statement 28 Business Review 28 Genetics 30 Advanced Nutrition 32 Animal Health 34 Knowledge Services 36 Chief Scientific Officer’s Statement 40 Financial Review 46 Sustainability 54 Our People 60 Risk Management 62 Principal Risks and Uncertainties 06 07 Image: Benchmark’s new land-based salmon egg production facility, Salten, Norway. BENCHMARK AT A GLANCE OUR DIVISIONS STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON DRIVING SUSTAINABILITY IN FOOD PRODUCTION Our mission is to enable food producers to improve their sustainability and profitability. We bring together biology and technology, to develop innovative products, which improve yield, quality and animal health and welfare for our customers. We aim to be aquaculture’s leading provider of solutions in genetics, health and specialist nutrition. Group Revenue £151.5m Genetics Animal Health Advanced Nutrition Knowledge Services Being close to our customers is key We have large-scale production facilities in seven countries, covering the main aquaculture regions, supported by a network of R&D and commercial operations in an additional 20 countries. Having a strong local presence is important for an efficient supply chain and to minimise the regulatory risk. R&D facilities and farms Diagnostic laboratories Commercial services Manufacturing/production We are a world-leading provider of aquaculture genetics. By combining our long-established breeding programmes and the latest genomic tools, we continuously grow better fish and shrimp to help aquaculture producers increase quality, yield, health and welfare. We do this by analysing DNA and identifying markers that are linked to desirable traits like growth, quality and disease resistance. We then select fish and shrimp with the strongest genetic profile and breed them to continuously improve; offering the resulting eggs, breeders or fry to our customers. We aim to remain at the forefront of technology, and constantly evaluate new techniques including gene editing, where we are participating in a research programme with the Roslin Institute in Edinburgh. REVENUE £35.8m GENETICS ADVANCED NUTRITION REVENUE £85.7m We are a world-leading provider of specialist nutrition, preventative health products and environment solutions for the early stages of shrimp and fish production. We have secure access to high-quality live feed (artemia) which, enhanced by our technology, improves nutrition and resilience. Fry and larvae quality is one of the main drivers for successful fish and shrimp farming. This is why we develop products that help early-stage fish and shrimp develop to their full potential throughout the production chain. Every day our products and protocols prove their added value in hundreds of hatcheries and farms worldwide. ANIMAL HEALTH Disease outbreaks and parasites remain the largest restriction on the growth of the aquaculture industry. Benchmark is developing solutions for some of the most persistent diseases in salmon, shrimp and marine finfish, including sea lice in salmon and viral diseases of fish. We tackle unmet needs with both preventative methods and treatments, including vaccines, medicines and sea lice treatments. Our locations around the world give us first-hand knowledge of emerging health issues in the key aquaculture regions and species, permitting more effective diagnosis, treatment and disease management advice. REVENUE £16.2m KNOWLEDGE SERVICES REVENUE £15.8m The Knowledge Services division helps Benchmark maintain key opinion leader status in the aquaculture industry. Our Knowledge Services Division also complements our product offering across Genetics, Advanced Nutrition and Animal Health by delivering education and data solutions which help our customers manage their farms, train their employees and adopt new products and technologies. Our education solutions include professional certifications, training, news platforms and industry events. Our data solutions include a new fish health portal which is being trialled by 70% of Norwegian fish health providers. 08 09 CHAIRMAN STATEMENT COMMERCIAL DELIVERY OF PIPELINE CONTINUES TO BE STRATEGIC PRIORITY I am confident that we are well positioned to be aquaculture’s leading provider of solutions in genetics, health and specialist nutrition. Our medium-term target is to generate double digit compound annual growth in revenues and underlying profits and to deliver a 25% Group Adjusted EBITDA1 margin. Peter George Chairman Our continued success with commercial- scale field trials for our next generation sea lice treatment combined with our breakthrough CleanTreat® system gives us confidence in the potential of our solution. With Alex Raeber joining Benchmark as Chief Scientific Officer we have greatly strengthened our leadership team, particularly with regards to the aquaculture health opportunity. Alex’s focus will be on delivery of the key elements of the pipeline and on taking full advantage of our R&D capabilities across the Group. Our review has brought clarity to our strategy in our Knowledge Services division. We have identified certain non-core activities from which we are exiting or disposing, and have refocused our efforts on areas that position us as key opinion leaders in our markets and strengthen and differentiate our offering — data services, education and training, and veterinary consulting. Early in the year we announced the review of the activities that fall outside of aquaculture. As a result we decided to pursue a licensing agreement for our companion animal products in the pipeline. The out-licensing process is ongoing with substantial progress being made. We have received strong interest, and expect to provide an update in the coming months. Going forward, the Group’s strategy will focus upon improving delivery of shareholder returns, by focusing on the efficient use of capital and implementing strategic KPIs that will drive our growth, profitability and cash flow. Our medium term target is to generate double digit compound annual growth in revenues and to deliver a 25% Group Adjusted EBITDA1 margin. Summary — strong market drivers and opportunities There are very strong drivers in our markets, including the increasing consolidation and professionalisation of our aquaculture customers; the regulatory emphasis on environmental impact and biosecurity; and consumer trends, such as interest in provenance and in reducing the use of antibiotics. We are extremely well placed to be aquaculture’s leading provider of solutions in genetics, health and specialist nutrition taking advantage of the significant opportunities these markets segments, which are growing considerably faster than the overall aquaculture market, present. These three complementary areas contribute significantly to increase yield, quality and animal health and welfare for our customers which is our primary aim. In the next three years we expect to deliver commercial success for our next generation sea lice treatment and CleanTreat® building up to peak revenues of at least £45m; deliver double digit returns on the Salten capital investment of £40m and establish ourselves as a leading global provider of shrimp genetics. I believe that Benchmark is a highly valuable and attractive asset given its skilled team, market leading positions, well invested platform and growth strategy. Our business model is already delivering high margins and cash generation is expected to come through, which will enable us to both de-gear and continue to invest. My job is to support the management team by helping them focus on making this happen. Introduction I am pleased to present my first report as Chairman having joined the Board in May 2018. I was excited to join the Group given its prospects, and since joining I have seen first-hand the excellent market positions, people and technology across the Group. The year under review has been a successful one for Benchmark with growth in revenues and underlying profits alongside good progress in developing our strategy, completing major projects and strengthening the management team. Strategy review My first priority as Chairman was to conduct a detailed review of our strategy, the results of which are very encouraging. We have strong positions in each of our established markets, with capacity to grow. In salmon, where we are the world’s leading provider of salmon eggs and genetic services to the aquaculture industry, our new facility in Norway and our Joint Venture in Chile will help us to grow organically in all our key markets. In shrimp, where we are the leaders in specialist nutrition for hatchery, we are uniquely positioned to introduce our disease resistant shrimp, leveraging our capabilities in genetics — unlike in salmon, development of genetic improvement for disease resistance in shrimp is at an early-stage. Combined with the scale of shrimp aquaculture, this represents a very significant opportunity for Benchmark. In Animal Health, our youngest business, commercial delivery of our pipeline continues to be a strategic priority to drive investment returns. 1 See financial review for definition of adjusted measures. 10 11 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMARKET OVERVIEW SUSTAINABLE FOOD PRODUCTION IS ONE OF THE BIGGEST CHALLENGES TODAY Benchmark addresses this challenge by delivering solutions that improve the sustainability and profitability of aquaculture producers. Aquaculture plays a big and increasing role in meeting the global protein demand, which is expected to double by 2050 • Aquaculture already accounts for 50% of the world’s fish consumed as food. • Fish consumption is growing faster than all other major animal protein sources. • With wild catch capped, the aquaculture industry faces a great opportunity as well as the challenges that come with accelerated growth. 180 160 140 120 100 80 60 40 20 i t h g e w e v i l t M Forecast 2 . 6 % C A G R Aquaculture Wild catch 0.4% CAGR 0 1990 1995 2000 2005 2010 2015 2020E 2026E Source: United Nations, OECD-FAO Agricultural Outlook 2017-2026 Benchmark’s large and growing markets Genetics, Health and Nutrition play a fundamentally important role in addressing the needs of producers, consumers and regulators by improving sustainable productivity at the key stages in the production life cycle. Increasing recognition of the value of these solutions and greater professionalism in the industry are driving more rapid adoption of new products and technologies, meaning that our market segments are growing at a much faster rate than the already growing aquaculture industry. MARKET DRIVERS Producers’ continuous drive for productivity, profitability and growth The most important driver of productivity and profitability for fish and shrimp farmers is biological performance, which combines growth, health and survivability. Benchmark’s products deliver substantial value for our customers. For example, in the area of genetics, Benchmark’s IPN (infectious pancreatic necrosis) resistant salmon eggs can reduce mortality by as much as 85% while delivering significant growth improvement. Growing consumer awareness Consumers today are increasingly concerned with the use of antibiotics, environmental impact, climate change and fish welfare putting pressure on retailers and producers. Benchmark’s focus on developing sustainable solutions aligns the interests of consumers, retailers and producers. Benchmark’s unique approach to disease management reduces the need for medicines and antibiotics: Benchmark offers disease resistance through genetics and vaccines, resilience through advanced nutrition and targeted treatments for disease outbreaks. Breakthrough solutions to reduce environmental impact: Benchmark’s CleanTreat® system eliminates medicinal residues addressing one of the industry’s main concerns. Fish welfare is one of the pillars of Benchmark’s sustainability strategy: In every product we develop and in each of our operations welfare is a core criterion and goal. Our deep understanding of fish biology and farming methods uniquely position us to drive improvement in the global aquaculture markets. Increasing regulatory standards Governments want to ensure that the growing aquaculture sector is sufficiently regulated to address sustainability concerns, while continuing to play a key role in satisfying protein demand and in promoting economic growth. Benchmark’s unique position as a technology and thought leader allows us to anticipate future trends, developing products and services that help our customers grow profitably while meeting the evolving regulatory standards. Our products contribute significantly to our customers’ success SALMON 85% reduction in Infectious pancreatic necrosis (IPN) introduction of quantitative trait loci (QTL) TILAPIA 15% growth gain per generation Thought leadership in action In 2018 Benchmark became a founding member and only foreign entity in the Chinese National Shrimp Alliance, set up by the Chinese Government to raise the standard of Chinese shrimp farming. 12 13 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Genetics Knowledge Services Advanced Nutrition Animal Health INVESTMENT CASE High growth markets Genetics, health and specialist nutrition are growing faster than the already growing aquaculture industry. Unique model Barriers to Competition Scalable Benchmark has a differentiated model bringing together genetics, animal health and advanced nutrition which, when combined, generate synergies and contribute significantly to improve the sustainability and profitability for our customers. We are market leaders with strong customer relationships, leading brands, deep market insight and long-established genetic breeding programmes. Following a period of investment and past peak capital expenditure, we have production capacity and a global distribution network to support organic growth. Potential to deliver attractive returns Our platform is capable of delivering double-digit growth and a 25% Adjusted EBITDA1 margin in the next three to five years. 1 See financial review for definition of adjusted measures. 14 15 Image: Benchmark’s land-based salmon egg production facility, Chile. STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON BUSINESS MODEL Benchmark has a broad portfolio of products and solutions to serve our customers in the global aquaculture industry. Our main products are salmon eggs, live feed (artemia) and sea lice treatments. KEY ASSETS OUR TECHNOLOGY Insight Our industry knowledge, strong customer relationships and team of experts in all key aquaculture regions provide us with deep insight into existing and emerging challenges for producers. Innovation We have a team of over 100 scientists and a network of relationships with scientific organisations which have enabled us to build a valuable portfolio of patents and a pipeline of innovative solutions to unmet needs. Our people and culture The founding vision for Benchmark was based on the need to build a global food chain that is more efficient, economical, ethical, environmentally friendly and fit for the future. This is part of our culture and our people are driven by the desire to make a difference. State-of-the-art manufacturing We operate secure and scalable manufacturing facilities with capacity for growth. Distribution We have a unique distribution network in aquaculture which allows us to serve more than 1,400 customers in 70 countries. We develop genetics, nutrition and health solutions that help producers improve their sustainability and profitability. Our knowledge services offering, focused on education and data services are contributing enablers of our solutions. Broodstock Hatchery Nursery Grow-out Genetics Improved genetics are the best start for disease resistance. Eggs, breeding (parent stock) animals for salmon, shrimp and tilapia Genetic improvement services to a broad range of industry players across 12 species Hatchery stage fish and shrimp Advanced Nutrition Specialist feed promotes growth and immunity. Animal Health New vaccines prevent disease and targeted treatments manage disease outbreaks. Knowledge Services Our offering includes industry education through accredited courses, training, conferences and publications and data and consultancy solutions. Broodstock diets Hatchery diets Probiotics Enrichment diets Vaccines and medicines Diagnostic services Veterinary health services Training Data services Industry news and analytics OUTPUTS Employees Our growth and continued success is down to the hard work, talent and dedication of every member of our team. Our people strategy ensures that we offer rewarding careers where employees are motivated and inspired to make a difference. Customers Investment in our products and services has a high return relative to the substantial costs resulting from major disease challenges. Our offering drives consistency in supply and supports the long-term growth and sustainability of our customers’ business — improving yield, quality and animal health and welfare. Shareholders We are securing the technology at the heart of the ‘blue revolution’ — driving shareholder value as the industry grows. Sea lice treatment Purification system Environment We care for our planet by operating our business responsibly and by developing sustainable solutions that tackle some of the key environmental challenges in our industry. For example, Benchmark’s CleanTreat® purification system eliminates the discharge of medicinal bath treatments into the ocean and the development of modern probiotics and vaccines is reducing the need for antibiotics. 16 17 Benchmark Holdings plc | Annual Report 2018 | Strategic Report STRATEGY AND PROGRESS Our vision is to be the leading provider of solutions in genetics, health and specialist nutrition. We have market leading positions, a portfolio and pipeline of innovative products and a global commercial, production and distribution platform to achieve our vision. Enablers of our strategy We have identified four areas of focus to support the delivery of our strategy OUR STRATEGY 2018 PROGRESS 2019 PRIORITIES INNOVATION STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON 1 Grow in established markets from existing capacity and through partnerships We have invested in a platform that allows us to deliver organic growth and operational leverage without significant additional investment. 2 Commercial delivery of pipeline products A key priority for Benchmark is to commercialise its rich pipeline of products developed over the last 10 years. 3 Focused investment in markets that leverage Group platform By applying our technologies across species and geographies we will penetrate new attractive markets, realising synergy opportunities across the Group. 4 Position Benchmark in areas of future growth Through our technology platform and industry knowledge we are well-placed to establish an early position in new areas as aquaculture develops. • Increased our salmon egg production capacity by 75% through our new facility in Norway and entered into a JV with AquaChile. The increased capacity leverages our market and technology leadership in genetics, setting the foundation for future growth. • Identified opportunity to expand our Advanced Nutrition business into the farm segment of shrimp production with our specialist nutrition products including probiotics. • Full commercial opening of land- based salmon egg production facility in Norway with additional fish brought into the facility in 2019 to ramp up egg volumes. • Expanding egg production to meet the requirements of the Chilean market through enhancement of infrastructure and optimisation of production systems and genetics. • Development of commercial capabilities to increase penetration of farm grow-out segment for shrimp. • Continue next generation sea lice treatment field trials with extension into new region. • Commence additional trials for bivalent and multivalent sea bass/bream vaccines. • Continue development of salmon vaccine portfolio. • Finalise partnership for companion animal products. • Conduct commercial-scale trials for our disease resistant shrimp. • Establish supply chain to commence sales of SPR shrimp into first Asian market. • Continue development aligned to industry trends and Group priorities. • Significant milestones achieved in the commercial launch of our next generation sea lice treatment and CleanTreat®. • Superior performance in trials of sea bass and sea bream vaccine. • Progressed partnership options for commercialisation of companion animal products in the pipeline. • Successful trials conducted in Thailand and Vietnam for our disease resistant shrimp (SPR). Addressing a significant unmet need in the market. This initiative leverages our expertise in genetics and our market presence in shrimp hatcheries. • Identified probiotics as an opportunity to apply our expertise in shrimp, to salmon and tilapia. • Continued breeding and genetics programme for tilapia. • Provided genetics consulting services and managed genetic programmes for 12 species. • Continued to develop proof of concept products and platform technologies including oral delivery of vaccines. Our goal is to be a recognised technology leader through our breakthrough solutions and superior products. INTEGRATION Further integration across the Group will allow us to realise synergies and to accelerate our commercial progress. EFFICIENCY • Innovation is at the heart of what we do. We use our industry insight, and R&D and technology expertise, supported by data, to maintain a focused pipeline of innovative solutions targeted at unmet needs which are commercially attractive. • The appointment of Alex Raeber as our Chief Scientific Officer brings leadership and a wealth of experience to our R&D programmes across the group, facilitating the prioritisation of opportunities and optimal utilisation of resources across the Group. • We continue to tighten our organisational structure to drive integration and have identified brand development as an opportunity to streamline our marketing and customer services across the Group. • This effort is being led by Doerte Laue who joined Benchmark as Group Marketing Director in October 2018 and brings over 20 years of marketing experience in the sector. The efficient allocation of capital and resources are a Group priority that will drive shareholder value. • As a growth company with large opportunities we are highly focused on maintaining an efficient cost structure and clearly defined investment criteria to support capital allocation. • The implementation of Group wide KPIs aligned to execution milestones and operating performance further aligns our efforts with Group priorities. PEOPLE Our people are key to delivering our strategy and we continue to invest in developing a team with the specialist skills and experience to execute our strategy. • Our focus is on attracting, developing and retaining the best talent who are passionate about our vision. • We continue to invest in people with the specialist skills, relationships and reputation in the sector, including Alex Raeber and Doerte Laue’s appointments. We will also continue to invest in training and development programmes to develop our team. • In 2019 we will launch an employee “Being Well” programme to help our people reach their personal potential at Benchmark. 18 Benchmark Holdings plc | Annual Report 2018 | Strategic Report 19 STRATEGY IN ACTION GROWTH IN ESTABLISHED MARKETS Salmon eggs produced to the highest quality and biosecure standards. Farmed salmon is a highly efficient source of protein production, and continues to outperform other protein sectors (chicken, beef, pork) when it comes to key data such as feed conversion ratios, protein retention and carbon footprint. Aquaculture is one of the most eco-efficient ways of producing protein, and salmon farming is leading the way in aquaculture innovation. During the year, Benchmark achieved two significant milestones in its strategy to serve producers with high-quality, robust salmon to help grow their profitability and sustainability, as well as to establish a leading position in key markets. Salmon farming — carbon footprint1 A carbon footprint measures the total greenhouse gas emissions caused directly by the production of a product. Carbon footprint is measured in tons of carbon dioxide equivalent (tCO2e) per ton edible protein of the product. 9.8 SALMONIDS 42.3 CHICKEN 56.7 PORK STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Image: Benchmark Genetics Chile team. Joint venture with AquaChile In June 2018 Benchmark and AquaChile, the world’s 6th largest salmon producer, signed an agreement to form a breeding and genetics joint venture. The joint venture, named Benchmark Genetics Chile, will produce eggs in high-quality biosecure land-based facilities in Chile, supported by Benchmark Genetic’s land- based breeding operations in Iceland and genetic technology from Benchmark’s Akvaforsk Genetics in Norway. Benchmark Genetics Chile is expected to supply AquaChile’s entire Atlantic salmon egg requirement and other customers. Matias Del Campo, CEO of Benchmark Genetics Chile (pictured 2nd from left), commented: We are very pleased to have the key people in the new management in place and ready to take on strategic efforts to establish the company as an independent genetics supplier to the Chilean aquaculture industry. Matias Del Campo CEO of Benchmark Genetics Chile Progressive step for salmon production in Norway Following two years of construction, Benchmark’s new SalmoBreed Salten land-based salmon-egg production facility was completed and delivered on time in September 2018. The 10,000 square-metre facility increases Benchmark’s salmon egg production capacity by 150 million eggs per year and serves growing global demand for year-round ova from land-based, biosecure facilities. The project marks a first for salmon production in Norway. The site has 14 employees and has already produced around 15 million eggs. Malcolm Pye, commented: “At Salten we are pushing forward the technology first developed in Iceland that gives us highly biosecure production and the ability to supply our customers outside the natural spawning season with top quality eggs every week of the year.” Salmonids: includes farmed salmon and trout. CO2e is calculated by multiplying the emissions of each of the six greenhouse gases (CO2, CH4, N20, HFCs, PFCs and SF6) by its 100-year global warming potential (GWP) 1 Improving Productivity and Environmental Performance of Aquaculture — World Resources Institute and Global Salmon Initiative. The new Company will combine leading-edge technology in salmon genetics and genomics from Benchmark and AquaChile to drive progress in the future on many of the key traits to the Chilean Industry, including resistance to diseases such as SRS and sea lice. 20 21 CEO STATEMENT 2018 WAS A SUCCESSFUL YEAR We are looking forward to bringing further important new products and disruptive technologies into the market in the next phase of our growth. Malcolm Pye Chief Executive Officer 2018 was a successful year for Benchmark. The Group achieved good growth in revenues, delivered Adjusted EBITDA1 ahead of market expectations and made substantial progress in implementing its strategy. Particular highlights in the year included the joint venture with AquaChile to accelerate penetration in the world’s second largest salmon market; the opening of a new state-of-the-art salmon egg production facility in Norway; the continued success of commercial-scale trials for our next generation sea lice treatment with CleanTreat®; and the successful field trials for our disease-resistant shrimp in three key Asian markets. These strategic projects will drive future growth and profitability. In addition, we made good progress in our product pipeline and launched six new products across the Group. We are well placed to capture the significant opportunities in our markets, which have stronger drivers than ever before amid increasing recognition from consumers, producers and regulators of the need for sustainable solutions for the aquaculture industry. Our clear focus remains on aquaculture. Our strategy for the companion animal products in our pipeline is to establish a licensing agreement with a suitable partner. We have made substantial progress towards this during the year, with strong interest received from industry leaders. I look forward to providing a further update in the coming months. Group performance The Group performed well during the year, with revenue and Adjusted EBITDA up by 8% to £151.5m and 68% to £17.0m respectively. Our target is to generate double-digit compound annual growth in revenues and Adjusted EBITDA, reaching a 25% Adjusted EBITDA margin for the Group within five years. Genetics and Advanced Nutrition, two of our three core divisions delivered Adjusted EBITDA margins above 20% this year. In Animal Health, our third division, there is increasing visibility of future profitability as we progress our field-scale trials for our sea lice treatment and for our sea bass/bream vaccines. We have also re-focussed our Knowledge Services division which delivered positive Adjusted EBITDA during the year. This, together with our ongoing work to realise efficiencies and reduce our cost base, gives us confidence in our ability to reach our target. Genetics Animal Health Our Genetics division delivered another robust performance with revenues and Adjusted EBITDA increasing by 17% and 36% to £35.8m and £7.9m respectively, achieving an Adjusted EBITDA margin of 22%. This is a result of our technology leadership and strong position in our key markets and growing demand for salmon eggs with a superior genetic profile. We are continuously working to offer incremental genetic improvements to our customers, particularly in the area of disease resistance. During the year we launched new cardiomyopathy syndrome (CMS) resistant eggs which were very well received with demand outstripping supply and demand for our sea lice resistant eggs also exceeded supply. Our new facilities in Salten, Norway, and Chile, through the JV with AquaChile, enable us to meet that demand and underpin our future growth and profitability in salmon genetics. In shrimp, the first field trials with our new Specific Pathogen Resistant (SPR) shrimp breeding stock also got underway during the year in the key markets of Vietnam, China and Thailand. I am very pleased that these trials reported very encouraging initial results, regarding disease resistance and growth performance, which we believe will enable us to build a very significant new business in shrimp genetics. Advanced Nutrition Advanced Nutrition also performed strongly with revenues rising by 2% to £85.8m and Adjusted EBITDA by 22% to £21.6m, and an Adjusted EBITDA margin of 25%. There was increasing demand for our higher margin, specialist replacement diets and health products as shrimp producers increasingly recognise the benefits that our products have on their yield and profitability. We expect this trend to continue benefitting from the ongoing consolidation and professionalisation in the shrimp production industry which favours our innovative products. During the year we launched four new products in Advanced Nutrition, completed upgrades on well-established brands and continued the development of our artemia replacement diets according to plan. Post period end, we announced the successful defence of a patent infringement in Asia relating to our artemia technologies. We have a strong patent portfolio across the Group with a portfolio of 240 patents which we will continue to robustly defend in each of our markets. In Animal Health our focus has been on delivering the products in our pipeline that are in the later stages of development, particularly our highly innovative next generation sea lice treatment. This is in commercial-scale field trials with three of the world’s largest salmon producers and these are progressing well, having delivered almost 100% efficacy with improved animal welfare and no environmental impact. We are continuing trials in Norway and are preparing for field trials in other markets. Feedback from customers so far points to a high acceptance of our new treatment as sea lice continues to be recognised as the biggest challenge for the salmon aquaculture industry. In our sea bream and sea bass vaccine portfolio, recent trials show strong performance of our products and as a result, we have prioritised their development with commercial field trials expected to commence during 2019. Aquaculture vaccines is a fast-growing market which is forecast to double by 2025. We continue to progress our portfolio of new vaccines across the major finfish species. During the year we conducted a review of our pipeline of new products in Animal Health. This has resulted in a more efficient and streamlined approach to R&D spend and a focus on those opportunities where we can achieve the highest risk-adjusted return. It has also resulted in the deceleration of some less strategic products that target longer term market opportunities. Knowledge Services Knowledge Services, our smallest division, performed well with revenues rising by 14% to £15.8m and Adjusted EBITDA improving from a loss of £0.9m to a profit of £0.2m During the year we conducted a review of the division with particular focus on those activities that fall outside of our core aquaculture markets. As a result, we disposed of certain elements of our publishing business and closed two sites in our veterinary services practice. This review has identified other opportunities which we expect to deliver on during the coming period. These changes are expected to improve our focus and profitability. Knowledge Services, which includes our aquaculture veterinary consulting services, data services, education and training, is an important component of our differentiated offering, contributing to the success of our customers in maximising yield and managing disease, 22 1 See financial review for definition of adjusted measures. 23 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONand helping us to take a thought leadership position in our industry. Knowledge Services will play an important role as we continue to integrate our aquaculture solutions, developing protocols across genetics, health and nutrition to address our customers’ needs. Our recently launched health portal, a data collaboration tool for salmon, is now being trialled by 70% of the fish veterinary practices in Norway. Our markets and strategy During the year we concluded an in-depth strategic review of our business. Our strategy is guided by our mission to drive improvements in sustainability in aquaculture production that lead to profitable outcomes for our customers. We seek to achieve this by developing innovative products that improve yield, quality and fish health. Over the past years, through acquisitions and organically, we have built a scalable, technology rich platform with leading market positions. Looking forward, our strategy is to grow organically by leveraging the capabilities across the Group taking advantage of the very significant opportunities facing us in the fast evolving aquaculture sector. Further integration of the Group will be an important enabler of our strategy. Our markets Our markets in Genetics, Advanced Nutrition and Animal Health complement each other and play a critical role in aquaculture production. They drive biological performance which in turn drives productivity. They also have the potential to address consumers’ growing concerns on animal welfare, use of antibiotics and sustainability. Animal welfare is intrinsically linked to productivity; poor animal welfare reduces biological performance and raises the cost of production. A good example of how our three areas of technology complement each other is Benchmark’s approach to sea lice, where we are developing a holistic solution that maximises resistance through genetics and vaccines, and that, in the case of an outbreak, offers a treatment which has no impact on animal welfare or on the environment. We are also developing probiotics for salmon which are designed to increase resilience in the fish overall. We believe our platform across the three critical technology areas gives us a unique position in the market. We estimate our markets in salmon and shrimp, our two main target species, to be c. £1bn each in size, and growing faster than the aquaculture industry itself. They provide significant Strategy Our five-year strategy can be summarised in four main components which are aimed at delivering growth and profitability and at positioning Benchmark as aquaculture’s leading provider of solutions in genetics, animal health and advanced nutrition. 1. Grow in established markets from existing capacity 3. Focused investment in markets that leverage Group platform 2. Commercial delivery of pipeline products 4. Position Benchmark in areas of future growth opportunity for Benchmark to grow and to generate attractive shareholder returns through a combination of growth in our key markets and organic expansion into new areas. 1. Grow in established markets There is significant potential for organic growth in our business in established markets where we have a strong market position. During the year we built additional capacity in Genetics and made excellent progress in the development of our artemia replacement diets which will support future growth in our core markets. Going forward we see an opportunity to expand from our strong position in hatchery and nursery into the shrimp farm grow-out segment with a targeted offering from our Advanced Nutrition portfolio. 2. Commercial delivery of pipeline products The commercial delivery of our animal health products continues to be a key priority for the Group as a driver of future profitability and industry leadership. We made good progress towards the commercialisation of our next generation sea lice treatment and of our sea bass/ bream portfolio of vaccines with more to follow. 3. Focused investment in new markets that leverage the Group’s platform SPR shrimp Shrimp genetics is an attractive growth opportunity for the Group which leverages our capabilities and experience in salmon and our leading position in shrimp hatchery diets, where we believe we can achieve a high return on our R&D investment to date. Shrimp genetics that provide disease resistance is an unmet need which we are well placed to address. In late 2017, we commenced trials of our SPR shrimp in Vietnam, Thailand and China. The results to date show our stock performing strongly both in terms of survival and growth. Our SPR shrimp has genetic resistance to a number of diseases including white spot and EMS which have been responsible for high mortality rates in Asia and Latin America in recent years. We plan to roll out our product in the five main shrimp producing countries in Asia with the first markets coming onstream in late 2019. Our strategy envisages leveraging our strong relationships in these markets by establishing joint ventures to accelerate the roll-out and reduce our capital commitment. Over time we anticipate disease resistant shrimp genetics to follow the experience of the salmon industry where the penetration of professional genetics is estimated to be more than 90%. Probiotics Probiotics improve the animal’s gut health and prevent the establishment of invasive bacteria. This reduces the need for treatment with antibiotics. Probiotics also increase food conversion efficiency and improve sustainability of production. This is a fast developing area of technology with great potential. Benchmark has an established portfolio of probiotics for shrimp and sea bass and bream which it continues to develop. Our five-year strategy envisages leveraging our technology expertise and our strong position in salmon to develop and launch a range of probiotics for salmon. 4. Position Benchmark in areas of future growth We believe that our technology platforms together with our international footprint and network, uniquely position us to establish a strong position in emerging aquaculture markets as they develop, including tilapia. Our experience and involvement in genetics of setting up and managing breeding programmes across more than 12 species and technologies in health and nutrition provide a solid platform for future growth in new species. Outlook and current trading The growth drivers for our business remain strong, with an increasing need for solutions that improve productivity in the growing aquaculture sector to support sustainable food production meaning that the areas of the market we address are growing considerably faster than the overall aquaculture market. The Group has started the current financial year trading ahead of the same period last year, and is trading in line with expectations for the full year. Trading has commenced strongly in Genetics, with high demand for our disease and sea lice resistant salmon eggs. Our Advanced Nutrition business in shrimp has started relatively slowly due to temporary volatility in the global shrimp market, but the outlook from spring onwards is positive. In Animal Health, we are planning to extend trials of our next generation sea lice treatment into new markets in 2019. We are making substantial progress towards establishing a partnership for our companion animal products. The Group continues to monitor developments regarding the UK’s forthcoming exit from the European Union and any potential impact on the Group’s business. The Group has developed mitigating actions and contingency preparations which will enable it to maintain the supply of its products to customers, and remains confident in its strategy and flexibility to adapt to changes. Over the next 18 months we expect to see our investment in a number of areas, such as our next generation sea lice treatment, our disease resistant shrimp and our new facility in Norway, starting to deliver, resulting in high growth in revenues, attractive margins and cash generation, which will increase our financial flexibility and deliver attractive shareholder returns. Image: Benchmark’s state-of-the-art vaccine manufacturing facility, Braintree, UK. 24 25 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGY IN ACTION Disease constrains growth FOCUSED INVESTMENT IN MARKETS THAT LEVERAGE OUR PLATFORM Shrimp and prawns are some of the most popular types of seafood consumed worldwide, driven by a trend for high protein, low-fat foods in both developed and developing countries. At least $45 billion was lost to shrimp diseases in white leg shrimp (P. vannamei) production alone over the past decade and is the biggest barrier to sustainable production.1 The percentage year-on-year change in the growth of Asian and global shrimp production. Episodes of disease have been a key factor in shaping growth. IHHNV TSV, WSSV, YHV AHPND/EHP World Asia 60 50 40 30 20 10 0 -10 1970 1975 1980 1985 1990 1995 2000 2005 2005 2010 2015 IHHNV = Infectious hypodermal and haematopoietic necrosis virus TSV = Taura Syndrome Virus WSSV = White Spot Syndrome Virus AHPND = Acute Hepatopancreatic Necrosis Disease previously known as Early Mortality Syndrome (EMS) EHP = Enterocytozoon hepatopenaei YHV = Yellow-head Virus Current disease management strategies have not been effective in controlling disease epidemics, which continue to threaten and sporadically decimate shrimp aquaculture in the region. The use of disease-free and disease- resistant populations offers the opportunity to stabilise shrimp production. Benchmark’s shrimp breeding programme has developed robust populations which are selected for growth, survival and performance and have high levels of resistance to the major pathogens affecting the global industry. This is achieved by uniquely combining Specific Pathogen Free (SPF) and Specific Pathogen Resistant (SPR) approaches, made possible by Benchmark’s advanced breeding programme design — similar to those underpinning genetic improvement work in our advanced salmon programs. Top producing countries Southeast Asia is the biggest producer of shrimp, of which China represents the largest market in terms of production, followed by the Americas and India. Shrimp aquaculture production by world region: 2000-2019 2006–2012 CAGR: 3.6% 2016–2019 Projected CAGR: 4.8% Based on species, the market is segmented into: Shrimp production life cycle Larvae quality is one of the main drivers for successful shrimp farming which is why Benchmark is developing products that help early-stage shrimp develop to their full potential throughout the production chain. Our products include specialist nutrition for the hatchery to nursery stages and broodstock and nauplii (larvae) from our Specific Pathogen Resistant (SPR) breeding programme. What is Specific Pathogen Resistant? Specific Pathogen Resistant (SPR) shrimp refers to genetic characteristics that allow them to be resistant to infection from a particular pathogen or tolerant to the development of the disease caused by a particular pathogen. 5000k 4500k 4000k 3500k 3000k 2500k 2000k 1500k 1000k 500k 0k 23.3% -7.2% -10.4% Penaeus vannamei (or whiteleg shrimp) Penaeus monodon (or black tiger shrimp) Shrimp broodstock Spawning Hatching Eggs Post larve Mysis Zoea Nauplii 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Southeast Asia Americas Middle East/N Africa China India Other Subadult Harvest Sources: Global Aquaculture Alliance (2017). FAO (2017) for 2000-2009; GOAL (2011-2016) for 2010-2015; GOAL (2017) for 2016-2019. Southeast Asia includes Thailand, Vietnam, Indonesia, Bangladesh, Malaysia, Philippines, Myanmar and Taiwan. M. rosenbergii is not included. Macrobrachium rosenbergii (or giant freshwater river prawn) 1 Shinn, A. Pratoomyot, J; Metselaar, M; Gomes, G. (2018). Diseases in aquaculture — counting the costs of the top 40. Fish Vet Group. 26 27 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW: GENETICS DELIVERING CONTINUOUS GENETICS IMPROVEMENT FOR OUR CUSTOMERS CONTINUED GENETIC INNOVATIONS LEADING TO INCREASED MARKET PENETRATION SCALING UP CAPACITY TO MEET FUTURE GROWTH Genetic innovations • Very positive results of Specific Pathogen Resistant (SPR) shrimp in trials conducted in Vietnam, Thailand and China, three key markets for shrimp. The trials show high survival and good growth of the Benchmark strain compared to competing strains in each of the countries. • Significant genetic marker identified for cardiomyopathy syndrome (CMS) in salmon. Eggs with CMS resistance launched autumn 2018 and experiencing high demand. • Significant improvements in salmon growth rates at land-based production site in Iceland through innovations in the oxygenation system improved genetics and better rearing techniques. Fish are now able to grow to market size within 11-13 months compared to 16-18 months three years ago. • Continued participation in three-year funded project on gene editing research including the Roslin Institute. The project investigates the potential for gene editing to increase resistance against infectious salmon anaemia (ISA). Increased market penetration and growth • Continued growth supported by demand for our disease resistant eggs, including sea lice where demand outstripped supply. • Established market-leading position in land-based salmon farming supported by Benchmark’s ability to deliver highly biosecure eggs adapted for this technology. • Entered new market in Canada through supply of sterile salmon eggs to Grieg Newfoundland. Egg deliveries will begin in 2019. Scaling up production and accelerating entry in Chile • First production at Salten, our new state of the art biosecure land based salmon egg production facility, which increases Benchmark’s production capacity by 75%. • Entered into Joint Venture with AquaChile to accelerate and de-risk Benchmark’s strategy in world’s second largest salmon market. The new brand, Benchmark Genetics Chile was successfully launched at trade show AquaSur. 23% FY18 REVENUE CONTRIBUTION 150 EMPLOYEES We are seeing increasing demand for our products in recognition of the benefits they provide, improving disease resistance, yield and growth. This year we added a new trait which delivers resistance against CMS in salmon and have substantially increased our capacity to support future growth with our land- based salmon egg production facility in Norway and our Joint Venture in Chile. Jan-Emil Johannessen Head of Benchmark Genetics Financial performance Benchmark Genetics delivered strong revenue growth in salmon genetics. This was driven by increased volumes and higher prices, the success of new higher value products, and winning an increased market share. The valuation of biological assets increased by £4.0m (2017: £4.2m) driven by the growth in sales in the year, the strong order book at the year end and the first year of production at the new land-based broodstock facility in Norway. This supported growth in gross margins which, combined with operating leverage, resulted in a 36% growth in Adjusted EBITDA1 to £7.9m (2017: £5.8m) with a margin of 22% (2017: 19%). Summary Income Statement Revenue Cost of Sales Gross Profit Research and development costs Operating costs Share of profit /(loss) of equity- accounted investees, net of tax Adjusted EBITDA Exceptional including acquisition related items Depreciation and amortisation Operating profit 2018 £m 35.8 (14.8) 20.9 (3.6) (9.1) (0.4) 7.9 (1.0) (3.5) 3.4 2017 £m 30.5 (13.8) 16.7 (2.7) (8.2) - 5.8 7.0 (3.3) 9.5 Genetics Division Revenue Genetics Division Adjusted EBITDA 2018 2017 £35.8m £30.5m 2018 2017 £7.9m £5.8m 1 See financial review for definition of adjusted measures. 28 29 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION56% FY18 REVENUE CONTRIBUTION 510 EMPLOYEES BUSINESS REVIEW: ADVANCED NUTRITION HIGH-PERFORMANCE NUTRITIONAL SOLUTIONS STRONG DEMAND FOR PREMIUM SPECIALIST DIETS FOR SHRIMP AND MARINE FISH SIGNIFICANT PROGRESS IN INNOVATION AND DELIVERY OF PIPELINE Strong growth in established markets • Significant Adjusted EBITDA1 growth driven by sales of our premium specialist diets for shrimp, and new hatchery and nursery feeding protocols for inducing faster growth of sea bass/bream fry. • Good harvest of artemia at the Great Salt Lake in Utah underpinning the Group’s access to high quality artemia, the main source of live feed for early stage nutrition. Continued product innovation — four new products launched • Easy Dry Selco (Marine Fish), a flagship product and part of pioneering live food enrichment diets. • NATURA (Marine Fish), an upgraded premium co-feeding diet. • Sanocare FIT (shrimp), a product to reduce stress impact of transporting early- stage shrimp from hatchery to ponds. • Sanolife PRO-2 (shrimp) an upgraded high performance probiotic for the farm segment. • Development of artemia replacement diets continued to make excellent progress. • 78 new product registrations approved in 2018 and 82 applications in the process of approval. Increasing market penetration • Thailand factory awarded certification to allow exports into Ecuador — the top shrimp producer in the Americas. • Joined the recently inaugurated China Shrimp Breeding Innovation Alliance as the only foreign founding member. The goal of the Alliance is to lift the performance of Chinese shrimp aquaculture through technology and capacity building. • Establishing local service centre to better support customers in Vietnam. Manufacturing excellence • Thailand factory recognised as the most advanced speciality product manufacturer for aquaculture. The site has an extensive list of certifications (GMP, HACCP, GLOBALG.A.P) and received the following awards this year: ‘ECO Factory’ from the Industrial Estate Authority of Thailand and the ‘establishment of outstanding employee relations and welfare 2018’ from the labour department. Our science-based, market driven approach ensures that we continue to be an innovator in the industry. During the year we launched four new products and have seen a significant increase in sales of our specialist diet products reflecting the need for high-performance nutritional solutions that help early-stage fish and shrimp exploit their full potential throughout the production life cycle. Philippe Léger Head of Benchmark Advanced Nutrition Financial performance Advanced Nutrition experienced strong growth in higher value live feed replacement and health diets. Sales volumes of live feed products also increased (+9.1%) but significant oversupply in Asia resulted in soft market prices for some products and revenue growth for this product category was restricted as a result. The consequent change in sales mix delivered strong overall improvement in gross margin. The division reported Adjusted EBITDA of £21.6m (2017: £17.7m) with an Adjusted EBITDA margin of 25% (2017: 21%). Summary Income Statement Revenue Cost of Sales Gross Profit Research and development costs Operating costs Adjusted EBITDA Depreciation and amortisation Operating profit 2018 £m 85.7 (41.0) 44.7 (2.8) (20.3) 21.6 (16.2) 5.4 2017 £m 83.7 (42.8) 40.9 (3.0) (20.2) 17.7 (16.6) 1.1 Advanced Nutrition Division Revenue Advanced Nutrition Division Adjusted EBITDA 2018 2017 £85.7m £83.7m 2018 2017 £21.6m £17.7m 1 See financial review for definition of adjusted measures. 30 31 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION11% FY18 REVENUE CONTRIBUTION 207 EMPLOYEES BUSINESS REVIEW: ANIMAL HEALTH CUTTING EDGE HEALTH PRODUCTS ACHIEVED SIGNIFICANT MILESTONES TOWARDS COMMERCIAL LAUNCH OF KEY PIPELINE PRODUCTS RE-PRIORITISATION OF PIPELINE AND R&D SPEND Successful field trials for next generation sea lice treatment • Conducted commercial field trials with three of the world’s largest salmon producers showing close to 99%+ efficacy, excellent fish welfare and no environmental impact. • Breakthrough product for single largest reported issue in salmon production. • Expanding trials into new markets in 2019; process to obtain marketing authorisation progressing as planned. Environmental protection — continued optimisation of CleanTreat® technology • Benchmark’s CleanTreat® technology addresses industry-wide need to eliminate discharge of medicinal residues from bath treatments into the water. • Core element of the Group’s next generation sea lice treatment with potential to expand use to other medicinal treatments. • Efficiency of the system has increased significantly during 2018, doubling throughput. Pipeline progress — sea bass/bream vaccines • Noda Virus vaccine continues to demonstrate high efficacy in farm-scale trials (mortality from Noda Virus outbreak can be over 90%). • Decision to accelerate development of multi-valent vaccines based on successful trial results, with commercial field trials expected in 2019. • Mobile diagnostic kits (cPCR) for key sea bass/bream diseases deployed for field validation. Kits will support disease management in the Mediterranean. Outlicensing of companion animal products • The outlicensing of our companion animal business is ongoing with substantial progress being made and strong interest received. • HypoCat vaccine successfully completed key safety and efficacy trials and in the process of transfer to GMP. In-house manufacturing capabilities • Development work at Braintree facility progressing well with transfer of six antigens from R&D into commercial batch scale-up. Pipeline Review — prioritisation and focus • Pipeline review resulted in re-prioritisation of R&D spend, focusing development effort on vaccine portfolios for sea bass/bream and salmon. This year we made significant progress towards the commercialisation of our next generation sea lice treatment and CleanTreat®. Our new solution addresses the biggest challenge in salmon farming and represents a transformational change towards a future where no medicinal residues are discharged directly into the oceans. John Marshall Head of Animal Health Financial performance Animal Health sales increased following the successful commencement of field trials of Benchmark’s next generation sea lice treatment and CleanTreat®. In addition, underlying sales volumes of the division’s existing mature sea lice treatment, Salmosan, were up whilst revenues were held back by the previously reported one off credits related to buy back of distributor inventory. Expensed R&D reduced by £1.7m to £5.6m reflecting focus on progressing products nearest to market for which costs are capitalised. Costs related to field trials are capitalised and will be amortised once the relevant product achieves its Marketing Authorisation (full licence). Total investment in R&D including capitalised costs increased to £12.2m (2017: £8.9m). Operating costs increased due to investment in management to deliver the pipeline of new products to market. The division delivered a reduced Adjusted EBITDA1 loss of (£11.0m) (2017: loss of (£11.6m)). Summary Income Statement Revenue Cost of Sales Gross Profit Research and development costs Operating costs Adjusted EBITDA Exceptional including acquisition related items Depreciation and amortisation Operating loss 2018 £m 16.2 (13.5) 2.7 (5.6) (8.1) (11.0) - (2.6) (13.6) 2017 £m 15.1 (13.9) 1.3 (7.3) (5.5) (11.6) (0.6) (1.4) (13.6) Animal Health Division Revenue Animal Health Division Adjusted EBITDA 2018 2017 £16.2m £15.1m £11.0m £11.6m 2018 2017 1 See financial review for definition of adjusted measures. 32 33 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW: KNOWLEDGE SERVICES PROFESSIONAL EDUCATION AND DATA SOLUTIONS INCREASING UPTAKE OF EDUCATION SERVICES REFLECTED IN THE INCREASING TREND FOR PROFESSIONALISATION IN THE INDUSTRY Growth in established markets • 190% growth in molecular diagnostic revenue in UK through design and implementation of bespoke disease monitoring programmes for major Scottish producers. • Benchmark’s 2018 Aquaculture UK event — shining a spotlight on research, innovation and technology — saw a 47% increase in floor space sales and hosted 2,400 visitors from 30 countries, up by 50%. • New two-year contract with Ireland’s Seafood Development Agency for an aquatic veterinary service and research programme around key issues such as cardiomyopathy syndrome (CMS), gill health and cleaner fish health and welfare. • Successful tender for major programme of diagnostic work into gill health in Scottish farmed salmon. • Launch of General Practitioner Advanced Certificate for veterinary professionals across three state-of-the-art European training centres with first edition of the courses fully booked. • Two-day practical veterinary courses launched in USA with plan to expand offering next year. Commercial delivery of new innovative data technology platform • Acquisition of Videntis (post year-end) whose technology enables producers to have real-time data and feedback on feed efficiency, welfare and product quality. • iWise HealthPortal a collaborative tool aimed at improving the management of fish health in the Salmon industry launched in Norway. 70% of Norwegian fish health providers are already early users. • Secured a new three-year contract with McDonald’s Corporation for sustainability data tracking and delivery of consultancy services. Review of activities During the period we conducted a review of our activities to identify opportunities for synergies, efficiencies and rationalisation. This resulted in: • Closure of two sites in our veterinary services business and alignment of our veterinary activities to support our service and training offering in aquaculture. • Disposal of non-core technical titles in our publishing business. 10% FY18 REVENUE CONTRIBUTION 160 EMPLOYEES Knowledge drives change. Benchmark’s data and education services help customers manage their farms and businesses more effectively. We help customers develop teams with the ability to manage day-to-day operations, assessment and adoption of new technologies in order to drive the industry’s sustainable future. James Banfield Head of Knowledge Services Financial performance Following management reorganisation Knowledge Services reported an improved Adjusted EBITDA1 profit of £0.2m (2017: loss of (£0.9m)). Progress with the Division’s Data and Education based strategy delivered increased sales alongside a largest ever Aquaculture UK conference which, when coupled with cost control, sets the course for improving results and delivered the anticipated move into profitability. Summary Income Statement 2018 £m 2017 £m Revenue Cost of Sales Gross Profit Operating costs Adjusted EBITDA Exceptional including acquisition related items Depreciation and amortisation Operating loss 15.8 (9.8) 6.0 (5.8) 0.2 - (2.4) (2.2) 13.8 (9.4) 4.4 (5.2) (0.9) (0.1) (1.9) (2.9) Knowledge Services Division Revenue Knowledge Services Division Adjusted EBITDA 2018 2017 £15.8m £13.8m £(0.9)m 2018 £0.2m 2017 1 See financial review for definition of adjusted measures. 34 35 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCSO STATEMENT STREAMLINING PRODUCT INNOVATION AND EXPLOITING SYNERGIES I was attracted to Benchmark by its enviable market position in aquaculture, scale and global footprint. The combination of our R&D pipeline, diagnostics and on the ground insight means that we are in a unique position to develop highly effective solutions to improve the sustainability and profitability of the aquaculture industry. Alex Raeber Chief Scientific Officer Intellectual Property As a result of our advanced innovation, R&D and subsequent investment, we have a strong patent portfolio across our products and processes in our three core divisions. Our portfolio with 28 families and 240 patents is well balanced, with a mixture of robust granted applications to protect current products and new patent applications to support the business in the future. We will continue our strategy and approach to IP and product registration, and IP protection will also be a core strategic area of focus. Post year-end we successfully defended a patent infringement in Asia which related to our Artemia hatching and enrichment technology, demonstrating the robustness of our patents. Product pipelines and 2019 priorities We have set out Benchmark’s genetics, advanced nutrition and health pipelines below and overleaf. Our top priorities for 2019 include continued delivery of trials for our next generation sea lice treatment and CleanTreat®, obtaining Marketing Authorisation for our first sea bass/bream vaccines and commencing trials of bi-valent and tri-valent vaccines (targeted at multiple diseases) for sea bass/bream. I believe I’ve joined Benchmark at a very exciting time. I am confident that our platform of technologies, deep expertise and commercialisation network will allow us to become the leading provider of solutions in genetics, health and advanced nutrition. I look forward to updating you on our progress throughout the year. Since joining the Benchmark Board in October 2018 (post year-end), my priorities for the first quarter were to conduct a review of our product pipelines and establish a cross group Innovation Leadership team. I am fortunate that we have some of the world’s leading scientists in aquaculture with deep expertise, as well as young talent who I am confident are capable to be successors in the future. R&D Our goal is to drive growth across the organisation through technology innovation and Benchmark’s platform technologies in genetics, advanced nutrition and animal health are well positioned to deliver this. The newly formed Innovation Leadership team are responsible for product innovation across the group, exploiting synergies and exploring disruptive technologies to maintain and grow our technology leadership. This year we will streamline our Group wide R&D and product commercialisation effort to drive efficiencies in development, including optimising utilisation of our trials facilities. Genetics pipeline Product code (peak projected sales (£)) Salmon Tilapia Shrimp Pre-Project Project phase Test development Launch DT003 (6.0m) 2021 DT006 (4.5m) 2020 DT005 (3.0m) 2020 DH021 (1.0m) 2020 DT004 (3.0m) 2020 Genomics GS-Quality (0.01m) 2018 DT002 (4.5m) 2018 DT001 (4.5m) 2018 DH022 (0.5m) 2020 DS011 (1.5m) 2021 DP002 (23.0m) 2019 DP001 (27.0m) 2019 Peak sales £17.5m £52.0m £9.01m Note: Dates refer to calendar years. 36 37 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Advanced Nutrition pipeline Product code (peak projected sales (£)) Development Field verification Market preparation Start of sales Shrimp Marine fish Tilapia Salmon Peak sales SDO3 (23.0m) SL22 (0.1m) FD05 (7.0m) SL19 (0.3m) SC12 (3.3m) SL32 (1.9m) SL20 (2.0m) SG26 (1.0m) SL18 (0.1m) SG25 (7.0m) FD31 (2.0m) (SL20) 0.1m SG34 (0.1m) SL20 (0.1m) £48.0m SG28 (8.5m) FD33 (0.5m) £9.0m ART01 (3.8m) ART02 (0.1m) ART02 (0.4m) SL16 (3.2m) SD29, SC15 (2.4m) FD06 (3.0m) SL23 (0.2m) FD07 (0.4m) £4.3m £9.2m Note: Dates refer to calendar years. Animal Health pipeline Product code (peak projected sales (£)), date of first sales (incl. field trials) Sea bass/bream Discovery Passed proof of concept Development Trials Regulatory process begins Species total Field Trials PAQ009 (18m) 2020 VAQ007 (3m) 2019 VAQ011 + 008 (9m) 2019 VAQ016 (1m) 2016 £31m Salmonids PAQ024 (25m) 2021 VAQ017 (50m) 2021 VAQ006 + 31 + 032 + 002 (18m) 2022 VAQ038 (19m) 2021 VAQ029 + 015 + 009 (17m) 2022 VAQ019 (1m) 2019 VAQ022 + 021 + 020 (15m) 2022 VAQ028 (19m) 2019 PAQ014 (1m) 2018 PAQ008 (45m) 2018 £210m Tilapia VAQ034 (3m) 2022 VAQ036 (1m) 2021 VAQ025 (1m) 2021 VAQ004 (4m) 2020 VAQ024 (1m) 2019 Number of products Peak sales Est. prob success 7 products £117m (10%) 1 product £17m (30%) Note: Dates refer to calendar years. £10m £251m 3 products £47m (80%) 38 Benchmark Holdings plc | Annual Report 2018 | Strategic Report 39 FINANCIAL REVIEW GROWTH IN REVENUE AND ADJUSTED EBITDA Our strategy to focus on added value products coupled with recent significant investment in production capacity and in new products in the final stages of development will drive further increased Adjusted EBITDA margins and cash generation. Mark Plampin Chief Financial Officer £m Revenue EBITDA1 Adjusted EBITDA2 Adjusted Operating Profit3 Operating loss Loss before tax Loss for the period Basic earnings/(loss) per share (p) Net debt4 Financial highlights • Revenue increased by 8% to £151.5m (2017: £140.2m). Using the same foreign exchange rates experienced in 2017 (constant currency), revenue increased by 13% • 17% growth (21% using constant currency) in salmon genetics revenues driven by increased volumes and average prices resulting from customer demand, the success of new products launched and winning market share • 2% (9% using constant currency) growth in sales of nutrition products driven by ongoing increased demand for higher value live feed replacement and health diets, growth in sales volumes of live feeds not reflected in revenue due to low market prices for some products • 7% growth in animal health sales driven by first commercial field trials of Benchmark’s next generation sea lice treatment and CleanTreat® coupled with stable Salmosan revenues • Significant strengthening in gross margin to 49% (2017: 45%) reflecting the Group’s strategic focus on added value products and services • Total operating costs increased by 13% to £44.6m (2017: £39.3m) due to staff bonuses reflecting improved performance, strengthening of management and of sales and product support teams • Expensed R&D reduced by £1.1m to £12.0m reflecting focus on progressing products nearest to market for which costs are capitalised 1 EBITDA is earnings before interest, tax, depreciation and amortisation and impairment — see income statement. 2 Adjusted EBITDA which reflects underlying profitability, is earnings before interest, tax, depreciation, amortisation, impairment, exceptional items and acquisition related expenditure — see income statement. 3 Adjusted Operating Profit is operating loss before exceptional items including acquisition related items and amortisation and impairment of intangible assets excluding development costs — see below. 4 Net debt is cash and cash equivalents less loans and borrowings — see below. 2018 151.5 15.8 17.0 10.2 (9.1) (13.7) (4.4) (0.94) (55.7) 2017 Change % 140.2 15.7 10.1 5.2 (7.6) (8.1) (7.1) (1.43) (23.9) +8% +1% +68% +96% -20% -69% +38% +34% - • Net debt increased to £55.7m (2017: £23.9m), primarily due to £32.7m capital expenditure (including £17.9m investment in Salten facility and investment associated with the field trials of the new sea lice treatment). Net debt includes £27m ringfenced non-recourse debt to fund the Salten facility • Investment in working capital resulting from top line growth and strategy to secure key supplier and key customer relationships • Subsequent to the year end, the Group’s bankers agreed to provide an additional $20m under the existing facility and relax the leverage covenant to provide additional liquidity • The $20m additional facility combined with the year end cash balance of £24.1m provides the Group with funding for continuing growth and additional headroom • Investment in field trials for nearer to market products, particularly Benchmark’s next generation sea lice treatment and CleanTreat®, meant that total investment in R&D increased to £19.4m (2017: £15.2m) or 13% (2017: 11%) of revenue • Adjusted EBITDA increased by 68% to £17.0m (2017: £10.1m) reflecting growth in sales volumes and prices coupled with lower expensed R&D • Adjusted EBITDA margin increased to 11% (2017: 7%) • Operating Loss increased to £(9.1m) (2017: £(7.6m)) influenced by improved trading and: • Higher depreciation following recent investment in production capacity • Acquisition related expenditure of £1.2m, whereas 2017 benefited from a £5.6m credit • Reported loss for the period reduced to £(4.4m) (2017: £(7.1m)) due to: • £9.3m tax credit (2017: credit £1.0m) principally due a large credit arising from a reduction in the corporate tax rate in Belgium which reduced the deferred tax liability on intangibles arising from the acquisition of INVE • Offset by the impact of foreign exchange movements in finance costs, £2.5m expense (2017: credit of £1.2m) • £40m investment in state-of-the-art additional genetics production capacity at Salten which was completed shortly after the year end 40 41 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAdjusted measures We continue to use adjusted results as our primary measures of financial performance. In line with many of our peers in the sector we highlight expensed R&D on the face of the income statement separate from operating expenses. Furthermore, we report earnings before interest, tax, depreciation and amortisation (“EBITDA”) and EBITDA before including exceptional and acquisition related items (“Adjusted EBITDA”). The activities of the Group’s equity accounted investees are closely aligned with the Group’s principal activities, as these arrangements were set up to exploit opportunities from the intellectual property held within the Group. As a result, to ensure that adjusted performance measures are more meaningful, the Group’s share of the results of these entities is included within Adjusted EBITDA. We are also reporting this adjusted measure after depreciation and amortisation of capitalised development costs (“Adjusted Operating Profit”) for the first time as the board consider this reflects the result after taking account of the utilisation of the recently expanded production capacity. We believe that these adjusted measures enable a better evaluation of our underlying performance. This is how the Board monitors the progress of the Group. Revenue Adjusted EBITDA Actual currency Constant Currency Actual currency Constant Currency 2017 £m Movement % Movement % 2018 £m 2017 £m Movement % Movement % Animal Health Genetics Advanced Nutrition Knowledge Services Other/intersegment 2018 £m 16.2 35.8 85.7 15.8 -2.0 15.1 30.5 83.7 13.8 -2.9 7% 17% 2% 14% -31% 8% 7% 21% 9% 18% -16% 13% (11.0) (11.6) 7.9 21.6 0.2 (1.7) 17.0 5.8 17.7 (0.9) (0.9) 10.1 Total 151.5 140.2 Constant currency represents the movement retranslating FY18 figures using the same foreign exchange rates experienced during FY17. Average Adjusted Operating Profit Exchange rates US Dollar Euro 2018 1.35 1.13 2017 Revenue 1.27 1.15 Cost of sales Gross profit Icelandic Krona 139.86 137.57 Research and development costs Norwegian Krone Thai Baht Nebt debt Cash and cash equivalents Bank borrowings and other loans — current Obligations under finance leases — current - Bank borrowings and other loans — non-current 10.90 43.58 2018 £m 24.1 10.56 Other operating costs 43.86 Depreciation Amortisation of capitalised development costs Share of profit of equity-accounted investees, net of tax 2017 £m 18.8 Adjusted Operating Profit Exceptional including acquisition related items Amortisation of intangible assets excluding development costs Operating Loss (9.1) (7.6) (0.9) (6.0) - (0.9) (0.2) (6.2) (78.9) (36.5) (5)% 36% 22% (4)% 40% 31% (123)% (102)% 78% 69% 2018 £000 151.5 (77.5) 74.0 (12.0) (44.6) (6.8) - (0.4) 10.2 (1.2) 64% 86% 2017 £000 140.2 (77.8) 62.4 (13.1) (39.2) (4.9) - 0.0 5.2 5.6 (18.1) (18.4) Revenue and Adjusted EBITDA Group revenue increased by 8% to £151.5m in the year (2017: £140.2m). Using the same foreign exchange rates experienced in 2017 (constant currency) revenue increased by 13%. Adjusted EBITDA increased by 68% to £17.0m (2017: £10.1m). Using constant currency Adjusted EBITDA increased by 86%. Adjusted Operating Profit increased to £10.2m (2017: £5.2m) as the improved trading result was partially offset by increased depreciation charges reflecting the contribution that recently constructed production assets have begun to deliver. Benchmark Genetics delivered strong revenue growth in salmon genetics. This was driven by increased volumes and higher prices, the success of new higher value products, and winning an increased market share. The valuation of biological assets increased by £4.0m (2017: £4.2m) driven by the growth in sales in the year, the strong order book at the year end and the first year of production at the new land-based broodstock facility in Norway. This supported growth in gross margins which combined with operating leverage resulted in a 36% growth in Adjusted EBITDA to £7.9m (2017: £5.8m) with a margin of 22% (2017: 19%). Advanced Nutrition experienced strong growth in higher value live feed replacement and health diets. Sales volumes of live feed products also increased (+9%) but significant oversupply in Asia resulted in soft market prices for some products and revenue growth for this product category was restricted as a result. The consequent change in revenue mix delivered strong overall improvement in gross margin. The division reported Adjusted EBITDA of £21.6m (2017: £17.7m) with a margin of 25% (2017: 21%). Animal Health sales increased following the successful commencement of field trials of Benchmark’s next generation sea lice treatment and CleanTreat®. In addition, underlying sales volumes of the division’s existing mature sea lice treatment, Salmosan, were up whilst revenues were held back by the previously reported one off credits related to buy back of distributor inventory. Expensed R&D reduced by £1.7m to £5.6m reflecting focus on progressing products nearest to market for which costs are capitalised. Costs related to field trials are capitalised and will be amortised once the relevant product achieves its Marketing Authorisation (full licence). Total investment in R&D for the Animal Health division including capitalised costs increased to £12.2m (2017: £8.9m). Operating costs increased due to investment in sales and product support teams to ensure successful launch of the pipeline of new products. The division delivered a reduced Adjusted EBITDA loss of (£11.0m) (2017: loss of (£11.6m)). Following management reorganisation Knowledge Services reported an improved Adjusted EBITDA profit of £0.2m (2017: loss of (£0.9m)). Progress with the division’s data and education based strategy delivered increased sales alongside a largest ever Aquaculture UK conference which, when coupled with cost control, sets the course for improving results and delivered the anticipated move into profitability. Total Group operating costs increased by 13% to £44.6m (2017: £39.3m). This increase reflects the impact of staff bonuses reflecting improved performance, increase in sales and product support headcount to deliver growth, strengthening of Plc and Operations boards and an increase in professional fees due to an enhanced focus on protecting the IP of our products. Total investment in expensed R&D reduced by £1.1m to £12.0m (2017: £13.1m). This reduction reflects the fact that an increasing number of new products in the pipeline are reaching the final stages of development and consequently the proportion of total R&D investment that is capitalised is increasing. Expensed R&D as a percentage of sales fell to 8% (2017: 9%). Total investment in R&D increased to £19.4m (2017: £15.2m) or 13% (2017: 11%) of revenue. Acquisition related items relate largely to the costs associated with completing the genetics JV with Empresas AquaChile. Group Revenue 2018 2017 £151.5m £140.2m 1.0 151.5 2.1 5.2 Group Revenue by Division 155 150 145 140 135 m £ 2.0 1.0 140.2 130 2 0 1 7 R evenue K no wledge S ervices Advanced Anim al N utrition B ench m ark G enetics Anim al H ealth 2 0 1 8 R evenue C orporate Increase Decrease Total Group Revenue by Division £16.2m £15.8m £85.7m £35.8m Animal Health Knowledge Services Benchmark Genetics Advanced Animal Nutrition Net debt 55.7 23.9 42 43 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAdjusted EBITDA 2018 2017 £17.0m £10.1m Adjusted EBITDA bridge by Division 3.9 17.0 -0.7 2.1 1.1 10.1 0.6 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 m £ 0 K no wledge S ervices Advanced Anim al N utrition B ench m ark G enetics Anim al H ealth 2 0 1 7 Adjusted E BIT D A C orporate 2 0 1 8 Adjusted E BIT D A Increase Decrease Total Adjusted EBITDA by Division 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 m £ -11.0 7.9 -0.2 -15.0 K no wledge S ervices Anim al H ealth B ench m ark G enetics Advanced Anim al N utrition Headcount 2018 2018 2017 Investment in R&D (including capitalised) -1.7 C orporate 1073 952 £19.4m Net finance costs The Group incurred net finance costs of £4.6m during the year (2017: £0.5m). Interest charged on the Group’s interest bearing debt facilities was £2.4m (2017: £2.0m) reflecting a higher level of net debt during the year. The revolving credit facility incurs interest in the range of 1.9% to 3.5% over LIBOR. Interest on other debt facilities ranges from 2.65% to 4.2% above Norwegian base rates. During the year, a foreign exchange loss of £2.5m arose due to the movement in exchange rates and has been included within finance costs (2017: £1.2m foreign exchange gain). Statutory loss before tax The loss before tax for the year at £13.7m is higher than the prior year (2017: loss of £8.1m) due to the impact of the improved trading outlined above being offset by higher depreciation, amortisation and impairment charges of £24.8m (2017: £23.4m) principally from the new production facilities coming on stream, coupled with the increase in finance costs as outlined above and a credit in exceptional costs in the prior year of £5.6m (£1.2m cost in 2018) relating to the release of a provision for deferred consideration on previous acquisitions. Taxation There was a tax credit in the period of £9.3m (2017: credit £1.0m), mainly due to a reduction in the corporation tax rate in Belgium from 34% to 25%. The largest elements of the remainder of the charge relate to overseas tax charges in the Genetics division of £1.6m and in the Advanced Nutrition division of £4.5m, offset by deferred tax credits on intangible assets arising on consolidation from recent acquisitions. No deferred tax assets have been provided on any losses made in the period. Basic loss and diluted loss per share were both -0.94p (2017: loss per share -1.43p). The movement year on year is due to a combination of the improved result for the year as noted above, and the higher average number of shares in 2018 due to the new shares issued in the equity raise used to fund the Genetics JV with AquaChile in June 2018. Basic EPS e c n e P 0.00 -0.20 -0.40 -0.60 -0.80 -1.00 -1.20 -1.40 -1.60 0.03 -1.43 B asic EP S 2 0 1 7 Im pact of Increased Ave no. of S hares Im pact of Increased Earnings 21.6 Earnings per share 2018 2017 44 £13.7m Increase Decrease Total STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Basic EPS from Adjusted EBITDA 1.30 3.20 1.93 -0.03 3.5 3.0 2.5 e c n e P 2.0 1.5 1.0 0.5 0 B asic EP S fro m Adjusted E BIT D A 2 0 1 7 Im pact of Increased Ave N o. of S hares Im pact of Increased B asic EP S fro m Adjusted E BIT D A 2 0 1 8 Earnings Increase Decrease Total Dividends No dividends have been paid or proposed in the year (2017: £nil) and the Board is not recommending a final dividend in respect of the year ended 30 September 2018. Biological assets A feature of the Group’s net assets is its investment in biological assets, which under IAS 41 are stated at fair value. At 30 September 2018, the carrying value of biological assets was £20.4m (2017: £16.5m). The movement in the overall carrying value of biological assets is due principally to the increase in sales of and future orders for the Company’s salmon eggs as well as expansion of own production. Liquidity and net debt The Group’s finance function is responsible for sourcing and structuring borrowing requirements. The Group had £79.8m in bank borrowings at the end of the year. Reported debt includes £27.3m in relation to the funding of the Group’s new salmon egg production facility in Norway. This is ringfenced debt without recourse to Benchmark. At the year-end a maximum of £54m was available on the Group’s key revolving credit facility, of this £53m had been drawn. Net debt increased to £55.7m during the year as investment in working capital expanded and available long-term capital was invested in R&D and production capacity. As outlined in the Basis of Preparation in Note 1 to the financial statements, a limit within the borrowing facility in relation to the amount of development funding provided to certain subsidiary companies (“leakage”) has been exceeded, which could have caused the outstanding loan of £52.3m (2017: £36.4m) to become repayable on demand by the lenders. A waiver from this leakage condition was received from the lenders on 7 January 2019 subject to the position being remedied by 31 March 2019. The process agreed with the lenders to reduce total leakage is underway and will be completed within the required timescale. Subsequent to the year end the Group’s lenders agreed to advance a further $20m using the accordion clause in the existing revolving credit facility and to relax the leverage covenant over the remaining term of the facility to provide additional liquidity. Simultaneously DNB joined the group banking syndicate, their significant experience of the aquaculture sector complements the global food and agri business expertise of the existing banks. The available maximum drawdown therefore increased to £69m post year end. The additional facility combined with the year end cash balance of £24.1m provides the Group with funding for continuing growth and additional headroom. Intangibles Movement in Net Debt Capitalised R&D increased by £5.1m to £7.2m (2017: £2.1m). R&D costs related to products that are close to commercial launch have to be capitalised when they meet the requirements set out under IFRS. As Benchmark goes through a period of an increasing number of new products approaching launch this capitalisation will be an increasing feature in the mid-term. Capital expenditure Tangible fixed asset additions of £25.1m (2017: £36.1m) includes £17.9m cash investment in the construction of the new salmon egg production facility in Norway which concluded post year end. 0.45 -0.94 Cash flow B asic EP S 2 0 1 8 Net cash flow from operations was an outflow of £3.7m (2017: inflow of £13.4m) principally due to working capital increases related to growth in trading and the strategy to secure key supplier and key customer relationships and also because prior year capital expenditure creditors were settled on completion of the new Salten facility. Proceeds from increased borrowings of £41.2m were used to part fund some of the capital expenditure outlined above, with total cash outflow on tangible and intangible capital additions totalling £32.7m (2017: £35.2m). Cash at the period end stood at £24.1m (2017: £18.8m) with net debt finishing the year at £55.7m (2017: £23.9m). m £ 0.0 -10.0 -20.0 -30.0 -40.0 -50.0 -60.0 -70.0 -80.0 15.8 -23.9 -13.7 18.5 0.2 -32.7 -1.2 -4.1 -55.7 -8.4 -6.4 W orking capital m ove m ents C ash generated fro m operations Interest and tax Loan to joint venture Investm ents S hares issued C apital expenditure FX on cash borro wings N et debt FY 2 0 1 7 Increase Decrease Other N et debt FY 2 0 1 8 Total 45 SUSTAINABILITY THERE IS NO RECIPE BOOK FOR SUSTAINABILITY Increasing our impact The 3Es provides a foundation from which we are able to pursue our commercial interests in a manner that ensures consideration, respect and a positive impact on: • Our people and partners • The animals under our care and those we impact upon • The communities and environments in which we operate • Our planet considered as a whole Sustainability has always been part of Benchmark’s DNA and, as we grow, so too must our commitment and impact. To accelerate our progress, in 2017 we created a dedicated Sustainability Committee that reports directly to the Board on achievements, performance and future plans, and a Sustainability Working Group to help drive forward our sustainability strategy across the Group. The Committee and the Working Group work alongside Benchmark’s Operations Board to ensure that we continue to deliver value for our customers, partners and investors while making sure that sustainability is embedded within our business. This year our Sustainability Committee carried out an in-depth review of our existing sustainability strategy and operations against our 3Es framework using information and data gathered from employee surveys, interviews and focus groups; strategy working groups and risk analysis; liaison with external bodies including NGOs, thought leaders, industry bodies and investors; and insights from our food production and retail clients. This has been invaluable in shaping our priorities moving forward and helping us to identify where we can have the most impact from a sustainability perspective. communications. In addition to helping to shape our sustainability work, a report compiling the results of each of the sessions, which were held in Sheffield, Inverness and Dendermonde Belgium, is being used to inform Benchmark’s People and Communications team strategies and future initiatives. The results and recommendations have been presented to the Operations and PLC Board to ensure that the feedback given is understood at every level of the business. Employee engagement During the year, we carried out our widest employee survey to date to gain employee feedback about our sustainability work. The survey, which was translated into five languages, encouraged participation from every part of the business, across all our geographies. Feedback from the survey was followed up with a series of focus groups and was used by the Sustainability Committee to help define our strategy in this area. Focus groups were held across a number of sites in the UK and Europe to help us engage with colleagues in more depth on Benchmark’s Sustainability work, as well as other key areas such as our Gender Pay Gap report, integration across our divisions, and internal Our business as a force for good A strong theme that came out in both the employee survey and the focus groups on the topic of sustainability was that our people felt strongly that Benchmark should play a greater leadership role in the industry, particularly with regards to animal welfare and our impact on the environment. Overall, consensus was that we must better utilise the knowledge and expertise that we have across the Group in order to set higher ambitions and drive greater progress and impact using our business as a force for good. It is not a simple standard or a tick-box. It is not a set path. It is defined with every step we take and redefined as we learn more. It is never something we have done or achieved, for its results are always in the future. Our approach is anchored in practical, on the ground experience — from the farm to the Boardroom. We understand the challenges and we identify the best, leading-edge science and practices to address those challenges. Our framework places equal value on ethics, environment and economics. We call this the 3Es of sustainability. Benchmark has reaffirmed its commitment to becoming a leader in corporate sustainability and has put this into action through the foundational work we undertook in 2018. This is the start of something that, if we work together across the Company, can serve as a model for corporate sustainability across the sector and create happier people, animals with lives worth living and a healthier environment and planet. Ruth Layton Group Sustainability Director 46 Benchmark Holdings plc | Annual Report 2018 | Strategic Report 47 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONPROGRAMME AREA GOAL ISSUES BEING ADDRESSED WHAT WE HAVE DONE THIS YEAR BENCHMARK SUSTAINABILITY PROGRAMME Information gathered from the focus groups was used to inform the development of our five sustainability workstreams (see table to the right). These five defined areas of work fit with our 3Es framework of taking care of people and animals (ethics), the environment and economic parameters. This programme has been presented to the Operations Board and is now agreed. Work is now underway to develop a three year programme of objectives, actions and key sustainability indicators for each of the programme areas. Benchmark has reaffirmed its commitment to becoming a leader in corporate sustainability and has put this into action through the foundational work we undertook in 2018. This is the start of something that, if we work together across the Company, can serve as a model for corporate sustainability across the sector and create happier people, animals with lives worth living and a healthier environment and planet. Being well Care for our people and empowering them to reach their personal potential. Business leadership Leading by example and engaging, supporting and developing initiatives that promote 3Es sustainability in the food chain. Environment Care for our planet whilst operating our business responsibly. Animal health & welfare Care for all our animals and those impacted by our products and services by providing what keeps them healthy and what they want.3 Communities Making a meaningful and positive impact on the communities in which we operate. 48 1 Figure relates only to UK employees 3 Marian Stamp Dawkins (2008), using Corporate Traveller. 2 As above. Department of Zoology, University of Oxford, UK; The Science of Animal Suffering. • Employment • T&Cs • Diversity • Career development • Health & Safety • Living wage • Stress • Living the Benchmark values • Living the 3Es • Benchmark’s perception and stakeholder relationships • Key sustainability areas (e.g. antibiotic resistance, climate warming, living wage, diversity) • Practical and validated measures to compare and monitor data • Land use change • Climate warming • Pollution • Ocean acidification • Biodiversity • Quality of local environment • Stakeholder relationships • Practical and validated measures to compare and monitor data • Injuries • Mortality • Behaviour • Mobility • Disease • Valid measures • Antibiotic use (criticals) • Poverty • Physical safety of local environment • Diversity • Living wage • Quality of local environment • Job security Developed a tailored mindfulness programme in cooperation with Imperial College which commences February 2019. Conducted employee focus groups to identify areas of opportunity for our being well programme. This will be followed up by an employee survey which will enable us to track progress. Launched an Employee Assistance Programme for UK employees offering a complete support network of expert advice and compassionate guidance 24 hours a day, seven days a week. Piloted a series of health workshops in the UK and Thailand to promote positive health, including mental health, in the work place. Active member of Global Salmon Initiative (GSI). Ongoing promotion via clients, publications and conferences of the 3Rs (replace, reduce, refine) approach to Antimicrobial Stewardship in food supply chains. Shortlisted for the Newton prize for our research into sea lice and Salmonid Rickettsial Septicaemia (SRS). Included in 5th edition of ‘1000 Companies to Inspire Britain’; one of only five companies to make the list for five consecutive years. 25% of energy use across the Group is now from renewable sources. 25% reduction in total distance travelled per UK traveller.1 25%+ reduction in CO2 emissions, as a result of reduced travel in the UK.2 Advanced Animal Nutrition factory in Thailand received: • ‘ECO Factory’ Award from the ECO Factory Project, which recognises sustainable businesses that have a strong focus on the environment. • National Excellence Award in recognition of their work on Health, Safety, Environment and Corporate and Social Responsibility (CSR). Ongoing contribution to the development and roll out of RSPCA Assured standards (or equivalent) across multiple species and geographical locations. Ongoing implementation of best-practice animal husbandry training for employees and clients. Over 650 people — including companies, NGOs government representatives, industry bodies and students — have attended training courses, technical visits, workshops and field days at Benchmark sites. Funding secured for research into gill disease in Norwegian farmed salmon. Participation in research to develop disease resistance in salmon. Launch of new salmon health portal to improve fish health management in Norway. Continued support for the Mama Magda Aquaculture Fund (MMAF) which offers young researchers from developing countries up to 15,000 EUR for a research stay of six months at Ghent University in preparation for a joint PhD between Ghent University and their host institution in developing countries. Ongoing contributions to local community projects in Thailand, including donations of food, electronic devices and essential supplies to local police forces, hospitals and schools. Partnered with local representatives in Sao Paulo Brazil to provide nutritional support for poor communities. Won 2018 local business charity award for Benchmark’s support for FarmAbility, a charity helping people with learning disabilities and autism get into employment. 49 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON SUSTAINABLE DEVELOPMENT GOALS BENCHMARK CONTRIBUTION TO THE UN’S SUSTAINABLE DEVELOPMENT GOALS Established by the United Nations (UN) as part of their 2030 agenda for sustainable development, the Sustainable Development Goals (SDGs) are a universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. Benchmark recognises the significant value of the Goals and our mission of driving greater sustainability in the food chain is closely aligned with their aspirations. There is a great deal of alignment and synergy between Benchmark’s work and the aspirations of the Goals. Benchmark directly and indirectly contributes to the delivery of them, in particular, Goal 14: Life below water, which runs through everything we do, including: • Collaborating with long-standing partner, Espersen, and other industry partners to develop new technologies with improved selectivity to reduce by-catch, increase fuel efficiency and reduced environmental impact — including damage to the ocean floor. • Improving fish genetics to increase yield, quality and health. Providing advanced nutrition to enhance fish growth and health thereby contributing to a sustainable source of protein to feed a growing population. • Developing health products and solutions that reduce waste from disease or sub-optimal production; • Providing training and data solutions to educate and upskill stakeholders throughout aquaculture and the food chain. • Investing in research, development and innovation to solve the most pressing challenges to achieving greater sustainability. 50 Benchmark Holdings plc | Annual Report 2018 | Strategic Report 51 SUSTAINABILITY COMMUNITIES We believe business can be a force for good and aim to have a positive impact in the communities in which we work. In the UK, Benchmark has shared its farm with a local charity, FarmAbility, for over six years, positively impacting the lives of over 100 people with learning disabilities and autism. What our charities say about us On 5th June, Benchmark won a 2018 Local Business Charity Award for its support of FarmAbility — a charity helping people with learning disabilities and autism get into employment. Benchmark was one of dozens of Oxfordshire businesses and individuals nominated at the 2018 Local Business Charity. Read below FarmAbility Director, Sarah Giles, abridged speech about why she nominated Benchmark. “Companies give to charities in different ways; through corporate volunteering, in-kind donations of time and skills, and of course financial support. “What makes Benchmark’s support of our charity almost unique, and the reason I nominated them for this award, is the nature of the support we receive, and the impact this has on our charity. “Benchmark’s support comes in the shape of the farm — they share their farm with us, and this provides the environment and all the key ingredients we need to run programmes for co-farmers. “Their contribution doesn’t stop at sharing their physical space and animals with us, as significant as that is. The myriad people who either regularly or occasionally meet our co-farmers on the farm — from managers and farm staff, to their science and operations team, visiting personnel from the wide range of Benchmark companies both national and international, and the plc’s own CEO and CFO; they are all interested in and committed to the concept of using the farm to bring value to the lives of people who face challenges. “This model of support is a brave and innovative one — many commercial farms would simply see too many barriers and challenges to welcoming us onto their farm, and to allowing us to be such a prescient and vocal presence on their farm! “I nominated Benchmark because we reckon they don’t shout nearly often enough and never loud enough about what they do for us. We are so grateful for what they give us and we would like them to be recognised and applauded for their commitment to inclusion and to meaningful occupation for everyone.” What is the Mama Magda Aquaculture Fund? The Mama Magda Aquaculture Fund (MMAF) offers young researchers from developing countries up to 15,000 EUR for a research stay of 6 months at Ghent University in preparation for a joint PhD between Ghent University and their host institution. The fund was established in memory of Magda Vanhooren — wife of Ghent University Professor, Patrick Sorgeloos — who took care of social matters for the foreign students at the Laboratory of Aquaculture & Artemia Reference Center from 1978 until her passing in 2010. Her devotion to the well-being and happiness of all students and colleagues earned her the nickname ‘Mama Magda’. For more information, please visit mamamagda.ugent.be Image: FarmAbility activities at Benchmark’s farm in Oxford, UK. Supporting the next generation Creating sustainability in aquaculture isn’t just about supporting our customers and partners, or ensuring we have a positive impact on the industry we serve and the planet, it’s also about investing in future generations — particularly in emerging or rapidly developing aquaculture markets. Through the Mama Magda Aquaculture Fund, which was established by Ghent University in 2010, we are contributing to educating and upskilling the next generation of aquaculture researchers, farmers, producers and specialists in developing countries. Under the initiative, and in cooperation with leading aquaculture-specialist universities in Asia, South America and South Africa, we are supporting students to take part in a six-month research stay at Ghent University. Thanks to decades of aquaculture experience and expertise, Ghent University is able to offer students leading-edge research and technical capabilities, whilst also supporting the remainder of the course which is managed by the partner university in the student’s home country. As well as creating better links between leading aquaculture universities in developed and developing countries, and ensuring students have access to the most experienced tutors and resources, the programme aims to equip aquaculture’s next generation with the knowledge and skills they need to forge a healthier more sustainable future for the industry in their home countries. 52 Benchmark Holdings plc | Annual Report 2018 | Strategic Report 53 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOUR PEOPLE OUR VALUES DEFINE US Our people are our most valuable asset and play a vital role in helping us pursue our strategic goals. We are a global business employing a talented and diverse work- force of 1066 people from 42 different nationalities, spanning a range of languages and cultures. 1066 PEOPLE 42 NATIONALITIES Our people uphold the core values that underpin Benchmark. We are committed to continuously attracting and retaining people of the highest calibre and creating a working environment where they feel inspired to drive our impact and growth. We are Brave & Ambitious We challenge the status quo to create understanding, opportunity and innovation We are Practical We deliver the day job, we keep it simple, we are honest and straightforward We are Focused We are clear on our vision and know what success looks like We are Collaborative None of us are as good as all of us We are Courteous & have Fun Our manners matter, our humour helps Ensuring the health and safety of every employee Benchmark is committed to building a working environment where health and safety is paramount in everything we do. We provide a safe and healthy working environment, including any company- provided living quarters. This year’s annual Global Safety Day, which was held post year end in October 2018, was accompanied by a compilation of videos that promoted the message that every employee has a responsibility to prioritise their own safety as well as that of their colleagues. They were translated into several languages and shared via our Group wide Intranet and shown on site where we have large numbers of employees without access to a computer. Our Commitment to Health and Safety • Nothing is more important than the health and safety of our people • Nothing we do is worth being hurt for • Nothing is so important we cannot take time to do it safely Readying the business for the next phase of growth Our rapid growth in recent years, including a number of acquisitions, called for a new organisational structure to promote delivery of synergies across the Group. A new matrix structure was put in place and our Operations Board was restructured. This has already resulted in improved communication and alignment across the Group and increased efficiency. New additions to the Operations Board include two high calibre appointments: Alex Raeber, who joined the Board as Chief Scientific Officer in October 2018. Alex has a strong track record in the animal health sector with more than 18 years’ experience in global public companies as well as start-ups. Most recently he was the Director of Global R&D, AgriBusiness at Thermo Fisher Scientific, the American multinational biotechnology product development company, listed on the NYSE. Doerte Laue joined Benchmark in September 2018 to take up the position of Group Marketing Director responsible for developing and implementing short, medium and long-term marketing strategies and plans to support Benchmark’s growth. Doerte has over 20 years’ professional experience in leadership functions related to innovation management, product management, new business development and marketing and sales. She brings to Benchmark a wealth of experience having worked for leading multinational B2C and B2B players related to the LifeScience and Packaging industry; such as Mars, Boehringer, DSM and Amcor. During the year, work to merge our Technical Publishing and Sustainability Science divisions was completed, forming our new Knowledge Services division, to provide professional education and data solutions for a sustainable food chain. Integration between the companies forming our Genetics division has been ongoing throughout the year and is already yielding greater collaboration and synergy. Succession planning remains a focus at various levels across the organisation and we are evolving our Management Development Programme to develop emerging talent. Ongoing recruitment for highly skilled, highly specialised positions across the Group — particularly within the areas of health, nutrition and genetics — remained a challenge throughout 2018. • We will never witness an unsafe act or condition without taking action The ‘Health’ element of ‘Health and Safety’ often gets overlooked in the workplace. To address this, we have been piloting a series of workshops that promote positive health at work. These workshops, held in the UK and Thailand to date, are complementary to our new ‘Being Well’ initiative (see Sustainability section for more information) which is seeking to foster an open and proactive culture across the Group around employee health, including mental health. Each workshop was tailored to the needs of the individual office or team and helps identify where stress can be removed or reduced, while equipping employees and managers with strategies and methods for dealing with stress and how to promote positivity and balance in the work place. In the UK, this was supported by a new Employee Assistance Programme (EAP), which is an online and telephone service designed to help employees deal with personal and professional problems that could be affecting their home life or work life, health and general well-being. The EAP service provides a complete support network that offers expert advice and compassionate guidance 24 hours a day, seven days a week, covering a wide range of issues. 54 55 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONEnvironment Reducing our travel footprint A new programme to improve environmental stewardship across the Group was launched this year. A network of Environmental Representatives has been established to ensure we have a dedicated employee at every Benchmark location to drive forward Group initiatives and measures intended to reduce our environmental impact. Representatives have taken on this role in addition to their existing roles to help gather data and drive forward the following initiatives: • Comply with environmental regulations and other applicable environmental requirements • Identify ways to protect our natural resources by implementing programmes and procedures to ensure minimal impact • Identify and minimise environmental impacts at the earliest opportunity • Re-use and recycle whenever possible The introduction of a new travel policy in March 2018 has resulted in some significant changes to our travel footprint. Benchmark has sites in 27 countries and serves customers in over 70 so there will always be a need to travel but it has been encouraging to see our people and partners making more use of video conferencing facilities, as well as train travel or car sharing, where possible. Equality, diversity and inclusion We believe in transparency and strive to attract a diverse workforce and provide equal opportunities throughout the business. The introduction of mandatory gender pay gap reporting in England, Scotland and Wales in 2018 is a positive step for diversity and gender equality and will likely lead to increased transparency. Whilst Benchmark is not obliged to report on this issue, as we do not have 250+ people employed at any one site, we have done so voluntarily as we recognise the benefits this will give us. Overall across the whole of Benchmark UK, the balance of men to women was 50:50 during the snapshot reporting period (April 2017). Our gender pay gap is strongly influenced by the gender make-up of our four pay quartiles (Figure 1). There are significantly more males than females in the two upper pay bands. As no one single entity has 250 employees, the figures presented are an amalgamation of information covering 10 different payrolls, and people working across a range of sectors from agriculture and publishing to pharmaceuticals. The pay gap and bonus differences are shown below. (Figure 2 and 3) Figure 1. Proportion of male and female UK employees according to quartile pay bands Female Male 32% 37% 54% 25% Lower Lower Middle Upper Middle Upper 68% 63% 46% 75% Figure 2. Pay gap and bonus difference between male and female UK employees Figure 3. Proportion of male and female UK employees receiving bonus pay Pay1 Mean 38.2% Bonus pay 2 Mean 65.3% Median 32.1% Median 51.9% Male 86.4% Female 89.1% 1 Pay calculations are based on FTE adjusted pay and include basic salary excluding salary sacrificed for pension contributions and childcare, plus allowances. Overtime payments are excluded from the calculations. 2 Based on actual bonus paid in the 12 months prior to 5th April 2017. Total company bonus, commission and share payments are included in the calculations which are not adjusted for FTE. We are committed to boosting female representation at senior levels in the business to create a representative workforce and are implementing several measures to facilitate this. Closing the gap 1. Challenging the recruitment process — to ensure that recruiters provide us with a diversified shortlist for all senior positions. 2. Training — Benchmark’s leadership and management team will receive unconscious bias training to help them to recognise their actions, both positive and negative. 3. Creating a diversity network — to provide encouragement and support to women throughout Benchmark to put themselves forward for more senior roles. 4. Mentoring — from other senior women to those putting themselves forward. The overall exercise of analysing the pay and bonus of the company workforce has been an extremely useful one. We are voluntarily undertaking a full company-wide gender pay gap review across all of our international employees and our overseas companies. Keeping the line of communication open We are fully committed to effective, two-way communication with employees across the Group and are always looking for ways to build on this. During the year, engagement with our Group wide Intranet has increased 43 percent. This was in part due to an increase in employees, as a result of new positions and acquisitions, as well as new initiatives such as video blogs and messages from the senior team; Group wide social activities including our ‘100-day Step Challenge’ and ‘Great Benchmark Bake Off’ to raise money for a range of global charities; the launch of a network of ‘Intranet Champions’ which ensures a representative in every Benchmark location to provide regular news and updates thereby ensuring every area of our business is represented on the Intranet and in the weekly news roundups. Image: Benchmark Genetics Chile. We share information about business plans and progress throughout the year and, based on feedback from the focus groups held this year (see above), we plan to build on this by holding regular ‘Town Hall’ meetings where all employees will be able to connect with and put questions to the CEO and members of the leadership team at an allotted timeslot at regular periods throughout the year. A range of blogs from members of the management team will continue to be rolled out, providing all employees with insights and updates about relevant projects they are working on and their life outside work which will be shared via our Group Intranet. Our ‘Day in the Life’ feature, which shines a light on members of the Group — their role at Benchmark and what they enjoy outside of work — remains one of our most popular initiatives and will continue for the foreseeable future. Looking to the future Two new initiatives that will be rolled out in 2019 include ‘Benchmark Informs’, which will include updates from a range of employees about Benchmark’s strategy, work and progress; and ‘Benchmark Insights’ which will tap in to the enormous wealth of expertise and experience we have throughout the group and share it company-wide — and externally where appropriate — via videos, presentations, articles and infographics. Benchmark’s intrinsic value rests with its people — our industry is one based on knowledge and innovation and we depend entirely on our workforce to bring these things to the Group. Our most important job is to ensure that the skills and experience of our people runs through everything we do. To do this we must ensure everyone within the Benchmark team feels valued and fulfilled within their roles while understanding the important part they play in helping Benchmark achieve its vision. This is and will continue to be a priority for Benchmark. 56 57 57 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAWARDS National Excellence Award in Thailand 1000 Companies to Inspire Britain BENCHMARK SCOOPS 2018 CHARITABLE AWARD In September 2018, our Advanced Nutrition team in Thailand received national recognition for their work on Health, Safety, Environment and Corporate and Social Responsibility (CSR). Competing companies were not only required to have excellent performance, but to complete a rigorous 249-point audit covering: compliance with HSE laws, continuous improvement processes, leadership, employee involvement and CSR. Benchmark was included in the 5th edition of ‘1000 Companies to Inspire Britain’, making us one of only five companies to make the list for five consecutive years. The report shines a light on some of the UK’s most ambitious and fast-growing companies, covering over 100 sectors. INVE Awarded GLOBAL GAP Certification Bronze in national Thailand 5S Awards 2018 In September, INVE Thailand, part of Benchmark Advanced Nutrition, became the only compound feed manufacturer in the country to hold GlobalGAP Compound Feed Manufacturing (CFM) certification. Benchmark Advanced Nutrition scooped bronze in the final round of the National level 5S competition. 5S is a systematic approach for the workplace to help create a better working environment and consistently high-quality processes throughout participating companies’ operations. ECO Factory Award Benchmark won the award after being nominated by FarmAbility — a charity helping people with learning disabilities and autism get into employment. Benchmark was one of dozens of Oxfordshire businesses and individuals nominated for the 2018 Local Business Charity Awards held on 5th June 2018. Image: Benchmark’s Øistein Thorsen (far left) was there to accept the award alongside Sarah Giles (2nd from right) from FarmAbility. During the year, our Advanced Nutrition factory in Phicit, Thailand was awarded the ‘ECO Factory Award’. The ECO Factory Project recognises sustainable businesses that have a strong focus on the environment, covering 14 key criteria including the use of raw materials, energy, safety and environment and sustainability of businesses in the community. The team accepted their award at the ECO Innovation Forum from Mr. Somchai Harnhirun, the Permanent Secretary of the Ministry of Industry. 58 59 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK MANAGEMENT Risk management framework The Company’s risk management framework and its implementation is led by the Chief Financial Officer, with the support of external consultants. The Board is ultimately responsible for oversight of the Company’s risk management systems, with the Audit Committee acting as a reviewing committee. During the year, the Audit Committee received reports from the Chief Financial Officer regarding risk management, and from the Company’s auditors regarding financial and management controls. No major issues were identified. The Company operates its established risk management framework, which is illustrated in the diagram below. The framework follows a bottom- up approach, through which local management lead the identification; assessment and evaluation; mitigation; and ongoing monitoring of risk. This process is followed in the context of guidelines regarding risk appetite in specified areas which are assessed and approved by the Board. The cycle of identification, assessment and evaluation, mitigation and ongoing monitoring is operated with a view to completing a full risk management cycle in each part of the business at least once every 24 months. The framework is designed to make risk management an integrated part of the Group’s day to day operations. Risks capable of having an effect at Group level are prioritised and reported on to the Board. During FY18, the Group undertook a bottom-up review of its risk registers and is continuing to assess and evaluate the risks identified, as well as monitoring progress with mitigating actions and tracking progress with these. Bottom-up risk review Risks are identified in a bottom-up process involving local management, resulting in a risk register for each business. PLC risk register Risks capable of having an effect at Group level are identified and prioritised. I D E N T I F I C A T I O N M O N I T O R I N G Ongoing monitoring and review There is a continual process of updating risk registers, incorporating newly acquired businesses into the process, reviewing risk appetite, and monitoring the implementation of mitigation strategies. Risk weighting Risks are assessed to give a gross risk weighting, taking into account likelihood of occurrence and severity of impact, and a net risk weighting, which also takes into account existing mitigating factors and controls. Risk exposure The risk exposure (net risk weighting) is evaluated and it is determined whether the relevant risk is within the Company’s risk appetite. A S S E S S M E N T A N D E V A L U A T I O N M I T I G A T I O N Actions Risk appetite Where risk exposure is outside risk appetite, actions are agreed and implemented, with priority given to risks capable of having an effect at Group level and risks outside risk tolerance. The Company’s risk appetite, which varies depending on the type of risk, is determined. The risk tolerance limit, which allows for a level of deviation from risk appetite where warranted to achieve objectives, and risk capacity, which is the level of risk that the Group is able to handle, are also evaluated. Risk appetite During the year, the Board reviewed the areas against which the Company assesses its risk appetite in light of the evolution of the Group, and assessed and approved its risk appetite in those areas. The Company also reviewed its risk appetite statement, and made some amendments to better reflect the strategic context. The revised text is set out below: Benchmark operates in a highly regulated sector involving significant interaction with living organisms and therefore has a very low tolerance to risks of breaching legal, regulatory or ethical standards or anything which could negatively impact on our reputation. The nature of our business means that we can be impacted by biological or climatic effects which are beyond our influence but where possible, we do take steps to mitigate these impacts on the business. We use our knowledge of fundamental biology to develop products that tackle unsolved problems often by applying new technology. We are mindful of our stakeholder requirements and so will take measured risk with regards to the integrity of our product pipeline and intellectual assets. We recognise that our people are our greatest asset and the Group encourages their long-term commitment allowing them to progress and achieve success. The Group recognises the value that can be leveraged through collaboration and cooperation within and between divisions and understands that failure to do this effectively is a threat to such value. This is a risk that the Group strives to avoid, and our management structure will continue to promote a collaborative way of working. The Group has substantial opportunity for organic growth and recognises the importance of its supply chain to delivering this. It seeks to minimise the risk of customer dissatisfaction by delivering quality products and services in the right place and at the right time. The Group has a measured approach to projects and acquisitions and will take an appropriate level of risk commensurate with the potential returns and availability of capital. Key risks and uncertainties The Company is increasingly seeking to distinguish between risks within its control, and risks outside its control, such as biological and climatic factors affecting the Group’s and its customers’ operations, which may require different strategies for mitigation. Risks outside the Company’s control The nature of the Group’s business and its customer base means that the Company is particularly vulnerable to biological and climatic factors. These include in particular: • Advanced Nutrition — Market fluctuations in shrimp production volumes and pricing, often influenced by disease, drive customer demand for advanced nutrition products. The geographic diversity of the division’s customer base offers some mitigation. • Genetics — Disease within the Group’s own operations and disease in the market resulting in border closures are the key risks affecting the division. The Group operates the highest levels of biosecurity; holds genetic stock at multiple sites; increasingly sources from its own land-based salmon breeding facilities; operates containment zones which mitigates the risk of border closures affecting its ability to import; and has placed increased focus on insuring its biological stock. • Animal Health — Sales of the Group’s sea lice medicines are affected by the degree of sea lice challenge in the environment, which is driven by sea temperatures and other biological factors. In addition, market and regulatory trends for tackling sea lice have an influence on customer demand for the Group’s products. The Group as a whole is also exposed to fluctuations in currency exchange rates. These impact sales volumes where products are priced by reference to US dollars but sold in local currencies; and impacts reported results when local results, assets and liabilities are converted to GBP for reporting purposes. The Company has evaluated the potential impact of the UK’s decision to leave the European Union and has identified a number of areas which could be affected. The scale of the impact depends on the nature of the exit process which is uncertain but is not expected to be material in any event. Our primary focus is on addressing Brexit risk in our Animal Health supply chain because our R&D and manufacturing operations are based in the UK and products are / will largely be sold outside the UK. Work includes transferring UK registered Marketing Authorisations for products that are sold in the EU to an EU entity and duplication of product release testing for products that are transferred between the UK and the EU. There may be potential tariffs on UK cross-border supply of products and ongoing changes to the regulatory framework. The Group has undertaken hard Brexit mitigation planning which includes possible provision of an EU based laboratory testing facility and staff for batch testing if this is required and the transfer of product registrations to an EU domiciled legal entity within the Group. Other contingency planning includes arrangements for a possible requirement for stockpiling to avoid border delays. Our current view on the potential changes that may result from Brexit is: • The majority of the Group’s operations are located outside of the UK and do not trade with the UK so will be unaffected; • In terms of manufacturing and product registration, Benchmark Animal Health is accustomed to trading with multiple countries and different rules and legislation; • Despite the possible additional administrative burden, our distribution and commercial model can adapt to changes in tariffs and duties; • Our business is naturally hedged and diversified, which helps in a period of economic uncertainty and exchange rate volatility; and • We will monitor the impact on workforce and global mobility to maintain an effective system for resource planning. The Board views the potential impact of Brexit as an integral part of the review of the Principal Risks and will continue to assess the potential impacts of Brexit as the process evolves. 60 61 Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION PRINCIPAL RISKS AND UNCERTAINTIES Risks within the Company’s control We have included a cross reference to our strategic objectives: In its Annual Report and Accounts 2017, the Company reported on the principal risks and uncertainties affecting the Group and actions taken to mitigate these risks. This report has been updated, with new risks included, together with an update on mitigating actions. 1. Grow in established markets from existing capacity; 2. Commercial delivery of Animal Health pipeline; 3. Focussed investment in markets that leverage group platform; and 4. Position Benchmark in areas of future growth. These are described in more detail on page 18. Operational risks Risk Threats to the supply chain Risk commentary • Benchmark is reliant on a small number of key raw materials for important products • The Group has R&D and production sites which are important to its current revenues and future success and which are leased • Commissioning of new facilities could be delayed leading to late product deliveries Strategic objectives 1, 2 Risk mitigation and controls • Dual supplies of raw materials where possible • Supplies secured with contractual arrangements • Seek long-term tenure of sites Health & Well-being of Employees • Poor health or wellness impacts employees lives and reduces productivity • Well-developed Health & Safety management regime in place across the Group - Strategic risks Risk Competition and loss of competitive advantage Risk commentary • Falling behind competitors with the development and commercialisation of new, innovative products • Threat to market share and revenues Reliance on continued success of existing products • The Group is currently exposed to risk by limited diversity of revenue streams • Risks associated with legal costs of protecting Group IP • Group products require the holding of certain licences, accreditations or regulatory approvals that could be withdrawn • Risks associated with failure to fully realise operational synergies and cost benefits • Lower profitability and cash generation, and slower returns than anticipated Delivery of cross group synergies New product commercialisation • Risk that pipeline products may be delayed or fail technically before launch • The Group’s strategy has a significant focus on new products and a material failure to deliver would be damaging Strategic objectives 1, 2, 3, 4 1, 3, 4 1, 2, 3, 4 2, 4 Risk mitigation and controls • Innovative development focus and strong pipeline of products • IP protection including patents • Strong customer relationships with key account structure • Increasing number of products launched from development pipeline is diversifying revenues • Strong Group legal team with dedicated IP expertise • Vigorous defence of own IP • High levels of staff competency and stringent processes related to Regulatory Affairs • Establishment of cross-divisional functions including Chief Scientific Officer, Marketing Director, Supply Chain initiative and Key Accounts Initiative to better facilitate cooperation and integration under guidance of Operations Board • Strategy Execution team assists with planning and managing key projects • Experienced CSO manages R&D teams across the Group • Experienced Group regulatory affairs team • Close dialogue with regulators Recruitment and retention of high calibre people Loss of key IT system Application of appropriate standards of governance • Some aquaculture activities have inherent operational risks • To maintain market leadership it is essential that the Group has and keeps people with key skills • The Group IT systems facilitate daily work, collaboration and hold Group IP and trade secrets • Multiple risks of systems failure or cyber attack • Senior level commitment to ESG programme Group wide • Centralised People Team delivering People strategy 2, 3 • Formal succession planning process • Remuneration policy designed to encourage retention • Internal experienced IT team • Increasing integration of software platforms to improve security and reliability • Loss of access or key information would be disruptive to the Group • As an international business, the Group is required to comply with law and regulation in several jurisdictions • There is risk of non-compliance leading to potential fines, penalties, loss of revenues and damage to reputation • Experienced Group legal, finance, people, regulatory affairs, investor relations, health & safety and IT teams work closely with divisions • Training programme, Whistleblowing policy, and informal routes by which concerns can be raised, are designed to identify and address potential non-compliance - - Financial risks Risk Maintain liquidity and manage leverage Risk commentary • Failure to identify and maintain sufficient liquidity headroom • Risk to funding of key growth strategies Growth in trading results in higher investment in working capital • Top line growth through new products and markets can drive changing patterns of working capital • Growth in some markets presents increased risk of slow paying or bad debts Risk mitigation and controls • Close control of cash flows with regular update of short and long- term projections • Strong relationships with Group’s bankers • Divisional management of pricing and credit terms • Close monitoring of investment in working capital by Operations and Plc boards • KPIs include working capital measures The Strategic Report was approved by the Board on 24 January 2019 and signed on its behalf by Strategic objectives - - 62 63 Malcolm Pye Chief Executive Officer Benchmark Holdings plc | Annual Report 2018 | Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON 02 GOVERNANCE 66 Introduction to the Board 70 Leadership 73 Effectiveness 76 Accountability 79 Remuneration 84 Shareholders 85 Directors’ Report 89 Directors’ Responsibility Statement 64 65 65 BOARD OF DIRECTORS DIVERSE LEADERSHIP The depth of knowledge, broad scientific skills and commercial experience of our directors ensure we recognise and extract the synergies we need to succeed. During the year, the Company saw the retirement of Alex Hambro as Chairman, and his replacement with Peter George, and after the year end in October 2018, Alex Raeber was appointed as Chief Scientific Officer. Peter’s appointment reflects a shift from the Company’s post IPO phase of acquisition led growth, to a focus on integration, extraction of synergies and organic growth. This shift is reflected in the Group’s results for FY18 which show 68% growth in adjusted EBITDA and 8% revenue growth (13% using FY17 forex rates). The appointment of Alex Raeber as Chief Scientific Officer reflects the importance of the Group’s product pipeline and its timely delivery, which is fundamental to maintaining the strong competitive position of the Advanced Nutrition and Genetics divisions in their respective markets, and to the growth in the Animal Health division which is anticipated over the coming years. The Company also reported in its Annual Report 2017 on the appointment of Hugo Wahnish and Yngve Myhre to the Board, which took place early in FY18. Hugo Wahnish brings a strong track record in the commercialisation of international pharmaceuticals, and Yngve Myhre has extensive experience and expertise in aquaculture in Norway, Chile and the Mediterranean. The Board has evolved to keep pace with the growth of the Company, and now comprises a strong and balanced executive team, complimented by an experienced and diverse group of non-executive Directors. Together they bring the depth of knowledge, scientific understanding, and commercial experience across the Group’s global and sectoral footprints, to enable Benchmark to execute its strategy and deliver success to its shareholders. Malcolm Pye Chief Executive Officer Mark Plampin Chief Financial Officer Alex Raeber Chief Scientific Officer Appointed: November 2000 Appointed: March 2010 Sustainability Committee Independent: No Independent: No Appointed: October 2018 Skills, competence and experience: Malcolm has over 30 years’ experience in international Agribusiness through his roles within the Hillsdown Holdings/ HMTF group, operating in animal breeding, poultry, feed milling and veterinary services. During this time, Malcolm gained extensive experience in breeding and genetics, sales and strategic M&A, and held board positions within the Group. Malcolm founded Benchmark in 2000 and has since led the Company’s growth and diversification. Malcolm has a degree in Zoology/Applied Zoology from the University of Wales (Bangor). Skills, competence and experience: Mark is a qualified Chartered Certified Accountant with over 20 years’ experience. Mark joined Benchmark in 2010 from PKF (UK) LLP (now BDO LLP), where he was a Partner and National Chairman of the Food Sector Group. Mark’s experience at PKF was focussed on corporate finance, including leading on M&A and the strategic development of high-growth small and mid-market businesses. Independent: No Skills, competence and experience: Alex has a strong track record in the animal health sector with more than 18 years’ experience in global public companies as well as start-ups. He most recently was the Director of Global R&D, AgriBusiness at Thermo Fisher Scientific, the American multinational biotechnology product development company, listed on the NYSE. In this role he drove the agribusiness innovation and growth strategy, and was focussed on the execution of the agribusiness product commercialisation pipeline across a range of R&D and manufacturing sites globally. Prior to this, Alex led R&D divisions at biotechnology firms including Prionics AG and Cytos Proteome Therapeutics. Alex holds a PhD in Pharmacology from the University of Zurich and an MSc from the Swiss Federal Institute of Technology. 66 67 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONPeter George Non-Executive Chairman Nomination Committee (Chair) — Remuneration Committee Appointed: May 2018 Independent: Yes Skills, competence and experience: Peter has a strong track record in growing successful international pharmaceutical and healthcare businesses. He is most renowned for his achievements as CEO of Clinigen Group plc, the FTSE AIM global pharmaceutical and services company, which he founded in 2010 and grew into close to a £1bn market cap company having acquired several businesses and expanded its international footprint. Prior to Clinigen, Peter held a number of senior roles in the pharmaceutical and healthcare sectors including CEO of Penn Pharmaceutical Services. He co-created Unilabs Clinical Trials International in 1997, which was successfully sold to Icon plc in 2000. Susan Searle Senior Independent Director Kevin Quinn Non-executive Director Remuneration Committee (Chair) — Nomination Committee — Audit Committee Appointed: December 2013 Independent: Yes Skills, competence and experience: Susan has over 25 years’ experience working with entrepreneurs and academic inventors in the commercialisation of university research. Susan co-founded Imperial Innovations Group plc (now owned by IP Group), one of the world’s leading technology venture investment businesses, and was the group’s Chief Executive Officer from 2002 to 2013. Previously, Susan held roles in sales, marketing, operations and manufacturing in various industries including chemicals, precious metals and retail. She has investment and M&A experience in healthcare and technology companies. Susan holds an MA in Chemistry from Exeter College, Oxford. Audit Committee (Chair) — Remuneration Committee — Nomination Committee — Sustainability Committee (Chair) — Disclosure Committee Appointed: November 2016 Independent: Yes Skills, competence and experience: Kevin is a qualified Chartered Accountant with over 30 years of financial experience in international business and the biosciences industry, including with FTSE 100 companies. Kevin was Chief Financial Officer at Berendsen plc, the leading FTSE 250 European textile service business, until the takeover of Berendsen by Elis SA in September 2017 and is currently Chairman designate of Marlowe plc. Previously, Kevin held senior finance positions within biosciences group Amersham plc and before that was a partner with Pricewaterhouse Coopers (Prague). Kevin holds a BA in French from University College, Durham. Other roles: Peter serves as Chairman of Ergomed plc, the AIM-listed provider of clinical research, drug development and safety services internationally. He is also an Entrepreneur in Residence at Oxford Science Innovations. Other roles: Chair of Woodford Patient Capital PLC; Chair of Mercia Technologies PLC; Senior Independent Director and Non-executive Director of Horizon Discovery Group plc; Non- executive Director of QinetiQ Group plc. Hugo Wahnish Non-executive Director Audit Committee Yngve Myhre Non-executive Director Appointed: November 2017 Appointed: November 2017 Independent: Yes Independent: Yes Skills, competence and experience: Hugo has over 35 years’ experience in the animal health and pharmaceuticals industry, firstly with GlaxoSmithKline, and more recently with Merck during a major growth period. Hugo was Chief Commercial Officer Animal Health at Merck, with responsibility for Merck’s commercial operations worldwide. Hugo brings a wealth of international experience to the board of Benchmark, alongside his expertise in aggressively growing businesses and in the commercialisation of medicines and animal health products. Other roles: Hugo has acted as an independent senior advisor with several multinational companies, private equity groups and consulting firms, primarily in the animal health sector. Skills, competence and experience: Yngve has more than 20 years’ experience in the aquaculture sector as a senior executive, adviser and investor. Yngve was Chief Executive of leading Norwegian salmon producer Salmar, and of international white fish supplier Aker Seafood during periods of successful growth. Yngve has a very strong track record in Benchmark’s focus area of aquaculture, both in the Norwegian and international markets. Other roles: Yngve is Chairman of Chilean salmon producer Nova Austral, and sits on the board of Mediterranean fish producer, Andromeda. Yngve also acts as a strategic adviser to investors in the aquaculture sector. Athene Blakeman Company Secretary and Group Legal Counsel Sustainability Committee Appointed: September 2014 Independent: No Skills, competence and experience: Athene is a qualified Solicitor with over 13 years’ experience. Having previously worked in Slaughter and May and Travers Smith’s corporate finance teams, Athene joined Benchmark in 2014. Athene is responsible for the Group’s legal and intellectual property functions globally, including compliance, M&A and joint ventures, share schemes, commercial and other contracts, capture and utilisation of IP, disputes and management of legal risk. Athene holds an MA in Jurisprudence from St John’s College, Oxford. Board Committees Audit Committee Kevin Quinn (Chair) Susan Searle Hugo Wahnish Remuneration Committee Susan Searle (Chair) Peter George Kevin Quinn Nomination Committee Peter George (Chair) Susan Searle Kevin Quinn Sustainability Committee Kevin Quinn (Chair) Alex Raeber Ruth Layton, Sustainability Director Ivonne Cantu, Investor Relations Director Athene Blakeman, Group Legal Counsel and Company Secretary Disclosure Committee Mark Plampin (Chair) Malcolm Pye Kevin Quinn In urgent situations, in the absence of the permanent members of the Disclosure Committee, any two Directors, one of which is Mark Plampin or Malcolm Pye, may exercise the powers of the Disclosure Committee. The Company Secretary serves as secretary to all of the Board Committees. 68 69 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONLEADERSHIP Governance framework Benchmark’s governance framework is outlined in the diagram below and described in this report. The Company complies with the UK Corporate Governance Code (the Code). An overview of the Company’s compliance with the Code, and an explanation of those Code provisions it has not implemented, is set out in the Directors’ Report on pages 85 to 89. Board of Directors of Benchmark Holdings plc Chair, Non-Executive Director Senior Independent Non-Executive Director Non-Executive Directors Chief Executive Officer Chief Scientific Officer Chief Financial Officer Company Secretary Peter George Susan Searle Kevin Quinn Hugo Wahnish Yngve Myhre Malcolm Pye Alex Raeber Mark Plampin Athene Blakeman Audit Committee Kevin Quinn (C) Susan Searle Hugo Wahnish Nomination Committee Peter George (C) Susan Searle Kevin Quinn Remuneration Committee Susan Searle (C) Peter George Kevin Quinn Sustainability Committee Kevin Quinn (C) Alex Raeber Ruth Layton Ivonne Cantu Athene Blakeman Disclosure Committee Mark Plampin (C) Malcolm Pye Kevin Quinn Operations Board Chief Executive Officer Chief Scientific Officer Chief Financial Officer Heads of Division • Advanced Nutrition • Genetics • Animal Health • Knowledge Services Heads of cross-Group functions • Marketing Director • Key Account Management • Group Legal Counsel • Investor Relations Director • Head of People Malcolm Pye Alex Raeber Mark Plampin Philippe Leger Jan-Emil Johannessen John Marshall James Banfield Doerte Laue Roland Bonney Athene Blakeman Ivonne Cantu Anna Winton Advanced Nutrition Board Genetics Board Animal Health Board Knowledge Services Board Executive Directors Executive Directors Executive Directors Executive Directors Head of Division Head of Division Head of Division Head of Division Senior management of businesses in division Senior management of businesses in division Senior management of businesses in division Senior management of businesses in division During the year, the Group appointed a new Chief Scientific Officer, Alex Raeber, and a new Marketing Director, Doerte Laue. Alex Raeber sits on the Benchmark Holdings plc Board, the Operations Board, and divisional Boards. Doerte Laue sits on the Operations Board, and divisional Boards. Alex’s profile and experience is summarised on page 67 of this report. His appointment recognises the importance of the Group’s product pipeline and its timely delivery, which is fundamental to maintaining the strong competitive position of the Advanced Nutrition and Genetics divisions in their respective markets, and to the growth in the Animal Health division which is anticipated over the coming years. Doerte has over 20 years’ professional experience in leadership functions related to innovation management, product management, new business development and marketing and sales. Doerte has built her professional profile with leading multinational B2C and B2B players in the lifesciences and packaging industries, including Mars, Boehringer, DSM and Amcor. Doerte’s appointment recognises the opportunity the Group has to leverage its existing strong market positions and brands; strengthen the Benchmark brand; utilise its wealth of market intelligence; and improve positioning of new products, in order to deliver its strategy of delivering sustainable solutions to the industries it serves. Board of Directors of Benchmark Holdings plc The Board is responsible for the long-term success of the Group, overseeing the development and delivery of strategy, financial performance, and conduct of the business, in order to generate sustainable value for shareholders. The Executive Directors are responsible for the delivery of strategy, business operations, risk management, and ensuring that the right financial and people resources are in place to achieve the Company’s aims. The Non-Executive Directors are responsible for assisting in the development of and constructively challenging strategy, overseeing the performance of management, satisfying themselves that financial controls and risk management systems are robust, and safeguard the integrity of financial information, determining the Directors’ remuneration, and succession planning for the Executive Directors and senior management. A formal schedule of matters reserved for the Board is maintained and communicated throughout the Group with regular training, to ensure that decisions which are significant due to their strategic, financial or reputational implications are reserved for approval by the Board. The column to the right lists the key areas of decision-making reserved for the Board. Operations Board Responsible for developing and delivering cross-Group opportunities, revenue and costs synergies, advancing integration, and overseeing the financial and operational performance of the Group as a whole. Divisional Boards — Advanced Nutrition; Genetics; Animal Health; Knowledge Services Responsible for the development and delivery of the strategy of the relevant division and its businesses, its financial performance, and the implementation of cross-Group opportunities and synergies. Matters reserved for the Board Strategic decisions • Review and approval of the long-term objectives and strategic direction of the Group • Approval and monitoring of strategic and annual business plans and budget • Approval of significant acquisitions, mergers, disposals and other transactions • Approval of diversification into new business activities and new geographies Reporting • Approval of the Annual Report and Accounts and of the interim financial statements • Oversight and approval of significant changes to reporting policies and practices Regulatory matters • Compliance with the AIM Rules for Companies, the UK Corporate Governance Code, procedures for regulating dealing in the Company’s shares by its employees and Directors Finance, governance and controls • Review and approval of internal control and risk management systems • Approval of significant projects, contracts and disputes • Approval of financing policy, including the issue of shares and significant borrowings • Appointment or removal of the auditors and determination of the audit fee • Oversight and approval of Directors’ conflicts of interests • Approval of interim dividends and recommendation of final dividends Succession planning and reward • Ensuring adequate succession planning is in place • Appointment and removal of Directors on the Board and its Committees, and of the Company Secretary • Approving and recommending to shareholders the terms of employee share schemes, and approving significant changes to pension schemes • Approval of remuneration of senior management 70 71 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBoard attendance During the year, the Board held 7 scheduled Board meetings, one scheduled strategy day and 11 special Board meetings. Individual attendance at the scheduled Board meetings is set out below. A Board dinner is usually held around Board meetings to allow for more informal discussion, and for the Board to spend time with the Company’s senior management team. Attendance Appointment Number of scheduled Board meetings attended in FY18 Maximum possible scheduled meetings in FY18 % of scheduled meetings attended Peter George1, Chair May 2018 Alex Hambro2, Chair December 2013 Susan Searle, Senior Independent Director Kevin Quinn Non-Executive Director December 2013 November 2016 Hugo Wahnish3 Non-Executive Director November 2017 Yngve Myhre4 Non-Executive Director November 2017 Malcolm Pye, Chief Executive Officer December 2013 Mark Plampin, Chief Financial Officer December 2013 2 4 8 8 7 6 8 8 3 4 8 8 7 7 8 8 66% 100% 100% 100% 100% 86% 100% 100% 1 Peter George was appointed to the Board in May 2018. 2 Alex Hambro stepped down from the Board in May 2018. 3, 4 Hugo Wahnish and Yngve Myhre were appointed to the Board in November 2018. Board activities in the year At each scheduled Board meeting, the following standing items are considered: Standing agenda items Notice, quorum, Directors’ duties and any conflicts of interest arising. Approval of minutes of and reviews action points from previous meetings. Review of Capex Project Report, tracking expenditure and progress with significant capital investments. In FY18 these reports included the SalmoBreed Salten land based salmon broodstock facility; fitting out of the Braintree Biotech vaccine manufacturing facility; Ardtoe aquaculture research facility; and the drilling of a new borehole at the land-based salmon broodstock facility in Iceland. Review of Deal Tracker, updating on potential acquisitions, joint ventures and other exceptional transactions. Consideration and approval of Matters Reserved for the Board. Review of Legal and Intellectual Property report, regarding IP development and protection, transactions, key commercial arrangements and their terms, and disputes. Review of Compliance Report, regarding compliance matters, training and initiatives. Review of People Report, with an overview of headcount, vacancies, management appointments, and updating on other people matters arising. Review of Health and Safety Report, with an overview of accident and near miss reporting, initiatives, risk assessments, and Health and Safety performance. Review of Investor Relations Report, summarising announcements, media coverage and other shareholder events. In addition to the standing items, an overview of the principal matters considered by the Board in the year is set out below: Strategy and operations Received and discussed presentations from the Heads of the Advanced Nutrition, Genetics, Animal Health and Knowledge Services divisions, regarding their 5-year strategic plans, market trends and opportunities, key growth areas, and main risks. Reviewed and approved the Group budget for FY18. Received and discussed presentations from the Head of Key Account Management regarding key account initiatives and systems. Received and discussed regular monthly updates from the Chief Scientific Officer, who is responsible for R&D functions across the Group, regarding the organisational structure, integration and alignment of R&D processes, optimisation of facilities utilisation, and intellectual property, for discussion. Received and discussed presentations from the Marketing Director, regarding branding development and alignment, and capture and utilisation of marketing and competitor information. Received and discussed presentations from the Head of the Animal Health division regarding the Animal Health product pipeline, including overview of the portfolio, key products, budgets, and prioritisation. Review of Management Information Pack which includes Group management accounts, outlook, cash flow forecast, financial covenant forecast, share price performance, shareholder and trading report and headcount report. Received and discussed a presentation from the Head of IP Commercialisation regarding the Group’s intellectual property strategy and discussed the capture and utilisation of IP within the business, key IP assets and risks. Receipt of update from the CEO regarding strategic matters and significant developments. Received and discussed updates from the Head of People regarding key initiatives including succession planning, talent management, and the ongoing professional development of our people. Received regular updates on progress with the Group’s next generation sea lice treatment and CleanTreat® technology, including the results of commercial field trials. Received and discussed the entry by the Genetics division into the joint venture with AquaChile for aquaculture breeding in Chile, including business and investment plans, funding, and terms. Received regular updates on the Group’s progress with development of its SPF/SPR shrimp breeding programme, related investments, key target markets, and moves towards full commercialisation. Received updates on and discussed the Group’s strategy in relation to China, and related agreements. Regularly reviewed utilisation plans for Benchmark Vaccines’ facilities, including the new Braintree Biotechnology Building. Received presentations on and discussed the Group’s strategy in relation to its aquaculture diagnostics business, Fish Vet Group, and approved the closure of certain sites. Approved the grant of share options to employees under the Group’s share schemes, which sees 58 per cent. of employees holding shares or options in the Company. Shareholders Approved the Annual Report and Accounts and Interim Results. Oversaw the planning and execution of the Company’s Capital Markets Day for investors, and other engagement with institutional investors. Received reports following meetings with major shareholders involving the Chairman of the Board, Senior Independent Director, and other Non-executive Directors, throughout the year. Governance and risk Completed the appointment of two new Non-Executive Directors with international pharmaceutical and aquaculture expertise, Hugo Wahnish and Yngve Myhre, shortly after the year end. Approved the appointment of Peter George as Chair of the Board, and Alex Raeber as Chief Scientific Officer. Received report from the Chair of the Audit Committee on the FY17 audit process and principal matters discussed with the auditors. Reviewed the Group’s risk management framework and risk register and received update on ongoing process for mitigation of key risks. Received updates on disputes and litigation, including successful actions taken to protect the Group’s intellectual property. Received updates on key regulatory developments, including the new proposed Corporate Governance framework. EFFECTIVENESS Nomination Committee Report Attendance Appointment The Nomination Committee is responsible for safeguarding the effectiveness of the Board. It regularly reviews the composition of the Board and is responsible for leading a rigorous and transparent process for the identification and appointment of new Directors. The current members of the Nomination Committee are: • Peter George (Chair) • Susan Searle • Kevin Quinn The composition of the Nomination Committee during the year was: • Alex Hambro (stepped down as Chair on 26 January 2018) • Susan Searle (member throughout the period, interim Chair from 26 January 2018 to 9 January 2019) • Kevin Quinn (appointed 26 January 2018) Only the members of the Nomination Committee have the right to attend meetings. The Head of People, Executive Directors, other Board members and advisers may be invited to contribute on specific agenda items. The Company Secretary acts as secretary to the Nomination Committee. The Nomination Committee updates the Board following its meetings, and invites contributions and views from the Board. Maximum possible scheduled meetings in FY18 % of scheduled meetings attended Number of scheduled Nomination Committee meetings attended in FY18 Susan Searle¹, Chair Kevin Quinn2 Alex Hambro3 December 2013, appointed Chair of the Nomination Committee 26 January 2018 26 January 2018 December 2013 3 3 0 3 3 0 100% 100% N/A 1 Susan Searle was appointed Chair of the Nomination Committee on 26 January 2018. 2 Kevin Quinn was appointed to the Nomination Committee on 26 January 2018 following Alex Hambro’s resignation from the Committee on the same date. 3 Alex Hambro resigned from the Nomination Committee on 26 January 2018, at the time the decision was taken to seek a successor to his position as Chairman of the Board. 72 73 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONIn addition to the formal Nomination Committee meetings, several informal meetings and calls were held in the year between members of the Nomination Committee, at times with contributions from other members of the Board, regarding the appointments of Peter George and Alex Raeber. Responsibilities The main responsibilities of the Nomination Committee are: • To review the composition of the Board, having regard to its size, balance of skills, knowledge, experience and diversity. • To lead the process for Board appointments and recommend the appointment of new Directors. • To review the re-appointment of Non-Executive Directors. • To make recommendations on the composition of Board Committees. • To consider succession for Board members and senior management. The terms of reference for the Nomination Committee are regularly reviewed and are available on the Corporate Governance section of the Company’s website at benchmarkplc.com. Actions undertaken during the year At the start of the year, the Board finalised the appointments of Hugo Wahnish and Yngve Myhre. Hugo Wahnish brings international animal health and pharmaceutical industry expertise and relationships to the Board. Yngve Myhre brings extensive expertise in the international aquaculture industry, across several species. In January 2018, the Board determined, in light of discussions around the FY17 year end results with investors, that the Board would benefit from a new Chairperson with experience of running a larger listed trading business, to lead the Company through the next period of its development, with focus on strategic delivery, including organic growth and synergies. The Nomination Committee engaged Russell Reynolds (formerly Zygos Partnership) to assist with the recruitment. Russell Reynolds are signatories to the Voluntary Code of Conduct for Executive Search Firms in Board Appointments, which is designed to enhance gender and wider diversity on boards. The Company set requirements relating to diversity in relation to the shortlist of candidates, and consulted with the wider Board throughout the recruitment process. On 8 May 2018, the Board was pleased to appoint Peter George as the new Chairman of the Company. The Nomination Committee and the Board also determined relatively early in the year that, in light of the importance of the Group’s technological leadership in its industries and the timely commercial delivery of products in the pipeline, it would be beneficial to appoint a Chief Scientific Officer to the Board. The Nomination Committee was involved with the recruitment and selection of the Chief Scientific Officer. The appointment was delayed pending the introduction and involvement of Peter George, to ensure that it had full support from the new Chairman of the Board. The Board and the Nomination Committee were then very pleased to announce on 2 July 2018 that Alex Raeber would be joining the Board as Chief Scientific Officer from 1 October 2018. Alex brings to the Board significant expertise in the animal health sector across both start ups and global public companies, including the successful commercialisation of product pipelines. Also during the year, the Nomination Committee and the Board received presentations from the Head of People and her team regarding the succession planning initiative being implemented throughout the Group, which focusses on ensuring that succession planning is in place for key roles, and that talent is identified and nurtured. In addition, the Company saw changes in its management structure towards the end of FY17, some of which were completed in FY18, including the establishment of a smaller and more focused Operations Board, and the introduction of new cross-group functions, including Key Account Management, Supply Chain, Marketing, the appointment of the Chief Scientific Officer and the establishment of the Strategy Execution and Business Growth Team. The Board received reports and presentations from these new functions during FY18, and the Nomination Committee continues to monitor and evaluate the performance and diversity of the Group’s senior management team. Actions for the coming year Through FY19, the Nomination Committee will continue to monitor and receive reports on the implementation of the succession planning initiative within the Group. It will also continue to assess the size and composition of the Board to evaluate whether this is suitable for the Group’s current stage of development, containing an appropriate balance of skills, knowledge, experience and skill sets. Board composition The Board comprises 5 Independent Non-Executive Directors, including the Chairman, and three Executive Directors, the Chief Executive Officer, Chief Financial Officer and Chief Scientific Officer. The Nomination Committee keeps the size and composition of the Board under review, to ensure that it is suitable for the Group and supports delivery of the strategy, containing an appropriate balance of skills, knowledge, experience and skill sets. Directors’ roles and responsibilities Biographical details for all members of the Board are found on pages 67 to 69 of this report. There is a clear separation between the roles of the Chairman and the Chief Executive Officer: Chairman Chief Executive Officer Lead the development and delivery of strategy and budget, to enable the Group to meet the requirements of its shareholders Oversee operation of the day-to-day business of the Group Lead and oversee the executive management of the Group Establish an environment which allows the recruitment, engagement, retention and development of the people needed to deliver the Group’s strategy Lead the Board to ensure effective functioning in all aspects of its role Promote an open culture of debate Ensure that the membership of the Board is appropriate for the needs of the business Oversee Board committees as they carry out their duties, including reporting to the Board Set and manage the agenda for Board meetings Ensure the provision of information necessary for Directors to take a full and constructive part in Board discussions Develop and maintain effective communications with shareholders Establish appropriate personal objectives for the Chief Executive Officer and Executive Directors Ensure the Directors are up to date and receive suitable training and development Independence of Directors The Board considered each Non-Executive Director’s independence on appointment, and concluded that they were independent. The Board reviews independence on an annual basis and has concluded that the Non-Executive Directors all remain independent. Non-Executive Directors are appointed for specified terms, subject to re-election by shareholders, and terms beyond six years are subject to rigorous review. Accordingly, Non-Executive Directors are appointed for a maximum of two terms of three years, and thereafter may serve for an additional period only at the invitation of the Board following scrutiny of their continued independence. The periods of service of our Non-Executive Directors are set out below. Name Date of appointment Term Peter George Chair 8 May 2018 8 months Susan Searle Senior Independent Director 18 December 2013 5 years, 1 month Kevin Quinn Non-executive Director Hugo Wahnish Non-executive Director Yngve Myhre Non-executive Director 25 November 2016 2 years, 1 month 6 November 2017 1 year, 2 months 6 November 2017 1 year, 2 months Conflicts of interest Directors are obliged to seek authorisation from the Board before taking up any position which conflicts, or which may conflict, with the interests of the Company. The Board is empowered to authorise situations of potential conflict, where it sees fit, in order that a Director is not in breach of his/her duties. The interested Director is excluded from voting on the resolution to authorise the conflict. The Directors may resolve that any such transaction or arrangement be subject to such terms as they may determine. All existing external appointments and other such situational conflicts of Directors have been considered and authorised by the Board, including in relation to the newly appointed Non-Executive Directors. The Senior Independent Director, Susan Searle, provides a sounding Board for the Chairman and serves as an intermediary for the other Directors when necessary. The Non-Executive Directors regularly meet, both formally and informally, without the Executive Directors present. Induction, business awareness and development The Chairman is responsible for ensuring that new Directors receive a comprehensive induction which includes: An overview of the Group, its operations and governance framework. • Briefings on Directors’ responsibilities and compliance. • Site visits to key locations. • Detailed reviews of strategic projects and initiatives being pursued. • One-to-one meetings with senior management. Each of the four new Directors appointed during the year have received a formal induction and exposure to senior management, including Strategy Days and informal dinners with the Operations Board. In keeping with costs savings initiatives across the Group, including reductions in travel expenditure, the Board travelled to fewer sites than usual in the year, with meetings held in London and, shortly after year end, at the Company’s leading vaccine manufacturing facility in Braintree, Essex. During the year, the Board held two Strategy Days with the Operations Board, and engaged with members of the Company’s senior management team in scheduled board meetings, which included presentations from and meetings with: • The Heads of the Advanced Nutrition, Genetics, Animal Health and Knowledge Services divisions, regarding their 5-year strategic plans, market trends and opportunities, key growth areas, and main risks. • The Head of Key Account Management regarding key account initiatives and systems. • The Chief Scientific Officer, who is responsible for R&D functions across the Group, regarding the organisational structure, integration and alignment of R&D processes, optimisation of facilities utilisation, and intellectual property. • The Marketing Director, regarding brand development and alignment, and capture and utilisation of marketing and competitor information. • The Head of the Animal Health division and Head of Intellectual Property Commercialisation regarding the Animal Health product pipeline and IP strategy across the group. • The Head of People regarding key initiatives including succession planning, talent management, and the ongoing professional development of our people. 74 75 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONACCOUNTABILITY Audit Committee Report Key objective Actions undertaken during the year The Audit Committee acts on behalf of the Board and the shareholders to ensure the integrity of the Group’s financial reporting, evaluate its systems of risk management and internal control and oversee the relationship and performance of the external auditors. Membership, meetings and attendance The composition of the Audit Committee during the year was: • Kevin Quinn (Chair) • Alex Hambro (resigned 4 May 2018) • Susan Searle (appointed 4 May 2018) • Hugo Wahnish (appointed 4 May 2018) All Committee members are independent Non-Executive Directors. In addition to the Committee members, there are a number of regular attendees at each meeting. The Chief Financial Officer (CFO) and external Group Audit Partner normally attend all scheduled Audit Committee meetings. The Audit Committee members regularly take time before or after a meeting, without any Executive Directors or senior management present, to raise any questions and discuss issues with the external auditor. The Chairman of the Audit Committee meets the CFO and the external auditor separately to review current issues and developments prior to each meeting of the Audit Committee, such meetings often taking place by telephone. The Audit Committee met four times during the year with all members of the Committee in attendance at each. Responsibilities The main responsibilities of the Committee are: • To review accounting policies and the integrity and content of the financial statements; • To monitor disclosure controls and procedures and the Group’s internal controls; • To monitor the integrity of the financial statements of the Group, and to assist the Board in ensuring that the Annual Report and Accounts 2017/18, when taken as a whole, are fair, balanced and understandable; • To consider the adequacy and scope of external audits; • To monitor the objectivity, independence and effectiveness of the external auditor, including the scope and expenditure on non-audit work; • To review and approve the statements to be included in the Annual Report on internal control and risk management; • To review and report on the significant issues considered in relation to the financial statements and how they are addressed. The Committee’s terms of reference are reviewed annually and a summary of these are available on the Governance section of our website at benchmarkplc.com The key activities for the Committee for the period under review are set out below. Presentation of results At the request of the Board, the Committee reviewed the presentation of the Group’s unaudited results for the six months to 31 March 2018 and the audited results for the year to 30 September 2018 to ensure they were fair, balanced and understandable and provide sufficient information necessary for shareholders and other users of the accounts to assess the Group’s position and performance, business model and strategy. In conducting this review, focus was given to the disclosure included in the basis of preparation in Note 1 to the financial statements in relation to the Group’s funding position and the suitability of the going concern assumption. Attention continues to be paid to the presentation of the results in the income statement which uses alternative profit measures as indicators of performance. The Board considers current treatment which retains reference to “Adjusted EBITDA” and “EBITDA” to remain appropriate. “EBITDA” is “earnings before interest, tax, depreciation and amortisation, and “Adjusted EBITDA” is “EBITDA before exceptional items and acquisition related expenditure”. Reference has also been made in the Annual Report to a further alternative profit measure “Adjusted EBITA”, which adjusts Adjusted EBITDA to include depreciation and amortisation of capitalised development costs to reflect their part in the underlying performance of the Group. No amortisation of capitalised development costs has yet been incurred as those products to which the assets relate have not yet been commercially launched. The Board regards these measures as an appropriate way to present the underlying performance and development of the business as it reflects the continuing investment being made by the Group, particularly in relation to recent and future acquisition activity, and this is how the board monitors progress of the existing group businesses. Management override of internal controls The Committee considered the inherent risk of management override of internal controls as defined by auditing standards. In doing so the Committee continue to review the overall robustness of the control environment, including consideration of the Group’s whistleblowing arrangements and the review by the external auditor. Revenue recognition The Committee considered the inherent risk of fraud in revenue recognition as defined by auditing standards and was satisfied that there were no issues arising, and is reviewing the work being undertaken on the likely impact of the new accounting standard IFRS 15 ‘Revenue from Contracts with Customers’, which will be effective for the Annual Report for the year ended 30 September 2019. The detailed work is ongoing but the impact on the Group’s financial statements is not expected to be material. Valuation of goodwill and intangible assets Internal audit The Committee considered the carrying value of the Group’s businesses, including goodwill and intangible assets. Management performed an annual impairment review on goodwill and other intangible assets held within the Group. The Committee reviewed management’s recommendations, which were also reviewed by the external auditor, including an evaluation of the appropriateness of the identification of cash generating units and the assumptions applied in determining asset carrying values. The Committee was satisfied with the assumptions and judgements applied by management and concluded that no impairment of carrying values was required. As the Group evolves and grows, the Committee continues to monitor whether an internal audit function would add significant value as a part of the integrated control environment currently operating. Further consideration has been given to this during the year, and although a decision is yet to be made to proceed with internal audit, possible options on the form and structure of such a function have been explored. The completion of the update to the Group’s risk register will further inform the decision on whether to proceed to create an in-house internal audit function or to outsource individual reviews to third parties. Going Concern The Committee was presented by management with an assessment of the Group’s future cash forecasts and profit projections, available facilities, facility headroom, banking covenants and the results of a sensitivity analysis. Detailed discussions were held with management concerning the matters outlined in the basis of preparation in Note 1 to the financial statements, together with the availability of the additional funding agreed subsequent to the year end. The Committee discussed the assessment with management and was satisfied that the going concern basis of preparation continues to be appropriate for the Group and advised the Board accordingly. Valuation of biological assets The Group holds significant biological assets on the balance sheet at fair value less costs to sell, with the valuation dependent on a number of subjective assumptions, including some which relate to future egg sales prices and volumes and seasonal variations. The Committee considered the accounting policy employed by the Group for biological assets, the assumptions used in the valuation calculations and the disclosures provided in the financial statements. The Committee was satisfied with the accounting policy in force and with the estimates and judgements applied by management in employing this policy. Risk management Effective risk management and control is key to the delivery of the Group’s business strategy and objectives. Risk management and control processes are designed to identify, assess, mitigate and monitor significant risks, and can only provide reasonable and not absolute assurance that the group will be successful in delivering its objectives. The Board is responsible for the oversight of how the Group’s strategic, operational, financial, human, legal and regulatory risks are managed and for assessing the effectiveness of the risk management and internal control framework. Further detailed risk assessment work has been conducted during the year to maintain and update the Group’s risk register to ensure that all risks are appropriately prioritised and addressed. A description of the Group’s risk management procedures and the work completed in the year is provided in the Principal Risks and Uncertainties section on page 62. Safeguards and effectiveness of the external auditor The Committee recognises the importance of safeguarding auditor objectivity. The following safeguards are in place to ensure that auditor independence is not compromised. • The Audit Committee carries out an annual review of the external auditor as to its independence from the Group in all material respects and that it is adequately resourced and technically capable to deliver an objective audit to shareholders. Based on this review the Audit Committee recommends to the Board the continuation, or removal and replacement, of the external auditor; • A tax adviser separate from the external auditor is engaged to provide tax related services; • The external auditor may provide audit-related services such as regulatory and statutory reporting as well as formalities relating to shareholder and other circulars; • Non-audit services carried out by the external auditor are generally limited to work that is closely related to the annual audit or where the work is of such a nature that a detailed understanding of the business is beneficial; • The external auditor may undertake due diligence reviews and provide assistance on tax matters given its knowledge of the Group’s business. Such provision is assessed on a case-by-case basis so that the best adviser is retained. The Audit Committee monitors the application of policy in this regard and keeps the policy under review; • The Audit Committee reviews all fees paid for audit and consultancy services on a regular basis to assess the reasonableness of fees, value of delivery and any independence issues that may have arisen or may potentially arise in the future; • The external auditor reports to the Directors and the Audit Committee regarding their independence in accordance with Auditing Standards. KPMG’s policy, in line with best practice, is that audit partners are required to be rotated every fifth year; • Different teams are used on all other assignments undertaken by the auditor; • The Audit Committee monitors these costs in absolute terms and in the context of the audit fee for the year, to ensure that the potential to affect auditor independence and objectivity does not arise. The Committee does not adopt a formulaic approach to this assessment. The split between audit and non-audit fees for 2018 and information on the nature of the non-audit fees incurred is detailed in Note 6 accompanying the consolidated financial statements. 76 77 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe Audit Committee monitors the effectiveness of the external audit. To comply with this requirement, the Committee reviews and comments on the external audit plans before it approves them. It then considers progress during the year by assessing the major findings of their work, the perceptiveness of observations, the implementation of recommendations and management feedback. At the request of the Board, the Committee also monitors the integrity of all financial statements in the Annual Report and half year results statements, and the significant financial reporting judgements contained in them. Further details of the Committee’s procedures to review the effectiveness of the Group’s systems of internal control during the year can be found in the section on effective risk management and internal control below. The Committee recognises that all financial statements include estimates and judgements by management. The key audit areas are agreed with management and the external auditors as part of the year-end audit planning process. This includes an assessment by management both at business unit and at Group level of the significant areas requiring management judgement. These areas are reviewed with the auditors to ensure that appropriate levels of audit work are completed and the results of this work are reviewed by the Committee. Effective risk management and internal control One of the Board’s key responsibilities is to ensure that management maintains a system of internal control which provides assurance of effective and efficient operations, internal financial controls and compliance with law and regulation. The Group’s systems are designed to identify key financial and other risks to the Group’s business and reputation, and to ensure that appropriate controls are in place. Consideration is given to the relative costs and benefits of implementing specific controls. Assurance On behalf of the Board, the Audit Committee examines the effectiveness of: • The systems of internal control, primarily through reviews of the financial controls for financial reporting of the annual, preliminary and half yearly financial statements and a review of the nature, scope and reports of external audit; • The management of risk by reviewing evidence of risk assessment and management; and • Any action taken to manage critical risks or to remedy any control failings or weaknesses identified, ensuring these are managed through to closure. Where appropriate, the Audit Committee ensures that necessary actions have been, or are being taken, to remedy or mitigate significant failings or weaknesses identified during the year either from internal review or from recommendations raised by the external auditor. The Group’s internal controls over the financial reporting and consolidation processes are designed under the supervision of the CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the Group’s published financial statements for external reporting purposes in accordance with IFRS. Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance and may not prevent or detect all misstatements whether caused by error or fraud. The Group’s internal controls over financial reporting and the preparation of consolidated financial information include policies and procedures that provide reasonable assurance that transactions have been recorded and presented accurately. Management regularly conducts reviews of the internal controls in place in respect of the processes of preparing consolidated financial information and financial reporting. During the year there were no changes to the internal controls over these processes that have or are reasonably likely to materially affect the level of assurance provided over the reliability of the financial statements. Risk management and internal control system features Risk management control system As well as the risks that management identify through the ongoing processes of reporting and performance analysis, the Audit Committee has additional risk identification processes, which include: • Risk and control process for identifying, evaluating and managing major business risks. A risk register is maintained defining each business risk identified and quantifying its likely impact to ensure adequate priority is given to each in turn; • External audit reports, which comment on controls to manage identified risks and identify new ones; and • A confidential whistle-blowing helpline and an email address available for employees to contact the Non-executive Directors in confidence. Internal control system The internal controls which provide assurance to the Committee of effective and efficient operations, internal financial controls and compliance with law and regulation include: • A formal authorisation process for investments; • An organisational structure where authorities and responsibilities for financial management and maintenance of financial controls are clearly defined; • Anti-bribery and corruption policies and procedures and a dedicated email hotline, designed to address the specific areas of risk of corruption faced by the Group; • A comprehensive financial review cycle where annual budgets and subsequent reforecasts are formally approved by the Board and monthly variances are reviewed against detailed financial and operating plans. REMUNERATION REMUNERATION REPORT FOR YEAR ENDED 30 SEPTEMBER 2018 Statement from Susan Searle, Chairman of the Remuneration Committee Introduction The business has been through a number of acquisitions but is now settled in terms of scope and organisational structure with the task ahead being financial delivery from this platform. The work of the Remuneration Committee this year has been focussed on the broader organisation and the operational board. Alex Raeber joined the executive directors as Chief Scientific Officer and we were pleased to have attracted such a high calibre individual into the team following an extensive search and review process which included the new non- executive chairman, Peter George. The operational board comprises 12 people, a mixture of divisional and functional heads and it is this team that takes responsibility for Group performance and strategy; driving efficiencies, market leadership, key account management and synergies. Following the appointment of our new remuneration committee advisors, FIT, the Committee commissioned a review of the remuneration policy and structures across the business. As part of the review, the committee has benchmarked the operational board against relevant comparators. This highlighted areas in terms of bonus levels and share ownership that will need to be addressed in future years. Performance outcomes During the year recruitment of the operations board was completed and, with the new chairman instigating several strategy sessions, the Board saw the strength of the new operations team in action. There has been good progress on the Animal Health pipeline with new sea lice treatment and CleanTreat® achieving 14 trials despite unusually cold sea water temperature and scheduling challenges. The product has been successful in field trials with the three major global salmon farmers, with strong interest from others. The development of new aqua vaccines and products has progressed, but the launches planned for 2018 did not occur due to delays in scaling production which have now been overcome. The team also achieved the objective of establishing a leadership position in Chile through its joint venture with AquaChile. A key target for this year was the review of non-core business and extraction of synergies. Several businesses have been closed and discussions with partners for the companion animal vaccines programme is well underway. Overall, this year has seen the Benchmark executive team deliver in line with expectations in most areas of operational performance and ahead of expectations in Adjusted EBITDA, one of the key financial metrics for the business. The share price went from 38p to 61p in the period but has yet to recover to reach the levels the board expects are achievable with consistent performance. In light of the operational, strategic and financial performance during the year, the committee determined that bonuses of 64.5% of salary would be payable to the executive directors. Implementation for 2018/19 and beyond We have decided that for 2018/19 we will award market value share options to the operational board (including the executive directors) and to managers in the business. These are one off awards ahead of a new scheme which we will implement from 2020 following further review. These awards will be made in January 2019 at levels comparable to our benchmarking peers; their purpose is retention and focus on increasing shareholder value (alignment). Awards will not vest for three years. A new five year strategic plan has been signed off by the Board and it is against this plan that we will judge bonuses for the senior team in the future. The Board has been through an extensive review of key performance indicators and, as a result, is moving to a 60/40 split in terms of financial/non-financial metrics for bonuses with these metrics clearly tied closely to the plan. Finally, the Remuneration Committee agreed a revised remuneration framework for the future which will apply to executive directors and the wider management team. Work is ongoing in this area to ensure that we can continue to attract and retain high quality talent as the business grows. Susan Searle Chairman of the Remuneration Committee 24 January 2019 ANNUAL REPORT ON REMUNERATION FOR 2018 An overview of the Remuneration Committee The composition of the Remuneration Committee during the year was: • Susan Searle (Chair) • Kevin Quinn • Peter George (from appointment on 8 May 2018) The Committee is made up of three independent Non-Executive directors with the Company Secretary acting as secretary and the Head of People attending committee meetings to provide advice on policies and practices. At appropriate times, the Committee invites the views of the Chief Executive, and seeks advice from independent remuneration consultants. No Director or employee is present when his or her own remuneration or fees are discussed. During the year, the committee appointed FIT Remuneration Consultants LLP as their advisors. Key objectives: The key objectives of the Remuneration Committee are to develop the Company’s policy on executive remuneration and to fix the remuneration of the Executive Directors, Chairman of the Board and senior managers. Responsibilities: The main responsibilities of the Committee are: • To monitor and develop the Company’s remuneration policy • To determine the remuneration of the Executive Directors • To approve the service agreements of the Executive Directors • To approve the remuneration of senior managers • To determine the fees of the Chairman • To review the Company’s annual bonus proposals and to approve bonuses for the Executive Directors and senior managers • To approve the design of and oversee all awards under the Company’s share incentive plans • To consider risks to the Group in light of its remuneration policies An overview of the Remuneration Committee’s terms of reference is available on the Governance section of our website at benchmarkplc.com. 78 79 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONActions undertaken during the year: During the year, the committee appointed FIT Remuneration Consultants LLP as its advisors and is working with them to develop a remuneration strategy that supports the growth of the group and ensures a fair and consistent approach to remuneration globally across the teams. This work has included salary benchmarking for the senior management and other areas across the group. Having established a policy of paying the living wage as described by the Living Wage foundation to all employees in the UK we continue to work to ensure that similar base levels of pay are implemented in other jurisdictions. The Group reported voluntarily on its gender pay gap (see page 56 for further details) and has been working to reduce the gap over the last year by encouraging and recruiting more women into senior roles. The management team has been reorganised during the year and our operations board comprised of the Executive Directors, Heads of Division and key support functions is now made up of 25% women. FIT were appointed because the Remuneration Committee believed that they were independent and objective. Following the reorganisation of the management team, the committee has continued to work on succession planning across the Group to ensure that we have the skills required to drive success in all our markets. Voting history The Directors’ Remuneration Report for the year ended 30 September 2017 was subject to an advisory vote at the Annual General Meeting held on 6 March 2018. The report was approved by 98.4% of shareholders. Single total figure of remuneration for the financial year ended 30 September 2018 The remuneration in respect of qualifying services of the directors who served during the financial year ended 30 September 2018 is as set out below. Executive Directors Mark Plampin Malcolm Pye Salary Bonus (a) 253,881 314,812 164,588 204,089 Taxable benefits (b) Long-term incentive 1,863 4,070 - - Pension 25,388 31,481 2018 445,720 554,452 Total 2017(c) 248,609 317,260 (a) The balance of the cash bonuses will be paid in January 2019 and is based on the salary at the 30 September 2018. (b) Benefits provided for all Executive Directors are medical insurance coverage for the Directors and their families, and death in service benefits. Also includes any taxable mileage reimbursed above the HMRC rate. (c) In 2017 the Executive Directors received market value share options in lieu of cash bonuses. The Chairman and the Non-Executive Directors Alex Hambro Susan Searle Kevin Quinn Yngve Myhre Hugo Wahnish Peter George 2018 27,115 45,000 45,000 40,687 40,687 48,307 Fees (£) 2017 45,000 45,000 38,365 - - - The Chairman, Alex Hambro stepped down in May 2018. Peter George was subsequently appointed as Chairman on 8 May 2018. Executive Directors’ bonuses for the financial year ended 30 September 2018 As described in the Chairman’s statement, the Remuneration Committee considered the performance of the Executive Directors against the delivery of long-term sustainable growth and their performance against KPIs set out below: 50% of the bonus was awarded against financial metrics: 1. EBITDA1 25% potential 2. Revenue 25% potential 50% of the bonus was awarded against qualitative metrics: 1. Establishment of the leadership team — recruitment of a Chief Scientific Officer and Group Marketing Director — 12.5% potential The Remuneration Committee exercises judgment in assessing performance against these metrics. For financial metrics, actual performance against a target range is considered. For non-financial measures, performance is assessed on a qualitative basis, involving the evaluation of relevant data. Accordingly, the Executive Directors received bonuses in respect of the financial year ended 30 September 2018 of 64.5% of salary each. This will be paid in cash in January 2019. Defined contribution pension scheme The Executive Directors all participate in defined contribution pension schemes. Malcolm Pye participates in the Benchmark Holdings Executive Pension Scheme and Mark Plampin participates in a self-invested personal pension (SIPP). In accordance with the policy set out on page 83, the Company contributes 10% of salary for each Executive Director. LTIP awards No awards under the Company’s share plans were made to Executive Directors in the financial year ended 30 September 2018, although the share plans were used to issue market value share options in lieu of cash bonuses for 2016/17. The market value of the share options on the date of grant was 69.5p. Malcolm Pye was granted 500,000 options and Mark Plampin received 400,000 options. Executive Directors’ external appointments None of the executive directors held non-executive directorships or external appointments with organisations other than the Company in the financial year ended 30 September 2018. The fees of the Chairman and the Non-Executive Directors for the financial year ended 30 September 2018 Yngve Mahyre and Hugo Wahnish were appointed as new non-executive directors on 6 November 2017 and Peter George was appointed Chairman on 8 May 2018. No changes were made to fees in the financial year ended 30 September 2018. STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN 2019 Executive Directors’ salaries From 1 January 2019, the Executive Directors’ base pay was increased as set out below. This is in line with the average base pay increases for all employees awarded across the Group. Mark Plampin Malcolm Pye Salary (£) % increase in salary 2018 to 2019 (b) 2019 (a) 2018 261,835 255,175 324,676 316,417 2.6 2.6 (a) Dr. Alex Raeber joined the group on 1st October 2018. As such, no salary increment has been applied for 2019. (b) In 2018, the average salary increase across the group including senior management was 5%. Bonus The 2019 bonus will be implemented in line with the future policy described in the following section, with a maximum of 100% of salary. As noted in the Chairman’s statement there will be a rebalancing of the performance measures, with an increased focus on financial performance. LTIP Shortly after the publication of the annual results for 2018, Alex Raeber, the incoming Chief Scientific Officer, will be granted 400,000 market value share options in part as consideration for what he has forgone from his previous employer. As noted previously, in January 2019 we will be making an award of market value share options to the other members of the management team, including the other executive directors, which will vest after three years. The committee is of the view that market value share options provide genuine alignment between the participants and shareholders. Value is only attributable to these awards to the extent that the Company’s share price increases and the participant remains employed until the end of the vesting period. They are also simple to administer and communicate to employees which is an important consideration in the context of our global business. 2. Progress with and development of the pipeline — launch and development of products/vaccines The fees of the Non-Executive Directors — 12.5% potential 3. Development and extraction of key synergies and processes — 12.5% potential 4. Progress on the Industry leadership positioning development of market opportunities — 12.5% potential 80 1 EBITDA is earnings before interest, tax, depreciation and amortisation and impairment — see income statement. The fees of Non-executive directors will be reviewed during the course of the current financial year and will be adjusted for 2019 as is considered necessary. Decisions on fee levels will be made by the Company Chairman and the Executive Directors (and not by the Remuneration Committee). The Chairman’s fee was set by the Committee on appointment at £120,000 per year based on increased engagement in the now enlarged business and remains unchanged for 2019. 81 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONADDITIONAL INFORMATION ON DIRECTORS’ INTERESTS Directors’ interests under the Company’s employee share plans Details of the Executive Directors’ interests in outstanding share awards under the employee share plans during the financial year ended 30 September 2018 are set out below. Share option scheme Options held at 30 September 2017 Options exercised in year Options granted in year At 30 September 2017 Exercise price Grant date Date from which exercisable Mark Plampin Mark Plampin Mark Plampin CSOP II 124,585 124,585 0.1p CSOP II CSOP I - - - 356,835 356,835 69.5p 43,165 43,165 69.5p Malcolm Pye CSOP II 456,835 456,835 69.5p Malcolm Pye CSOP I 43,165 43,165 69.5p 10 March 2015 and 6 March 2017 10 March 2018 and 6 March 2020 24 January 2018 24 January 2021 24 January 2018 24 January 2021 24 January 2018 24 January 2021 24 January 2018 24 January 2021 Director’s interests in ordinary shares At 30 September 2018, the interests of the Directors and their connected persons in ordinary shares was as follows. Alex Hambro Malcolm Pye Mark Plampin Susan Searle Kevin Quinn Hugo Wahnish Interests in ordinary shares at 30 September 2018 % of Company’s issued share capital at 30 September 2018 Interests in ordinary shares at 30 September 2017 100,000 (a) 15,145,686 536,686 (b) 98,125 (a) 60,929 275,000 0.02% 2.72% 0.10% 0.02% 0.01% 0.05% 100,000 15,145,686 536,686 98,125 25,000 0 (a) Held through self-invested personal pension (SIPP). Alex Hambro stepped down as Chairman in May 2018. (b) Comprising 265,000 ordinary shares registered in own name, 267,000 ordinary shares held through self-invested personal pension (SIPP) and 4,686 ordinary shares held through the Benchmark employee share incentive plan. DIRECTORS’ REMUNERATION POLICY The Group’s policy is broadly unchanged and seeks to balance three key objectives: • To pay competitively in the relevant talent markets to sustain motivation and commitment, recognising that Benchmark has a unique culture. • To remunerate in a way that makes economic sense for the Company, ensuring there is a fair balance of return to the executive team, management, staff and shareholders for their contributions to the Company’s success. • To encourage the cooperative behaviours which promote business priorities and lead to high performance. The Company’s remuneration policy supports a climate of team involvement and generates a shared enthusiasm for the growth and success of the Group as a whole. Our aim is to encourage cooperation, sharing of ideas and mutual support between people in different business units. The policy reflects and supports the sense that the Group is involved in creating and delivering services which benefit mankind and the natural environment. We recognise that the non-monetary rewards of team membership, intellectual stimulation, freedom, creativity and producing something worthwhile have equal or higher place in maintaining personal commitment and in attracting and retaining the best people. However, this year we have reviewed our remuneration policy to ensure that we are paying our teams competitively and will be implementing a new bonus structure and annual LTIP in the next few years to coincide with the next phase of our growth. Remuneration policy The executive directors’ remuneration comprises fixed elements in the form of a base salary, benefits and pension contributions, and a variable discretionary element in the form of a bonus, which may be satisfied in cash, deferred shares (or share options) or a combination of both. Fixed elements of remuneration The fixed elements of the Executive Directors’ remuneration are designed to attract and retain directors of the appropriate calibre, with the requisite knowledge, skills and experience, and to sustain motivation and commitment. The Executive Directors all participate in defined contribution pension schemes with the Company contributing 10% of the executive’s salary. The Executive Directors also receive private medical insurance for themselves and their families and death in service benefits. Variable elements of remuneration Executive Directors are eligible for an annual performance bonus, part or all of which may be deferred for three years and paid in shares or share options. The maximum award, including any deferred element, is 100% of salary. The bonus is designed to reward and incentivise success leading to sustainable long-term growth and to recognise the directors’ commitment to the business. Statement of consideration of employment conditions elsewhere in the Group Historically, the salaries across the group have been increased annually by reference to the consumer price index (CPI). In 2018, the average salary increase across the group including senior management was 5 per cent. This percentage rise included adjustments made for additional responsibilities taken on by staff and promotions as the Group’s activities expanded. Bonuses for all employees are determined on a discretionary basis, by reference to a combination of Group and individual performance. Senior managers’ bonuses for 2018 will be paid in cash. The Company aims to encourage everyone in the team to have an interest in the Company’s shares in order to foster a culture of cooperation and shared participation in the Group’s achievements. The remuneration policy supports this by issuing share options to employees at a level that reflects the strategic contribution of their role. In 2018, the company issued 10,711,581 market value share options to 377 employees across the Group in lieu of 2016/17 cash bonuses. Where we are unable to grant options a cash mirror scheme is operated to ensure consistent treatment of the teams globally. Executive Directors’ service contracts and remuneration on termination The contracts of the two Executive Directors in post during the year each commenced on 18 December 2013 and are terminable by either party on 12 months’ notice at any time, and by the Company at any time and without compensation in case of serious misconduct, breach of duty or in similar circumstances. In the event of termination by the Company without cause, the Executive Director is entitled to receive payment of salary for any unexpired notice period and any accrued holiday entitlement. In the event of termination for cause, the Director is not entitled to compensation in respect of salary. The Executive Directors’ bonuses are fully discretionary. In the event of termination during a bonus period, the Committee will consider payment of a bonus on a pro rata basis for the relevant portion of the year worked, having regard to the circumstances. Deferred bonuses which have been satisfied in share options remain exercisable where the Executive Director is a good leaver, including in case of death, incapacity, redundancy, retirement, and where the Remuneration Committee so determines. In all other circumstances, deferred bonuses satisfied in share options cease to be exercisable on termination of employment and lapse. During the year the Company recruited a new Executive Director, Dr. Alex Raeber, who took up the post of Chief Scientific Officer on 1st October 2018. His contract is on the same terms as for existing directors. The terms of appointment of the Chairman and the Non-executive directors The Chairman and the Non-Executive Directors hold office under letters of appointment. Each appointment is for a term of 3 years but with an additional period of 3 years anticipated. All directors are required to stand for re-election at least every three years. Hugo Wahnish and Yngve Myhre were appointed as new non- executive directors on 6 November 2017 and both stood for election at the AGM held on 8 March 2018. Either the Company or the Non-Executive Director may terminate the appointment on 3 months’ notice, and the appointments are subject to the Company’s articles of association and to the Director being re-elected by shareholders upon retirement by rotation. On termination as a result of the non-executive director not being re-elected by shareholders or under the articles of association for reasons connected with outside interests or independence, the appointment terminates immediately and the non-executive director is not entitled to compensation. On termination in other circumstances, including on 3 months’ notice, a non- executive director is entitled to accrued but unpaid directors’ fees to the date of termination but no other compensation. The dates of appointment of and length of service for each non-executive director are shown in the table below. Name Date of appointment Length of service as at 2019 AGM Peter George 8 May 2018 10 months Susan Searle 18 December 2013 5 years, 3 months Kevin Quinn 25 November 2016 2 years, 4 months Hugo Wahnish 6 November 2017 1 year, 4 months Yngve Myhne 6 November 2017 1 year, 4 months Share dilution The total number of ordinary shares issued and issuable in respect of options granted in any ten year period under the Company’s discretionary share option schemes (excluding pre-IPO options under the Enterprise Management Incentive (EMI) scheme) is restricted to 10% of the Company’s issued ordinary shares from time to time. In the financial year ended 30 September 2018 the Company allocated 10,771,581 market value share options (2.06% of issued share capital as at the date of grant) to staff including senior management and Executive Directors as mentioned on page 83. Susan Searle Chairman of the Remuneration Committee 24 January 2019 82 83 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION SHAREHOLDERS DIRECTORS’ REPORT STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Share capital and substantial shareholdings The Company’s issued share capital, together with details of movements during the year, are shown in Note 25 accompanying the financial statements. The Company has one class of ordinary share which carries no right to fixed income. Each ordinary share carries the right to one vote at general meetings of the Company. As at 23 January 2019 the Company has been notified of the following substantial shareholdings under Rule 5 of the UKLA’s Disclosure and Transparency Rules: FERD AS Invesco Limited Woodford Investment Management Limited Lansdowne Partners International Limited, Lansdowne Partners Limited and Lansdowne Partners (UK) LLP The Royal Bank of Scotland Group plc (Herge Holding B.V.) Harwood Capital LLP (as investment adviser/manager), Oryx International Growth Fund Limited, North Atlantic Smaller Companies Investment Trust PLC, and Harwood Capital LLP for private clients % of issued share capital 26.00 16.17 12.45 9.88 6.84 4.15 Engagement with shareholders The Board recognises that it is vital for the Company’s success that the shareholders understand the strategy and the means by which it will be delivered. All Directors welcome regular and open engagement with shareholders. A focus of the Company during the year was strengthening its engagement and communication with shareholders. The Company’s new Chairman, Peter George, commenced his tenure by commissioning a review of the Group’s 5-year strategy, which was undertaken by the Operations Board and the Company’s Board over several dates during the year. The outcome of this review is now being communicated both internally and externally to the Company’s shareholders. In addition, the Company engaged an Investor Relations Director, Ivonne Cantu, to improve its communications with shareholders and ensure that they are clear and understandable. Regular meetings were held during the year with the Company’s institutional shareholders, involving both Executive and Non-Executive shareholders (together and independently). The Company held a capital markets day for institutional shareholders in the spring, which included information regarding the macro-environment and aquaculture industries in which the Group operates; Benchmark’s position in those industries; the strategies, capabilities and growth plans of the core Nutrition, Genetics and Animal Health divisions; and the Company’s capital model and financial structure. Institutional shareholders had the opportunity to meet with members of the Company’s Board and Operations Board, including Divisional Heads. The Directors also attend the Annual General Meeting, at which formal discussion is welcomed, and are available for informal discussion with shareholders after the meeting. The Chairman has primary responsibility for ensuring that major shareholders are able to engage with the Company and Board. The Chairman is also responsible for ensuring that the Board is aware of feedback from its shareholders and that these views are taken into account. The focuses of shareholders were a feature of the Company’s 5-year strategy review, and the Board regularly discusses feedback from meetings and correspondence with major shareholders. The Senior Independent Director is also available to shareholders, particularly where they have concerns which have not been resolved through other channels, or for which other channels are inappropriate. Accordingly, shareholders are welcomed to contact the Chairman or Senior Independent Director. The Directors present their Annual Report and audited financial statements of the Company and of the Group for the year ended 30 September 2018. Benchmark Holdings plc is a public limited company, incorporated and domiciled in England and Wales. Its shares are admitted to trading on AIM, London Stock Exchange’s international market for smaller growing companies. The disclosure requirements of the Companies Act 2006, and where the Directors have deemed it appropriate, the UK Disclosure and Transparency Rules, have been met by the contents of this Directors’ Report, along with the Strategic Report, Corporate Governance Report, Nomination Committee Report, Audit Report and Remuneration Report, which should be read in conjunction with this report. UK Corporate Governance Code The Company assesses its corporate governance arrangements and practice against the UK Corporate Governance Code 2016. A copy of the Code is available from the website of the Financial Reporting Council (FRC) at frc.org.uk. In accordance with the AIM Rules, we produce a statement setting out how Benchmark complies with the principles of the UK Corporate Governance Code, which is available on our website at benchmarkplc.com. The statements and table below set out how Benchmark complies with the Code, and where it elects to deviate from the Code. The governance environment is evolving, including by means of the issue of a new UK Corporate Governance Code 2018, which applies to financial years commencing on or after 1 January 2019. We are monitoring changes to the governance environment, including the new edition of the Code, to ensure that the Company continues to comply with the laws, regulations and rules applicable to it, and to operate structures and practices which deliver good corporate governance. The Nomination Committee evaluates the performance of the Board as a whole and in doing so evaluates the performance of each of the Directors; however, a formal evaluation of the performance of individual Directors was not undertaken this year which, in part, was due to the changes to the board which are described below. During the year, the evaluation of the Board resulted in a number of changes. The Nomination Committee and Board determined, having regard to the expertise of the then current Directors, that the Board would benefit from Animal Health and Aquaculture expertise, which resulted in the appointment of Hugo Wahnish and Yngve Myhre respectively to the Board shortly after the start of the year. During the year, the Board determined that in light of the Company’s shift from a post IPO phase of acquisition led growth to a focus on integration, extraction of synergies and organic growth, a change of Chairman was appropriate, which resulted in the appointment of Peter George. During the year, the Board also determined that in light of the importance of the Company’s pipeline of products, a dedicated Chief Scientific Officer should be appointed to the Board, resulting in the appointment of Alex Raeber shortly after year end. In addition, the re-appointment of Non-executive Directors at the end of their term is dependent on their suitability to continue, including performance, which is reviewed by the Nomination Committee and the Board, and in the case of the Chairman by the Senior Independent Director and the Board. 84 85 Overview of compliance with principles of UK Corporate Governance Code A. Leadership A.1 Role of Board The Board is collectively responsible for the long-term success of the Group, and oversees the development and delivery of strategy and operations. It does this by exercising oversight and control over the performance of the Company through review of management financial information; agreeing budgetary targets; approving investment programmes and monitoring their execution against budget and returns on investment. (See page 71) A.2 Clear division of responsibilities There is a clear division of responsibilities between Chairman and Chief Executive Officer which is described this report. (See page 74) A.3 Role of Chairman The Chairman leads the Board, setting and managing the agenda, and promoting open and constructive discussion and challenge. (See page 74) A.4 Role of Non-Executive Directors The Board has a culture of transparency and open debate, and the Non-Executive Directors constructively challenge the Executive Directors regarding the strategy and its implementation. (See page 71) B. Effectiveness B.1 Composition of the Board During the year we completed the appointment of two addition Non-executive Directors, Hugo Wahnish and Yngve Myhre, to strengthen the expertise of the Board in the areas of pharmaceuticals and aquaculture. We appointed a new Chairman, Peter George, with a history of delivering growth and shareholder value, to lead the Company through its next phase of development. Lastly, we appointed a new Chief Scientific Officer to the Board, Alex Raeber, who has a strong scientific background and extensive expertise in the animal health sector. The Board and the Nomination Committee is of the view that the Board contains an appropriate breadth and balance of skills, knowledge, experience and independence. B.2 Board appointments The Nomination Committee leads the process for the appointment of new Directors, and follow a formal and rigorous process, with the assistance of independent external recruiters, and taking into account the Group’s policies regarding diversity. This process was followed in respect of the four appointments made to the Board in the year. B.3 Time commitments Non-Executive Directors are notified of and agree to the required time commitments prior to appointment, and external directorships which may impact existing time commitments must be agreed with the Chairman. (See pages 73 to 75) B.4 Training and development New Directors receive a comprehensive and formal induction programme which is tailored to their role and needs, and the Board receives updates regarding the business and regulatory developments. (See page 75) B.5 Provision of information and support The Chairman, supported by the Company Secretary, ensures that Board members receive accurate and timely information and other support requested, including access to external legal advice. (See page 74) B.6 Board and Committee performance evaluations The Nomination Committee reviews the skills, experience, independence and knowledge of the Directors as a whole to ensure the composition of the Board is suitable for the Company as it grows and diversifies. A total of four new appointments were made to the Board in FY18 to strengthen and broaden the range of skills, knowledge and experience represented. The Nomination Committee and the Board actively considers and discusses Board diversity, which remains a focus. As mentioned above, the Company does not undertake a formal review of Board and individual Director performance on an annual basis. B.7 Re-election of Directors The Articles of Association require Directors to retire by rotation at the third Annual General Meeting after the Annual General Meeting at which they were elected. (See page 88) C. Accountability C.1 Financial and business reporting The Board has reviewed this Annual Report and the results for the year to 30 September 2018 to ensure that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable. (See pages 76 and 89) C.2 Risk management and internal control systems The Board is responsible for ensuring that the Company has in place effective procedures for the management of risk, and that the principal risks faced by the Group are identified, assessed, appropriately mitigated and monitored. This report sets out the Company’s risk framework and risk management activity. (See pages 60 to 63) C.3 Role and responsibilities of the Audit Committee Responsibility for oversight of the Group’s financial reporting procedures, internal controls and audit process is delegated to the Audit Committee, which also oversees the Group’s risk management framework. (See pages 76 to 78) D. Remuneration D.1 Executive Directors’ remuneration The policy for determining the remuneration of Executive Directors is set out in the Remuneration Report. No Director is involved in setting his / her own remuneration. (See pages 79 to 81) D.2 Remuneration policy The Company’s remuneration policy is set out in the Remuneration Report. (See pages 79 to 83) E. Relations with Shareholders E.1 Shareholder engagement The Board engages actively and regularly with its shareholders. The Chairman and Senior Independent Director are available for discussions with major shareholders, and the Board is kept appraised of their views and feedback. (See page 84) E.2 Use of general meetings The Directors are always available at the AGM to meet with shareholders, who are invited to raise questions and also to meet with the Board following the formal business of the meeting. (See page 87) STRATEGIC REPORT GOVERNANCE FINANCI AL STATEMENTS ADDITIONAL INFORMATI ON Viability statement The Board assesses the Group’s going concern and viability based on its cash flows and business plans, combined with downside scenarios of the principal risks described on pages 62 to 63 and other financial and performance factors that could threaten the Group’s plans, performance and financial position including the nature of the business and its investment and planning periods. The outcome of this analysis and the appropriateness of the period over which the Board decided to provide its viability statement are described below. Assessing our prospects In order to reach a conclusion on both the appropriateness of adopting the going concern basis of accounting in preparing the Annual Report and on our viability, the Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The key factors affecting the Group’s prospects are set out in the strategy on page 18 being the ability to continue to grow in established markets from existing capacity and through partnerships, commercial delivery of pipeline products, focussed investment in markets that leverage the Group platform and positioning the Group in areas of future growth. This assessment considered: • Benchmark’s current strategic plan, financial position and the financing facilities available to the Group together with forecast compliance with the related covenants. As outlined in the Basis of Preparation in Note 1 to the financial statements, a limit within the borrowing facility in relation to the amount of development funding provided to certain subsidiary companies has been exceeded. A waiver from this leakage condition was received from the bank on 7 January 2019 subject to the position being remedied by 31 March 2019. The process agreed with the lenders to reduce total intercompany debt with non-obligor companies is underway and the board considered the reasons for the limit being exceeded and was satisfied that measures have been put in place to ensure this is continually monitored more closely in the future. Also on 7 January 2019, the accordion facility within the Company’s existing bank facility was activated raising the total facility from USD70m to USD90m (c£69m) and certain covenants were revised accordingly. As at 30 September 2018 the Group had net assets of £381.8m (2017: £358.6m), including cash of £24.1m (2017: £18.8m). The Group made a loss for the year of £6.3m (2017: £7.1m). • A number of assumptions in relation to trading performance across the group including availability and timing of licences associated with sea lice treatment and other vaccine field trials and related marketing authorisations once these trials are completed, supply and pricing of key raw materials and the out-licensing of certain products in development. The Directors have considered reasonably possible downside sensitivity scenarios, including mitigating actions within their control should these occur around deferring and reducing non-essential capital and revenue expenditure, redeployment or curtailment of research and development spend in the relevant areas and working capital management. These forecast cash flows, considering the ability and intention of the directors to implement mitigating actions should they need to, provide sufficient headroom in the forecast period. • The potential impact of Brexit on the Group. The scale of the impact depends on the nature of the exit process which is uncertain but is not expected to be material to the Group in any event. The Board views the potential impact of Brexit as an integral part of the review of the Principal Risks and the Group has undertaken hard Brexit mitigation planning. The Board continues to assess the potential impacts of Brexit as the process evolves. Assessment period In their assessment of the Group’s viability, the Directors have determined that a three-year time horizon, to September 2021, is an appropriate period to adopt. This is the period focussed on by the Board during its strategic planning process and is aligned with the Group’s goodwill and other intangible impairment testing. The Group’s main funding facility expires in December 2020 but is fully expected to be renewed beyond that date in due course based on the recent activation of the accordion facility, the recent covenant reset and ultimately the Group’s strong relationship with the banks. While the formal assessment period extends to September 2021, the Board considers that the Group’s longer-term prospects are likely to be positive beyond this time horizon as a result of market growth, increasing market demand for its products and its strong competitive position derived from its technology platform and pipeline of products. Going concern and Viability Statement The Directors have considered all of the factors noted above and confirm that the Group has adequate resources to continue to meet all liabilities as and when they fall due for the foreseeable future and at least for the period of 12 months from the date of signing these financial statements. Accordingly, the financial statements have been prepared on a going concern basis. Also, based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to September 2021. Annual General Meeting The next Annual General Meeting will be held at 12.00 p.m. on 14 March 2019 at Travers Smith LLP, 10 Snow Hill, London, EC1A 2AL. Details of the AGM are set out in the Notice of AGM which is being made available to shareholders with this report. The Directors will be available at the AGM to answer questions and for discussion with shareholders following conclusion of the formal business of the meeting. Directors The Directors who held office during the year were as follows: • Alex Hambro (stepped down 8 May 2018) • Alex Raeber (appointed 1 October 2018) • Hugo Wahnish (appointed 6 November 2017) • Kevin Quinn • Malcolm Pye • Mark Plampin • Peter George (appointed 8 May 2018) • Susan Searle • Yngve Myhre (appointed 6 November 2017) The Directors benefited from qualifying third party indemnity provisions during the financial year and continue to do so at the date of this report. 86 87 Re-election of Directors At the Annual General Meeting held in March 2018, the appointments of Hugo Wahnish and Yngve Myhre as Directors of the Company were approved. of the meeting, and is thought to be in the best interests of shareholders as a whole. The Company offers the facility for shareholders to vote by electronic means. This facility is open to all shareholders and would be available if the Company were to call a meeting on 14 clear days’ notice. The Articles of Association require Directors to retire by rotation at the third Annual General Meeting after the Annual General Meeting at which they were last elected. The Articles also provide that the Board has the power to appoint any person to be a Director, and that any Director appointed by the Board shall hold office only until the next following Annual General Meeting. Peter George and Alex Raeber were appointed as Directors of the Company by the Board on 8 May 2018 and 1 October 2018 respectively. Mark Plampin was last elected as a Director at the Company’s 2016 Annual General Meeting. Accordingly, at the Annual General Meeting to be held on 14 March 2019, Peter George and Alex Raeber are standing for election, and Mark Plampin is standing for re-election. Power to allot shares Each year at the Annual General Meeting, the Directors seek authority to allot shares for the following year. At the last AGM held on 8 March 2018, shareholders authorised the Directors to allot relevant securities up to an aggregate nominal value of £174,123, representing one third of the issued share capital, and to further allot equity securities up to an additional aggregate nominal value of £174,122 in connection with a fully pre-emptive rights issue, in accordance with ABI guidance. Directors were authorised to allot for cash equity securities having a nominal value not exceeding in aggregate £26,118 (being 5 per cent. of issued share capital), and to further allot for cash equity securities having a nominal value not exceeding in aggregate £26,118 for the purpose of financing acquisitions and capital investments. The authorities expire at the conclusion of the next AGM. Employee involvement As the Group has grown, organically and through acquisition, with increasing geographical spread in order to access its markets, employee engagement has become more important and necessarily more structured. The Company has commenced a series of focus groups, which are being held at sites globally. The aim of the focus groups is to establish how informed people are about our strategy and developments at Benchmark; assess staff buy-in to our philosophy and values; understand the extent to which employees feel informed and motivated by communications from different sources; capture ideas around new initiatives; identify training needs; give employees an opportunity to speak up and be heard; and promote employee engagement and collaboration. The outcomes of the initial round of focus Groups, including recommended initiatives, are being presented to the Operations Board for discussion in early 2019. Following the work undertaken to review and define the Group’s 5-year strategy, the outcome of that review is being communicated throughout the organisation in interactive forums, both through cascade, and presentations given by the leadership team on visits to Group sites. The Group has a policy of encouraging share ownership and 58 per cent. of the Group’s employees hold shares or options in the Company. Political contributions Neither the Company nor any of its subsidiaries made any political donations or incurred any political expenditure during the year. At the forthcoming AGM, authorities will be sought from shareholders similar to those sought at the 2018 AGM. Disclosure of information to auditor Authority for the Company to purchase its own shares At the Company’s 2018 Annual General Meeting, shareholders renewed the Company’s authorities to make market purchases of up to 52,236,817 ordinary shares, representing 10 per cent. of the Company’s issued share capital. These authorities were not used in the year. At the 2019 Annual General Meeting, shareholders will be asked to renew these authorities for another year, and the resolution will once again propose a maximum aggregate number of ordinary shares which the Company can purchase equal to 10 per cent. of the Company’s issued ordinary share capital. Details are set out in the Notice of Annual General Meeting. The Company held no treasury shares during the year, or at the date of this report. Length of notice of general meetings The Company has taken authority under the Companies Act 2006 to call general meetings of the Company, other than AGMs, on 14 days notice. The 14 day notice period will only be used where the flexibility is merited by the business The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each Director has taken all the steps that he/she ought to have taken as a director to make himself/ herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Auditor In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting. Branches outside the UK The Company has a branch in Switzerland for the purposes of engaging employees who are resident in Switzerland. Information elsewhere in the report The information set out below is contained in other areas of this report. Financial instruments Details of the Group’s financial risk management objectives and policies including the Group’s policy for hedging, and the exposure of the Company and its subsidiaries to price risk, credit risk, liquidity risk and cash flow risk. 113 to 116 Important events Particulars of important events affecting the Company or its subsidiaries. Post balance sheet events Description of post balance sheet events. Future developments Likely future developments in the business of the Company or its subsidiaries. Research and development Details of research and development activities of the Company and its subsidiaries. 5, 18, 23 to 25 None 18, 19, 23 to 25 28 to 33, 36 to 39 Risk management Details of the Company’s risk management framework, activities in the year and principal risks and uncertainties. 60 to 63 Directors’ remuneration and interests Details of Directors’ remuneration, interests in shares of the Company, share options and pension arrangements. 79 to 83 Principal activities and business review Business review, details of 2018 results, key performance indicators, outlook for future years. 4 to 5, 8 to 45 Financial risk management Objectives and policies for management of financial risk. Share capital Details of the issued share capital and movements during the year. 76 to 78 146 Page(s) of this report This report was approved by the Board on 24 January 2019 and signed on its behalf. Athene Blakeman Company Secretary 24 January 2019 DIRECTORS’ RESPONSIBILITIES Statement of directors’ responsibilities in respect of the Annual Report and the financial statements The directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent Company financial statements for each financial year. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and they have elected to prepare the parent Company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable, relevant and reliable; • State whether they have been prepared in accordance with IFRSs as adopted by the EU; • Assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • Use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The directors have decided to prepare voluntarily a Directors’ Remuneration Report in accordance with Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 made under the Companies Act 2006, as if those requirements applied to the company. The directors have also decided to prepare voluntarily a Corporate Governance Statement as if the company were required to comply with the Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority in relation to those matters. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We consider the annual 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 and performance, business model and strategy. Signed on behalf of the Board The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy Malcolm Pye Chief Executive Officer 24 January 2019 88 89 Benchmark Holdings plc | Annual Report 2018 | GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORT GOVERNANCE FINANC IAL STATEME NTS ADDITIONAL INFORMATI ON 03 FINANCIAL STATEMENTS 92 Independent Auditor’s Report 98 Consolidated Income Statement 99 Consolidated Statement of Comprehensive Income 100 Consolidated Balance Sheet 101 Company Balance Sheet 102 Consolidated Statement of Changes in Equity 103 Company Statement of Changes in Equity 104 Consolidated Statement of Cash Flows 105 Company Statement of Cash Flows 106 Notes Forming Part of the Financial Statements 90 91 Image: Benchmark’s genetics centre, Lønningdal, Norway. INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BENCHMARK HOLDINGS PLC Overview Materiality: Group financial statements as a whole £1,100,000 (2017: £1,000,000) 0.7% (2017: 0.7%) of revenue Coverage 80% (2017: 86%) of group revenue Key audit matters Recurring risks vs 2017 New: uncertainties due to the UK exiting the European Union New: going concern Valuation of group goodwill, acquired intangibles and recoverability of parent company’s investment in subsidiaries and group debtor balances Valuation of biological assets 1. Our opinion is unmodified We have audited the financial statements of Benchmark Holdings plc (“the Company”) for the year ended 30 September 2018 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Statement of Cash Flows, and the related notes, including the accounting policies in Note 1. In our opinion: • The financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30 September 2018 and of the Group’s loss for the year then ended; • The group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); • The parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • The financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters were as follows: The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 60 (principle risks) and page 87 (viability statement) Unprecedented levels of uncertainty: All audits assess and challenge the reasonableness of estimates, in particular as described in valuation of goodwill, acquired intangibles and recoverability of parent company’s investment in subsidiaries and group debtor balances below, related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group and Company’s future prospects and performance. In addition, we are required to consider the other information presented in the Annual Report including the principle risks disclosure and the viability statement and to consider the directors’ statement that the annual report and financial statements taken as a whole are fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. Going concern Disclosure quality: Refer to page 76 (Audit Committee Report), page 106 (accounting policy) The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and Parent company. That judgement is based on an evaluation of the inherent risks to the Group’s and Company’s business model and how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risks most likely to adversely affect the Group and Company’s available financial resources over this period were: • The ability of the Group to meet conditions attached to the facility waiver in place to 31 March 2019. • Meeting management forecasts particularly in relation to availability and timing of licences associated with sea lice treatment field trials, supply and pricing of key raw materials and potential outlicensing of certain products in development. • The achievability of mitigating actions the Directors would take to improve the position should these or other risks materialise. There are also less predictable but realistic second order impacts, such as the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: • Our Brexit knowledge: We considered the directors’ assessment of Brexit-related sources of risk for the Group and Company’s business and financial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks. • Sensitivity analysis: When addressing going concern, valuation of goodwill, acquired intangibles and recoverability of parent company’s investment in subsidiaries and group debtors and other areas that depend on forecasts, we compared the directors’ sensitivity analysis to our assessment of the worst reasonably possible, known adverse scenario resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. • Assessing transparency: As well as assessing individual disclosures as a part of our procedures on going concern, valuation of goodwill, acquired intangibles and recoverability of parent company’s investment in subsidiaries and group debtors, we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit. Our procedures included: • Funding assessment: Assessing the committed level of financing available to the Group, including the ability of the Group to meet certain conditions of the facility waiver in place to 31 March 2019. Also considering the recent increase in facility made available to the Group and it’s ability to meet covenants in place. • Historical comparison: Considering the Group’s historical budgeting accuracy, by assessing actual performance against budget, including current trading; • Sensitivity analysis: Performing analysis of changes in key assumptions such as supply and pricing of key raw materials, removing income from sea lice treatment field trials which are dependent on receiving certain licences and removing the impact of outlicensing of certain products in development to understand the sensitivity of the cash flow forecasts; • Benchmarking assumptions: Comparing the Group’s assumptions in relation to market growth to externally derived data; • Evaluating directors’ intent: Evaluating the intent of the directors and the achievability of the actions they would take to improve the position should certain risks materialise including looking at the history of similar actions being taken; and • Assessing transparency: Assessing the completeness and accuracy of the matters covered in the going concern disclosure by comparing this to the key assumptions, key sensitivities and mitigating actions considered by management. 92 93 Benchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORT 2. Key audit matters: our assessment of risks of material misstatement (continued) 3. Our application of materiality and an overview of the scope of our audit The risk Forecast-based valuation: The carrying value of goodwill, acquired intangibles, investments and debt due from group entities depends on assumptions of future financial performance which inherently contain an element of judgement and uncertainty. In addition, certain cash generating units of the group are at risk of impairment as they contain immature products or markets, or are not trading in line with initial expectations. Significant areas of judgement include sales growth rates, operating margins and the discount rate applied to future cash flows. Valuation of group goodwill, acquired intangibles and of parent’s investment in subsidiaries /debt due from group entities Goodwill: £152,439,000 (2017: 149,665,000) Intangibles: £162,381,000 (2017: £175,695,000) Investments (parent company): £264,472,000 (2017: £263,841,000) Debt due from group entities (parent company): £165,446,000 (2017: £126,348,000) Refer to page 76 (Audit Committee Report), pages 110 and 112 (accounting policies) and pages 127, 135 and 138 (financial disclosures) Valuation of biological assets, Salmon broodstock Salmon broodstock: £11,723,000 (2017: £9,273,000) Refer to page 76 (Audit Committee Report), page 111 (accounting policy) and page 136 (financial disclosures) Subjective valuation: The group hold significant biological assets at StofnFiskur in Iceland. Under IFRS these are required to be held at fair value less cost to sell. The calculations of fair value include a number of assumptions relating to the future (e.g. egg sales prices, sales volumes), and are subject to seasonal variations which can lead to income statement fluctuations. Our response Our procedures included: • Data comparisons: Assessing the Group’s impairment model for mathematical accuracy as well as internal consistency with board approved budgets and forecast. • Benchmarking assumptions: We compared the Group’s assumptions in relation to key inputs such as projected growth and discount rates to externally derived data. We used our valuation specialists to assist with our work on the discount rate; • Sensitivity analysis: Performing analysis of changes in key assumptions such as projected growth and discount rates to understand the sensitivity of the valuation; • Historical comparison: Considering the Group’s historical budgeting accuracy, by assessing actual performance against budget; • Comparing valuations: Comparing the sum of the discounted cash flows to the group’s market capitalisation to assess the reasonableness of those cash flows; and • Assessing transparency: We also assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill, intangibles and investments. Our procedures included: • Data comparisons: Assessing the Group’s valuation model for mathematical accuracy and internal consistency with board approved budgets and forecast. • Benchmarking assumptions: We compared the Group’s assumptions in relation to key inputs such as selling price to externally derived data; • Sensitivity analysis: Performing analysis of changes in key assumptions such as egg sales prices to understand the sensitivity of the valuation; • Assessing transparency: We considered the adequacy of the Group’s disclosures in respect of the valuation of biological assets; and • Alternative methods: We considered an alternative valuation basis to that used by management to corroborate the reasonableness of management’s approach. Materiality for the Group financial statements as a whole was set at £1,100,000 (2017: £1,000,000), determined with reference to a benchmark of Group revenue, of which it represents 0.7% (2017: 0.7% of group revenue). We consider revenue to be the most appropriate benchmark as it provides a more stable measure year on year than group loss before tax. Materiality for the parent company financial statements as a whole was set at £800,000 (2017: £750,000), determined with reference to a benchmark of company total assets, of which it represents 0.2% (2017: 0.2%). We agreed to report to the audit committee any corrected or uncorrected identified misstatements exceeding £55,000 (2017: £50,000), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s 71 (2017: 69) reporting components, we subjected 16 (2017: 19) to full scope audits for Group purposes and 1 (2017: 1) was subject to specified risk-focused audit procedures over cost of sales and trade payables. The latter was not individually financially significant to require an audit for group reporting purposes but did present specific individual risks that need to be addressed. For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team also approved the component materialities ranging from £50,000 — £800,000 (2017: £10,000 – £750,000) having regard to the mix of size and risk profile of the Group across the components. The work on 8 of the 17 (2017: 10 of the 20) components was performed by component auditors and the rest, including the audit of the parent company, by the Group team. The Group team held calls with all full scope component auditors to assess the audit risk and strategy as part of the planning process. During these, the audit approach to key risk areas were discussed. The Group team visited three component locations in Iceland, Norway, and Belgium to attend clearance meetings and held calls with all other full scope component auditors. During these, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. The Group team reviewed the audit work papers of all full scope component auditors. Revenue £151,467,000 (2017: £140,172,000) Group Materiality £1,100,000 (2017: £1,000,000) £1,100,000 Whole financial statements materiality (2017: £1,000,000) £800,000 Range of materiality at 17 components (£50,000 – £800,000) (2017: £10,000 – £750,000) Revenue Group Materiality £55,000 Misstatements reported to the audit committee (2017: £50,000) Group revenue Group loss before tax 80% (2017: 86%) 86 80 82%(2017: 90%) 90 82 Group total assets 91% (2017: 87%) 87 91 Full scope for group audit purposes 2018 Specified risk-focused audit procedures 2018 Full scope for group audit purposes 2017 Specified risk-focused audit procedures 2017 Residual components 94 95 Benchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORT4. We have nothing to report on going concern Strategic report and directors’ report The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the group or the company will continue in operation. We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if: • We have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Based solely on our work on the other information: • We have not identified material misstatements in the strategic report and the directors’ report; • In our opinion the information given in those reports for the financial year is consistent with the financial statements; and • In our opinion those reports have been prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: • The directors’ confirmation within page 62 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; • The directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability. Corporate governance disclosures We are required to report to you if: • We have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or • The section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have nothing to report in these respects. 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and the terms of our engagement by the company. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and the further matters we are required to state to them in accordance with the terms agreed with the company, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Frances Simpson (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 24 January 2019 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • The parent Company financial statements are not in agreement with the accounting records and returns; or • Certain disclosures of directors’ remuneration specified by law are not made; or • We have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 89, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at frc.org.uk/auditorsresponsibilities. 96 Benchmark Holdings plc | Annual Report 2018 | Financial Statements 97 Benchmark Holdings plc | Annual Report 2018 | Financial StatementsFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORT CONSOLIDATED INCOME STATEMENT for the year ended 30 September 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 September 2018 Loss for the year Other comprehensive income Items that are or may be reclassified subsequently to profit or loss Movement on foreign exchange reserve Total comprehensive income for the year Total comprehensive income for the year attributable to: – Owners of the parent – Non-controlling interest The accompanying notes form part of the financial statements. 2018 £000 2017 £000 (4,389) (7,120) 7,624 3,235 (7,128) (14,248) 2,546 (14,407) 689 159 3,235 (14,248) Revenue Cost of sales Gross profit Research and development costs Other operating costs Share of profit of equity-accounted investees, net of tax Adjusted EBITDA² Exceptional including acquisition related items EBITDA¹ Depreciation Amortisation and impairment Operating loss Finance cost Finance income Loss before taxation Tax on loss Loss for the year Loss for the year attributable to: – Owners of the parent – Non-controlling interest Basic loss per share (pence) Diluted loss per share (pence) Notes 2018 £000 2017 £000 4 151,467 140,172 (77,447) (77,781) 74,020 62,391 (12,040) (13,055) (44,600) (39,297) (362) 27 17,018 10,066 10 (1,239) 5,649 15,779 15,715 (6,841) (4,877) (18,002) (18,473) (9,064) (4,927) 332 (13,659) 9,270 (4,389) (7,635) (1,960) 1,495 (8,100) 980 (7,120) (5,009) (7,440) 620 320 (4,389) (7,120) (0.94) (0.94) (1.43) (1.43) 13 14 9 9 11 12 12 1 EBITDA – Earnings before interest, tax, depreciation, amortisation and impairment 2 Adjusted EBITDA – EBITDA before exceptional and acquisition related items EBITDA and Adjusted EBITDA have been amended to include Share of profit of equity-accounted investees which in the prior year was included after Operating loss as this is how the Directors now monitor the progress of the Group. The accompanying notes form part of the financial statements. 98 99 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements CONSOLIDATED BALANCE SHEET as at 30 September 2018 COMPANY BALANCE SHEET as at 30 September 2018 Assets Non-current assets Property, plant and equipment Intangible assets Equity-accounted investees Other investments Biological and agricultural assets Trade and other receivables Total non-current assets Current assets Inventories Biological and agricultural assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Loans and borrowings Corporation tax liability Provisions Total current liabilities Non-current liabilities Loans and borrowings Other payables Deferred tax Total non-current liabilities Total liabilities Net assets Issued capital and reserves attributable to owners of the parent Share capital Additional paid-in share capital* Capital redemption reserve Retained earnings Foreign exchange reserve Equity attributable to owners of the parent Non-controlling interest Total equity and reserves * See note 26 Notes 2018 £000 2017 £000 13 14 16 19 20 18 19 20 34 21 22 23 22 21 24 25 25 26 26 26 99,527 80,845 325,386 329,137 17,457 29 8,502 4,145 2,512 237 5,745 - 455,046 418,476 20,483 11,892 41,337 24,090 97,802 20,053 10,798 38,530 18,779 88,160 552,848 506,636 (45,680) (44,498) (898) (2,629) (70) (6,234) (2,844) (450) (49,277) (54,026) (78,868) (36,453) (1,219) (1,213) (41,637) (56,359) (121,724) (94,025) (171,001) (148,051) 381,847 358,585 557 522 357,894 339,431 5 5 (28,240) (24,742) 45,953 38,398 376,169 353,614 5,678 4,971 381,847 358,585 Assets Non-current assets Property, plant and equipment Investments Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Total current liabilities Non-current liabilities Loans and borrowings Total non-current liabilities Total liabilities Net assets Issued capital and reserves attributable to owners of the parent Share capital Additional paid-in capital* Capital redemption reserve Retained earnings Total equity and reserves * See note 26 Notes 2018 £000 2017 £000 13 17 20 34 225 287 264,472 263,841 264,697 264,128 166,273 126,843 2,309 1,776 168,582 128,619 433,279 392,747 21 (39,522) (26,195) (39,522) (26,195) 22 (52,291) (36,451) (52,291) (36,451) (91,813) (62,646) 341,466 330,101 25 25 26 26 557 522 357,894 339,431 5 5 (16,990) (9,857) 341,466 330,101 The financial statements on pages 98 to 153 were approved and authorised for issue by the Board of Directors on 24 January 2019 and were signed on its behalf by: M J Plampin Chief Financial Officer The accompanying notes form part of the financial statements. The financial statements on pages 98 to 153 were approved and authorised for issue by the Board of Directors on 24 January 2019 and were signed on its behalf by: M J Plampin Chief Financial Officer 100 The accompanying notes form part of the financial statements. 101 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 30 September 2018 for the year ended 30 September 2018 Share capital £000 Additional paid-in share capital* £000 Other reserves £000 Retained earnings £000 Total attributable to equity holders of parent £000 Non- controlling interest £000 Total equity £000 As at 1 October 2016 521 339,431 45,370 (18,904) 366,418 1,281 367,699 Comprehensive income for the period (Loss) for the period Other comprehensive income Total comprehensive income for the period Contributions by and distributions to owners Share issue Share based payment Total contributions by and distributions to owners Changes in ownership Investment in subsidiary by NCI Total changes in ownership interests Total transactions with owners of the Company - - - 1 - 1 - - 1 - - - - - - - - - (6,967) (6,967) - - - - - - - (7,440) (7,440) (6,967) - 320 (161) 159 (7,120) (7,128) (14,248) (7,440) (14,407) - 1 1,602 1,602 1,602 1,603 - - - - 1,602 1,603 3,531 3,531 3,531 - - - 1 1,602 1,603 3,531 3,531 5,134 As at 30 September 2017 522 339,431 38,403 (24,742) 353,614 4,971 358,585 Comprehensive income for the period (Loss) for the period Other comprehensive income Total comprehensive income for the period Contributions by and distributions to owners Share issue Share based payment Total contributions by and distributions to owners Changes in ownership Acquisition of NCI without a change in control Total changes in ownership interests Total transactions with owners of the Company As at 30 September 2018 * See note 26. - - - 35 - 35 - - 35 557 - - - - (5,009) (5,009) 7,555 7,555 - (5,009) 7,555 2,546 18,463 - 18,463 - - 18,463 - - - - - - - 18,498 1,511 1,511 1,511 20,009 - - - - 1,511 20,009 620 69 689 - - - 18 18 18 (4,389) 7,624 3,235 18,498 1,511 20,009 18 18 20,027 357,894 45,958 (28,240) 376,169 5,678 381,847 The accompanying notes form part of the financial statements. As at 30 September 2017 522 339,431 As at 1 October 2016 Comprehensive income for the year Loss for the year Total comprehensive income for the year Contributions by and distributions to owners Share based payment Share issue Total contributions by and distributions to owners Comprehensive income for the year Loss for the year Total comprehensive income for the year Contributions by and distributions to owners Share based payment Share issue Total contributions by and distributions to owners As at 30 September 2018 * See note 26. Share capital £000 Share premium reserve £000 Capital redemption reserve £000 Retained earnings* £000 Total attributable to equity holders £000 521 339,431 5 (12,141) 327,816 - - - 1 1 - - - - - - - - 35 35 - - - 18,463 18,463 - - - - - 5 - - - - - 682 682 682 682 1,602 1,602 - 1 1,602 1,603 (9,857) 330,101 (8,644) (8,644) (8,644) (8,644) 1,511 1,511 - 18,498 1,511 20,009 557 357,894 5 (16,990) 341,466 The accompanying notes form part of the financial statements. 102 103 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 September 2018 COMPANY STATEMENT OF CASH FLOWS for the year ended 30 September 2018 Cash flows from operating activities Loss for the year Adjustments for: Depreciation of property, plant and equipment Amortisation and impairment of intangible fixed assets Loss on sale of property, plant and equipment Finance income Finance costs Other adjustments for non-cash items Share of profit of equity-accounted investees, net of tax Foreign exchange losses/(gains) Share based payment expense Tax credit Increase in trade and other receivables (Increase)/decrease in inventories Increase in biological and agricultural assets (Decrease)/increase in trade and other payables Decrease in provisions Income taxes paid Net cash flows used in operating activities Investing activities Proceeds from investment by NCI Purchase of investments Purchase of property, plant and equipment Purchase of intangibles Proceeds from sale of fixed assets Interest received Net cash flows used in investing activities Financing activities Proceeds of share issues Proceeds from bank or other borrowings Acquisition of NCI Repayment of bank or other borrowings Cash advances and loans made to other parties Interest and finance charges paid Payments to finance lease creditors Net cash inflow from financing activities Net decrease/(increase) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of movements in exchange rate Cash and cash equivalents at end of year Notes 2018 £000 2017 £000 13 14 9 9 16 31 11 (4,389) (7,120) 6,841 4,877 18,002 18,473 8 (332) 2,432 (1,931) 362 2,609 1,511 (9,270) 15,843 (4,355) (815) (4,102) (4,026) (388) 2,157 (5,898) (3,741) 19 (1,495) 1,960 - (27) (1,434) 1,602 (980) 15,875 (1,250) 3,247 (4,500) 3,665 (643) 16,394 (3,015) 13,379 - 188 (6,356) (2,032) (25,072) (32,740) (7,581) (2,423) 233 261 245 270 (38,515) (36,492) 18,498 41,206 (33) (5,815) (4,076) (2,442) (218) 47,120 1 5,921 - - - (1,869) (301) 3,752 4,864 (19,361) 18,779 38,140 447 - 34 24,090 18,779 Cash flows from operating activities (Loss)/Profit for the year Adjustments for: Depreciation of property, plant and equipment Finance income Finance expense Foreign exchange gains Share based payment expense Tax (credit)/expense Decrease/(increase) in trade and other receivables Increase in trade and other payables Net cash flows from operating activities Investing activities Proceeds of transfer of investment in subsidiary Loans to subsidiary undertakings Investment in subsidiary undertakings Purchases of property, plant and equipment Interest received Net cash used in investing activities Financing activities Proceeds of share issue Proceeds from bank borrowings Interest paid Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The accompanying notes form part of the financial statements. Notes 2018 £000 2017 £000 13 31 (8,644) 682 130 (570) 3,892 1,714 208 (325) 90 (1,567) 2,232 (587) 369 325 (3,595) 1,544 6,583 (24,462) (675) (576) 2,313 (23,494) 17 706 (33,595) (33) (68) 12 (32,978) 18,498 14,500 (1,800) 31,198 - (800) - (137) 30 (907) 1 - (1,304) (1,303) 533 (25,704) 1,776 2,309 27,480 1,776 34 The accompanying notes form part of the financial statements. 104 105 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 1 Accounting policies Corporate information Benchmark Holdings plc (the Company) is a public limited company, which is listed on the Alternative Investment Market (AIM) , a sub-market of the London Stock Exchange. The Company is incorporated and domiciled in England and Wales. The registered office is at Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN. The Group is principally engaged in the provision of technical services, products and specialist knowledge that support the global development of sustainable food and farming industries. Basis of preparation The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman’s Statement, the Strategic Report, the FY18 Financial Review and the Audit Committee report. As at 30 September 2018 the Group had net assets of £381.8m (2017: £358.6m), including cash of £24.1m (2017: £18.8m) as set out in the consolidated balance sheet on page 100. The Group made a loss for the year of £4.4m (2017: £7.1m). As at 30 September 2018 the Company had net assets of £341.5m (2017: £330.1m), including cash of £2.3m (2017: £1.8m) as set out on the Company balance sheet on page 101. The Company made a loss for the year of £8.6m (2017: profit £0.7m). The Group has started the current financial year trading ahead of the same period last year. The company funds the development of its subsidiaries by way of intercompany loans, drawn on the revolving credit facility. The loan documentation includes limits on the level of this intercompany funding to subsidiaries that are not obligors under the facility (‘leakage restriction’). In December 2018 the Group identified that this limit had been exceeded both historically and at the year end, which could have caused the outstanding loan of £52.3m (2017: £36.4m) to become repayable on demand by the lenders. The facility agreement allows the company 15 business days in which to rectify the position from the point of identification to prevent the loan becoming due on demand. The directors have concluded that as the Company always had the intention and ability to rectify the position within the 15 business day period it remains appropriate to classify the loan as non-current at the reporting date. On 7 January 2019, the Directors of the Company received a waiver from its lenders in relation to the leakage condition not being met and consequently the lenders cannot demand repayment of the loan. This waiver is subject to a condition that the Company must rectify the position by 31 March 2019. The process agreed with the lenders to reduce total inter-company debt with non-obligor companies is underway. The required execution documents are in preparation for approval by certain directors within the Group. All of these directors have signed statements to confirm agreement to the process. At the date of approval of these financial statements, the directors have therefore concluded that rectification is under their control as this is a procedural matter with no approvals required from any third parties, and they have taken legal advice to confirm that there are no reasons why the position will not be rectified in the required timeframe. Details of bank borrowings are disclosed in note 22. On 7 January 2019, the accordion facility within the Company’s existing bank facility has been activated raising the total facility from USD70m to USD90m (c£69m) and certain covenants have been revised appropriately. As at 24 January 2019 drawings against the facility were USD75.2m (c£58m) and the most recent month end cash reserves at 31 December 2018 were £14.5m. The Directors have prepared trading and cash flow forecasts for the Group covering the period to September 2020, including forecast compliance with the revised covenants and other undertakings relating to the external financing facilities. These forecasts include a number of assumptions in relation to trading performance across the Group including availability and timing of licences associated with sea lice treatment field trials, supply and pricing of key raw materials and the out-licensing of certain products in development. The Directors have considered reasonably possible downside sensitivity scenarios, including mitigating actions within their control should these occur around deferring and reducing non-essential capital and revenue expenditure and working capital management. These forecast cashflows, considering the ability and intention of the directors to implement mitigating actions should they need to, provide sufficient headroom in the forecast period. The Directors have considered all of the factors noted above and confirm that the Group and Company have adequate resources to continue to meet all liabilities as and when they fall due for the foreseeable future and at least for the period of 12 months from the date of signing these financial statements. Accordingly, the financial statements have been prepared on a going concern basis. These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (“adopted IFRSs”) and those parts of the Companies Act 2006 that are applicable to companies that prepare financial statements in accordance with IFRS. The Group reports earnings before interest, depreciation and amortisation (“EBITDA”) and EBITDA before exceptional and acquisition related items (“Adjusted EBITDA”) to enable a better understanding of the investment being made in the Group’s future growth and provide a better measure of our underlying performance. During the current year these measures have been amended to include Share of profit of equity- accounted investees which had previously been shown after Operating loss. This is how the Directors now monitor 1 Accounting policies (continued) the progress of the Group. The activities of the Group’s equity accounted investees are closely aligned with the Group’s principal activities and are an integral part of the Group’s operations and strategy, as these arrangements were set up to exploit opportunities from the intellectual property held within the Group. As a result, it is more meaningful to include the Group’s share of the results of these entities within Adjusted EBITDA. The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group’s accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries at 30 September 2018. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date when such control ceases. Where the Company has power, either directly or indirectly, over another entity or business and the ability to use this power to affect the amount of returns, as well as exposure or rights to variable returns from its involvement with the investee, it is classified as a subsidiary. The consolidated financial statements present the results of the Company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany transactions, balances, unrealised gains and losses resulting from intra- Group transactions and dividends are eliminated in full. The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the consolidated balance sheet, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. Non-controlling interests, presented as part of equity, represent a proportion of a subsidiary’s profit or loss and net assets that is not held by the Group. The total comprehensive income or loss of non-wholly owned subsidiaries is attributed to owners of the parent and to the non-controlling interests in proportion to their respective ownership interests. A separate income statement for the Company is not presented, in accordance with Section 408 of the Companies Act 2006. The loss for the year for the Company was £8,644,000 (2017: profit £682,000) . Standards issued but not effective A number of new standards, amendments to standards and interpretations are not yet effective, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. IFRS 9 Financial Instruments: Classification and Measurement has been issued but is not yet effective. The standard has been developed in several phases and replaces IAS 39 Financial Instruments: Recognition and Measurement in its entirety. The effective date of the fully completed version of IFRS 9 is for periods beginning on or after 1 January 2018 with retrospective application. The Group expects no material impact to profit as a result. The Group has not yet quantified the full impact of all phases of the final standard. The Group will adopt IRFS 9 in its next financial statements. IFRS 15 Revenue from Contracts with Customers, which is effective for periods beginning on or after 1 January 2018. IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC 31 Revenue — Barter Transactions Involving Advertising Services. The Group expects no material impact to either revenue recognised or profit as a result, however a detailed review is still ongoing. The Group will adopt IFRS 15 in its next financial statements. IFRS 16 Leases introduces a single, on-balance sheet accounting model for lessees which is effective for period beginning on or after 1 January 2019. The Group has not yet quantified the potential impact of this standard. The Group will adopt IFRS 16 on 1 October 2019. New standards and interpretations applied for the first time The following standards which are effective for periods beginning on or after 1 January 2017 have been adopted without any significant impact on the amounts reported in these financial statements: • Disclosure Initiatives (Amendments to IAS 7) • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) • Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 12 Disclosure of Interest in Other Entities) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as a principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The following specific criteria must also be met before revenue is recognised: 106 107 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsNOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 1 Accounting policies (continued) Sale of goods Within Benchmark Animal Health, revenue from the sale of licenced veterinary vaccines and vaccine components is recognised when the Group has transferred the significant risks and rewards of ownership to the buyer, usually on despatch. Where the buyer has a right of return, revenue and cost of sales are adjusted for the value of the expected returns based on historical results, taking into consideration the specifics of each arrangement. Within Benchmark Genetics, revenue from the sale of eggs is recognised upon despatch, which is when the risks and rewards of ownership are considered to have passed to the customer. Within Benchmark Advanced Animal Nutrition, revenue of advanced nutrition and health products is recognised when the Group has transferred the significant risks and rewards of ownership to the buyer, usually on despatch. Within Benchmark Knowledge Services, revenue from the sale of agricultural produce is recognised when the Group has transferred the significant risks and rewards of ownership to the buyer, usually on delivery. Where the buyer has a right of return, revenue and cost of sales are adjusted for the value of the expected returns based on historical results, taking into consideration the specifics of each arrangement. Revenue from the sales of books and publications is recognised when the Group has transferred the significant risks and rewards of ownership to the buyer, usually on despatch. Rendering of services Services including sustainable food production consultancy, technical consultancy and assurance services are provided by Benchmark Knowledge Services, Benchmark Animal Health, Benchmark Genetics and Benchmark Advanced Animal Nutrition. Online news, marketing and technical publications, book publishing, online shops, online distance learning programs and other training courses are provided by Benchmark Knowledge Services. Provided the amount of revenue can be measured reliably and it is probable that the Group will receive any consideration, revenue for these services is recognised in the period in which they are rendered. Business combinations Business combinations are accounted for using the acquisition method. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition by acquisition basis, either at fair value or at the non- controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets. Transaction costs, other than share and debt issue costs, are expensed as incurred. In accordance with IFRS 3 — Business Combinations, the Group has a twelve- month period in which to finalise the fair values allocated to assets and liabilities determined provisionally on acquisition. Contingent consideration is measured at fair value based on an estimate of the expected future payments. Deferred consideration is measured at the present value of the obligation. If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in the consolidated income statement. Foreign currency The Group’s consolidated financial statements are presented in UK pounds sterling, which is also the parent Company’s functional currency. The Group determines the functional currency of each of its subsidiaries and items included in the financial statements of each of those entities are measured using that functional currency. Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the consolidated income statement. On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. Exchange differences recognised in the income statement in the Group entities’ separate financial statements on the translation of long-term monetary items forming part of the Group’s net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated income statement as part of the profit or loss on disposal. 1 Accounting policies (continued) Financial liabilities fair value through profit and loss Financial assets The Group classifies all of its financial assets as loans and receivables and has not classified any of its financial assets as held to maturity. Loans and receivable assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables) , but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms of the receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within operating costs in the consolidated income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the consolidated balance sheet. Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less from inception, and for the purpose of the statements of cash flows, bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated balance sheet. Financial liabilities The Group classifies its financial liabilities as other financial liabilities which include the following items: • Bank borrowings which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated balance sheet. • Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Contingent consideration is recognised at fair value with movements recognised in the consolidated income statement. Share capital The Group’s ordinary shares are classified as equity instruments. Retirement benefits: Defined contribution schemes Contributions to defined contribution pension schemes are charged to the income statement in the year to which they relate. Share-based payments Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period. Leased assets Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a “finance lease”) , the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an “operating lease”) , the total rentals payable under the lease are charged to the consolidated income statement on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis. 108 109 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsNOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 1 Accounting policies (continued) Impairment of non-financial assets (excluding inventories) 1 Accounting policies (continued) Inventories Goodwill Goodwill is initially measured at cost, being the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement on the acquisition date. Externally acquired intangible assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised over their useful economic lives as outlined below, on a straight-line basis from the time they are available for use. Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below) . In-process research and development programmes acquired in such combinations are recognised as an asset, even if subsequent expenditure is written off because it does not meet the criteria specified in the policy for development costs below. The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows: Intangible asset Useful economic life Websites 5 years Patents Trademarks Contracts 2-5 years 2-5 years 3-20 years Licences 3-20 years Intellectual property Up to 20 years Customer lists Up to 26 years Genetic material and breeding nuclei 10-40 years Valuation method Assessment of estimated revenues and profits Cost to acquire Cost to acquire Assessment of estimated revenues and profits Cost to acquire, or if not separately identifiable, assessment of estimated revenues and profits Cost to acquire, or if not separately identifiable, assessment of estimated revenues and profits Assessment of estimated revenues and profits Cost to acquire, or if not separately identifiable, assessment of estimated revenues and profits Development costs Up to 10 years Cost to acquire The carrying values of all non-current assets are reviewed for impairment, either on a stand-alone basis or as part of a larger cash generating unit, when there is an indication that the assets might be impaired. Additionally, goodwill, intangible assets with indefinite useful lives and intangible assets which are not yet available for use are tested for impairment annually. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell) , the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units (‘CGUs’) . Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from the synergies of the combination giving rise to the goodwill. Impairment charges are included in the consolidated income statement, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Internally generated intangible assets (development costs) Expenditure on internally developed products is capitalised if it can be demonstrated that: • It is technically feasible to develop the product for it to be sold; • Adequate resources are available to complete the development; • There is an intention to complete and sell the product; • The Group is able to sell the product; • Sale of the product will generate future economic benefits; and • Expenditure on the project can be measured reliably. Capitalised development costs are amortised over the periods the Group expects to benefit from selling the products developed. The amortisation expense is included within the cost of sales line in the consolidated income statement. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the consolidated income statement as incurred. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base, except for differences arising on: • The initial recognition of goodwill; • The initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and • Investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The carrying amount of deferred tax asset is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/assets are settled/recovered. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • The same taxable Group company; or • Different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognised within provisions. Freehold land is not depreciated. Assets in the course of construction which have not yet been brought into use are not depreciated until fully commissioned and available for use. Depreciation is provided on all other items of property, plant and equipment so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates: Freehold property – 2% per annum straight line Long term leasehold property improvements – 2% - 10% per annum straight line Plant and machinery – 15% per annum reducing balance Motor vehicles – 25% per annum reducing E commerce infrastructure balance – 10% per annum straight line Other fixed assets – 15% - 33% per annum straight line Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Biological assets Biological assets comprise two asset types: livestock, and fish, fish eggs and frozen milt. Livestock is measured at fair value less costs to sell. The fair value of livestock is based on quoted prices of livestock and adjusted for age, breed, and genetic merit in the principal (or most advantageous) market for the livestock, and therefore is categorised within level 2 of the fair value hierarchy set out in IFRS 13. Fish, fish eggs and frozen milt are, in accordance with IAS 41 ‘Agriculture’, measured at fair value, unless the fair value cannot be measured reliably. These are categorised within level 3 of the fair value hierarchy set out in IFRS 13. The principal components of fish, fish eggs and frozen milt within the business are: • Salmon broodstock • Salmon fingerlings • Salmon eggs • Lumpfish eggs and fingerlings • Tilapia broodstock and fingerlings • Frozen milt Non-current biological assets are those biological assets which will not produce saleable progeny within twelve months of the balance sheet date. Further details of the valuation of fish, fish eggs and frozen milt are given in note 19. Government grants Government grants received on capital expenditure are included in the balance sheet as deferred income and released to the income statement over the life of the asset. Grants for revenue expenditure are netted against the cost incurred by the Group. Where retention of a government grant is dependent on the Group satisfying certain criteria, it is initially recognised as deferred income. When the criteria for retention have been satisfied, the deferred income balance is released to the consolidated income statement or netted against the asset purchased. Provisions The Group has recognised provisions for liabilities of uncertain timing or amount including those for leasehold dilapidations, sale or return obligations and legal disputes. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date, discounted at a pre-tax rate reflecting current market assessments of the time value of money and risks specific to the liability. In the case of leasehold dilapidations, the provision takes into account the potential that the properties in question may be sublet for some or all of the remaining lease term. 110 111 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsNOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 1 Accounting policies (continued) 2 Critical accounting estimates and judgements Investments in subsidiary undertakings Investments in subsidiaries are stated at cost less provision for impairment. Investments in equity-accounted investees A joint venture is an entity over which the Group has joint control, under a contractual agreement. An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of joint ventures and associates are incorporated in the consolidated financial statements using the equity method of accounting. Under the equity method, investments in joint ventures and associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the joint venture or associate, less any impairment in the value of the investment. Losses of a joint venture or associate in excess of the Group’s interest in that entity are not recognised. Additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture or associate. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the joint venture or associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statements of cash flows. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the Directors. In the case of final dividends, this is when approved by the shareholders at the AGM. The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates (a) Fair value measurement A number of assets and liabilities included in the Group’s financial statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Group’s financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’) : Level 1: Quoted prices in active markets for identical items (unadjusted) Level 2: Observable direct or indirect inputs other than Level 1 inputs Level 3: Unobservable inputs (i.e. not derived from market data) . The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur. The Group measures the following items at fair value. Biological assets. The largest estimation relates to Salmon Broodstock valued at £11,724,000 (note 19). Contingent consideration outstanding from past acquisitions valued at £1,498,000 (note 21) . For more detailed information in relation to the fair value measurement of the items above, please refer to the applicable notes. (b) Impairment of goodwill The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. More information including carrying values is included in note 15. 2 Critical accounting estimates and judgements (continued) (c) Valuation of intangible assets Where the cost of intangible assets acquired as part of business combinations is not separately identifiable or does not represent the fair value, the valuation is calculated based upon value in use which requires the use of a discount rate in order to calculate the present value of cash flows. These intangibles are reviewed annually for impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. The assumptions used in the assessment of the recoverable amount are consistent with those used in the impairment review for goodwill as outlined in note 15. Judgements (a) Capitalisation of development costs Costs incurred on internally developed products are capitalised in line with the Group’s accounting policy, and significant judgement is required in determining at which point the appropriate criteria for capitalisation have been met. This involves determination of factors such as the point when the technical feasibility has been established and the likelihood of commercialisation of the product. (b) Recognition of deferred tax Deferred tax is provided in full on temporary differences under the liability method using substantively enacted rates to the extent that they are expected to reverse. Provision is made in full where the temporary differences result in liabilities, but deferred tax assets are only recognised where the directors believe it is probable that the assets will be recovered. Judgement is required to determine the likelihood of reversal of the temporary differences in establishing whether an asset should be recognised. 3 Financial instruments — Risk Management The Group is exposed through its operations to the following financial risks: • Credit risk • Fair value or cash flow interest rate risk • Foreign exchange risk • Liquidity risk In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: • Trade and other receivables • Cash and cash equivalents • Trade and other payables • Bank overdrafts • Floating-rate bank loans • Contingent consideration The contingent consideration held within other payables is classified as financial liabilities at fair value through profit and loss. In accordance with IFRS 13 ‘Fair Value Measurement’, the measurement of the fair value of contingent consideration is categorised into Level 3 in the fair value hierarchy, as the inputs are primarily unobservable. The amounts payable for all of the outstanding amounts depend on sales volumes or sales revenue targets. Management uses the actual performance against these targets together with relevant budgets and forecasts to derive the fair value of the contingent consideration. Where the level of contingent consideration payable is known with a reasonable level of certainty, as the underlying performance against target levels is well established, the contingent consideration is adjusted accordingly. This has resulted in an income statement credit in the period as shown in note 10. The contingent consideration for Akvaforsk Genetic Center Inc is dependent on a longer-term target and is recorded in these financial statements at management’s best estimate. An increased level of performance for Akvaforsk Genetic Center Inc would increase the amount payable. A reduction in the level of performance would significantly reduce the amounts payable. 112 113 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsNOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 3 Financial instruments — Risk Management (continued) A summary of the financial instruments held by category is provided below: 3 Financial instruments — Risk Management (continued) The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below: Group Financial assets Financial assets not measured at fair value Cash and cash equivalents (note 34) Trade and other receivables (note 20) Total financial assets Financial liabilities Financial liabilities measured at amortised cost Trade and other payables (note 21) Loans and borrowings (note 22) Financial liabilities at fair value through profit and loss Other payables — contingent consideration (note 21) Total financial liabilities Company Financial assets not measured at fair value Cash and cash equivalents (note 34) Trade and other receivables (note 20) Total financial assets Financial liabilities Financial liabilities at amortised cost Trade and other payables (note 21) Loans and borrowings (note 22) Financial liabilities at fair value through profit and loss Other payables — contingent consideration (note 21) Total financial liabilities There were no financial instruments classified as available for sale. General objectives, policies and processes 2018 £000 2017 £000 24,090 18,779 30,944 30,074 55,034 48,853 2018 £000 2017 £000 38,819 37,850 79,766 42,687 118,585 80,537 1,498 1,222 120,083 81,759 2018 £000 2017 £000 2,309 1,776 166,273 126,843 168,582 128,619 2018 £000 2017 £000 39,285 52,291 25,772 36,451 91,576 62,223 85 84 91,661 62,307 Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from credit sales. It is Group policy, implemented locally, to assess the credit risk of new customers before entering contracts. Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with minimum rating “A” are accepted. Further disclosures regarding trade and other receivables are provided in note 20. Fair value and cash flow interest rate risk During the year the Group had borrowings denominated in Sterling, US Dollars and Norwegian Krone, if interest rates on Pound Sterling, US Dollar and Norwegian Krone denominated borrowings had been 100 basis points higher/lower with all other variables held constant, loss after tax for the year ended 30 September 2018 would be £687,000 higher/lower (2017: £454,000 higher/lower) . The Directors consider that 100 basis points is the maximum likely change in the relevant interest rates over the next year, being the period up to the next point at which the Group expects to make these disclosures. Foreign exchange risk Foreign exchange risk arises when individual Group entities enter into transactions denominated in a currency other than their functional currency (principally Sterling, Norwegian Krone, Icelandic Krona, Euro, US Dollars and Danish Krone) . The Group’s policy is, where possible, to allow Group entities to settle liabilities denominated in their functional currency with the cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them) , cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group. The table below shows the impact of a 10 per cent increase and reduction in Sterling against the relevant foreign currencies, with all other variables held constant, on the Group’s profit before tax and equity. A greater or smaller change would have a pro- rata effect. The movements in profit arise from retranslation of foreign currency denominated monetary items held at the year end, including the foreign currency revolving credit facility, foreign currency bank accounts, trade receivables, trade and other payables. The movements in equity arise from the retranslation of the net assets of overseas subsidiaries and the intangible assets arising on consolidation in accordance with IFRS 10 Consolidated Financial Statements. £/$ £/€ £/NOK £/ISK £/THB Increase/(decrease) Profit £000 Equity £000 Profit £000 Equity £000 Profit £000 Equity £000 Profit £000 2018 10% increase in rate 3,085 (23,196) (16) (1,745) 166 (4,072) 2018 10% reduction in rate (3,771) 28,351 19 2,133 (202) 4,977 - - Equity £000 (3,968) 4,850 2017 10% increase in rate 3,213 (17,949) (186) (1,735) 115 (3,480) 427 (2,888) 2017 10% reduction in rate (3,927) 21,938 227 2,121 (140) 4,253 (521) 3,530 Profit £000 - - - - Equity £000 (1,647) 2,014 (961) 1,174 Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, the Group seeks to maintain cash balances (or agreed facilities) sufficient to meet expected requirements detailed in rolling three month cashflow forecasts, and in longer term cashflow forecasts. The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The Board receives monthly reports from the Group Chief Financial Officer through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. 114 115 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 3 Financial instruments — Risk Management (continued) The following table sets out the contractual maturities (representing undiscounted contractual cash-flows) of financial liabilities: Group As at September 2018 Trade and other payables Loans and borrowings Total As at September 2017 Trade and other payables Loans and borrowings Total Company As at September 2018 Trade and other payables Loans and borrowings Total As at September 2017 Trade and other payables Loans and borrowings Total Capital Management Up to 3 months £000 Between 3 and 12 months £000 24,579 14,519 1,114 3,027 25,693 17,546 Between 1 and 2 years £000 277 5,108 5,385 Between 2 and 5 years £000 942 Over 5 years £000 - 61,334 18,503 62,276 18,503 Up to 3 months £000 34,803 6,411 41,214 Between 3 and 12 months £000 Between 1 and 2 years £000 Between 2 and 5 years £000 3,332 1,146 4,478 - 937 1,314 1,314 38,091 39,028 Up to 3 months £000 38,995 1,041 40,036 Between 3 and 12 months £000 375 1,263 1,638 Up to 3 months £000 25,615 328 Between 3 and 12 months £000 241 984 25,943 1,225 Between 1 and 2 years £000 - 2,304 2,304 Between 1 and 2 years £000 - 1,312 1,312 Between 2 and 5 years £000 - 53,451 53,451 Between 2 and 5 years £000 - 38,091 38,091 Over 5 years £000 - 60 60 Over 5 years £000 - 60 60 Over 5 years £000 - 60 60 4 Revenue Revenue arises from: Sale of goods Provision of services 5 Expenses by nature Changes in inventories of finished goods and work in progress Changes in biological assets Write-down of inventory to net realisable value Course fees Raw materials and consumables used Transportation expenses Staff costs (see note 7) Motor, travel and entertainment Premises costs Advertising and marketing Professional fees Foreign exchange gains Losses on disposal of property, plant and equipment Exceptional expenses (see note 10) Other research and development costs Depreciation of PPE Amortisation and impairment of intangible assets Other income Other costs Total cost of sales, operating costs, depreciation, amortisation and impairment 6 Auditor’s remuneration The capital structure of the Group consists of debt, as analysed in Note 22, and equity attributable to the equity holders of the Parent Company, comprising share capital, share premium, merger reserve, capital redemption reserve, foreign exchange reserve, retained earnings, and share based payment reserve, and non-controlling interest as shown in the Consolidated Statement of Changes in Equity. The Group manages its capital with the objective that all entities within the Group continue as going concerns while maintaining an efficient structure to minimise the cost of capital and ensuring that the Group complies with the banking covenants associated with the external borrowing facilities. These covenants are related to interest cover and leverage. The Group is not restricted by any externally imposed capital requirements. Audit of these financial statements Amounts receivable by auditors and their associates in respect of: Audit of financial statements of subsidiaries pursuant to legislation Audit related assurance services Due diligence 2018 £000 2017 £000 128,287 122,513 23,180 17,659 151,467 140,172 2018 £000 (2,854) (4,128) 246 2,308 2017 £000 4,788 (4,413) 1,414 2,871 59,726 56,288 3,402 3,306 41,833 37,183 4,572 11,188 1,632 5,189 11 8 1,239 4,801 6,841 4,580 8,169 1,909 4,846 (136) 18 (5,649) 5,180 4,877 18,002 18,473 (1,416) (1,646) 7,569 5,776 160,169 147,834 2018 £000 105 381 24 - 510 2017 £000 66 304 24 13 407 116 117 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 7 Staff costs Staff costs (including Directors) comprise: Wages and salaries Social security contributions and similar taxes Defined contribution pension cost Share-based payment expense (note 30) The average monthly number of employees, including Directors, during the year was as follows: £000 £000 35,094 30,992 3,432 1,796 1,511 2,946 1,643 1,602 41,833 37,183 2018 No. 2017 No. Production Administration Management Directors’ remuneration Mark Plampin Malcolm Pye Alex Hambro Susan Searle Kevin Quinn Peter George Hugo Wahnish Yngve Myhre Roland Bonney Total Salary £000 254 315 Bonus £000 165 204 - - - - - - --- 569 - - - - - - - Taxable benefits £000 Long-term incentive £000 Pension £000 Fees £000 2 4 - - - - - - - 25 31 - - - - - - - - - 27 45 45 48 41 41 - - - - - - - - - - - 369 6 56 247 1,247 713 151 104 968 2018 £000 446 554 27 45 45 48 41 41 - 636 138 107 881 2017 £000 250 318 45 45 38 - - - 271 967 Of the 2017 total of £967,000, £899,000 was emoluments and £68,000 related to pension and other post-employment benefit costs. During the year retirement benefits were accruing to 2 Directors (2017: 3) in respect of defined contribution pension schemes. The cost of employer National Insurance contributions in relation to the Directors was £128,000 (2017: £119,000) . The value of the Group’s contributions paid to a defined contribution pension scheme in respect of the highest paid Director amounted to £31,000 (2017: £28,000) . In addition to the above, there was an accounting charge for share-based payments in respect of the Directors for £92,000 (2017: £81,000) . The aggregate gain on the exercise of options by the Directors during the year was £nil (2017: £106,000) . 7 Staff costs (continued) Directors’ interests under the Company’s employee share plans Share option scheme Options held at 30 September 2017 Options exercised in year Options granted in year Options held at 30 September 2018 Exercise price Grant date Date from which exercisable Director Mark Plampin CSOP II 67,647 - Mark Plampin CSOP II 56,398 Mark Plampin CSOP I Mark Plampin CSOP II Malcom Pye CSOP I Malcom Pye CSOP II - - - - - - - - - - - 67,647 56,398 0.1p 0.1p 9 March 2015 8 March 2018 6 March 2017 5 March 2017 43,165 43,165 69.5p 356,835 356,835 69.5p 43,165 43,165 69.5p 456,385 456,385 69.5p 24 January 2018 24 January 2018 24 January 2018 24 January 2018 23 January 2018 23 January 2018 23 January 2018 23 January 2018 Further details of Directors’ remuneration are provided in the Remuneration Report on pages 79 to 83. The key management of the Group is deemed to be the Board of Directors who have authority and responsibility for planning and controlling all significant activities of the Group. 8 Segment information Operating segments are reported in a manner consistent with the reports made to the chief operating decision maker. It is considered that the role of chief operating decision maker is performed by the Board of Directors. The Group operates globally and for management purposes is organised into reportable segments as follows: • Animal Health Division — provides veterinary services, environmental services diagnostics and animal health products to global aquaculture, and manufactures licenced veterinary vaccines and vaccine components; • Benchmark Genetics Division — harnesses industry leading salmon breeding technologies combined with state-of-the-art production facilities to provide a range of year-round high genetic merit ova; • Advanced Animal Nutrition Division — manufactures and provides technically advanced nutrition and health products to the global aquaculture industry. In addition to the above, reported as “all other segments” is the Knowledge Services division, this was created on 1 October 2017 by a combination of Sustainability Science Division and Technical Publishing Division, the results of which were not significant on an individual basis. The division provides sustainable food production consultancy, technical consultancy and assurance services and promotes sustainable food production and ethics through online news and technical publications for the international agriculture and food processing sectors and through delivery of training courses to the industries. In order to reconcile the segmental analysis to the Consolidated Income Statement, Corporate and Inter-segment sales are also shown. Corporate represents revenues earned from recharging certain central costs to the operating divisions, together with unallocated central costs. Measurement of operating segment profit or loss Inter-segment sales are priced along the same lines as sales to external customers, with an appropriate discount being applied to encourage use of Group resources at a rate acceptable to local tax authorities. This policy was applied consistently throughout the current and prior period. 118 119 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 8 Segment information (continued) Year ended 30 September 2018 8 Segment information (continued) External revenue by location of customers Animal Health £000 Genetics £000 Notes Advanced Animal Nutrition £000 All other segments £000 Corporate £000 Inter- segment sales £000 Total £000 16,153 35,755 85,746 15,786 5,277 (7,250) 151,467 (13,494) (14,822) (40,998) (9,811) (440) 2,118 (77,447) 2,659 20,933 44,748 5,975 4,837 (5,132) 74,020 (5,593) (3,611) (2,836) - - - (12,040) (8,058) (9,089) (20,285) (5,772) (6,632) 5,236 (44,600) Norway India United Kingdom Singapore Ecuador Rest of Europe Other 2018 £000 2017 £000 19,284 18,803 18,190 15,040 14,742 14,661 11,748 9,253 9,821 9,223 36,680 30,471 41,570 42,153 151,467 140,172 - (362) - - - - (362) (10,992) 7,871 21,627 203 (1,795) 104 17,018 One customer in Advanced Animal Nutrition accounted for greater than 10% of total revenue in the year with revenue of £18,892,000, no customer accounted for more than 10% of revenue in the previous year. Non-current assets by location of assets Revenue Cost of sales Gross profit / (loss) Research and development costs Operating costs Share of profit of equity- accounted investees, net of tax Adjusted EBITDA Exceptional including acquisition related items EBITDA Depreciation Amortisation and impairment (108) (2,171) (14,523) (1,200) - 10 - (1,013) - - (226) - (1,239) (10,992) 6,858 21,627 203 (2,021) 104 15,779 (2,459) (1,330) (1,679) (1,242) (131) - - (6,841) (18,002) Operating profit / (loss) (13,559) 3,357 5,425 (2,239) (2,152) 104 (9,064) Finance cost Finance income Loss before tax Year ended 30 September 2017 (4,927) 332 (13,659) Animal Health £000 Genetics £000 Notes Advanced Animal Nutrition £000 All other segments £000 Corporate £000 Inter- segment sales £000 Total £000 Revenue Cost of sales 15,149 30,530 83,659 13,770 4,300 (7,236) 140,172 (13,882) (13,842) (42,789) (9,405) (359) 2,496 (77,781) Gross profit / (loss) 1,267 16,688 40,870 4,365 3,941 (4,740) 62,391 Research and development costs (7,343) (2,682) (3,030) - - - (13,055) Operating costs (5,527) (8,221) (20,159) (5,240) (4,890) 4,740 (39,297) Share of profit of equity- accounted investees, net of tax - - 27 - - Adjusted EBITDA (11,603) 5,785 17,708 (875) (949) Exceptional including acquisition related items EBITDA Depreciation Amortisation 10 (631) 7,005 (19) (51) (655) (12,234) 12,790 17,689 (926) (1,604) (851) (523) (1,217) (1,630) (1,053) (126) (2,113) (14,950) (887) - Operating profit / (loss) (13,608) 9,460 1,109 (2,866) (1,730) Finance cost Finance income Loss before tax 120 - - - - - - - 27 10,066 5,649 15,715 (4,877) (18,473) (7,635) (1,960) 1,495 (8,100) Belgium UK Rest of Europe Rest of world 9 Net finance costs Interest received on bank deposits Foreign exchange gains on financing activities Dividend income Finance income Finance leases (interest portion) Foreign exchange losses on financing activities Foreign exchange losses on operating activities Interest expense on financial liabilities measured at amortised cost Finance costs Net finance costs recognised in profit or loss 2018 £000 2017 £000 247,979 244,627 49,384 44,911 126,158 109,916 31,525 19,022 455,046 418,476 2018 £000 301 - 31 2017 £000 258 1,225 12 332 1,495 (5) (1,054) (1,441) (2,427) (4,927) (4,595) (5) - - (1,955) (1,960) (465) 121 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 10 Exceptional items 11 Taxation (continued) Items that are material because of their nature, non-recurring or whose significance is sufficient to warrant separate disclosure and identification within the consolidated financial statements are referred to as exceptional items. The separate reporting of exceptional items helps to provide an understanding of the Group’s underlying performance. The reasons for the difference between the actual tax credit for the year and the standard rate of corporation tax in the United Kingdom applied to profits for the year are as follows: Acquisition related items Exceptional expenses Total exceptional items 2018 £000 2017 £000 1,239 (6,254) - 605 1,239 (5,649) Accounting loss before income tax Expected tax credit based on the standard rate of UK corporation tax at the domestic rate of 19.0% (2017: 19.5%) Acquisition related items are costs incurred in investigating and acquiring new businesses. During the year, the contingent consideration element of the provision for deferred consideration held for previous acquisitions has been recalculated considering up to date performance of those acquisitions and the projected performance for the final 3 months of the earn out period (which ended on 31 December 2017) against the relevant sales volumes and revenue targets. As a result, £206,000 (2017: £7,283,000) has been released in the year. Exceptional expenses include: costs of £nil (2017: £452,000) for legal fees incurred in relation to a dispute around building works with the main contractor at premises in Braintree within the Animal Health Division; costs totalling £nil (2017: £182,000) relating to a restructuring in an Animal Health Division business in Thailand, this included £nil (2017: £97,000) of redundancy payments (staff costs) and £nil (2017: £85,000) loss on disposal of property, plant and equipment; also included is a £nil (2017: £29,000) credit in relation to balances written off in preparation for liquidating an entity in the Advanced Animal Nutrition division. 11 Taxation Amounts recognised in profit or loss Current tax expense Analysis of charge in period Current tax: Current income tax expense on profits for the period Adjustment in respect of prior periods Total current tax Deferred tax expense Origination and reversal of temporary differences Deferred tax movements in respect of prior periods Total deferred tax credit (Note 24) Total tax credit 2018 £000 2017 £000 6,041 (309) 5,732 4,404 245 4,649 (14,990) (5,812) (12) 183 (15,002) (5,629) (9,270) (980) 2018 £000 2017 £000 (13,659) (8,100) (2,595) (1,580) (155) (1,484) 686 4,788 (321) (10,496) 801 2,835 428 (142) (1,177) (2,162) - (9,270) 324 (980) Income not taxable Expenses not deductible for tax purposes Deferred tax not recognised Adjustment to tax charge in respect of prior periods Effects of changes in tax rates Different tax rates in overseas jurisdictions Other Total tax credit Changes in tax rates and factors affecting the future tax charge Reductions in the UK corporation tax rate were substantively enacted in the year. The main rate of corporation tax was reduced from 20% to 19% effective from 1 April 2017 and to 17% from 1 April 2020. Deferred tax is calculated at the substantively enacted rates, at which the temporary differences and tax losses are expected to reverse, in the territories in which they arose. Reductions in the corporation tax rate in Belgium were substantively enacted in the year. The main rate of corporation tax was reduced from 34% to 29.58% effective from 1 January 2018 and to 25% from 1 January 2020, this change is reflected in the “Effects of changes in tax rates” item in the current period in the above reconciliation. The adjustment in respect of prior periods includes £nil (2017: £109,356) in relation to Research and Development tax credits from 2015 and 2016 received during the year. Income not taxable includes a release of provision for deferred consideration. There was no deferred tax recognised in other comprehensive income. 12 Loss per share Basic loss per share is calculated by dividing the profit or loss attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares in issue during the period. Loss attributable to equity holders of the parent (£000) Weighted average number of shares in issue (thousands) Basic loss per share (pence) 2018 2017 (5,009) (7,440) 531,651 522,092 (0.94) (1.43) Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. This is done by calculating the number of shares that could have been acquired at fair value (determined as the average market price of the Company’s shares since admission to AIM) based on the monetary value of the subscription rights attached to outstanding share options and warrants. Therefore, the Company is required to adjust the loss per share calculation in relation to the share options that are in issue under the Company’s share based incentive schemes as follows: Loss attributable to equity holders of the parent (£000) Weighted average number of shares in issue (thousands) Diluted loss per share (pence) 2018 2017 (5,009) (7,440) 531,651 522,092 (0.94) (1.43) A total of 3,724,453 potential ordinary shares have not been included within the calculation of statutory diluted loss per share for the year (2017: 4,464,413) as they are anti-dilutive. However, these potential ordinary shares could dilute earnings/loss per share in the future. 122 123 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 13 Property, plant and equipment Group Cost Freehold Land and Buildings £000 Assets in the course of construction £000 Long Term Leasehold Property Improvements £000 Plant and Machinery £000 E commerce Infrastructure £000 Office Equipment and Fixtures £000 Total £000 Balance at 1 October 2016 12,448 21,807 4,847 15,512 247 1,136 55,997 Additions Reclassification Exchange differences Disposals 5,147 21,708 893 15,047 (16,118) (1,188) 310 4 (245) - (54) (217) 7,993 2,254 150 (318) - - - - 309 36,050 5 19 (242) - 180 (773) Balance at 30 September 2017 32,956 27,152 4,281 25,591 247 1,227 91,454 Balance at 1 October 2017 32,956 27,152 4,281 25,591 247 1,227 91,454 Additions Reclassification 1,678 17,705 (2,450) - 874 (99) 3,593 2,610 Increase/(decrease) through transfers from assets in the course of construction Exchange differences Disposals 71 196 (23) (5,060) 3,534 1,455 573 (10) 10 (63) 475 (636) - - - - - 1,222 25,072 (61) - 117 (224) - - 1,371 (956) Balance at 30 September 2018 32,428 40,360 8,537 33,088 247 2,281 116,941 Accumulated Depreciation Balance at 1 October 2016 Depreciation charge for the year Reclassification Exchange differences Disposals Balance at 30 September 2017 Balance at 1 October 2017 Depreciation charge for the year Reclassification Exchange differences Disposals Balance at 30 September 2018 Net book value At 30 September 2018 At 30 September 2017 At 30 September 2016 956 1,029 245 184 - 2,414 2,414 1,269 - 193 (21) 3,855 - - - - - - - - - - - - 916 759 (305) (36) (123) 1,211 1,211 843 (5) 34 (94) 3,601 2,817 22 108 (160) 6,388 6,388 4,410 25 359 (515) 242 2 - - - 259 270 37 12 (226) 5,974 4,877 (1) 268 (509) 244 352 10,609 244 2 - - - 352 317 (20) 93 (85) 657 10,609 6,841 - 679 (715) 17,414 1,989 10,667 246 28,573 40,360 6,548 22,421 30,542 27,152 3,070 19,203 11,492 21,807 3,931 11,911 1 3 5 1,624 99,527 875 877 80,845 50,023 13 Property, plant and equipment (continued) Security over the assets is disclosed within note 22. The above includes the following in respect of plant and machinery held under finance leases (note 28) : Cost Accumulated depreciation Net book value Company Cost Balance at 1 October 2016 Additions Balance at 1 October 2017 Additions Balance at 30 September 2018 Accumulated Depreciation Balance at 1 October 2016 Depreciation charge for the year Balance at 1 October 2017 Depreciation charge for the year Balance at 30 September 2018 Net book value At 30 September 2018 At 30 September 2017 At 1 October 2016 2018 £000 42 (23) 19 2017 £000 599 (396) 203 Office equipment and fixtures £000 366 137 503 68 571 126 90 216 130 346 225 287 240 124 125 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 14 Intangible assets Cost or valuation Websites £000 Goodwill £000 Patents and Trademarks £000 Intellectual Property £000 Customer Lists £000 Contracts £000 Licences £000 Genetics £000 Development costs £000 Total £000 Balance at 1 October 2016 561 153,184 1,075 138,390 6,783 9,648 35,578 26,189 1,440 372,848 15 Impairment testing of goodwill and other intangible assets Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from the business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Goodwill arises across all of the Group’s operating segments, and is allocated specifically against the following CGUs: - 18 - - - - - - - - - 169 110 2,144 2,144 Animal Health 2018 £000 Sustainability Science 2018 £000 Genetics 2018 £000 Technical Publishing 2018 £000 Advanced Animal Nutrition 2018 £000 Additions — on acquisition - 12 - - 157 Additions — externally acquired Additions — internally developed Exchange differences Balance at 30 September 2017 36 - - - - 30 26 - - - - (3,255) (294) (3,778) (156) (156) (914) 56 (53) (8,550) 597 149,941 811 134,638 6,784 9,510 34,664 26,245 3,531 366,721 Balance at 1 October 2017 597 149,941 811 134,638 6,784 9,510 34,664 26,245 3,531 366,721 Additions — on acquisition - 51 - - Additions — externally acquired Additions — internally developed Disposals 86 - - - - (447) Exchange differences 2 3,171 30 118 - - 6 - - - - - - - - - - - - - - - - - - - 51 139 373 7,178 7,178 - (447) Balance at 30 September 2018 Accumulated amortisation and impairment 685 152,716 847 138,435 6,933 9,530 35,682 26,186 10,905 381,919 3,679 149 20 1,018 (59) 57 8,043 Balance at 1 October 2016 518 279 607 10,290 491 4,123 2,858 1,144 Amortisation charge for the period Exchange differences Balance at 30 September 2017 13 - - (3) 79 13,544 552 1,443 2,162 (55) (932) (15) (60) (121) 680 (13) 531 276 631 22,902 1,028 5,506 4,899 1,811 Balance at 1 October 2017 531 276 631 22,902 1,028 5,506 4,899 1,811 21 - 158 12,631 403 1,399 2,161 782 - - - 447 (447) 1 - - - - - - - - - - 11 1,037 17 35 294 - - (1) 552 277 800 36,570 1,448 6,940 7,354 2,592 - 56,533 - - - - - - - - - 20,310 18,473 (1,199) 37,584 37,584 17,555 447 (447) 1,394 Amortisation charge for the period Impairment Disposals Exchange differences Balance at 30 September 2018 Net book value At 30 September 2018 133 152,439 47 101,865 5,485 2,590 28,328 23,594 10,905 325,386 At 30 September 2017 66 149,665 180 111,736 5,756 4,004 29,765 24,434 3,531 329,137 At 1 October 2016 43 152,905 468 128,100 6,292 5,525 32,720 25,045 1,440 352,538 FVG Limited Benchmark Vaccines Limited Atlantic Veterinary Services Limited FAI do Brasil Criacao Animal Ltda FAI Aquaculture Limited 5M Enterprises Limited Salmobreed AS Stofnfiskur HF Akvaforsk Genetic Center* Improve International Limited Improve International GmbH INVE Aquaculture Group 288 432 167 - - - - - - - - - - - - 96 450 - - - - - - - - - - - - - 7,435 13,874 9,194 - - - - - - - - 379 - - - 2,995 12 - - - - - - - - - - - *Includes goodwill arising from the joint acquisition of Akvaforsk Genetics Center AS and Akvaforsk Genetics Center Inc. 887 546 30,503 3,386 117,117 152,439 - 117,117 117,117 Animal Health 2017 £000 Sustainability Science 2017 £000 Genetics 2017 £000 Technical Publishing 2017 £000 Advanced Animal Nutrition 2017 £000 FVG Limited Benchmark Vaccines Limited Atlantic Veterinary Services Limited FAI do Brasil Criacao Animal Ltda FAI Aquaculture Limited 5M Enterprises Limited Salmobreed AS Stofnfiskur HF Akvaforsk Genetic Center* Improve International Limited Improve International GmbH INVE Aquaculture Group 288 432 167 - - - - - - - - - - - - 96 450 - - - - - - - - - - - - - 7,401 14,049 9,099 - - - - - - - - 775 - - - 2,996 12 - - - - - - - - - - - *Includes goodwill arising from the joint acquisition of Akvaforsk Genetics Center AS and Akvaforsk Genetics Center Inc. 887 546 30,549 3,783 113,900 149,665 The recoverable amounts of the above CGUs have been determined from value in use calculations which have been predicated on discounted cash flow projections using formally approved 3-year budgets and in some cases a 5-year business plan. These forecasts were then extrapolated into perpetuity taking account of specific growth rates for future cash flows, using individual business operating margins based on past experience and future expectations in light of anticipated economic and market conditions. - 113,900 113,900 Total 2018 £000 288 432 167 96 450 379 7,435 13,874 9,194 2,995 12 Total 2017 £000 288 432 167 96 450 775 7,401 14,049 9,099 2,996 12 126 127 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 15 Impairment testing of goodwill and other intangible assets (continued) 16 Equity-accounted investees (continued) The pre-tax cashflows that these projections produced were discounted at pre-tax discount rates based on the Group’s beta adjusted cost of capital reflecting management’s assessment of specific risks related to each cash generating unit. Pre-tax discount rates of between 10.6% and 14.9% (2017: between 9.0% and 11.0%) have been used in the impairment calculations which the Directors believe fairly reflect the risks inherent in each of the CGUs, and growth rates of 2.5%-4% (2017: 2.5%) were used in extrapolating the budgets into perpetuity. The value in use assessment is sensitive to changes in the key assumptions used, most notably the discount rate, the growth rates and the timing of new product launches. Sensitivity analysis has been performed on the individual CGUs, and based on this analysis, no reasonably possible changes, such as a 1% increase in discount rate or a 1% reduction in long term growth rate, to these assumptions resulted in an additional impairment charge being required. Sensitivities to changes in assumptions Management has identified the following assumptions as key sources of estimation uncertain within the most sensitive CGUs (see note 3). Animal Health Benchmark Genetics Advanced Animal Nutrition Weighted average risk adjusted discount rate 14.9% 11.2% 11.7% Long term growth rate 2.5% 2.5% 4.0% Impact of increase of 1% in the discount rate £000 (13.7) (20.9) (42.2) Impact of decrease of 1% in the long term growth rate £000 (12.1) (18.2) (36.9) Management has performed sensitivity analysis on the key assumptions with other variables held constant and incorporating the potential impact of downside scenarios concerning assumptions in relation to availability and timing of licences associated with sea lice treatment field trials, supply and pricing of key raw materials, the out-licensing of certain products in development and the timing of new product launches within the next five years. Management have identified that for one of the CGUs, a reasonably possible change in two key assumptions could cause the carrying amount to exceed the recoverable amount. In Advanced Animal Nutrition if the discount rate was to increase by 1.9 % or if the long term growth rate beyond year 5 was to reduce by 2.4%, the estimated recoverable amount would equal the carrying amount. 16 Equity-accounted investees Interest in joint venture Interest in associate Joint ventures 2018 £000 16,192 1,265 17,457 2017 £000 1.934 578 2,512 During the year ended 30 September 2017 the Group invested in Salmar Genetics AS (SGA) . SGA is a joint venture in which the Group has joint control and a 50% ownership interest. SGA is structured as a separate vehicle and the Group has a residual interest in the net assets of SGA. Accordingly, the Group has classified its interest in SGA as a joint venture. The following table summarises the financial information of SGA as included in its own financial statements for the year ended 30 September 2018, adjusted for fair value adjustments and differences in accounting policies. The table also reconciles the summarised financial information to the carrying amount of the Group’s interest in SGA. Percentage ownership interest Non-current assets Current assets Non-current liabilities Current liabilities Net assets (100%) Group’s share of net assets (50%) Elimination of unrealised profit Carrying amount of interest in joint venture Revenue Cost of sales and operating costs Finance costs Taxation Profit and total comprehensive income (100%) Group’s share of total comprehensive income (50%) 2018 £000 50% 3,895 2,150 (420) (1,199) 4,426 2,213 (336) 1,877 2017 £000 50% 3,173 2,917 (441) (863) 4,786 2,393 (459) 1,934 2,104 1,966 (2,463) (1,965) - 73 (286) (143) (1) - - - The company is registered in Norway and the registered address is 7266 Kverva, Frøya, Norway. During the year the Group invested in Benchmark Genetics Chile SPA (BGCSPA) . BGCSPA is a joint venture in which the Group has joint control although only a 49% ownership interest. Total consideration of $21.25m (£16.09m) consisted of cash paid of $7.5m (£5.68m), deferred consideration of $8.75m (£6.63m) (which was paid in December 2018 and January 2019) and Intellectual Property contributed by the Group, this has been valued at $5.0m (£3.78m) (49% of this Intellectual Property contribution (£1.85m) was eliminated on consolidation). The sale of Intellectual Property is shown in the Consolidated Statement of Cash Flows as £1,931,000 as Other adjustments for non-cash items. BGCSPA is structured as a separate vehicle and the Group has a residual interest in the net assets of BGCSPA. Accordingly, the Group has classified its interest in BGCSPA as a joint venture. The following table summarises the financial information of BGCSPA as included in its own financial statements for the period from 1 June 2018 to 30 September 2018, adjusted for fair value adjustments and differences in accounting policies. The table also reconciles the summarised financial information to the carrying amount of the Group’s interest in BGCSPA. 128 129 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 16 Equity-accounted investees (continued) 17 Subsidiary undertakings Percentage ownership interest Non-current assets Current assets Non-current liabilities Current liabilities Net assets (100%) Group’s share of net assets (49%) Elimination of unrealised profit Carrying amount of interest in joint venture Revenue Cost of sales and operating costs Finance costs Taxation Profit and total comprehensive income (100%) 2018 £000 49% 2017 £000 0% 53,847 5,855 (22,657) (4,075) 32,970 16,155 (1,840) 14,315 1,806 (1,801) (404) 116 (283) - - - - - - - - - - - - - Group’s share of total comprehensive income (49%) (139) - The company is registered in Chile and the registered address is Cardonal S/N, Lote B- Barrio Industrial, Puerto Montt, Chile. Associate The Group has a 22% interest in an associate Great Salt Lake Brine Shrimp Cooperative, Inc (the “Cooperative”) . The Cooperative is one of the Group’s strategic suppliers and is an aquacultural cooperative organised for the purpose of harvesting, processing, manufacturing, and marketing artemia cysts and artemia feeds. The Group’s interest in the Cooperative represents 22% of the Cooperative’s unallocated equity reserves. The company is registered in USA and the registered address is 1750 West 2450 South, Ogden, Utah. The direct and indirect subsidiary undertakings of Benchmark Holdings plc, all of which have been included in these consolidated financial statements, are as follows: Company name Registered address Country of Incorporation Direct/ Indirect Group Interest Share class % of share capital/ voting rights held by Group companies Note Animal Health Division Atlantic Veterinary Services Limited Benchmark Animal Health Group Limited Benchmark Animal Health Limited Benchmark Vaccines Limited Fish Vet Group Asia Limited Unit 7B Oranmore Business Park, Oranmore, Co Galway, H91 XP3F Ireland Indirect 1€ ordinary shares 100% Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Direct £1 ordinary 100% Indirect £1 ordinary 100% Indirect £1 ordinary 100% No.57/1 Moo 6, Samed Sub- District, Muang Chonburi District, Chonburi Province, 20000 Thailand Indirect THB 10 ordinary 100% Fish Vet Group Limited (dormant) Benchmark House, 8 Smithy Wood Drive, Sheffield, S351QN United Kingdom Indirect £1 ordinary 100% Fish Vet Group Norge AS Hoffsveien 21-23, 0275, Oslo Norway Indirect Fish Vet Group SPA Bernardino 1978, Puerto Montt Chile Indirect FVG Canada Inc FVG Inc FVG Limited 1600-3500 Boulevard De Maisonneuve, Ouest, Westmount,QC, H3Z 3CI Gulf of Maine Research Institute, 350 Commercial Street, Portland, Maine 04101 Canada Indirect USA Indirect 22 Carsegate Road, Inverness, IV3 8EX United Kingdom Indirect £1 ordinary 100% NOK 1 ordinary CLP 1 ordinary CAD 1 ordinary $10 common stock 100% 100% 100% 100% Knowledge Services — Sustainability Science Division Allan Environmental Limited Dust Collective Limited FAI Aquaculture Limited FAI do Brasil Criação Animal LTDA FAI Farms Limited RL Consulting Limited Trie Benchmark Limited Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom 340 Glossop Road, Sheffield, S10 2HW United Kingdom Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Indirect £1 ordinary 100% Direct £1 ordinary 100% Direct £1 ordinary 100% Fazenda Santa Terezinha, S/N – Zona Rural, Jaboticabal/SP, CEP: 14870-000 Brazil Indirect R$1 ordinary 99.25% Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom The Field Station, Northfield Farmhouse, Wytham, Oxford, OX2 8QJ United Kingdom Direct £1 ordinary 100% Direct £1 ordinary 100% Direct £1 ordinary 100% Viking Fish Farms Limited (dormant) Benchmark House, 8 Smithy Wood, Sheffield, S35 1QN United Kingdom Woodland Limited (dormant) Benchmark House, 8 Smithy Wood, Sheffield, S35 1QN United Kingdom Indirect £1 ordinary 100% Direct £1 ordinary 100% 130 131 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 17 Subsidiary undertakings (continued) 17 Subsidiary undertakings (continued) Note Company name Registered address Country of Incorporation Direct/ Indirect Group Interest Share class % of share capital/ voting rights held by Group companies Note Company name Registered address Knowledge Services - Technical Publishing Division 5M Enterprises Inc 5M Enterprises Limited CBoT, 141 West Jackson Boulevard, Chicago, IL 60604- 2900 Benchmark House, Smithy Wood, Sheffield, S35 1QN AquacultureUK Limited (dormant) Benchmark House, Smithy Wood, Sheffield, S35 1QN Continuous Medical Training LDA 53 Rua do Bolhao, 4000-112 Oporto Curriculo Limited (dormant) European School of Veterinary Post-Graduate Studies Ltd (ESVPS) Improve Formacion Veterinaria Benchmark House, Smithy Wood, Sheffield, S35 1QN Benchmark House, Smithy Wood, Sheffield, S35 1QN Calle Rio Lozoya 5, Bloque Derecho 3 A, 28981 Parla, Madrid Spain Improve France SARL 11 rue Laugier, 75017 Paris France Improve International Australia Pty PO Box 59, Kenmore QLD 4069 Australia Country of Incorporation Direct/ Indirect Group Interest Share class % of share capital/ voting rights held by Group companies USA Direct ordinary shares 100% United Kingdom United Kingdom Portugal United Kingdom United Kingdom Indirect £1 ordinary 100% Direct £5 ordinary 100% Indirect £1 ordinary 100% Indirect £1 ordinary 100% Indirect N/A 0% b Indirect Indirect Indirect N/A N/A AUD 1 ordinary shares Direct 1p ordinary 100% 100% 100% 100% 100% Indirect Shares 0% Improve International GmbH Amtsgericht, Frankfurt, HRB 90624 Germany Indirect N/A Improve International Limited OOO 5M Enterprises Alexandra House, Wroughton, Swindon SN4 0QJ Shlizovaya embarkmet 8/1, Moscow, 115 115 United Kingdom Russia Benchmark Genetics Division Akvaforsk Do Brasil Cultivo De Especies Aquaticas LTDA Rua Doutor Ribamar Lobo, 451, Coco, Fortaleza, CEl Akvaforsk Genetic Center AS Auragata 3, 6600 Sunndalsøra. Akvaforsk Genetic Center Spring Mexico, SA de CV (dormant) Akvaforsk Genetics Center Inc Caguama 3023, Zapopan, Loma Bonita, Jaalisco 45086 25508 SW 169th Ave, Miami Florida 33031 Brazil Indirect ordinary 80% Norway Mexico Indirect Indirect ordinary ordinary 100% 80% USA Indirect ordinary 80% Benchmark Genetics Limited Benchmark House, 8 Smithy Wood Drive, Sheffield, S35 1QN United Kingdom Direct £1 ordinary 100% Genetica Spring SAS Calle 32, 8a-33 Office 215 Genetilapia, SA de CV Avenida Dr Carlos Canseco 5994 Planta Alta El Cid C.P. 82110 Mazatlan, Sinaloa Salmobreed AS Sandviksboder 3A,5035 Bergen Salmobreed Salten AS Spring Genetics SRL Sørfjordmoen, Kobbelv, 8264 Engan Calle Los Alemanes, Condominium Condado de Baviera, Apt 703 Colombia Mexico Indirect Indirect ordinary ordinary Norway Norway Indirect Indirect ordinary ordinary 100% 41% 100% 75% Costa Rica Indirect ordinary 80% b a a a a Stofnfiskur Chile Limitada (dormant) Urmeneta 581, Of. 42, Puerto Montt, Reg. X Chile Indirect ordinary 89.45% Stofnfiskur HF. Stadarberg 2-4, Hafnarfjordur Stofngen EHF (dormant) Stadarberg 2-4, Hafnarfjordur Sudourlax EHF (dormant) Stadarberg 2-4, Hafnarfjordur Iceland Iceland Iceland Indirect Indirect Indirect ordinary 89.45% ordinary 62.62% ordinary 89.45% Advanced Animal Nutrition Division Fortune Ocean Americas, LLC 3528 W 500 South, Salt Lake City, Utah 84104 USA Indirect N/A 100% Fortune Ocean Technologies Ltd. Golden West Artemia Inland Sea Incorporated INVE (Thailand) Ltd. 25/F., OTB Building 160 Gloucester Road, Wanchai Hong Kong Indirect 1 HKD ordinary 100% 3528 W 500 South, Salt Lake City, Utah 84104 3528 W 500 South, Salt Lake City, Utah 84104 USA USA Indirect $1 shares 100% Indirect shares 100% No. 79/ 1 Moo 1 Nakhonsawan- Pitsanulok Road, Tumbol Nhong Lhum, Amphur, Wachirabharamee, Phichit Province Thailand Indirect THB 1,000 shares 100% Inve Animal Health, S.A. Policarpo Sanz 12, 4º, 36202 Vigo, Pontevedra Spain Indirect 10€ shares 100% Inve Aquaculture Europe Holding B.V. Verlengde Poolseweg 16,4818 CL Breda Inve Aquaculture Holding B.V. Inve Aquaculture México, S.A. de C.V. Verlengde Poolseweg 16, 4818 CL Breda Avenida Camaron Sabalo # 51, Local 6, Interior, Plaza Riviera, Zona Dorada,Mazatlán Sinaloa 82110 Netherlands Indirect 1€ shares 100% Netherlands Direct $1 shares 100% Mexico Indirect Inve Aquaculture NV Hoogveld 93, 9200 Dendermonde Belgium Indirect MXN $1,000 shares shares 100% 100% 100% Verlengde Poolseweg 16, 4818 CL Breda Netherlands Indirect 1€ shares 3528 W 500 South, Salt Lake City, Utah 84104 USA Indirect shares 100% 25/F., OTB Building, 160 Gloucester Road, Wanchai 471 Bond Street, Tumbol Bang- Pood, Amphur Pakkred, Nonthburi ProvinceTumbol bang-pood, Amphur Pakkred, Nontburi Province Rua Augusto Calheiros, n° 226, Messejana, Fortaleza, Ceará, Zip Code 60.863-290 Karacaogg˘lan Mahallesi 6170 Sokak No. 17/B Is¸ikkent/Izmir Hong Kong Indirect $1 shares 100% Thailand Indirect THB 100 shares 100% Brazil Indirect Turkey Indirect BRL 1 shares 6.25 TL shares $29.35 shares 100% 100% 100% Inve Hellas S.A. 93 Kiprou Str., 16451, Argyroupoli Greece Indirect Inve Aquaculture Temp Holding B.V. INVE Aquaculture, Inc. Inve Asia Ltd INVE Asia Services Ltd. Inve do Brasil Ltda. Inve Eurasia SA 132 133 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial StatementsNOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 17 Subsidiary undertakings (continued) 17 Subsidiary undertakings (continued) Company name Registered address Inve Latin America B.V. Verlengde Poolseweg 16, 4818 CL Breda Country of Incorporation Direct/ Indirect Group Interest Share class % of share capital/ voting rights held by Group companies Note Netherlands Indirect 10€ shares 100% Inve Technologies NV Hoogveld 93, 9200 Dendermonde Belgium INVE USA Holdings, Inc. 3528 W 500 South, Salt Lake City, Utah 84104 USA Indirect Indirect shares $0.001 shares 100% 100% Inve Vietnam Company Ltd Invecuador S.A. 8FI-19 Tan Canh, Ward 1, Tan Binh District, Ho Chi Minh City CDLA. Las Conchas, MZ A-11 No. Lot 8 , Salinas, Santa Elena Vietnam Indirect N/A 100% Ecuador Indirect $1 shares 100% Inveservicios, S.A. de C.V. Maricoltura di Rosignano Solvay S.r.l. PT. Inve Indonesia Salt Creek Holdings, Inc Salt Creek, Inc. Avenida Camaron Sabalo # 51, Local 6, Interior, Plaza Riviera, Zona Dorada,Mazatlán Sinaloa 82110 Rosignano Marittimo (LI) , in via Pietro Gigli, 57013 , Solvay Loc. Lillatro Cilandak Commercial Estate, Jl. Cilandak KKO — Cilandak Timur — PasarMinggu — South Jakarta 12560 3528 W 500 South, Salt Lake City, Utah 84104 3528 W 500 South, Salt Lake City, Utah 84104 Sanders Brine Shrimp Company, L.C. 3528 W 500 South, Salt Lake City, Utah 84104 Tianjin INVE Aquaculture Co., Ltd Tom Algae C.V.B.A. No. 108, 83 Area, Xiamen Road, Tanggu Economic Development Zone, Binhai, New Area, Tianjin Graaf van Hoornestraat 1, 9850 Nevele Mexico Indirect shares 100% Italy Indirect shares 100% Indonesia Indirect A shares & B shares 100% USA USA USA Indirect Indirect $0.001 shares $0.05 shares 100% 100% Indirect N/A 100% China Indirect shares 100% Belgium Direct fixed and variable shares 100% United Aquaculture Technologies, LLC 3528 W 500 South, Salt Lake City, Utah 81404 USA Indirect N/A 100% Notes a b A put and call option agreement is in place to acquire the remaining 20% of Akvaforsk Genetic Center Inc, so the Group controls 100% of that company and its wholly owned subsidiaries despite having an 80% equity holding in addition the Group controls 51% of Genetilapia, SA de CV despite having a 41% equity holding. European School of Veterinary Post-Graduate Studies is a company limited by guarantee and although the Group has no equity holding in the company, its results are consolidated into this annual report by virtue of control exercised under the provisions of IFRS 10 — Consolidated Financial Statements. The same is true of 0005M Enterprises, a limited company incorporated in Russia. Cost or valuation Balance at 1 October 2016 Additions Capitalisation of intercompany balances Balance at 1 October 2017 Additions Transfer of shares to subsidiary Balance at 30 September 2018 Provisions Balance at 1 October 2016, 30 September 2017 and 30 September 2018 Net book value At 30 September 2018 At 30 September 2017 At 1 October 2016 Investments in subsidiary companies £000 262,752 1,233 706 264,691 1,337 (706) 265,322 (850) 264,472 263,841 261,902 During 2018, intercompany balances totalling £nil were converted into share capital (2017: £706,000) . During the year this investment of £706,000 was transferred to a subsidiary company, FVG Limited at book value. Additionally, £1,304,000 (2017: £1,233,000) of the charge associated with share options relates to employees of subsidiary companies, and so this amount has been treated as an investment by the Company. During the year the company acquired the remaining 1.5% of 5M Enterprises Limited not already owned for a consideration of £33,000. Management have performed an impairment review of the investments in subsidiaries at the period end taking into account both net assets of the subsidiaries and value in use calculations using assumptions consistent with those disclosed in note 15. No reasonable change in key assumptions would have resulted in an impairment. 18 Inventories Group Raw materials Work in progress Finished goods and goods for resale Total inventories at the lower of cost and net realisable value 2018 £000 5,467 2,058 2017 £000 8,120 1,781 12,958 10,152 20,483 20,053 During 2018, £60,044,000 (2017: £57,702,000) was recognised as an expense for inventories carried at net realisable value. This is recognised in cost of sales. The cost of inventories recognised as an expense includes £246,000 (2017: £1,414,000) in respect of write-downs of inventory to net realisable value. The Company did not have any inventories at the year-end (2017: £nil) . 134 135 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 19 Biological assets (continued) Assumptions used for determining fair value of broodstock, eggs and fingerlings IAS41 requires that biological assets are accounted for at the estimated fair value net of selling and harvesting costs. Fair value is measured in accordance with IFRS13 and is categorised into level 3 in the fair value hierarchy as the inputs include unobservable inputs in the valuation of broodstock, eggs and fingerlings for which there are no published market data available. The calculation of the estimated fair value of salmon broodstock is primarily based upon its main harvest output being salmon eggs, which are priced upon our current seasonally adjusted selling prices for salmon eggs. These prices are reduced for harvesting costs, freight costs, incubation costs and market capacity to arrive at the net value of broodstock. The valuation also reflects the internally generated data to arrive at the biomass. This includes the weight of the broodstock, the yield that each kilogram of fish will produce and mortality rates. The fish take approximately four years to reach maturity, and the age and biomass of the fish is taken into account in the fair value. The calculation of the fair value of the salmon eggs is based upon the current seasonally adjusted selling prices for salmon eggs less transport and incubation costs, and taking account of the market capacity. The valuation also takes account of the mortality rates of the eggs and expected life as sourced from internally generated data. The calculation of the fair value of the salmon and lumpfish fingerlings is valued on current selling prices less transport costs. Internally generated data is used to incorporate mortality rates and the weight of the fish. The lumpfish eggs are valued at cost. Internally generated data is used to calculate mortality rates. The valuation models by their nature are based upon uncertain assumptions on sales prices, market capacity, weight, mortality rates, yields and assessment of the discounts to reflect the stages of maturity. The Group has a degree of expertise in these assumptions but these assumptions are subject to change. Relatively small changes in assumptions would have a significant impact on the valuation. A 1% increase/decrease in assumed selling price would increase/decrease the fair value of biological assets by £183,000. A 10% increase/decrease in the biomass of salmon broodstock and the quantity of salmon eggs valued would increase/decrease the fair value of those biological assets by £1,172,000 and £577,000 respectively. Total quantities held at 30 September were: Salmon broodstock and fingerlings Lumpfish fingerlings Salmon eggs The Company did not hold any biological assets at the year-end (2017: £nil) . 2018 2017 612 tonnes 538 tonnes 3.4m units 2.1m units 51.0m units 37.2m units 19 Biological assets Group Organic sheep Organic beef Organic hens Frozen Milt Broodstock, eggs and fingerlings Total biological assets Less: non current broodstock Total current biological assets Livestock 2018 £000 123 150 26 484 2017 £000 214 201 24 876 19,611 15,228 20,394 16,543 (8,502) (5,745) 11,892 10,798 The Group operates a commercial and research farming and technology transfer business, and at 30 September 2018 held 2,192 (2017: 2,909) head of sheep, 299 (2017: 327) head of cattle, and 11,088 (2017: 9,011) hens. The Group had farming sales of £443,144 in the year ended 30 September 2018 (2017: £346,194) . The Group is exposed to financial risks arising from changes in the market value of farm animals. The Group does not anticipate that prices will decline significantly in the foreseeable future and, therefore, has not entered into derivative or other contracts to manage the risk of a decline in livestock price. The Group reviews its outlook for livestock prices regularly in considering the need for active financial risk management. Frozen Milt Where we have identified individual salmon carrying particular traits or disease resistance, semen (milt) can be extracted and deep frozen using cryopreservation techniques (the process of freezing biological material at extreme temperatures in liquid nitrogen) . The calculation of the fair value of milt is based on production and freezing costs and, where appropriate, an uplift to recognise the additional selling price that can be achieved from eggs fertilised by premium quality milt. The estimated fair value of Frozen Milt at 30 September 2018 was £484,000 (2017: £876,000) . The decrease in value of £392,000 relates to usage during the year. Broodstock, eggs and fingerlings Biological assets 1 October 2017 Increase due to production / purchase Due to physical changes Foreign exchange movements Reduction due to sales / discarding of stock Salmon Broodstock £000 Salmon eggs £000 Salmon fingerlings £000 9,273 17,521 3,913 1,952 (15,595) 19,812 (150) (49) 292 262 397 (3) Lumpfish eggs and fingerlings £000 1,661 2,639 328 (16) Tilapia and Shrimp £000 89 222 - 3 Total £000 15,228 22,596 4,942 (215) - (19,910) (767) (3,108) (2) (23,787) Fair value adjustments 675 54 Biological assets 30 September 2018 11,724 5,772 84 265 81 1,585 (47) 265 847 19,611 Broodstock, eggs and fingerlings - non current Broodstock, eggs and fingerlings - current 8,502 3,222 11,724 - 5,772 5,772 - 265 265 - 1,585 1,585 - 8,502 265 265 11,109 19,611 136 137 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 20 Trade and other receivables 21 Trade and other payables Group Trade receivables Less: provision for impairment of trade receivables Trade receivables — net 2018 £000 2017 £000 34,253 33,284 (3,309) (3,210) 30,944 30,074 Group Trade payables Other payables Accruals Total financial assets other than cash and cash equivalents classified as loans and receivables 30,944 30,074 Prepayments Other receivables Total trade and other receivables Less: non-current portion: other receivables Current portion 4,829 9,709 2,812 5,644 45,482 38,530 (4,145) - 41,337 38,530 The non-current portion of other receivables relates to a loan made to a joint venture, Benchmark Genetics Chile SPA this is repayable no later than 17 July 2023 and had interest payable of 6.28% p.a. The fair values of trade and other receivables classified as loans and receivables are not materially different to their carrying values. As at 30 September 2018 trade receivables of £5,775,000 (2017: £4,577,000) were past due but not impaired. They relate to customers with no default history. The ageing analysis of these receivables is as follows: Financial liabilities, excluding loans and borrowings, classified as financial liabilities measured at amortised cost Other payables — contingent consideration Financial liabilities, excluding loans and borrowings, classified as financial liabilities at fair value through profit or loss Other payables — tax and social security payments Deferred income Total trade and other payables Less: non-current portion of other payables (including contingent consideration) Current portion Book values approximate to fair value at 30 September 2018 and 2017. 2018 £000 2017 £000 17,141 22,534 11,294 10,384 5,629 9,687 38,819 37,850 1,498 1,222 1,498 2,094 4,488 1,222 2,882 3,757 46,899 45,711 (1,219) (1,213) 45,680 44,498 Up to 3 months overdue 3 to 6 months overdue 6 to 12 months overdue Movements on the Group provision for impairment of trade receivables are as follows: At 1 October Assumed in a business combination Provided during the year Receivable written off during the year as uncollectable At 30 September 2018 £000 4,279 1,206 290 2017 £000 3,616 716 245 5,775 4,577 2018 £000 2017 £000 3,210 2,130 - 618 (519) 3,309 - 1,347 (267) 3,210 The movement on the provision for impaired receivables has been included in the administrative expenses line in the consolidated income statement. Other classes of financial assets included within trade and other receivables do not contain impaired assets. Company Receivables from related parties Loan provided to subsidiary company 2018 £000 2017 £000 158,034 117,986 7,412 8,362 The financial liability at fair value through profit and loss relates to contingent consideration outstanding from business combinations. The majority of this relates to deferred cash consideration dependent on the performance of the acquired businesses and the fair value is derived from the likely liabilities based on current performance against the targets at each reporting date. As disclosed in note 10, there has been a release of £206,000 (2017: £7,283,000) of the amount provided. Included in contingent consideration is a put/call agreement exercisable and payable in 2022 to acquire the remaining 20% stake in Akvaforsk Genetics Center Inc for a sum determined by future performance. The minimum consideration is NOK 1 (one Krone) payable in the event the business under performs the minimum target set and the maximum consideration is capped at NOK 60m. If Akvaforsk Genetics Center Inc achieves the projections provided by the vendors, payment will be NOK 10m and this assumption has been used in calculating the fair value of the liability. Included within Other Payables is £6,716,000 relating to deferred consideration for the acquisition of the Group’s 49% share of investment in the joint venture Benchmark Genetics Chile SPA which is payable in less than one year. Company Trade payables Payables to related parties Accruals Financial liabilities, excluding loans and borrowings, classified as financial liabilities measured at amortised cost Other payables - contingent consideration Financial liabilities, excluding loans and borrowings, classified as financial liabilities at fair value through profit or loss Other payables — tax and social security payments Total trade and other payables Less: non-current portion of other payables — contingent consideration 2018 £000 384 2017 £000 474 37,098 24,156 1,803 1,142 39,285 25,772 85 84 85 152 84 339 39,522 26,195 - - 39,522 26,195 Total financial assets other than cash and cash equivalents classified as loans and receivables 165,446 126,348 Current portion Prepayments Other receivables Total trade and other receivables Less: non-current portion Current portion 448 379 475 20 166,273 126,843 - - 166,273 126,843 The balance of receivables from related parties include a provision for impairment of £9,283,000 (2017: £6,600,000) A provision of £2,683,000 (2017: £6,600,000) was made during the year following a review of the individual subsidiaries’ net assets. Book values approximate to fair value at 30 September 2018 and 2017. 138 139 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 22 Loans and borrowings Group Non-Current Bank borrowings Other loans Finance lease creditor (note 28) Current Bank borrowings Other loans Finance lease creditor (note 28) Total loans and borrowings 2018 £000 2017 £000 78,808 36,391 60 - 60 2 78,868 36,453 894 - 4 - 6,019 215 898 6,234 79,766 42,687 The fair value of loans and borrowings is not materially different to the carrying value and has not been separately disclosed. On 30 December 2015, the Group completed the acquisition of the Inve Aquaculture Group and on the same day entered into new borrowing facilities consisting of a five-year revolving credit facility (expiring on 11 December 2020) of up to $70,000,000 secured on the assets of the parent company, UK subsidiary companies and certain overseas subsidiary companies. At 30 September 2018, $69,200,000 was drawn down on the facility. The interest rate on the facility is between 1.9% and 3.5% above LIBOR depending on leverage. In December 2018 the Group identified that a condition of the borrowing facility agreement had not been met both historically and as at the year end, which could cause the loan of £52.2m (2017: £36.4m) to become repayable on demand. The facility agreement allows the company 15 business days in which to rectify the position and the directors have determined that as the company would have intended to and always had the ability to rectify the position within the 15 business day period the loan remains classified as non-current at the reporting date. The finance lease liabilities are secured on the assets to which they relate. At 30 September 2018 SalmoBreed Salten AS has a loan of NOK 216 million provided by Nordea Bank Norge ASA. The loan is a five-year term loan ending November 2023 at an interest rate of 2.65% above 3 month NIBOR. In addition, SalmoBreed Salten AS has a loan of NOK 55 million provided by Innovasjon Norge. The loan is a twelve-and-a-half-year term loan ending March 2031 at an interest rate of 4.2% above Norges Bank base rate. Salmobreed Salten AS has a loan of NOK 16.75 million provided by Salten Aqua ASA (the minority shareholder) this loan attracts interest at 2.5% above 3-month NIBOR and is repayable in a minimum of 6 years but not before the bank loans. The currency profile of the Group’s loans and borrowings is as follows: Sterling US Dollar Euro Norwegian Krone Thai Baht Company The book value and fair value of loans and borrowings are as follows: Non-Current Bank borrowings Other loans Total loans and borrowings 2018 £000 13,918 2017 £000 71 38,564 36,391 - 200 27,282 6,019 2 6 79,766 42,687 2018 £000 2017 £000 52,231 36,391 60 60 52,291 36,451 22 Loans and borrowings (continued) The currency profile of the Company’s loans and borrowings is as follows: Sterling US Dollar 2018 £000 13,916 38,375 52,291 2017 £000 60 36,391 36,451 Reconciliation of movements of liabilities to cash flows arising from financing activities Group Year ended 30 September 2018 Liabilities: Assets: Equity: Balance at 1 October 2017 Changes from financing cash flows Proceeds of share issues Proceeds from bank or other borrowings Acquisition of NCI Repayment of bank or other borrowings Loans and borrowings £000 42,687 - 41,206 - (5,815) Interest and finance charges paid Payments to finance lease creditors Total changes from financing cash flows The effect of changes in foreign exchange rates Other changes — liability-related Interest expense Capitalised borrowing fees Total liability-related other changes Total equity-related other changes Balance at 30 September 2018 (2,442) (218) 32,731 1,869 2,193 286 2,479 - Trade and other receivables — non- current £000 Share capital/ additional paid-in capital £000 Non- controlling interest £000 - - - - - - - 339,953 4,971 18,498 - - - - - - - - (33) - - - - (69) - - - - - - - - - - - - - 740 5,678 79,766 (4,145) 358,451 Cash advances and loans made to other parties - (4,076) Total £000 18,498 41,206 (33) (5,815) (4,076) (2,442) (218) (4,076) 18,498 (33) 47,120 The fair value of loans and borrowings is not materially different to the carrying value and has not been separately disclosed. 140 141 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 22 Loans and borrowings (continued) Year ended 30 September 2017 Balance at 1 October 2016 Changes from financing cash flows Proceeds of share issues Proceeds from bank or other borrowings Interest and finance charges paid Payments to finance lease creditors Total changes from financing cash flows The effect of changes in foreign exchange rates Other changes — liability-related Interest expense Capitalised borrowing fees Total liability-related other changes Balance at 30 September 2017 Company Year ended 30 September 2018 Balance at 1 October 2017 Changes from financing cash flows Proceeds of share issues Proceeds from bank or other borrowings Interest and finance charges paid Total changes from financing cash flows The effect of changes in foreign exchange rates Other changes — liability-related Interest expense Capitalised borrowing fees Total liability-related other changes Balance at 30 September 2018 Liabilities: Equity: Loans and borrowings £000 Share capital/ additional paid-in capital £000 37,696 339,952 - 5,921 (1,869) (301) 3,751 (998) 1,937 301 2,238 1 - - - 1 - - - - Total £000 1 5,921 (1,869) (301) 3,752 22 Loans and borrowings (continued) Year ended 30 September 2017 Balance at 1 October 2016 Changes from financing cash flows Proceeds of share issues Interest and finance charges paid Payments to finance lease creditors Total changes from financing cash flows The effect of changes in foreign exchange rates Other changes — liability-related Interest expense Capitalised borrowing fees Total liability-related other changes Balance at 30 September 2017 42,687 339,953 23 Provisions Total £000 18,498 14,500 (1,800) 31,198 Liabilities: Equity: Loans and borrowings £000 Share capital/ additional paid-in capital £000 36,451 339,953 - 18,498 14,500 (1,800) 12,700 (1,054) 1,800 286 2,086 - - 18,498 - - - - 50,183 358,451 At 1 October 2016 Charged to profit or loss Provision reversed during the year Foreign exchange movement Utilised in year At 1 October 2017 Charged to profit or loss Provision reversed during the year Foreign exchange movement Utilised in year At 30 September 2018 Current Non-current At 30 September 2018 Current Non-current At 30 September 2017 Legal fees provision Liabilities: Equity: Loans and borrowings £000 Share capital/ additional paid-in capital £000 (37,193) 339,952 - (1,304) (301) (1,605) 743 1,304 300 1,604 1 - - 1 - - - - (36,451) 339,953 Legal fees provision £000 462 Repairs provision £000 70 - - (262) 200 (3) - - (197) - - - - 200 - 200 - - - - 70 - - - - 70 70 - 70 70 - 70 Other provisions £000 554 (336) - 7 (45) 180 - (187) 7 - - - - - 180 - 180 Total £000 1 (1,304) (301) (1,604) Total £000 1,086 (336) - 7 (307) 450 (3) (187) 7 (197) 70 70 - 70 450 - 450 142 143 The legal fees provision related to potential costs the Group may be liable for relating to a legal action it took against a third party in relation to intellectual property matters. The provision was utilised during the current year. FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 23 Provisions (continued) Repairs provision Under property operating lease agreements, FAI Farms Limited, a subsidiary company, has a rolling obligation to maintain all properties to the standard that prevailed at the inception of the lease. The Directors estimate the costs of this obligation at £15,000 (2017: £15,000) . Additionally, Benchmark Vaccines Limited has a repairs provision of £55,000 (2017: £55,000) in respect of its Braintree premises. Other provisions During the year provisions of a £187,000 were released as no longer required to total £nil (2017: £180,000) in relation to potential rebates to customers/distributors based on targeted volumes, price fluctuations and potential stock returns under right of return clauses. A provision of £354,000 held at the 30 September 2016 end for an overseas customs duty dispute was released to profit or loss in the previous year as it was no longer required. No provisions were held by the Company at the year-end (2017: £nil) . 24 Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using the substantively enacted rates in the relevant territories in which the temporary differences and tax losses are expected to reverse. The movement on the net deferred tax account is as shown below: Group At 1 October Recognised in income statement Tax credit (note 11) Exchange differences At 30 September 2018 £000 2017 £000 (56,359) (63,261) 15,002 (280) 5,629 1,273 (41,637) (56,359) The Company did not have a deferred tax balance at the year-end (2017: £nil). There was no deferred tax recognised in other comprehensive income. Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets where the Directors believe it is probable that these assets will be recovered. The Directors believe there is sufficient evidence that the amounts recognised will be recovered against future taxable profits in the relevant tax jurisdiction. The Group did not recognise deferred tax assets of £13,332,000 (2017: £9,112,000) in respect of losses amounting to £46,540,000 (2017: £28,492,000) and temporary differences of £1,839,000 (2017: £1,363,000) , where there was insufficient evidence that the amounts will be recovered. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries and joint ventures. As the earnings are continually reinvested by the Group and there is no intention for these entities to pay dividends, no tax is expected to be payable on them in the foreseeable future. 24 Deferred tax (continued) The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the period, together with amounts recognised in the consolidated income statement and amounts recognised in other comprehensive income are as follows: Group Accelerated capital allowances Biological assets Other temporary and deductible differences Available losses Fair value of share options Net tax assets / (liabilities) Group Accelerated capital allowances Other temporary and deductible differences Available losses Fair value of share options Net tax assets / (liabilities) Company Accelerated capital allowances Other temporary and deductible differences Available losses Fair value of share options Net tax assets / (liabilities) Company Accelerated capital allowances Other temporary and deductible differences Available losses Fair value of share options Net tax assets / (liabilities) Asset 2018 £000 Liability 2018 £000 Net 2018 £000 (Charged) / credited to profit or loss 2018 £000 (Charged) / credited to equity 2018 £000 - - 26 337 - (40,406) (40,406) 18,074 (1,594) (1,594) - - - 26 337 - (438) (49) (2,585) - 363 (42,000) (41,637) 15,002 - - - - - - (Charged) / credited to profit or loss 2017 £000 (Charged) / credited to equity 2017 £000 Asset 2017 £000 Liability 2017 £000 Net 2017 £000 - - 2,922 - (58,348) (58,348) (933) - - (933) 2,922 - 3,126 (132) 2,635 - 2,922 (59,281) (56,539) 5,629 - - - - - Asset 2018 £000 Liability 2018 £000 Net 2018 £000 - - - - - - - - - - - - - - - Asset 2017 £000 Liability 2017 £000 Net 2017 £000 - - - - - - - - - - - - - - - (Charged) / credited to profit or loss 2018 £000 (Charged) / credited to equity 2018 £000 - - - - - - - - - - (Charged) / credited to profit or loss 2017 £000 (Charged) / credited to equity 2017 £000 - - - - - - - - - - 144 145 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 25 Share capital and additional paid-in capital 26 Reserves Allotted, called up and fully paid Ordinary shares of 0.1 penny each Balance at 30 September 2016 Exercise of share options Benchmark Share Incentive Plan Balance at 30 September 2017 Exercise of share options Shares placed to fund investment in Joint Venture Balance at 30 September 2018 Number Share Capital £000 Share Premium £000 521,348,079 521 339,431 991,144 25,811 1 - - - 522,365,034 522 339,431 290,302 34,545,455 - 35 - 18,463 557,200,791 557 357,894 On 1 December 2016, the Company issued a total of 670,173 shares of 0.1p each to certain employees of the Group relating to share options granted in August 2013 and March 2015. On 6 March 2017, the Company issued a total of 203,105 shares of 0.1p each to certain employees of the Group relating to share options granted in August 2013 and March 2015. On 13 March 2017, the Company issued a total of 25,811 shares of 0.1p each in respect of the Benchmark Share Incentive Plan (“SIP”) . The shares are free matching shares issued upon certain conditions being met following purchase by eligible employees of partnership shares in 2014. On 3 April 2017, the Company issued a total of 117,866 shares of 0.1p each to certain employees of the Group relating to share options granted in August 2013 and March 2015. During the year ended 30 September 2018, the Company issued a total of 29,302 shares of 0.1p each to certain employees of the Group relating to share options granted in August 2013, March 2015 and March 2016. On 25 June 2018, the Company issued 34,545,455 shares of 0.1p each at a price of 55p per share to fund the investment in the Joint Venture Benchmark Genetics Chile SPA. Non-recurring costs of £0.5m were incurred in relation to the share placing and this has been charged to the share premium account. Employee share option scheme The Company introduced an employee share option scheme in 2010. The options existing immediately before admission to trading on AIM on 18 December 2013 were subdivided into equivalent options over the new 0.1p ordinary shares. At the year end, options exist over 14,549,686 (2017: 4,543,420) 0.1p ordinary shares in the Company. Exercise prices and movements in the share options are disclosed in note 30. Members of the scheme can exercise the options at any point from the third anniversary of the option grant date until the options lapse on the tenth anniversary of the option grant date. Options cannot be exercised after the option holder ceases to hold employment with any member of the Group. The following describes the nature and purpose of each reserve within equity: Reserve Description and purpose Share premium reserve Amount subscribed for share capital in excess of nominal value. Merger reserve Under merger relief, the amount in excess of nominal value attributed to shares issued as consideration in an acquisition where the Group has secured at least a 90% equity holding in the other company. Capital redemption reserve Amounts transferred from share capital on redemption of issued shares. Foreign exchange reserve Retained earnings Gains/losses arising on retranslating the net assets of overseas operations into sterling. All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere. To simplify presentation, the share-based payment reserve has been combined with the retained earnings reserve. The share-based payment reserve recognised the value of equity-settled share-based payment transactions provided to employees, including management personnel, as part of their remuneration. Refer to note 31 for further details of these plans. The balance of additional paid-in share capital includes the merger reserve balance of £33,188,000, the balance being the share premium reserve. The merger reserve arose due to the Company issuing 38,635,671 shares of 0.1p each at 86p as part consideration for the acquisition of INVE Aquaculture Holdings B.V. on 30 December 2015. 27 Non-controlling interest The following table summarises the information relating to each of the Group’s subsidiaries that has a material non-controlling interest (NCI) , before any intra-group eliminations. Year ended 30 September 2018 NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Net assets attributable to NCI Revenue Profit OCI Total comprehensive income Profit allocated to NCI OCI allocated to NCI Cash flows from operating activities Cash flows used in investment activities Other individually immaterial subsidiaries £000 Total £000 (139) 5,678 (164) (5) 620 69 Stofnfiskur HF. £000 Salmobreed Salten AS £000 10% 25% 19,257 43,104 13,633 7,734 (2,133) (26,388) (11,177) 19,580 2,050 (9,402) 15,048 3,767 21,208 5,112 533 5,645 535 56 136 995 70 1,065 249 18 1,794 (2,118) (1,417) (17,992) Cash flows (used in) /from financing activities (dividends to NCI: £nil) (1,273) 24,716 Net increase in cash and cash equivalents (896) 4,606 146 147 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 27 Non-controlling interest (continued) Year ended 30 September 2017 NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Other individually immaterial subsidiaries £000 Total £000 Stofnfiskur HF. £000 Salmobreed Salten AS £000 10% 25% 16,184 24,517 11,330 (1,880) 716 - (11,698) (11,250) 13,936 13,983 Net assets attributable to NCI 1,459 3,500 12 4,971 Revenue Profit/(loss) OCI Total comprehensive income Profit/(loss) allocated to NCI OCI allocated to NCI Cash flows from operating activities Cash flows used in investment activities Cash flows from financing activities (dividends to NCI: £nil) Net increase in cash and cash equivalents 14,345 4,116 (1,280) 2,836 431 (134) - (99) (256) (355) (25) (64) 2,425 3,781 (1,815) (23,858) 500 20,737 1,110 660 (86) 37 320 (161) 28 Leases Finance leases The Group leases plant and machinery with a carrying value of £19,000 (2017: £203,000) . Such leases are generally classified as finance leases as the rental period amounts to the estimated useful economic life of the assets concerned and often the Group has the right to purchase the assets outright at the end of the minimum lease term by paying a nominal amount. Future lease payments are due as follows: Not later than one year Later than one year and not later than five years Later than five years Not later than one year Later than one year and not later than five years Later than five years The present values of future lease payments are analysed as: Current liabilities Non-current liabilities Operating leases — lessee Minimum lease payments 2018 £000 Interest 2018 £000 Present value 2018 £000 4 - - 4 1 - - 1 4 - - 4 Minimum lease payments 2017 £000 220 2 - 222 Interest 2017 £000 5 - - 5 2018 £000 4 - 4 Present value 2017 £000 215 2 - 217 2017 £000 215 2 217 The Group has entered into commercial leases on certain items of property, plant and equipment. These leases have an average life of greater than five years. There are no restrictions placed on the Group by entering into these leases. The total future value of minimum lease payments under non-cancellable operating leases for property, plant and equipment are as follows: Not later than one year Later than one year and not later than five years Later than five years 2018 £000 2,388 4,604 4,286 2017 £000 2,860 5,667 4,021 11,278 12,548 148 149 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 29 Retirement benefits The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The pension cost represents contributions payable by the Group and amounted to £1,796,000 (2017: £1,506,000) . Contributions totalling £833,000 (2017: £783,000) were payable to the fund at the balance sheet date and are included in other payables. 30 Capital commitments At 30 September 2018, the Group and Company had capital commitments as follows: Contracted for but not provided within these financial statements 736 9,339 - - Group 2018 £000 Group 2017 £000 Company 2018 £000 Company 2017 £000 31 Share-based payment Share options The Group operates equity settled share option schemes for certain employees. Options are exercisable at a price equal to the nominal value of the parent Company’s shares. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant the options expire. Options are forfeited if the employee leaves the Group before the options vest. The share options under the scheme are as follows: Year ended 30 September 2018: Year 2013 2015 2015 2016 2017 As at 1 October 2017 222,000 775,036 97,575 2,985,107 463,702 No. of options Granted in 2018 Exercised in 2018 Forfeited in 2018 As at 30 September 2018 Option Price* - - - - - - - 222,000 0.10p (268,042) (1,394) 505,600 0.10p (16,260) - 81,315 0.10p (6,000) (63,569) 2,915,538 0.10p - -- (24,968) 438,734 0.10p (325,082) 10,386,769 69.5p Exercise Period August 2016 to July 2023 March 2018 to February 2025 July 2018 to June 2025 March 2019 to February 2026 March 2020 to February 2027 January 2021 to January 2028 2018 18 - 10,711,851 * The option price is the nominal value of the parent Company’s shares for options issued except for the options issued in 2018 for which the option price is the market price of the share on the date the options were granted. Of the total number of options outstanding at 30 September 2018, 808,915 (2017: 222,000) were exercisable. Options exercised in 2018 resulted in 290,302 shares being issued at a weighted average price of 0.1p. The related weighted average share price at the time of exercise was 58.1p per share. 31 Share-based payment (continued) Year ended 30 September 2017: As at 1 October 2016 89,000 1,113,000 864,903 119,396 3,071,132 No. of options Granted in 2017 Exercised in 2017 Forfeited in 2017 As at 30 September 2017 Option Price* - - - - - (89,000) (891,000) - - - 0.10p 222,000 0.10p (11,144) (78,723) 775,036 0.10p - - - (21,821) 97,575 0.10p (86,025) 2,985,107 0.10p - 463,702 0.10p Exercise Period August 2016 to July 2023 August 2016 to July 2023 March 2018 to February 2025 July 2018 to June 2025 March 2019 to February 2026 March 2020 to February 2027 Year 2013 2013 2015 2015 2016 2017 - 463,702 * The option price is the nominal value of the parent Company’s shares Options exercised in 2017 resulted in 991,144 shares being issued at a weighted average price of 0.1p. The related weighted average share price at the time of exercise was 83.6p per share. Share options issued in August 2013 Share options outstanding at the year-end had a weighted average exercise price of 0.1p and a weighted average remaining contractual life of 5 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £nil (2017: £nil) . Additional share options issued in August 2013 Share options outstanding at the year-end had a weighted average exercise price of 0.1p and a weighted average remaining contractual life of 5 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £nil (2017: £nil) . Share options issued in March 2015 and July 2015 Share options outstanding at the year-end had a weighted average exercise price of 0.1p and a weighted average remaining contractual life of 6 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £246,000 (2017: £329,000) . This has been reflected in the income statement and included within operating costs. Share options issued in March 2016 Share options outstanding at the year-end had a weighted average exercise price of 0.1p and a weighted average remaining contractual life of 7 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £617,000 (2017: £663,000) . This has been reflected in the income statement and included within operating costs. Of the options issued in March 2016, 6,000 were exercised early in respect of good leavers. 150 151 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) NOTES FORMING PART OF THE FINANCIAL STATEMENTS (continued) for the year ended 30 September 2018 for the year ended 30 September 2018 31 Share-based payment (continued) Share options issued in March 2017 Share options outstanding at the year-end had a weighted average exercise price of 0.1p and a weighted average remaining contractual life of 8 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £165,000 (2017: £110,000) . This has been reflected in the income statement and included within operating costs. Share options issued in January 2018 In 2017 a decision was made to replace an element of cash bonuses for the year with an award of share options to be granted after the year end this resulted in share options being issued in January 2018. Share options outstanding at the year-end had a weighted average exercise price of 69.5p and a weighted average remaining contractual life of 9 years. The fair value of the equity settled share options granted is estimated at the date of grant using the Black Scholes Merton model taking into account the terms and conditions on which the options were granted. The expense recognised for these options during the year was £483,000 (2017: £500,000) . This has been reflected in the income statement and included within operating costs. Share warrants In January 2015, the Company issued warrants to acquire 259,312 ordinary shares at 112p per share as part consideration for the acquisition of the Improve International Limited business and its subsidiaries. The exercise of these warrants is subject to the extension of certain contracts and the warrants are exercisable at any point between the extension of these contracts and six months thereafter. The Group did not enter into any other share-based payment transactions with parties other than employees during the current or previous period. The total charge reflected in the consolidated income statement in relation to all of the above share-based transactions, and included within operating costs was £1,511,000 (2017: £1,602,000) . The share-based payment expense comprises: Equity-settled schemes Total share based payment charge 2018 £000 1,511 1,511 2017 £000 1,602 1,602 The total charge reflected in the Company’s income statement was £312,000 (2017: £369,000) , all charged to operating costs in both years. 32 Related party transactions Transactions between the Company and its subsidiary undertakings (see note 17) , which are related parties, amounted to £3,737,400 in the year (2017: £1,912,800) . These transactions related to intercompany recharges. Balances with subsidiary undertakings are shown in notes 20 and 21. Details of transactions between the Group and other related parties are disclosed below. Included within trade and other payables due after more than one year are the following loans from related parties: Director Total Group 2018 £000 (60) (60) Group 2017 £000 (60) (60) Company 2018 £000 (60) (60) Company 2017 £000 60 60 The loan from Malcolm Pye, Chief Executive Officer, has no fixed repayment date and no interest is payable. Group entities entered into the following trading transactions and outstanding balances with related parties that are not members of the Group: Transaction values for the year ended 30 September Balance outstanding as at 30 September 2018 £000 162 692 343 332 2017 £000 2018 £000 2017 £000 974 -- 195 -- - - 18 -- - - 103 -- Sales of good and services Salmar Genetics AS1 Bechmark Genetics Chile S.A.1 Great Salt Lake Brine Shrimp Cooperative, Inc2 Andromeda S.A.3 Purchases Benchmark Holdings Limited Executive Pension scheme4 90 72 Great Salt Lake Brine Shrimp Cooperative, Inc2 21,035 15,819 22 2,313 - 3,344 1 Joint venture 2 Associate 3 A Director is a director of the parent undertaking of Andromeda S.A. 4 Pension scheme of a director A contribution of Intellectual Property of £3.78m to Benchmark Genetics Chile S.A. as part of the acquisition during the year (note 16) has not been included in the value of sales above. Remuneration for Key management personnel is included within note 7. The Company is controlled by the shareholders. There is no single controlling party. 33 Contingent liabilities There is a full cross guarantee in respect of certain borrowings of other Group undertakings. Total such borrowings of other Group undertakings at 30 September 2018 were £nil (2017: £nil) . 34 Notes supporting statement of cash flows Cash and cash equivalents for purposes of the statement of cash flows comprises: Group Cash at bank and in hand Cash and cash equivalents Company Cash at bank and in hand Cash and cash equivalents 2018 £000 2017 £000 24,090 18,779 24,090 18,779 2,309 2,309 1,776 1,776 152 153 FINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCESTRATEGIC REPORTBenchmark Holdings plc | Annual Report 2018 | Financial StatementsBenchmark Holdings plc | Annual Report 2018 | Financial Statements 04 ADDITIONAL INFORMATION 156 Glossary 157 Advisers 154 155 GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORTNominated Adviser and Broker: Numis Securities 10 Paternoster Square London EC4M 7LT Auditor: KPMG LLP 1 Sovereign Square Sovereign Street Leeds LS1 4DW Registrars: Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Financial Public Relations: MHP Communications 6 Agar Street London WC2N 4HN Lawyers: Travers Smith LLP 10 Snow Hill London EC1A 2AL Bankers: Lloyds Bank 1st Floor Butt Dyke House 33 Park Row Nottingham NG1 6GY Financial Advisers: Equity Strategies 3rd Floor New Liverpool House 15 Eldon Street London EC2M 7LD GLOSSARY ADVISERS Histopathology Diagnosis and study of disease IFRS Investing Activities IP IPO LTIP M&A Organic growth International Financial Reporting Standards Investing Activities are those activities which have no associated income stream in the current period, but which are intended to provide the Group with income generating operations in future periods. Includes exceptional items, research and development expenditure, pre-operational expenses for new ventures and costs of acquiring new businesses Intellectual Property Initial Public Offering Long-term Incentive Plan Mergers & Acquisitions Organic growth, as it applies to financial information, is the growth arising year on year in any part of the business eliminating the impact of the different ownership periods of any acquisitions made in either the current or prior year as appropriate PD Pancreas Disease 3Es AAN Environment, Ethics & Economics — Benchmark’s framework for sustainability Benchmark’s Advanced Animal Nutrition division Adjusted EBITDA EBITDA before exceptional and acquisition costs Adjusted Operating Profit is operating loss before exceptional items including acquisition related items and amortisation and impairment of intangible assets excluding development costs Annual General Meeting Benchmark’s Animal Health division Acute Hepatopancreatic Necrosis Disease — a shrimp disease — previously known as Early Mortality Syndrome Alternative Investment Market Compound Annual Growth Rate Chief Executive Officer Chief Financial Officer Cash Generating Unit Adjusted Operating Profit AGM AHD AHPND AIM CAGR CEO CFO CGU CleanTreat® Constant currency CPD EBITDA Benchmark’s purification system which removes any detectable traces of medicine from treatment water before it is discharged into the ocean QCA Code qPCR 2018 figures in GBP converted using average foreign exchange rates prevalent in 2017 QTL Continuing Professional Development Earnings before interest, tax, depreciation and amortisation Quoted Companies Alliance Code — outlining best practice for quoted companies Quantitative polymerase chain reaction — a diagnostic tool Quantitative Trait Loci — DNA containing/linked to genes that underlie a quantitative trait EMI scheme Enterprise Management Incentive scheme EMS Early Mortality Syndrome in shrimp, now known as AHPND EU GMP EU Good Manufacturing Practice FAO FAWC FCR FY Genomic Selection GWE Food and Agriculture Organisation Farm Animal Welfare Committee Feed Conversion Ratio Financial Year Targeted breeding by selecting individuals based on their genome Gutted Weight Equivalent R&D Research & Development SalmoBreed Salten Benchmark’s new land-based salmon egg and broodstock production facility currently under construction Salmosan® Benchmark’s sea lice bath treatment SIP SPR Share Incentive Plan Specific Pathogen Resistant Total investment in R&D R&D expensed costs plus capitalised development costs Trading Activities Trading Activities are those operations which generate earnings in the current period excluding Investing Activities 156 All images copyright © 2018 Benchmark Holdings plc and its subsidiaries. This document and any information contained with it is the property of Benchmark Holdings Plc and its affiliates. Printed on FSC Certified paper — Manufactured with Windpower Information regarding forward-looking statements This document includes statements that are, or may be deemed to be, ‘forward-looking statements’. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ‘believes’, ‘estimates’, ‘plans’, ‘projects’, ‘anticipates’, ‘expects’, ‘intends’, ‘may’, ‘will’, or ‘should’ or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding the Company’s intentions, beliefs or current expectations concerning, among other things, its business, results of operations, financial position, prospects, growth, product pipeline, strategies and the industry in which it operates. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and are not guarantees of future performance. The actual results may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. Any forward-looking statements in this document reflect only the Directors’ and the Company’s current intentions or beliefs. Subject to the requirements of the AIM Rules, the Disclosure and Transparency Rules and any other applicable law or regulation, Benchmark explicitly disclaims any obligation or undertaking publicly to release the result of any revisions to any forward-looking statements in this document that may occur due to any change in Benchmark’s expectations or to reflect events or circumstances after the date of this document. Benchmark Annual Report 2018 V1 / 24 January 2019 / BMK-EN-10001 157 Benchmark Holdings plc | Annual Report 2018 | Additional InformationGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSTRATEGIC REPORT COMMITTED TO THE SUSTAINABLE DEVELOPMENT OF THE AQUACULTURE INDUSTRY Benchmark Holdings plc Benchmark House 8 Smithy Wood Drive Sheffield S35 1QN t. +44 (0)114 240 9939 w. benchmarkplc.com e. info@benchmarkplc.com

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