Genus plc.
Annual Report 2012

Plain-text annual report

Genus plc Annual Report 2012 our vision Pioneering animal genetic improvement to help nourish the world. Genus is a world leader in creating advances to animal breeding and genetic improvement by applying biotechnology. We sell added value products for livestock farming and food producers. Our technology is applicable across all livestock species and is currently commercialised by Genus in the dairy, beef and pork food production sectors. our values Five principles and attributes guide everything we do. They are integral to our role as a company that helps to meet a basic human requirement: nourishment. We play a key role in the world’s agricultural economy. We do this by providing innovative solutions to our global farmer and food producer customers to meet the challenge of growing global demand for milk, pork and beef from an increasing world population when there are decreasing resources available for food production. Genus’ worldwide sales are made in 70 countries under the trademarks ‘ABS’ (dairy and beef cattle) and ‘PIC’ (pigs) and comprise semen and breeding animals with superior genetics to those animals currently in production. Genus’ customers’ animals produce offspring with greater production efficiency, and quality, and use these to supply the global dairy and meat supply chain. The Group’s competitive edge has been created from the ownership and control of proprietary lines of breeding animals and the biotechnology used to improve them. We combine this with a global supply chain, technical service and sales and distribution network. With headquarters in Basingstoke, UK, Genus companies operate in 30 countries on six continents, with research laboratories located in Madison, Wisconsin, USA. customer-centric results-driven pioneering people-focused responsible see paGe 10 for more on our values Company overview > 02 2012 Highlights > 04 Genus at a Glance > 06 Chairman’s Statement > 08 > 10 Our Values > 12 Our Business Model > 14 Our Strategy > 16 Our Strategy in Practice Chief Executive’s Report Key performance indicators page 22 REVENUE (£MILLION) 2 012 PERFORMAN CE: £341.8m RETURN ON CAPITAL EMPLOYED 2 012 PERFORMAN CE: 18% 8 . 1 4 3 9 . 9 0 3 4 . 0 8 2 3 . 5 8 2 350 300 250 200 150 100 50 0 0 . 8 1 0 . 7 1 4 . 6 1 5 . 5 1 20 % 15 10 5 0 09 10 11 12 09 10 11 12 Busines s r e vie w > 20 Market Overview > 22 Key Performance Indicators Financial and Operational Review Principal Risks and Uncertainties > 32 > 24 > 34 Our People > 36 Corporate Social Responsibility Corporate GovernanCe > 38 Board of Directors > 40 Genus Executive Leadership Team > 42 Directors’ Report > 47 Corporate Governance Statement Audit Committee Report Directors’ Remuneration Report Directors’ Responsibilities Statement > 52 > 54 > 67 FinanCial statements > 68 Independent Auditors’ Report – Group Financial Statements Group Income Statement Group Statement of Comprehensive Income Group Statement of Changes in Equity Group Balance Sheet Group Statement of Cash Flows Notes to the Group Financial Statements Independent Auditors’ Report – Parent Company Financial Statements Parent Company Financial Statements Balance Sheet Notes to the Parent Company Financial Statements Five Year Record – Consolidated Results Notice of Annual General Meeting > 69 > 70 > 71 > 72 > 73 > 74 > 113 > 114 > 115 > 123 > 124 our Business model page 12 World demand for improved farming productivity Developing differentiated products Global sales and distributio Chief executive’s report page 08 Financial and operational review page 24 our people page 34 our strategy page 14 For more information visit: www.genusplc.com Genus plc Annual Report 2012 01 company overviewbusiness reviewcorporate governancefinancial statements2012 Highlights RE VENUE (£MILLION) 8 . 1 4 3 9 . 9 0 3 4 . 0 8 2 3 . 5 8 2 350 300 250 200 150 100 50 0 09 10 11 12 £341.8m ADJUSTED OPERATING PROFIT ( £ M I L L I O N ) 8 . 5 4 2 . 2 4 1 . 8 3 9 . 9 3 50 40 30 20 10 0 09 10 11 12 £45.8m ADJUSTED OPERATING PROFIT INCLUDING JVs ( £ M I L L I O N ) 6 . 8 4 3 . 5 4 2 . 2 4 2 . 0 4 50 40 30 20 10 0 09 10 11 12 £48.6m Business }} Record results with strong growth in revenue and adjusted profits; }} Adjusted operating profit including joint ventures up 7% to £48.6m – Bovine volumes up 8% and porcine volumes up 7% – Strong performances in Asia, North America and Latin America – Continued investment in research and development; up 13% to £28.7m; }} Adjusted profit before tax up 19% to £46.5m and earnings per share up 19% to 53.5 pence; }} Statutory profit before tax up 33% to £54.4m, benefiting additionally from a higher increase in the net IAS 41 valuation movement of biological assets; }} Strong cash generation: £14.5m cash inflow reduced net debt to £56.4m; and }} Significant strategic progress achieved under new CEO – New strategy for growth developed – Organisation structure aligned to new strategy – Progress on strategy execution, including announcement of first porcine joint venture in China. 02 Genus plc Annual Report 2012 ADJUSTED PROFIT BEFORE TAX ( £ M I L L I O N ) 5 . 6 0 4 . 9 9 3 . 2 3 0 . 2 3 50 40 30 20 10 0 09 10 11 12 £46.5m ADJUSTED BASIC EPS (PENCE) 5 . . 3 8 5 4 7 4 6 3 . 60 50 40 30 20 10 0 1 . 6 3 FinanCial adjusted results year ended 30 June Revenue Operating profit* Operating profit inc JVs* Profit before tax* Basic earnings per share (p)* statutory results year ended 30 June Revenue Operating profit Profit before tax Earnings per share (p) Dividend per share (p) actual currency Constant currency** 2011 £m Movement % Movement % 12 10 9 22 22 309.9 42.2 45.3 39.0 44.8 2011 £m 309.9 44.8 40.8 49.0 13.3 10 9 7 19 19 % 10 21 33 34 10 2012 £m 341.8 45.8 48.6 46.5 53.5 2012 £m 341.8 54.2 54.4 65.9 14.6 * Adjusted operating profit, adjusted profit before tax and adjusted basic earnings per share are before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. These are the measures used by the Board to monitor underlying performance. ** Constant currency percentage movements are calculated by restating 2012 results at the exchange rates applied in 2011. 09 10 11 12 53.5p DIVIDEND PER SHARE (PENCE) 6 . 4 1 3 . 3 1 1 . 2 1 0 . 1 1 15 12 9 6 3 0 09 10 11 12 14.6p “In this, my first year as CEO at Genus, I am pleased to report very good progress both in financial and strategic terms. Once again, the Group achieved record results, with operating profits up 7% and pre-tax profits up 19%. In addition, we have developed a new vision and strategy. With the investments we are making in R & D, the BRIC countries and core competencies, we believe this strategy will enable Genus to continue to make progress in the year ahead and will see an improving rate of growth from 2014 onwards.” Karim Bitar CHieF exeCutive Genus plc Annual Report 2012 03 company overviewbusiness reviewcorporate governancefinancial statementsGenus at a Glance Genus applies biotechnology to advance the science of animal breeding. as the world leader in improving porcine and bovine stock, we play a crucial role in the global agricultural economy. the progeny of our robust and highly productive pigs and cattle enable Genus customers – farmers and food producers in 70 countries – to meet growing demand for meat and milk despite tightening constraints on resources available for food production. We sell and distribute our products and services in over 70 countries. researCH and development Continuing market leadership depends on innovation and investment. Genus is committed to both; and both are driven by customer needs. Our research programme is aimed at developing proprietary technologies in areas such as gender skew, sexed semen and disease resilience that ultimately help to increase our customers’ efficiency whether their business focus is in milk, beef or pork production. Equally important is our work on leveraging and accelerating the use of genomics, leading to valuable genetic improvements. The output of our programme leads to better quality product for our customers. Central to our research and development (‘R & D’) programme is a dedicated team of over 50 scientists and skilled technicians (over half of whom have PhDs). Genus also has a successful track record of working in partnership with universities, consortia and others. produCts Genus breeds the world’s best pigs and bulls. This involves scientifically selecting livestock that will produce offspring aimed at increasing value for our global farmer and food producer customers. In the porcine market, it means selling disease-resistant boars and sows that will produce quality and efficient offspring. In the dairy and artificial insemination (‘AI’) beef markets, our primary product is bull semen. Artificial insemination from semen straws produces high quality cattle; enabling our customers to improve their herds and so become more efficient. marKets Genus is the leader in each of its three markets of porcine, dairy and beef and animal genetics. In the porcine market, we have a 25% share, more than double our nearest competitor. Genus has a leading position of 8% of global sales in dairy and 25% of the market in artificial insemination for beef. Our regional sales and distribution network extends to 30 countries. Our products and services are sold to customers in 70 countries across six continents. Throughout, we are strengthening our market focus and, where necessary, tailoring the Company’s business model to better serve specific markets and segments. 04 Genus plc Annual Report 2012 Genus global sales and operationsworKinG witH our Customers to Create value } Building long-term relationships } our competitive environment We develop strategic partnerships with our customers by aligning our objectives with theirs. For example, in Genus PIC, one of the focuses of our porcine genetics is improving the economics of pork production for our customers. Our royalty model then enables us to share in the value we have helped to create. } Focus on excellent service To maximise the potential of our genetics offering, we support our customers with technical services in important areas like nutrition, reproduction, health management and genetics. In dairy, our global Genetic Management System (‘GMS’) programme helps customers through sire selection to get the progeny that matches their herd aspirations. } increasing demand for our products and growth potential We are extending our global leadership by increasing business with existing customers, exploring new geographies and gaining market share from competitors. The opportunities are immense, since the current use of advanced genetics in pigs, dairy cattle and beef cattle is currently at levels of approximately 40%, 60% and 10% respectively. Unlike the majority of Genus competitors, many of which operate under traditional cooperative systems, Genus as a listed company, is unique. Our business model and multi-species approach enables us to commit higher levels of resources to delivering value to customers and shareholders alike. } r & d focus R & D is one of the main pillars of our business strategy. Genus continues to pioneer the most advanced technologies in order to accelerate genetic improvement and deliver continuous value to customers. } product lines Customer needs determine the wide range of Genus products. For example, in dairy our breeding programmes take into account differing market requirements for milk and cheese production. Similarly in pig production, systems vary across markets to suit the tastes and preferences of consumers around the world. Genus’ genetic improvement programmes provide products and services that suit them all. } markets served Genus has direct presence in 30 countries and we sell to customers in 40 more through agents. North America and Europe account for 70% of our profits. The remainder come from our fast growing businesses in Latin America and Asia; over the next five years we expect these businesses will contribute close to 40% of Genus profits. Genus plc Annual Report 2012 05 company overviewbusiness reviewcorporate governancefinancial statements Genus global sales and operationsChairman’s statement Bob lawson the last year has been one of enormous progress on a number of fronts, with one of the highlights being the successful transition to a new leadership team and structure. significant I am pleased to report a year of significant progress for the Group. In my Chairman’s Statement last year, I reported on the appointment of Karim Bitar as the Group’s new Chief Executive from 30 September 2011. Nearly a year on, Karim has brought a new energy to Genus. He and his management team have made excellent progress in refreshing the Group strategy and putting in place the necessary building blocks to ensure its achievement. At the same time, the Group’s performance has also been fully in line with the Board’s expectations, with growth in adjusted pre-tax profits for the year of 19%. results Genus’ results for the year ended 30 June 2012 show record profits. On revenues up 10%, adjusted operating profit rose 9% to £45.8m, with improved profits in all four key geographies. There were particularly strong performances in Asia and across the Americas. Adjusted profit before tax increased by 19% to £46.5m and earnings per share by 19% to 53.5p, benefiting from the growth in operating profits and significantly lower interest costs. As discussed in the Financial and Operating Review on page 24, the statutory results show a significantly higher operating profit of £54.2m, an increase of 21% on last year. Similarly, the statutory profit before tax of £54.4m is 33% up on last year. These results are struck after non-recurring exceptional items and certain non-cash items, particularly the net IAS 41 valuation movement in biological assets. In this respect, in the year, we reported a small net credit of £0.9m in respect of exceptional items. This includes a credit in relation to the carrying value of our pure line porcine animals following a revision to the basis of valuation, and an increase in the provision relating to the Milk Pension Fund in which we are a participating employer. Also the credit reported under IAS 41 was significantly higher this year compared to the previous year. The nature and volatility of these items do not reflect the underlying performance of the business. It is for this reason that we report externally and use internally adjusted profits to measure performance. Along with the improved profits, we have also once again demonstrated the cash generative nature of the Group’s operations. The cash inflow for the year was £14.5m and net debt consequently reduced to £56.4m. Genus’ results for the year ended 30 June 2012 show record profits. 06 Genus plc Annual Report 2012 The Board is recommending a final dividend of 10.1 pence per share. This, together with the interim dividend of 4.5 pence per share, would result in a dividend for the full year of 14.6 pence per share, an increase of 10% over last year’s dividend. dividend During the year, the Board introduced for the first time an interim dividend that was paid in March 2012. The Board is recommending a final dividend of 10.1 pence per share. This, together with the interim dividend of 4.5 pence per share, would result in a dividend for the full year of 14.6 pence per share, an increase of 10% over last year’s dividend. With this in mind, at the beginning of July 2012 we implemented a new organisational structure which aligns with the new strategy. At the highest level, each sector of our business will be addressed by a global team with R & D providing innovation and support. Further details of our new organisational structure are contained in Karim’s review in this report. people In a group that spans operations in 30 countries and sells into over 70, it is inevitable that our people are the driving force behind our success. During the last year I have had the opportunity to visit Genus’ businesses from the USA to China and meet many of these people. I have been impressed by the enthusiasm and professionalism of the teams that I have met. On behalf of the Board and you, our shareholders, I would like to thank all of Genus’ employees for their hard work and support over the last year in helping deliver yet another record year of profits for the Group. in summary The last year has been one of enormous progress on a number of fronts, with one of the highlights being the successful transition to a new leadership team and structure under Karim. The Board and I are confident that the right foundations are in place for the Group to continue to take advantage of the long-term growth opportunities available in the global animal genetics market. BoB lawson CHairman 3 SEPTEMBER 2012 Subject to approval at the Company’s Annual General Meeting, to be held on 8 November 2012, the final dividend will be paid on 23 November 2012 to shareholders on the register at the close of business on 9 November 2012. strateGy World population growth and increasing urbanisation continue apace and demand for animal protein is growing. As a result, pressure for improved agricultural efficiencies is continuing to increase. This is creating enormous opportunities for Genus. Inevitably, the challenge for Karim, as our new Chief Executive, has been to review and decide how we should take advantage of these opportunities. On his arrival last September, Karim initiated a thorough strategic review. We announced the outcome of this process – a new vision and a new Group strategy – at the beginning of May 2012. The vision is to focus with absolute clarity on our core activity of improving animal genetics on a global basis. The new strategy has reconfirmed the significant growth opportunities available in our chosen sectors of dairy, porcine and beef animal genetics markets, particularly in the BRIC countries (Brazil, Russia, India and China). We have developed thorough plans to capture these growth opportunities for Genus. An in-depth review of the new strategy is set out in the Chief Executive’s Review and on pages 14 to 19 of this report. Here, I would particularly highlight three key elements of the new strategy. Firstly, Genus will increase focus on the needs of its customers and adopt a more effective marketplace orientation. Secondly, our R & D programme will become even more tightly concentrated on key projects aligned to meeting these customer needs. Finally, we will increase our emphasis on ensuring that Genus has the right resources and competencies, from people through to supply chain, in place to deliver on the strategy. Genus plc Annual Report 2012 07 company overviewbusiness reviewcorporate governancefinancial statementsChief executive’s report Karim Bitar with a new vision, strategy and organisational structure now in place, we have made good progress in defining how Genus will seize the opportunity. seizing the We believe strongly in the philosophy of delivery through people. This is my first Chief Executive’s Report since I joined Genus last September. One of the key factors that attracted me to the Company was my belief that there was a significant opportunity for Genus in the world of animal genetic improvement. A year into the role, I am as convinced as ever. In fact, the scale of the opportunity is larger and more exciting than I first thought. More importantly, with a new vision, strategy and organisational structure now in place, we have made good progress in defining how Genus will seize the opportunity. We have also created a set of values that guide the Company in how we will operate in delivering on the new strategy. At the same time, we have been conscious of the need to continue driving operational performance in line with expectations. Record results for the year to 30 June 2012 demonstrate that we have achieved this. Group perFormanCe In a year in which market conditions were generally favourable for Genus’ customers, revenue for the year ended 30 June 2012 of £341.8m was up 10%. Growth in volumes was the primary driver. Porcine volumes were up 7% and bovine volumes up 8%. Growth was particularly strong in Asia, Latin America and the porcine business in North America. Adjusted operating profit increased by 9% to £45.8m. We achieved double digit growth in profits in North America, Latin America and in Asia. In North America, the porcine business performed particularly well, with royalty income up 10%. Latin America benefited from good volume growth in both bovine and porcine. Volumes also grew strongly in Asia. This, together with a buoyant market in the first half of the year, resulted in a 41% increase in Asian profits. strateGy During the past year, we undertook a thorough review of the Group’s strategy. This involved an extensive analysis of our business; examining the scale of the opportunity for Genus and developing the strategy to seize that opportunity and the way in which we should be structured to deliver it. Over 60 senior managers in the Group were actively involved in this process. As part of the process, we established a new vision for the Group: ‘Pioneering animal genetic improvement to help nourish the world’. The vision confirms our intention to focus on our core strengths in animal genetic improvement on a global basis. The strategy we developed to deliver on this vision is designed to take advantage of the very significant growth opportunities in the animal genetics markets; particularly in our existing dairy, porcine and beef animal genetics markets, and especially in the BRIC countries (Brazil, Russia, India and China). To seize these opportunities, Genus will increasingly focus on the needs of its customers and adopt a stronger marketplace orientation. Important drivers in this strategy will be: }} Accelerating Genus’ product lead over competitors: }– The R & D team now reports directly to me and will focus on quickening the pace of genetic improvement and ensuring that products meet specific customer requirements. 08 Genus plc Annual Report 2012 }} Targeting key markets and segments: }– We will place particular emphasis on continuing to grow in those large markets and key segments in which the Group currently operates, as well as in newer markets offering strong growth potential such as the BRIC countries. }} Tailoring the business model: }– We will ensure that our product and service offering meets the specific requirements of the target market/ segment and that we implement best practice in areas such as value capture across the Group. }} Strengthening core competencies: }– We will place renewed emphasis on strengthening core competencies including marketing, key account management, product development, supply chain and technical services. Our prime focus will be on our existing markets of porcine, dairy and beef animal genetics but we will also continue to explore opportunities in other species where we believe we can add value. As part of the strategy, we have also reviewed the way Genus is structured. As a result, we implemented changes to the organisational structure at the beginning of July 2012 to align the business with our customers and increase our marketplace orientation. The new structure involves three business units; Genus PIC, Genus ABS and Genus Asia (covering the porcine and dairy/AI beef business in that region). All three units report directly to me. Genus PIC and Genus ABS will focus on meeting the unique needs of our pork customers and our dairy and AI beef customers respectively and ensure consistent implementation of best practices. Genus Asia is a separate business unit which will drive growth in this fast-growing and increasingly important region. In achieving this, Genus Asia will collaborate closely with Genus PIC and Genus ABS, especially with their global supply chain, marketing and technical service teams. In addition, R & D will continue to report to me to ensure continued high focus on this critical area. Working with me, the heads of these business units and the head of R & D together with the heads of the key support functions – Finance, HR and Legal/Company Secretariat – will now form the Genus Executive Leadership Team (‘GELT’). Its task is to lead the business and implement the strategy going forward. Finally, as part of the strategy review, we have redefined the values by which we will operate as a business. More details of the values and strategy are set out on pages 10 to 11 and 14 to 19 respectively in this report. The Group will amend its segmental analysis of results in the year ahead to align it to the new organisation structure. Details of the results for the year to 30 June 2012 in this new format are available on the Genus website. Having established the new strategy, we are now focused on its execution. A key part of the strategy is to take advantage of the strong growth opportunities in the BRIC countries. In the porcine market in China we envisage the creation of joint ventures with leading integrated pork producers, who will utilise a significant proportion of the breeding animals produced by the joint venture to build their own pig production system. We announced in July 2012 the first such joint venture with BeSun, a leading integrated pork producer in the Shaanxi Province. We are also in discussions with other potential partners for such joint ventures. our people We believe strongly in the philosophy of delivery through people. As a result, during the year we established a new global human resources function and appointed Catherine Glickman as Group Human Resources (‘HR’) Director. Catherine joined us from a 20-year career at Tesco, one of the five largest global retailers with over 500,000 employees in 14 countries, where she was the Head of HR. Under her direction, we now have an extensive programme under way to ensure we have the right people in place to deliver on our ambitions. outlooK Market conditions remained generally favourable for Genus and its customers in the year just ended. However, towards the end of the period, markets became more challenging. This was in large part due to increased feed costs in North America caused by drought conditions and by weakening global commodity dairy prices. These conditions are likely to impact a number of our customers in the year ahead. Although this may lead to some slowing in demand, we believe the strength of Genus’ business model will enable the Group to continue to make progress in the year ahead. Furthermore, with the new strategy and investments in R & D, the BRIC countries and core competencies to support delivery of the strategy, we believe this strategy will enable Genus to continue to make progress in the year ahead and will see an improving rate of growth from 2014 onwards. Karim Bitar CHieF exeCutive 3 SEPTEMBER 2012 Genus plc Annual Report 2012 09 company overviewbusiness reviewcorporate governancefinancial statementsour values Five principles and attributes guide everything we do. our values are integral to our role as a company that helps to meet a basic human requirement: nourishment. customer-centric results-driven We are one team, dedicated to helping customers thrive. We anticipate their needs and help them seize opportunities, acting as partners to improve quality, efficiency and output. If we’re not adding value to our customers, we stop and think again. We are proactive, determined to be the best we can and exceed expectations. We redefine standards for ourselves, our customers and our industry. Every one of us takes pride in delivering the highest level of performance. If something can be improved, we find a simpler, better way to do it. We held 40 focus groups around the world with Genus staff at all levels that consistently confirmed the five values that guide everything that we do. Karim Bitar CHieF exeCutive 10 Genus plc Annual Report 2012 pioneering people-focused responsible We are an innovative, forward-thinking company. We have the courage and confidence to explore new ideas and the energy and enthusiasm to deliver them. We are creative, tenacious and resourceful in every area of our work. We are a business rooted in science but built around our people. We inspire, challenge and support everyone to perform, develop and grow. We treat others with respect and we invite views and feedback to help us improve. We are ethical to our core. We feel a deep sense of responsibility to our customers, colleagues, animals, communities and shareholders. We are honest, reliable and trustworthy. We mean what we say and do what we say. Genus plc Annual Report 2012 11 company overviewbusiness reviewcorporate governancefinancial statementsour Business model Genus is a world leader in the application of biotechnology to achieve animal genetic improvement, thereby improving dairy, beef and pork quality and affordability. a strong focus on customers is at our core; be it in the r & d programme that develops and enhances our market leading products; our global sales and distribution network; or our technical services that ensure customers have the right products and support to enable them to capture the full value potential of the products supplied. value CHain World demand for improved farming productivity Developing differentiated products Global sales and distribution Technical services By making it our business to understand customer needs, Genus consistently strives to provide outstanding products and services that improve milk, pork and beef production. world demand For improved FarminG produCtivity The world population is growing and urbanisation is accelerating in most developing countries, especially in Brazil, Russia, India and China (‘BRIC’). This is leading to increased demand for food such as milk, pork and beef. Meeting this demand with limited resources requires improved farming productivity. Genetics play a key role in achieving the necessary productivity improvements. Genus’ world leading position means that it is well placed to improve the quality, safety and affordability of milk, beef and pork. developinG diFFerentiated produCts Successful R & D starts from the customer’s perspective. By making it our business to understand customer needs, Genus consistently strives to provide outstanding products and services that improve milk, pork and beef production. In porcine, we base our core genetic improvement in two nucleus farms, located in Canada and the US. We combine quantitative sciences with leading edge biotechnology, whilst at the same time adopting a no walls approach to considering and introducing external genes where they can add to our portfolio and meet the needs of our customers. Our dairy and beef product development programme is designed to create elite bulls whose characteristics meet our customers’ needs. Our world-class bulls derive from a range of progeny-testing and young-sire programmes that Genus conducts in the US, UK, Brazil, Australia and Italy. In the beef artificial insemination (‘AI’) sector, the main imperative is to coordinate the different elements of the beef value chain. There is enormous scope for driving value in this way by reducing the high level of variation in the cost of production, mainly driven by feed efficiency. At Genus, we are therefore adapting our genetic selection programme to capture this opportunity and deliver a higher value to the beef chain. GloBal sales and distriBution Genus sells and distributes most of its products through 30 subsidiary companies across the globe. In a number of other countries, sales are made through distributors. In porcine genetics, Genus PIC is the most recognised brand in delivering pigs that combine economical production costs with the best carcass value. In order to capitalise on the value our animals create for our customers, whilst minimising the impact of volatility in pig 12 Genus plc Annual Report 2012 the strong customer orientation, geographic spread of our business activities and the application of our royalty model in porcine all contribute to a robustness of performance even when our customers experience more difficult agricultural markets. } Improved productivity } Shareholder return prices that we experience, we outsource the multiplication of animals either to third party pig producers or customers. In addition, much of our business is under royalty contracts. In such contracts, breeding animals are sold to customers at or close to our cost to produce. In return, customers commit to pay a royalty fee on each of the offspring produced. This use of third party multipliers and customers’ own multiplication under royalty contracts to disseminate genetics reduces volatility in performance and therefore produces a more robust and consistent profit stream and mitigates the impact on Genus of cycles during which profitability is tested by price reductions or increases in input cost. Over 99% of the Group’s multiplication requirements are outsourced and 44% of porcine sales are made under royalty contract. By leveraging our third party multipliers in local markets, we are able to distribute our improved genes into our customers’ systems in more than 70 countries. In dairy and beef, Genus ABS leverages both its sales and distribution networks directly with in-house employees, independent representatives or distributors to efficiently reach and serve our customers. We take care to ensure we understand what our customer expects and that we deliver a product and service that meets these expectations. For example, traditional dairy farmers rely on Genus products that provide consistent results in an industry where high conception rates are critical for success. In the developing countries there is an increased demand for milk that is accelerating the degree of technology used in dairy farming. In these markets, the products we supply have to meet two main goals: to enhance cow herd productivity, with more milk per animal per year, and to expand the cow inventory. teCHniCal serviCes Our sales and distribution efforts are supported by our experienced technical service teams. Ensuring our products meet the expectations of our customers is critical for success. Our global technical services teams not only ensure the product is right but also assist and advise our customers how to achieve the best results. This creates a winning situation for both us and our customers and serves to enhance customer loyalty. Genus Core CompetenCies Key enablers that set us apart: } marketing and sales Speed to market with fresh, relevant products enables Genus to meet, and anticipate, customer needs. Our ability to learn and adapt keeps us in the vanguard. So does a distinctive sales, distribution and technical service infrastructure managed by a skilled and motivated workforce. Strong customer segmentation and adherence to global best practice strengthens our offering. } research and development Genus R & D is closely aligned to current and future customer requirements. The result: leadership in next-generation proprietary technology platforms based on in-depth in-house research as well as fruitful collaborations with leading external technology partners. All of this is driven by the Genus R & D philosophy of ‘discovery without walls’. } supply chain Genus understands the importance of accelerating genetic improvement by increasing the pace of transferring the best genes to our customers’ systems. Our efficient processes ensure seamless and cost-appropriate product delivery. } technical services Genus carefully tailors service and staffing levels to each of our customer segments to best meet its needs in maximising sustainable milk, pork or beef production. Our highly skilled global technical services team help our customers to achieve best results with our products. This involves working closely with customers on areas that include genetics, production, health, nutrition services and farm management. } people development With a team of talented people who are passionate about their work, at Genus we are committed to making a positive difference for customers. This means ongoing skills development and strengthening compensation and recognition schemes to attract and retain the right people for our business. We strive to create a meritocratic and performance driven culture where people leadership is highly valued. Genus plc Annual Report 2012 13 company overviewbusiness reviewcorporate governancefinancial statementsour strategy Genus has developed a robust strategy to capture the very significant growth opportunities in the animal genetics market, particularly in the BriC countries. to achieve this, Genus will increasingly focus on customer needs and adopt a stronger market place orientation. the detailed strategies to support this call for continuing commitment to r & d and focus on key markets and segments while strengthening key competencies. We have developed a robust strategy built around a stronger market place orientation to ensure we capture the opportunities in global animal genetics. Genus’ new strategy focuses on 4 key elements 1. increasing genetic control and product differentiation Increasing our control over genetics to help us create differentiated products for customers 2. targeting key markets and segments Expanding into emerging markets and targeted customer groups, whilst strengthening our position in core markets 3. tailoring the business model Shaping our product and service around the needs of specific markets and customer segments. Delivering the right product, right level of service, at the right time 4. strengthening the core competencies Making sure we have the right skills and systems in place across critical areas of our business strateGiC FrameworK We have built our vision for Genus on a firm foundation. Our strategy provides the collective actions that determine how we will capture these opportunities. We are focused on providing animal genetic improvement on a global basis and we already have leading global market shares in each of our three current business sectors, pork, dairy and beef. There are very significant opportunities to grow in these three areas and beyond. Guiding everything we do are our values; the fundamental beliefs that enable people to make the right choices when faced with difficult decisions. The result is a vision, strategy and values that are unique to Genus; ones that will continue to set the Company apart from the competition and maintain our leadership in the years ahead. 14 Genus plc Annual Report 2012 1 Increasing genetic control and product differentiation 3 Tailoring the business model A top Genus priority is increasing control over the genetics we market and ensuring our products maintain a lead over those of our competitors through increased product differentiation. The starting point is an obsessive focus on establishing our customers’ requirements and then building a R & D programme and supply chain. This ensures our rapid ability to bring to market products and services that meet or exceed customer expectations. To achieve this, we will explore through universities and external research organisations the latest developments in our chosen fields and will invest in proprietary technologies, where relevant. This includes the ability to breed resilience against the diseases that can impact commercial viability and productivity. Equally important are our efforts to leverage and accelerate the use of genomics in our porcine and bovine breeding programmes. Such technologies are widening the gap between Genus and our competitors and emphasising differentiation. Through this process, our technological advances are producing animals that have increased value for our customers in terms of factors such as prolificacy and feed conversion. In addition, under the gender skew element of our research programme we are actively pursuing sexed semen R & D to deliver an improved and more efficient product offering. 2 Targeting key markets and segments The success of Genus rests, in large part, on the Company’s ability to target the right key markets and segments. In the porcine part of our business, we are focusing on two links in the value chain: integrators, who produce, slaughter and brand their products; and the farrow-to-finish segment, which delivers stock to third parties for further processing. We are ensuring that we have the right products for each of these segments in each of the critical geographies. In the dairy and AI beef business, we recognise and target the growth that is occurring in larger dairy customers who focus more on the scale economics of farming. We also seek continuing growth in the fast-expanding BRIC economies, while retaining strong links with reliable customers in places such as the US and Europe. There, steady business will help fund our expansion elsewhere. As we focus on target markets and segments, we recognise that every geographic market or customer segment has its differences – and Genus remains sensitive to them. For example, in the US, emphasis is on pigs that produce good bacon, while Spain and France prefer leaner meat. For the Chinese, good flavour prevails. Through our porcine development programme, we have the ability to tailor our product offering and better meet the specific requirements of these differing markets. Our emphasis extends beyond the products we offer to factors such as the level and type of service we provide. We are establishing global technical service teams both in our porcine and in our dairy and AI beef businesses. These teams will ensure we offer the right service at the right time to ensure we exceed customer expectations. In our porcine business we evaluate carefully when is the right time to use the royalty model and when to continue with direct sales. And in dairy and AI beef, we will continue to evaluate when to operate an owned business and when to use distributors. 4 Strengthening core competencies To implement our strategy, we are strengthening each of the five following core competencies that set Genus apart: (i) marketing and sales (ii) product & development (iii) supply chain (iv) technical services and (v) people development. This involves gearing up our key account management on a global basis to offer the improved service our large enterprise customers expect. We are also sharpening our focus on product development through proprietary technologies. The strengthening of our world-class supply chain in our porcine and dairy and AI beef businesses is also a major priority. On the technical side, we are increasingly providing the sort of service that allows customers to extract the full potential of our products. To ensure we achieve this consistently throughout our business, we are establishing global technical service teams. And, throughout Genus, we are enhancing the skills and expertise of our people through training and recruitment. We are also using our global presence to transfer people and skills well established in developed markets into the teams we are building in the developing markets. tHe result Our strategy envisages a higher level of capital investment to support the planned growth; however, we expect such investment to remain modest in the context of the Group as a whole. We are also planning increased investment in our core competencies and people to ensure we are well placed to execute on our growth plans. As a result of the planned investment, we expect the delivery of our plans to enable the Group to achieve an improving rate of growth from 2014 onwards. Genus plc Annual Report 2012 15 company overviewbusiness reviewcorporate governancefinancial statementsour strategy in practice porcine at Genus piC we are expanding our presence with the world’s largest integrated pork producers. this involves a full understanding of varying customer needs and a passionate commitment to delivering the best products to meet them. To succeed on a global basis, we are making every effort to attract the most talented team. The porcine business, like any other, has cycles during which profitability, particularly for our customers, is tested by a reduction of prices or increase on input cost. At such times, it is imperative to drive better results through more resilient business models. Genus PIC understands customer economics and uses genetics to deliver better, more efficient pigs with greater carcass value. 1 Increasing genetic control and product differentiation 3 Tailoring the business model wHat we plan to do in 2013 }} We will continue investing in proprietary technologies that accelerate genetic progress and increase the value we deliver to our customers. }} Imputation in genomics will be used to further improve our product differentiation. Our genomics work to date shows impressive results in economically relevant traits, with accuracy of breeding values increasing by 71% for litter size, and by 58% for pig mortality. wHat we plan to do in 2013 }} Improving our understanding of the different needs of our customer segments will enable us to continuously tailor our products and services and exceed customer expectations. }} We are establishing a global technical service team that will assist in ensuring we deliver the best product and service tailored to specific customers and markets. This will include our fast growing business in China. }} We will start a two-year global programme to }} Large integrated customers have reduce the dissemination lag (the time it takes to get the latest genetics to the market) in the most relevant markets and at our customers’ systems worldwide. Our target is to reduce the lag by one full year. enthusiastically adopted our royalty model for cost effectively improving the performance of their pig production systems. We will continue expanding this model, already well established throughout our customer base in North America, by extending it to other geographies to the benefit of customers and Genus alike. 2 Targeting key markets and segments 4 Strengthening core competencies wHat we plan to do in 2013 }} With presence in more than 30 countries, we will continue solidifying our leading position in most markets across the Americas, especially the US. We will expand our presence in Brazil, Russia, Germany, Spain and China. }} Leveraging Genus’ strengths in the Americas will enable us to build success in the world’s largest integrated and production systems. wHat we plan to do in 2013 }} Our technical service group will continue to realise the full potential of our genetics. }} Genus PIC will continue to attract and retain the best talent in the industry. We are establishing a global technical service team that will assist in ensuring we deliver the best product and service tailored to specific customers and markets. Bill CHristianson CHieF oper atinG oFFiCer , Genus piC 16 Genus plc Annual Report 2012 dairy and ai Beef Genus aBs leads the world in dairy and ai beef semen genetics. the Company has a strong and successful development programme and unrivalled global coverage. By acting locally, Genus ABS leverages strengths in people and technology with the highest standards of innovation and service that transcend national borders. In some countries, we are seeing an accelerated growth in the scale of dairy farming. This offers exciting opportunities to achieve efficiency gains as well as the benefits of specialisation. 1 Increasing genetic control and product differentiation 3 Tailoring the business model wHat we plan to do in 2013 }} We are fully committed to deliver the best wHat we plan to do in 2013 }} We acknowledge the differences among genetics of the industry. The application of our new technologies will drive a step change in our customers’ farms. }} We expect to sustain the leadership of our product line and to continue meeting demand for the highest ranked bulls in the industry. We are fully committed to deliver the best genetics of the industry. riCardo Campos CHieF operatinG oFFiCer, Genus aBs customer segments and will tailor our product offers accordingly. This will involve ongoing refinement of our range as well as timely deliveries in required volumes. }} We will establish a global technical service team, leveraging off our successful experience in markets such as Mexico, to bring a better all round offering to key customers. }} We will establish a global marketing team that will facilitate further improved coordination between customer needs and product development. }} We will seize the opportunity to support the coordination of the supply chain with ever-better products and people dedicated to making a positive change in what remains a very traditional industry. 2 Targeting key markets and segments 4 Strengthening core competencies wHat we plan to do in 2013 }} We are putting increasing emphasis on further developing skills in key account management, technical service, product development and the supply chain. wHat we plan to do in 2013 }} Genus ABS will expand presence in developing markets, with the BRIC economies and Argentina offering the most promising opportunities. }} At the same time we will sustain our successes in very competitive countries such as Mexico, Italy, France and the UK. }} We will continue to recognise and accommodate the differing needs of traditional farmers and large dairy systems, with a particular focus on ensuring we capture the growth in the latter through targeted product and service offerings. }} In North America, we will focus our efforts in the large enterprise segment. Genus plc Annual Report 2012 17 company overviewbusiness reviewcorporate governancefinancial statementsour strategy in practice asia the world’s largest continent, extending across 30% of the globe’s land mass is home to 3.9 billion people, or 60% of the world’s population. and that population is growing, as are incomes and appetites. For Genus, the opportunities are unrivalled. China alone accounts for almost 50% of the pigs in the world. India has 15% of the dairy cows. And Russia, which spans Europe and Asia, is one of the globe’s largest importers of all animal protein. Food availability, safety and quality are critical objectives for each of these countries, with self-sufficiency in animal protein production featuring as an important element of their national plans. Genus Asia is becoming an increasingly significant feature in those plans, building our business in pork, dairy and beef. Case study – GrowinG our porCine Business in CHina In China’s pork business, we are looking into joint ventures with large food companies that are vertically integrating upstream. We are also considering alliances with feed companies that are moving downstream into production and later bringing their pork to the market. Our recently-signed joint venture (‘JV’) agreement with BeSun, a leading company in the Chinese pork market, expands Genus’ porcine business in China and is in line with our new corporate strategy. Genus will become a 49% partner in the JV through a cash investment of approximately £8.7m. The JV will own a recently completed state-of-the- art nucleus farm. We will provide, over the next nine months, pure line porcine stock from Genus PIC’s global high-health pyramid and we will manage the farm. This arrangement will safeguard the Company’s intellectual property and form a framework for a royalty revenue model similar to those in operation in other key porcine geographies. The JV will produce grandparent sows, with the output from the farm being used proportionally by the JV partners. Once in full operation, the herd will underpin production of 10 million slaughter pigs per year. We are well established but will continue to pursue growth in a number of Asian markets. Jerry tHompson CHieF operatinG oFFiCer, Genus asia 1 Increasing genetic control and product differentiation 3 Tailoring the business model wHat we plan to do in 2013 }} We will work to develop a differentiated product pipeline for key countries such as Russia, India and China. In porcine, this will be through our global product development programme. In dairy, we will ensure the product from our local studs is tailored to the individual market requirements. }} We will work to ensure that the latest genetics are available in specific markets, through more rapid dissemination. wHat we plan to do in 2013 }} In China, we will continue to pursue joint venture opportunities with large food companies that are integrating vertically in pork production, such as the recently agreed joint venture with BeSun. }} In dairy, we will expand our distribution in countries such as China to target large accounts. In India we will continue the development of production and distribution channels to serve this more fragmented market. }} Our focus on large customers will be leveraged through the targeted use of specialist technical services, calling on the global team where appropriate to ensure we bring our world leading expertise to our key customers in Asia. 2 Targeting key markets and segments 4 Strengthening core competencies wHat we plan to do in 2013 }} We are well established but will continue to pursue growth in a number of Asian markets. Genus is placing particular emphasis on China, Russia and India. wHat we plan to do in 2013 }} We will leverage the knowledge and experience of the Genus Group global teams, including internal staff transfer and assignments. }} We are rapidly building our teams in China, Russia and India to ensure we have the right resources in place to support our ambitious growth plans. This includes putting emphasis on further developing skills in key account management and technical service. 18 Genus plc Annual Report 2012 research and development For Genus, r & d is crucial for growing our businesses and honing the Company’s competitive edge. the focus is on meeting, and anticipating, customer needs and aligning technical advances to business strategy in the areas of porcine, dairy and beef. The quality of Genus science is one of the Company’s great differentiators. dr denny FunK CHieF sCientiFiC oFFiCer Just as Genus today is reaping the benefits of technologies developed a decade ago, in five to ten years’ time, today’s R & D efforts will enable us to maintain Genus’ leadership in every aspect of our operations. We will continue to accelerate speed to market through close involvement with Genus marketing, sales and technical service groups and, of course, our customers. Our research programme is focused on three core platforms: Genus produCt advantaGe The quality of Genus science is one of the Company’s great differentiators. To determine precisely how R & D sets us apart from the competition, we regularly benchmark our performance. For example, in porcine, feed costs represent about 75% of the cost of production. At Genus, we regularly collect feed efficiency differences from head-to-head trials in the marketplace. Genus PIC’s products consistently rank first compared to competitor products. Disease resilience We continuously benchmark our value against our competitors. 1 }} We understand the impact of major disease outbreaks in the animal world, including foot and mouth, BSE, swine fever and Porcine Reproductive and Respiratory Syndrome. Genus is working on research projects to deliver animals that are more robust or less affected by diseases of this kind. Gender skewing 2 }} There is an already established market for sexed semen that relies on third party technology. We are actively pursuing sexed semen R & D to deliver an improved and more efficient product offering. }} Sexed semen offers even greater potential value in countries like India. There, demand for milk is growing at 4% per year. Our aim is to double the number of heifers available for replacement or herd expansion, while minimising the number of male calf births. FEED CONVERSION RATIO 3.0 2.8 2.6 2.4 2.2 2.0 PIC A PIC B PIC C PIC D PIC E C o m petitor 4 C o m petitor 3 PIC F C o m petitor 5 C o m petitor 2 C o m petitor 1 Source: Genus 2010 product validation summary Similarly, in dairy, Genus ABS has the most bulls at the top of the US TPI rankings. And while the number of Genus top bulls is a sign of success, so is ‘strike rate’. Ours is the best in the industry. In dairy we have delivered product leadership. 3 Genomic selection }} One of the most important tools in our core genetic improvement programme, genomic selection, enables the identification of genetic markers, that can lead to significant breed improvements. This results in an increase in the frequency of identifying elite individuals to use in breeding programmes. }} Over a decade of development in this area has reduced costs and widened application to a much bigger proportion of the breeding population. TOP 10 0 HOLSTEIN BULLS FOR TOTAL PERFORMANCE INDE X ( ‘ TPI’), APRIL 2012 30 25 20 15 10 5 0 28 22 21 14 10 4 2 A B S C RI S elect Accel Alta S e m ex Others Genus plc Annual Report 2012 19 company overviewbusiness reviewcorporate governancefinancial statementsmarket overview Growth in demand is greatest in developing countries, with China, amongst other developing countries, at an inflection point in pork and milk consumption and production. the demand is primarily driven by an increase in urbanisation and economic growth. Income growth is fastest in countries with large populations, and this is driving demand growth for food. GloBal trends Demand for animal protein is outstripping supply and the world has shifted from an era of structural surplus to structural shortage of grain to sustain the growth in animal protein. This is leading to a period of higher meat prices. With limited and more expensive input resources, animal production has to increase yield by a better and higher use of genetics and other key technologies. Within these macro trends, milk, beef and dairy prices and feed costs fluctuate according to short-term demand and other factors such as weather. meetinG inCreasinG demand Whilst grain prices have been volatile due to weather fluctuations from year to year, the underlying trend in recent years has been for grain prices to rise because of higher demand and the additional use of grain as an energy source to help reduce reliance on hydrocarbons. Ethanol now demands about 40% of the US corn production – which is one third of the world’s total. Before the year 2000, ethanol demanded less than 10% of the US corn production. Since then, corn prices have more than doubled from a range of $2.50–$4.00 per bushel to a new level of $5.00–$8.00. Given such market constraints, one of the key solutions is to increase yield through technologies such as improved genetics. There is enormous scope for this, with variations of more than 100% in productivity when comparing pork or milk yield across different countries. Other factors that contribute to productivity rises include access to greater use of advanced nutrition and better production practices. CHINA’S URBAN GROWTH 1970–2020 (estimated) 51% 40% 60% 49% 80% 67% 33% 20% 82% 80% Rural Urban 20% 18% 1970 1980 1990 2000 2010 2020 Source: Data is from National Bureau of Statistics and Ministry of Public Security MILK PRODUCED PER COW/ YE AR (KG) 10,000 8,000 6,000 4,000 2,000 0 U S N etherlands Great Britain Argentina Japan C hina N e w Zealand R ussia Brazil India Source: Genus 2010 Inevitably, countries with local access to large volume of grains and/or grass will continue leading the cost of production and capture the export opportunity in milk, pork and beef. Therefore, the US and Brazil are likely to continue to lead in pork and beef exports. New Zealand, the US, Argentina and selected countries in EU will lead in whole milk powder, butter and cheese. Income growth is fastest in countries with large populations, and this is driving demand growth for food. For instance China has the desire to be self-sufficient in the production of pork. The nation already accounts for almost 50% of the pigs in the world. This aim will generate a higher demand for grains, putting higher pressure on prices. Within the other factors that contribute to efficiency in animal production, genetics plays the most significant role in driving cheaper cost of production and better quality of proteins. Genus will have a significant role in helping to redress this imbalance. porCine Pork consumption is growing annually in a range of 1.5–2.5% and China accounts for 80–90% of that growth in the last decade. The US accounts for over 35% of the world’s exports, and keeps growing, with competitive production cost unsurpassed. As a result there is a correlation between China and US market prices. We had higher prices in the first half of our fiscal year but during the second half (Jan–June), pork prices fell back in most export and import markets. 20 Genus plc Annual Report 2012 The promotion of vertically integrated food systems is likely to continue and is driving strong demand for porcine genetics. This trend was attributable to an increase in production in China, the US and Brazil. The exception was the EU. It was particularly noticeable in China, where production is less efficient and pork prices are high and volatile due to disease-related supply disruptions. INTERNATIONAL PORK PRICES PIG CARCAS S (£ PER KG) 3.00 3.0 2.50 2.5 2.00 2.0 1.50 1.5 1.00 1.0 0.50 0.5 0 0.0 Jul 09 Jul 10 Jul 11 Jul 12 – Brazil – USA – China – EU Source: China Swine, CIRCA, CME and IEA October 2009. Over-production has cut prices of commodity dairy products including cheese, butter and whole milk powder. The decline in China has been less dramatic, since the country is still importing large product volumes to fill growing demand for milk and its derivatives. Within the EU, new standards in sow housing are likely to cause a market readjustment. While some countries, including the UK, Denmark and the Netherlands, already comply with the new regulations, in others, such as Spain and Poland, the transformation is more expensive. This is likely to mean a decline in pork production of as much as 5%. As occurs with other commodities, lower prices and higher input cost are driving supply adjustments of milk production in the short term. Global milk prices are expected to recover during 2013 and continue the upward trend seen over the last four years that is primarily explained by an increased demand from importing countries like China and Russia. More significant is the transformation in China, which represents about half of world pork production and consumption. There, with urbanisation up to 50% that translates into higher disposable income, demand for pork is growing; pork is the preferred protein source. To encourage increased supply to meet demand, the government is supporting the development of large integrated pork producers to replace traditional small farmsteads. Large scale pig producers now account for 37% of pigs to market; three years ago they represented only 25% of the total market. The promotion of vertically integrated food systems is likely to continue and is driving strong demand for porcine genetics. dairy and ai BeeF International dairy prices have risen over recent years from the lows experienced in 2008 and remained at relatively high but stable levels over much of 2011 and into early 2012. Much of the strength in the global dairy markets is attributed to a combination of strong demand in the Russian Federation and South East Asia, and constrained supplies from New Zealand and Australia. Imports of milk powders to China have soared, fuelled by rising income but also food safety concerns, in the aftermath of the milk adulteration incidents. The global dairy sector is entering a decade of relatively high prices, continuing strong demand, but also higher production costs and possibly continued market variability. During 2012, dairy prices have declined over the last six months to a level last seen in INTERNATIONAL DAIRY PRICES (PENCE PER LITRE) 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 Jul 09 Jul 10 Jul 11 Jul 12 – Brazil – USA – China – Russia – EU Av Source: CEPEA, China MOA, CME, Dairy Co and Russian Ministry of Agriculture Cattle prices have declined in Brazil over the last six months, a trend likely to change by late 2012 when Brazil’s short-term production increase comes to an end. Prices in the US are expected to remain firm, supported by the impact of the hot weather and drought conditions in much of the US. INTERNATIONAL CATTLE PRICES LIVE CATTLE (£ PER KG) 2.0 2.0 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0.0 Jul 09 Jul 10 Jul 11 Jul 12 – Brazil – USA Source: CEPEA and CME Genus plc Annual Report 2012 21 company overviewbusiness reviewcorporate governancefinancial statementsKey performance indicators our clear objectives are to deliver organic growth in both our species, to drive operating profitability from that growth and to generate cash. we apply key performance indicators to monitor and measure our progress against each of these objectives. perFormanCe measures BOVINE SALES VOLUME GROWTH 2 012 PERFORMANCE : 8% 12 % 10 8 6 4 2 0 1 1 8 7 2 09 10 11 12 PORCINE SALES VOLUME GROWTH 2 012 PERFORMANCE : 7% % 8 7 6 5 4 3 2 1 0 7 6 5 3 09 10 11 12 we measure our business by reference to indicators in two main areas: wHy we measure To track the underlying performance of the business by reference to a common unit of measure used consistently around the world. wHy we measure To track the underlying performance of the business by reference to a common unit of measure used consistently around the world. deFinition The change in the volume of dairy, beef and sorted units of semen delivered in the year. perFormanCe Volumes grew 8% to 15.7m doses. The driver for this was strong growth in volumes in Latin America and Asia, with particular expansion in China. The growth includes semen produced locally from production facilities that we established in India and China last year. Semen volumes supplied from global studs increased by 4%. deFinition The change in the volume of animals on which we receive revenue, whether through direct sales or royalty contracts. In order to ensure we have a consistent unit of measurement the volume is based on market pig equivalents i.e. slaughter animals that contain our genetics. perFormanCe After last year’s return to growth that followed the agricultural recession, volume growth has continued into FY12 with growth of 7%. Customer confidence was apparent throughout the year with strong evidence of royalty customers updating their genetics regularly, particularly in North America. Performance in Asia, and especially China, continued the strong growth seen throughout last year. OPERATING PROFIT PER DOSE OF SEMEN 2 012 PERFORMANCE : £1.32 OPERATING PROFIT PER MARKET PIG EQUIVALENT (‘MPE’) 2 012 PERFORMANCE : £0.42 3 4 . 1 2 4 . 1 5 3 . 1 2 3 . 1 1.5 1.2 0.9 0.6 0.3 0 2 4 . 0 5 3 . 0 6 3 . 0 6 3 . 0 0.5 0.4 0.3 0.2 0.1 0 09 10 11 12 09 10 11 12 wHy we measure To monitor the profitability of the business by species unit. wHy we measure To monitor the net, fully allocated profitability of the business by species unit. deFinition Net operating profit of dairy and AI beef expressed per dose of semen delivered. deFinition Net porcine operating profit expressed per MPE. perFormanCe FY12 saw a small reduction in unit profitability. Average selling prices fell overall on prior year due to the stronger growth in volumes of the lower cost, locally sourced product in Russia, India and China. In addition, product development costs associated with expanded bull development programme were higher. perFormanCe Profit per MPE increased on FY11 as product improvements, additional value programmes such as CBVPlus and CBVMax, and the continued switch to the more robust royalty model increased porcine profitability. }} performance; and }} financial strength. 22 Genus plc Annual Report 2012 perFormanCe measures REVENUE (£MILLION) 2 012 PERFORMANCE : £341.8m 8 . 1 4 3 9 . 9 0 3 4 . 0 8 2 3 . 5 8 2 350 300 250 200 150 100 50 0 PORCINE REVENUE: % ROYALTY 2 012 PERFORMANCE : 44% 4 0 4 8 4 6 3 3 50 % 40 30 20 10 0 FinanCial strenGtH measure NET DEBT TO EBITDA 2 012 PERFORMANCE : 1.1 9 . 1 7 . 1 4 . 1 1 . 1 2.0 1.5 1.0 0.5 0 09 10 11 12 09 10 11 12 09 10 11 12 wHy we measure To track the underlying performance of the business geographically. deFinition Sales of products and services analysed by region. The change in revenues is also shown on an underlying constant basis, to indicate underlying sales trends. perFormanCe Revenues grew by 10% in actual currency and 12% in constant currency, with strong growth in the developing markets. In Asia sales were up 36%, with growth of 12% in Latin America, balancing the adverse impact of exchange experienced during the last quarter. Mature North American markets had respectable growth levels, especially in porcine. wHy we measure To monitor the success of the fundamental strategy to transition porcine customers to the royalty model. wHy we measure To ensure an appropriate level of financial gearing and generation of sufficient cash profits to service debts. deFinition The proportion of revenue stemming from royalty arrangements expressed as a percentage of total porcine revenue. This is a key indicator of Genus’ success in converting porcine customers from direct sales to the more robust royalty model. perFormanCe The proportion of porcine revenue contributed by the royalty model grew to 44% in FY12. This was a significant increase on the prior year and demonstrates the traction in converting customers in the developing markets to the royalty model. Also, customer confidence in the developed markets returned, with increased genetic uptake into royalty contracts in North America. deFinition The ratio of net debt (being gross debt including finance lease obligations less cash held), to earnings (excluding JV income) before interest, tax, depreciation and amortisation. perFormanCe The ratio reduced during the year from 1.4 to 1.1, reflecting the business’ improved profitability, focus on cash generation and the reduction in net debt from £67.9m to £56.4m. CASH CONVERSION 2 012 PERFORMANCE : 96% RETURN ON CAPITAL EMPLOYED 2 012 PERFORMANCE : 18% 1 0 1 6 2 9 9 4 7 120 % 100 80 60 40 20 0 0 . 8 1 0 . 7 1 4 . 6 1 5 . 5 1 20 % 15 10 5 0 09 10 11 12 09 10 11 12 wHy we measure To monitor the Group’s performance at converting profits into cash through working capital management disciplines. wHy we measure To ensure we invest wisely and achieve rates of return for the Group in excess of our cost of capital. deFinition Cash generated from operations before interest and taxes, expressed as a percentage of adjusted operating profit. perFormanCe The business continued to target reduction in net debt through disciplined working capital management and cash conversion improved in spite of ongoing investment. FY12 experienced continued investment in the bull programme, to meet future demands identified in the strategy review, and investment in production and product development facilities. Genus is also required to pay deficit repair contributions into its defined benefit pension schemes. deFinition Return on capital employed (‘ROCE’) is defined as adjusted operating profit expressed as a percentage of historical (non IAS 41 adjusted) gross assets. perFormanCe ROCE increased from 17% last year to 18% for the year to 30 June 2012. The historical cost asset base stabilised after the significant investments made two years ago, with more modest investment in infrastructure being made this year. Investment in the bull programme and development spend was offset by lower levels of inventory holdings and amortisation of intangible assets. Genus plc Annual Report 2012 23 company overviewbusiness reviewcorporate governancefinancial statementsFinancial and operational review Financial review we achieved record results with revenues up 10% to £341.8m and adjusted profit before tax up 19% to £46.5m. Adjusted basic earnings per share rose by 19% to 53.5 pence (2011: 44.8 pence). The increase was in line with the improvement in profit before tax. JoHn worBy Group FinanCe direCtor adJusted perFormanCe Adjusted operating profit Share of JV profits* Adjusted operating profit inc JV Net finance costs Adjusted profit before tax * Excludes net IAS 41 valuation movement in biological assets and taxation. actual currency 2012 £m 45.8 2.8 48.6 (2.1) 46.5 2011 £m 42.2 3.1 45.3 (6.3) 39.0 Constant currency Movement % 10 Movement % 9 7 19 9 22 The results for the year ended 30 June 2012 show that Genus has continued to make good progress. We achieved record results with revenues up 10% to £341.8m and adjusted profit before tax up 19% to £46.5m. As in previous years, we continue to use adjusted operating profit and adjusted profit before tax as the prime measures of financial performance, particularly in monitoring underlying performance. The following non-cash or non-recurring items are excluded from adjusted operating profit: }} net IAS 41 valuation movement in biological assets; }} amortisation of acquired intangible assets; }} share-based payment expense; and }} exceptional items. revenue Revenue increased by 10% from £309.9m to £341.8m. Revenue grew across the Group’s activities, with porcine revenues up 14% and dairy and AI beef revenues up 6%. Growth was particularly strong in developing markets with Latin America revenues up 12% and Asia up over 30%. adJusted proFit BeFore tax Adjusted operating profit, including joint ventures, increased by 7% to £48.6m (2011: £45.3m) and adjusted profit before tax increased by 19% to £46.5m (2011: £39.0m). The percentage improvement in operating profit and profit before tax, at constant exchange rates, was 9% and 22% respectively. Operating profits increased in all four regions. Profit growth was strongest in Asia, where significant volume growth and a buoyant market in porcine, especially in China, led to a 41% increase in profits to £10.4m. In North America, profits increased by 12% to £39.5m, driven by increased volumes in porcine and higher margins in both porcine and dairy and AI beef. Latin American profits also increased by 20% to £16.2m. In the more mature European market, profits improved to £18.9m, an increase of 3%. R & D costs were 13% higher including increased investment in research activities, particularly in relation to genomic evaluation work. Central costs were also higher, reflecting investment in the establishment of an enhanced Group HR function and a dedicated strategy unit in support of the new Genus strategy. A more detailed review of operating profit performance by region is set out on pages 28 to 30. It is also relevant to look at the Group’s performance by species, particularly in light of the change in structure introduced in July 2012 to align the organisational structure with the new strategy. In this respect, both porcine and dairy and AI beef increased revenues and profits. Porcine revenues grew by 14%, with royalty income up 10% to £57.6m. Underlying volumes were up 7%. Margins improved as a result of initiatives such as the CBVPlus and CBVMax programmes in North America whereby we deliver improved value to our customers through using higher quality boars. The increased volumes and improved margins led to a 19% increase in porcine profits. 24 Genus plc Annual Report 2012 perFormanCe By speCies revenue Dairy & AI beef Porcine Research & development adJusted operatinG proFit inC Jv Dairy & AI beef Porcine Central costs & research Dairy and AI beef revenues increased by 6%. Volumes increased by 8%, with growth strongest in China, India and Russia. In these countries, we saw a benefit from increased sales of lower priced locally produced semen as well as continuing growth in sales of imported semen. Sales volumes of semen from our global studs, which represent over 82% of semen sales, increased by 4% and average selling prices improved by 3%. The resultant improvement in margins was partly offset by the higher costs of the increased bull development programme to support future volume growth. Overall, profits increased by 6%. exCHanGe rates The Group’s products and services are sold to customers in 70 countries across six continents. Consequently, our results are subject to variation based on the translation of profits at different exchange rates. As in previous years, we have shown changes in performance on a constant exchange rate basis to illustrate underlying business performance. actual currency 2012 £m 2011 £m Movement % Constant currency Movement % 165.1 165.5 11.2 341.8 155.1 145.7 9.1 309.9 20.8 43.6 (15.8) 48.6 19.7 36.6 (11.0) 45.3 6 14 6 19 7 15 8 20 In the year ended 30 June 2012, the Group’s adjusted operating profits were reduced by £0.9m. This was due to a modest strengthening of Sterling against currencies such as the Brazilian Real and Mexican Peso in the last quarter of the year. This had the impact of reducing the growth in adjusted operating profits for the Group from 9% to 7%. The key average and year-end exchange rates used to translate the results for the year were: average Closing 2011 1.61 US Dollar/£ 1.11 Euro/£ 2.51 Brazilian Real/£ Mexican Peso/£ 20.90 19.47 21.06 18.83 2012 1.57 1.24 3.17 2012 1.59 1.19 2.86 2011 1.60 1.16 2.65 Genus plc Annual Report 2012 25 company overviewbusiness reviewcorporate governancefinancial statementsFinancial and operational review Financial review continued ADJUSTED BASIC EPS (PENCE) 60 50 40 30 20 10 0 5 . 3 8 5 . 4 7 4 . 6 3 1 . 6 3 09 10 11 12 STATUTORY BASIC EPS ( PENCE) 80 70 60 50 40 30 20 10 0 9 . 5 6 3 . 6 4 0 . 9 4 4 . 0 3 09 10 11 12 DIVIDEND PER SHARE (PENCE) 15 12 9 6 3 0 6 . 4 1 3 . 3 1 1 . 2 1 0 . 1 1 09 10 11 12 profit before tax showed growth of 19%. The Board believes these adjusted profit measures provide a better measure of the Group’s underlying performance. taxation The effective rate of tax for the year, based on adjusted profit before tax, was virtually unchanged at 31.0% (2011: 31.5%). The effective rate remains higher than the UK corporate tax rate. This is due to the mix of overseas profits, particularly the proportion of profits generated in North America, where the tax rate is approximately 39%. earninGs per sHare Adjusted basic earnings per share rose by 19% to 53.5 pence (2011: 44.8 pence). The increase was in line with the improvement in profit before tax. Basic earnings per share on a statutory basis were 65.9 pence per share (2011: 49.0 pence). dividend The Board is recommending to shareholders a final dividend of 10.1 pence per ordinary share. Taking into account the interim dividend of 4.5 pence per share paid in March 2012, this will result in a total dividend for the year of 14.6 pence per ordinary share, representing an increase of 10% for the year as a whole. Subject to shareholder approval at Genus’ forthcoming Annual General Meeting, this dividend will be paid on 23 November 2012 to shareholders on the register at the close of business on 9 November 2012. Dividend cover remains strong, with the dividend covered 3.7 times by adjusted earnings (2011: 3.4 times). BioloGiCal assets A feature of the Group’s net assets is a substantial investment in biological assets, which are required by IAS 41 to be held at fair value. At 30 June 2012, the carrying value of biological assets was £282.2m (2011: £238.8m) as set out in the table below: Non-current assets Current assets Inventory Represented by: Porcine Dairy & AI beef 2012 £m 223.0 36.8 22.4 282.2 107.6 174.6 282.2 2011 £m 187.0 27.3 24.5 238.8 74.6 164.2 238.8 FinanCe Costs Net finance costs reduced by £4.2m to £2.1m (2011: £6.3m). Approximately £2.0m of this reduction arose from the benefits of the Group’s refinancing in March 2011. The remainder was due to a combination of reduced net borrowings, lower interest on pension liabilities and a reduced average interest rate; the latter was due to the fixed rate swaps entered into at the time of the Sygen acquisition maturing. Following the increased pension deficit at 30 June 2012, including the additional one-off pension provision made, the interest cost on pension liabilities will be higher in the year ahead. exCeptional items There was a £0.9m (2011: £1.2m) net exceptional credit this year. This comprises three elements: 1. A restructuring charge of £2.0m principally relating to refocusing the European porcine business on larger integrated customers; 2. A provision of £20.1m (2011: £nil) for potential additional pension costs in respect of the multi-employer Milk Pension Fund (‘MPF’). The triennial valuation of the MPF at March 2012 is expected to show an increased deficit particularly following recent reductions in gilt yields. In light of this, and the difficulty certain other employers may experience in fulfilling their obligations to the scheme, the Group concluded that it was necessary to make a provision for its potential joint and several obligations in connection with the MPF scheme. The provision relates to potential future cash payments that may arise over a number of years as a result of the possibility of certain employers in the MPF being unable to meet increased deficit repair contributions. These potential costs are additional to the pension liabilities in respect of Genus’ past and present employees in the now closed MPF. They arise because of Genus’ joint and several liability with the other employers for the obligations of the MPF; and 3. An exceptional credit of £23.0m as a result of a change in the basis of calculating the value of the Group’s porcine pure line breeding animals under IAS 41. This change has increased the carrying value of biological assets under IAS 41 but has no cash impact. Further details are given in note 15 to the Financial Statements. statutory proFit BeFore tax Operating profit on a statutory basis was £54.2m compared with £44.8m last year. The statutory profit before tax was £54.4m (2011: £40.8m). These statutory results benefit from the impact of the exceptional items discussed above combined with a higher underlying net fair value credit on biological assets under IAS 41 of £15.8m (2011: £9.8m). As noted above, the performance as measured by adjusted operating profit including joint ventures showed growth of 7%, and adjusted 26 Genus plc Annual Report 2012 The Group had a strong cash flow performance with a £14.5m cash inflow despite increased capital investment. The increase in the overall carrying value of biological assets includes a £33.0m increase in the carrying value of porcine biological assets; £23.0m of this increase relates to a reassessment in the method of calculation of the value of pure line animals in the Group’s two nucleus farms, valuing the herds as entities and using discounted cash flows from the herds’ saleable product. This better reflects the true value of these animals. The remaining increase is due principally to the higher number of animals held in the Group’s farms, particularly those in China, to meet customer needs. The carrying value of biological assets related to dairy and AI beef has increased by £10.4m mainly due to an increase in the value of the bulls in the development programme. CasH Flow and net deBt Cash generated by operations Interest, tax and dividends Capital investments Other Net cash inflow before swap settlement US Dollar swap settlement 2012 £m 2011 £m 43.9 (22.0) (9.1) 1.7 14.5 – 14.5 39.2 (18.3) (4.8) 0.9 17.0 (7.0) 10.0 The Group had a strong cash flow performance, with a net cash inflow for the year of £14.5m (2011: £10.0m). This was notwithstanding increased capital investment and higher tax payments as a result of the Group’s growing profits. Capital investment in the year increased to £9.1m (2011: £4.8m). This includes expenditure in expanding the Group’s dairy and AI beef production facilities in Canada and additional spend in porcine on product development facilities in North America and a production farm in China. We reduced net debt from £67.9m to £56.4m at 30 June 2012. The Group’s financial position and ratios remained strong and there is substantial headroom under our £132m borrowing facilities. Interest cover, based on net interest excluding interest on pension liabilities, improved to 17.7 times (2011: 7.9 times) and the ratio of net debt to EBITDA as calculated under our financing facilities reduced from 1.4 to 1.1. retirement BeneFit oBliGations The Group’s retirement benefit obligations at 30 June 2012, calculated in accordance with IAS 39, were £67.3m (2011: £23.6m) before tax and £51.0m (2011: £17.5m) net of related deferred tax. The significant increase in obligations in the year arose from an increase in the deficit in the MPF, a multi-employer defined benefit scheme, together with an additional provision of £20.1m. The total deficit of the MPF scheme, calculated in accordance with IAS 19 at 30 June 2012, increased from £39m to £102m. This was due to the impact of lower bond yields and only modest investment returns in the year. Genus’ estimated share of this deficit increased from £14.3m to £57.2m. This is after taking into account the £20.1m exceptional provision made in connection with the Group’s potential joint and several liabilities under the scheme. We consider this exceptional provision to be necessary in light of the higher underlying deficit and the likely difficulty of certain other employers in the MPF being able to meet their obligations. During the year, annual deficit contributions payable in respect of the Group’s defined benefit scheme amounted to £1.9m. A triennial actuarial valuation of the MPF as at 31 March 2012 is under way. We expect this valuation to result in higher deficit contributions in the future. Genus plc Annual Report 2012 27 company overviewbusiness reviewcorporate governancefinancial statementsFinancial and operational review review of operations continued market conditions provided reasonable profitability for Genus customers throughout most of the year. Our North American porcine production multiplication network was expanded by 9%. nortH ameriCa Revenue Adjusted operating profit Adjusted operating margin Revenues rose by 6% to £121.5m and operating profit increased by 12%. The porcine business performed strongly, with more modest progress in dairy and AI beef. Market conditions provided reasonable profitability for Genus customers throughout most of the year. During the last quarter, however, market conditions became more difficult for some customers due to increased feed costs and declining milk prices. In porcine, we continued to gain market share, which improved to 36% as volumes grew by 4%. Sales of animals under royalty contracts were also higher. This will lead to further increases in royalty income in the years ahead. In addition, we continued to implement successfully our CBVPlus and CBVMax programmes whereby we deliver improved value to our customers through using boars of higher genetic merit. This, along with price increases, has enabled us to improve margins whilst at the same time providing better service to customers. Our North American porcine production multiplication network was expanded by 9%. This will provide the actual currency 2012 £m 121.5 39.5 33% 2011 £m 114.5 35.3 31% Movement % 6 12 Constant currency Movement % 5 11 necessary supply to continue the expansion of our business in North America and provide an increased number of animals for export to Genus customers in other countries. In particular, this supported our growth in the Latin America and Asian regions. In May 2012, Genus PIC celebrated its 50th anniversary in conjunction with the annual PIC Symposium. Over 500 key customers representing 22 countries were in attendance. The dairy and AI beef business had a more difficult year; hot weather at the beginning of the year and lower milk prices towards year-end had an impact on the demand for dairy semen. This was most notable in the large dairy enterprise sector. Beef sales were more encouraging and rose modestly. Overall, however, volumes were down 2%. More effective sales management enabled a small improvement in average selling prices. This, together with continuing tight management of costs, resulted in a small improvement in dairy and AI profits. 28 Genus plc Annual Report 2012 The performance across Latin America benefited from improved customer services. Volumes grew by 6%, aided by an increased emphasis in a number of markets on our reproductive management services. latin ameriCa Revenue Adjusted operating profit exc JV Adjusted operating profit inc JV Adjusted operating margin exc JV Latin America achieved another year of strong growth. Revenue increased 12% to £52.5m and operating profit (excluding joint ventures) grew 20% to £16.2m. A disappointing performance in our Brazilian joint venture caused by weak pig prices in Brazil held back growth in operating profit including joint ventures to 12%. Volumes in porcine grew by 16%. We continued to focus on converting customers to royalty contracts. Consequently, royalty income grew 34%. Our business in Chile performed well, benefiting from increased volumes and improved margins due to the superior performance of our animals in customers’ herds. Our joint venture in Brazil had a difficult year, with lower pig prices caused by the temporary closure of the export market to Russia. As a result, our share of profits was lower. europe Revenue Adjusted operating profit Adjusted operating margin Revenue in Europe increased by 4% and operating profits increased by 3%. Our porcine business in Europe continued to improve in a difficult market. Market conditions for European pig farmers remained challenging. Short-term profitability for farmers has improved as a result of higher pig prices. However, with the likely need for many producers to invest in order to comply with the European welfare legislation that becomes effective in 2013, demand has been weak. Consequently, volumes in the porcine business in Europe were down 3%. Firmer pig prices together with cost reductions helped to improve margins. During the year, we commenced the implementation of a restructuring of the European porcine business to sharpen the focus on larger integrated pork producers and to reduce our exposure to directly owned farming activities. We implemented cost reductions in Germany, the benefits of which started to become apparent in business performance towards the end of the year. Another milestone was the recent appointment of a new senior executive with considerable industry experience to lead our European porcine operations. actual currency 2012 £m 52.5 16.2 18.2 31% 2011 £m 47.0 13.5 16.3 29% Movement % 12 20 12 Constant currency Movement % 23 26 18 Progress continues in converting more Brazilian customers towards the royalty model. In dairy and AI beef, volumes grew by 11% in markets that generally remained favourable. Mexico was the exception, due to weak milk prices. Chile and Argentina had a particularly good year, with strong volume growth and improved prices. The new business in Colombia, that opened in February 2011, has made good progress. The performance across Latin America benefited from improved customer services. In beef, the fixed AI programme continued to grow. In dairy, customer support services were enhanced through an increased level of dairy technical services support made available to our key customers. actual currency 2012 £m 117.3 18.9 16% 2011 £m 113.3 18.4 16% Movement % 4 3 Constant currency Movement % 4 4 Demand for dairy and beef semen has been reasonable, with European milk prices higher than the comparable prior period for most of the year albeit there was a modest fall towards year-end. Volumes grew by 6%, aided by an increased emphasis in a number of markets on our reproductive management services (‘RMS’). In the important UK market, we increased market share. We contained the impact of cost increases in fuel and other areas by replacing a large proportion of the fleet with more fuel efficient and lower CO2 emitting vehicles. We also implemented the latest fuel efficiency monitoring technology. In Italy, we achieved benefits through an improved local bull line up and increased emphasis on RMS. During the year, we acquired our small Polish distributor, which will enable us to accelerate expansion of our presence in the large Polish dairy market. Elsewhere in our distributor markets, we saw good volume progress in Hungary and Saudi Arabia. However, volumes in Turkey were affected by a difficult market. Promar, our agricultural consulting business, continued to perform well, winning new contracts in the year. Genus plc Annual Report 2012 29 company overviewbusiness reviewcorporate governancefinancial statementsFinancial and operational review review of operations continued The Asian region achieved an excellent performance, with strong growth broadly across the region and in both the porcine and dairy and AI beef businesses. asia Revenue Adjusted operating profit exc JV Adjusted operating profit inc JV Adjusted operating margin exc JV actual currency 2012 £m 48.9 10.4 11.1 21% 2011 £m 35.9 7.4 7.7 21% Movement % 36 41 44 Constant currency Movement % 40 39 43 The Asian region achieved an excellent performance, with strong growth broadly across the region and in both the porcine and dairy and AI beef businesses. Revenues increased by 36% and operating profits (including joint ventures) by over 40% to £11.1m. of breeding animals. We announced the first such joint venture, involving a large 4,250-sow nucleus farm with an existing customer, BeSun, shortly after the year-end. We are also progressing discussions regarding potential joint ventures with other integrated producers. In porcine, volumes grew strongly by 33%. In Russia, we strengthened further our position in a number of key accounts with new stockings. This included a number of animals provided directly from our US operations. Similarly, volumes grew in the Philippines, despite more difficult market conditions there for part of the year. In both countries, we have continued to convert customers to the royalty model, which now accounts for over 40% and 20% respectively of volumes in these two countries. In China, where to date we have not operated the royalty model, direct sales grew. Profitability in China also benefited from buoyant market conditions in the first half of the year. We also achieved higher volumes elsewhere, including a large multiplication and nucleus farm stocking in South Korea. During the year, milk prices were stable in China and steadily increased in most of our other key dairy markets in Asia. This, combined with growing demand, resulted in the volume of semen sold by our dairy and AI beef business increasing by 24%. Semen produced locally from studs in China, India and Russia (which started production in August 2011) was the key driver of the high level of growth. Increased volumes of imported semen from Genus global studs supplemented this growth. During the year, we received approval to open a warehouse for imported semen in India. This will enable us to improve further availability and service to our customers. Our business in Australia performed well, with volumes up 8% and firmer prices as farms recovered from the drought of the previous year. In China, we are realigning our production to be more in line with the new strategy that focuses on large integrated pork producers. This strategy envisages entering into joint ventures with such customers and less reliance on direct sales from our own local production Across our business in Asia, and particularly in China, we have strengthened the management and supporting technical service teams. This will ensure the business is well placed to achieve our planned growth in the years ahead. 30 Genus plc Annual Report 2012 Genus continues to invest ahead of the rate of inflation in R & D to ensure that our products meet customer needs and put us ahead of our competitors. researCH and development Research & development costs actual currency 2012 £m 28.7 2011 £m 25.3 Movement % 13 Constant currency Movement % 14 Genus continues to invest ahead of the rate of inflation in R & D to ensure that our products meet customer needs and put us ahead of our competitors. During the year, the costs of our R & D increased by 13% to £28.7m. Porcine product development costs rose principally as a result of higher feed costs, net of increased slaughter revenue, as part of running the two nucleus farms in North America. Dairy and beef product development costs were higher due to the additional costs associated with the increased size of the bull development programme, which is crucial to providing capacity for anticipated growth. We also invested more heavily on research activities targeted on programmes devoted to genomic evaluation, gender skew and disease resistance. porCine produCt development During the year, we completed the implementation of genome wide selection in our breeding programme using our extensive proprietary database of over 14 million performance records and genomics software developed in house. We now have a database of over 20,000 animals that have been genotyped for 60,000 genomic regions across all chromosomes of the pig. In addition, we have completed the development of imputation programmes that will allow us to use this information to genotype an even larger number of animals going forward at a much lower cost per animal. This will allow us to increase the accuracy of selection based on estimated breeding values within our programme. As feed costs continue to rise, feed efficiency remains an important trait. With programmes such as our cross-bred trials and the increased use of specialist feeders to record feed usage, PIC continues to deliver the most feed-efficient animals in the industry. dairy and ai BeeF produCt development Throughout the past year, ABS bulls continued to perform well in the national rankings of the countries where we progeny- test bulls. In the US, ABS averaged 30 bulls in the internationally important top 100 TPI rankings across all three sire summaries in the year. The UK had similar results while Italy contributed with some key bulls during the year that drove additional volume and improved prices. We continued to supply differentiated genetics into Russia, China, and India. Bulls shipped to our new stud in Russia produced their first saleable units in September 2011. During the year, we shipped a total of 29 dairy and six beef bulls to our partners in China, where we now have a population of 64 dairy bulls and 14 beef bulls. In India, we shipped embryos produced in Canada from elite Holstein pedigrees to our partner’s stud. We expect the first calves from these imported embryos will be born in the Autumn of 2012. researCH and development We refocused and enhanced Genus research activities during the year to place increased emphasis on our three key research programmes: genomic evaluation, gender skew and disease resistance. We continue to make progress in these areas, although our initiative to develop a proprietary sexed semen product is progressing but taking longer than originally anticipated. We have extended key sexed semen supply contracts to ensure continuity of supply in this growing segment of our dairy and AI beef business. Genus plc Annual Report 2012 31 company overviewbusiness reviewcorporate governancefinancial statementsprincipal risks and uncertainties Genus operates a structured and embedded risk management system that identifies, evaluates and prioritises risks and uncertainties and actively reviews control and mitigation activities. wHat we did in 2012 During 2012, following consultation with the Genus Executive Leadership Team and the Audit Committee, we reviewed our risk management system. Key elements now include: }} oversight by the Head of Internal }} Audit and Risk; regular meetings and workshops to identify and discuss key risks and mitigations with senior Group management; }} three times a year review of the corporate risk register in terms of completeness and accuracy at a meeting of the Genus Executive Leadership Team; }} Audit Committee discussion of the latest corporate risk register and the risk management system at each of its regular meetings, with subsequent reports to the Board; and targeted Board review of selected specific risks contained in the corporate risk register. }} wHat we plan to do in 2013 During 2013, we intend to continue to operate the improved risk management system as agreed with the Genus Executive Leadership Team and the Audit Committee. Further refinements will include: }} Group-wide reviews of selected specific risks identified on the corporate risk register; and }} presentations to the Audit Committee or Board by senior operational and financial management covering specific risk areas. risK manaGement FrameworK }} Has overall responsibility for the Group’s risk management and internal control systems }} Sets strategic objectives tHe Board }} Monitors the nature and extent of risk exposure against risk appetite for our principal risks }} Provides direction on the importance of risk management and risk management culture Genus exeCutive leadersHip team }} Identifies, addresses and mitigates risks Group-wide }} Monitors risk management process and internal controls audit Committee }} Supports the Board in monitoring risk exposure against risk appetite }} Reviews the effectiveness of our risk management system internal audit }} Oversees the risk management process and provides guidance on risk management matters }} Engages with senior management to review risks and mitigating actions risK marKets Intellectual property protection risK desCription mitiGatinG aCtions }} Genus-developed porcine genetic material could become freely available to third parties }} Strict contractual restrictions imposed on counterparties to limit use of genetic material within pure lines }} Careful selection of multipliers and joint venture partners (including in emerging markets) to ensure trustworthiness }} Ability to undertake genetic testing of animals to determine genetic origin Agricultural recession and commodity pricing }} }} Impact of fluctuations in agricultural markets on customer profitability and demand Increase in operating costs owing to commodity pricing volatility }} Geographic diversity of businesses }} Use of the porcine royalty model }} Hedging transactions to fix pricing of inputs and outputs where appropriate Emerging markets }} Fail to appropriately develop business in emerging markets }} Experienced management team blending local and expatriate executives }} Asia established as a separate business unit reporting directly to CEO }} High level of Board oversight }} Dedicated development, technical services and veterinary staff within emerging markets }} Adoption of joint venture business model in appropriate regions 32 Genus plc Annual Report 2012 risK risK desCription mitiGatinG aCtions disease and environment Bio-security Continuity of supply Environmental pollution incident Business continuity Hr Human resources researCH and development Product development and competitive edge }} Loss of key livestock owing to disease outbreak }} Formal bio-security standards featuring movement controls, veterinary inspection, and independent bio-security reviews }} No over-reliance on single production sites with key facilities placed in different countries }} Loss of ability to move animals and semen or semen freely (including across borders) owing to, for example, disease outbreak, environmental incident, or international trade sanctions }} Environmental incident on porcine development facility }} Unavailability of key research, production or administrative site }} Failure of IT system }} Formal bio-security standards featuring movement controls, veterinary inspection, and independent bio-security reviews }} Care taken to avoid over-reliance on single production sites with key facilities placed in different countries }} High standards of facility development and operation Independent assessment of operational compliance }} }} Business Continuity Plans in place for key locations }} Testing programme established }} Care taken to avoid over-reliance on single production sites with key facilities placed in different countries }} Formal IT Disaster Recovery Plans in place with testing programme }} Property Damage and Business Interruption insurance cover }} Fail to attract or retain skills and experience within executive, management and employee cohorts }} Executive pay levels recently reviewed by external consultants }} Regular scrutiny of senior management performance and remuneration at Remuneration Committee }} Recent appointment of dedicated experienced Group-wide HR Director }} Development of people and talent plans }} Development programme }} Formal communication process to ensure development is }} fails to produce best genetics for customers Increased competition in developed and emerging markets drives down market share and margins aligned with customer requirements }} Dedicated product development team }} Focus on key account management }} Use of porcine royalty model }} Offering technical services and support to customers }} Benchmarking of performance }} High density of bulls in Top 100 listings Commercialisation of research }} Fail to focus research initiatives on commercially important areas }} Regular oversight of research by R & D Portfolio Management Team and executive management }} Continuing appropriate budget allocated to research }} Fail to lead on future ‘game-changing’ technology and development FinanCe Pensions }} Exposure to costs }} Agreement of appropriate actuarial valuations and deficit associated with failure of third party member of joint and several pension scheme }} Exposure to costs as a result of external factors impacting size of pension deficit (e.g. mortality rates, investment values etc.) recovery plans with pension fund trustees }} Review of investment strategy }} Closure of pension funds to future service }} Monitoring of joint and several liability in the Milk Pension Fund }} Third-party review of pension arrangements undertaken Genus plc Annual Report 2012 33 company overviewbusiness reviewcorporate governancefinancial statementsour people we are creating high-calibre teams dedicated to every aspect of our business. as a company rooted in science but built around people, we are able to deliver on our strategy and maintain our leading market position around the world. Our focus in 2012 has been on establishing an enhanced Group HR function. Ca tHe rine GliCKman Group Human resourCes direCtor our people Our values, developed by our people, demonstrate how unique our people are. strivinG For exCellenCe A high performance culture starts at the top. In the last year, we have focused on developing a compelling vision, based on values that capture the spirit of the business. These delineate a clear strategy, in which every one of the 2,400 staff can see the part that he or she plays. All of this has created a true global team. This high performance culture, dedicated to innovation and customer service, is self- perpetuating. It attracts, rewards and retains teams who delight in creating products that exceed customer expectations and delivering profitable and sustainable growth. perFormanCe manaGement – investment in people A refreshed and consistent approach to performance management is uniting the top 500 managers, underpinned with a new online resource. The approach focuses on metrics that measure customer loyalty, people development, product and service improvements and financial performance. We timed its launch in July, so we can set high quality objectives for the financial year ahead. GELT has set the example, with their objectives published to the business, and each of the 500 will now set their objectives based on the cascade. Work on behaviours and two core competencies – key account management and technical service, together with talent development, will be a major focus in 2013. KeepinG in ContaCt In January 2012 we launched a new Group intranet site ‘Helix’, our internal communications tool. Named by Genus employees, Helix is already succeeding in communicating Group strategy, spreading best practice and updating our people on business progress. In addition to serving as central location for storing key documents, training sessions and annual conference presentations, Helix supports the ‘one team’ principle that is helping to shape our future. Helix is increasingly seen as the source of information on Genus, and is becoming a key tool to network knowledge around the Group. developinG and reCruitinG talent Genus is committed to recognising, developing and recruiting new talent across the businesses. This is strengthening our teams and providing the high levels of support and innovation that our customers have come to expect. Our focus in 2012 has been on establishing an enhanced Group HR function, with a remit to specifically focus on developing and recruiting the talent to support the growth envisaged in the strategy. To achieve this we recruited Catherine Glickman, who became Group HR Director in January. From our own talent pool we appointed Ricardo Campos to head up Genus ABS, drawing on his vast experience in the cattle industry and knowledge of Latin America. We also promoted Dr Denny Funk, a world-class geneticist, to serve as Head of Research & Development. We have strengthened the Group with high quality recruits into our PIC product development teams and key account teams, as well as into our developing businesses in China and India. developinG tHe pioneers oF tHe Future Creating the environment in which innovation is recognised and rewarded is integral to our future success as the pioneer of animal genetic improvement. Research in the last year has shown that personal development and growth are very important to staff that value learning and are highly qualified. Genus University, our online training and development centre, is becoming increasingly important in training the current and future staff throughout the Group. We know that it helps to retain, motivate and develop staff at every level. Last year, 1,378 of our people benefited from Genus University training, taking a total of over 4,000 courses. 34 Genus plc Annual Report 2012 Creating the environment in which innovation is recognised and rewarded is integral to our future success as the pioneer of animal genetic improvement. Seizing the Opportunity To bring life and immediacy to our new vision, values and strategy, Genus brought together the top 60 managers for the Group’s first Global Leadership Conference in June 2012. The theme was ‘seizing the opportunity’ and the venue was, appropriately, one of our most exciting markets: China. The three-day meeting outside Beijing provided an opportunity for Genus leaders to shape the future of the Company. In addition to an agenda that focused on strategic alignment, marketplace orientation and the importance of people leadership, the conference provided a new level of support for the Genus in-country team. It also enabled participants to develop a deeper understanding of local customer needs. Conference feedback confirms that Genus leaders understand and are committed to delivering the strategy in their businesses. They recognise that execution will be key in realising Genus’ potential. Participants are now sharing and cascading the messages to their teams, aligning every part of the business behind our strategy. The curriculum is very broad, including customer-focused genomics, cross-breeding management systems, fertility fundamentals, one-to-one customer services success, communication across cultures and change management for employees. Other programmes are also progressing, with emphasis on graduates in Genus Asia. In the Philippines, for example, we launched an enhanced six-month management training module in September 2011. It is helping to equip participants with swine production knowledge and skills, update them on best practice and prepare them for leadership roles. Based on the success of this endeavour, we have now launched a specially adapted version of the course in China, with nine graduates with higher degrees as the first participants. PIC – 50th Birthday }} Founded in 1962 at the White Hart pub in Wallingford, UK, PIC has grown from a small group of pig farmers to an international leader in porcine genetics. }} Through the decades, PIC has worked diligently to bring the advantages of superior swine health, genetics and production efficiency to countries around the globe. }} With our 50 years of experience in pig improvement, PIC is ready, willing and able to help pork producers everywhere make the most of their operations. Genus plc Annual Report 2012 35 company overviewbusiness reviewcorporate governancefinancial statementsCorporate social responsibility Genus does essential work, advancing the frontiers of biotechnology. it is equally essential that we work responsibly, wherever we do business. We are committed to the highest standards of corporate and individual behaviour. ian Farrelly Group Company seCretary & General Counsel sustainaBility in world aGriCulture Genus plays a key role in the world’s agricultural economy. Our unique position in the supply of superior natural animal genetics enables farmers and food producers on six continents to ensure the supply of quality products with increasing output at improved production efficiencies. With an ever-increasing world population and decreasing resources available for food production, Genus meets a social and economic need in the efficient production of quality foods. In doing so, we are committed to the highest standards of corporate and individual behaviour. This involves careful thought about the economic, social and environmental impacts of the Group’s activities, wherever Genus operates. By acting with the highest standards of business conduct, Genus earns the trust of customers, shareholders, colleagues, suppliers, regulators and the communities in which we operate. Maintaining these standards is vital to the continued success and development of the Group. All companies in the Genus Group follow procedures that comply with local laws and regulations. In many cases, our procedures and practices exceed local requirements. The Genus Board has overall responsibility for corporate responsibility, regularly assessing the needs of Genus’ stakeholders and delegating day-to-day management of corporate responsibility issues to GELT in conjunction with regional management. The Genus approach to corporate responsibility covers the following key areas: the environment, our employees, health and safety, our stakeholder relationships and our community. The Genus principles of corporate responsibility apply to all our employees and set the minimum standard for their behaviour. tHe environment Concern for the environment is an essential part of our business operations. Therefore we minimise environmental risk by effectively managing the Group’s activities. Genus is committed to conducting business in ways that are sensitive to the environmental needs of the communities in which we operate. Our locations integrate environmental management into their operational systems and procedures. Monitoring and reporting on environmental performance is an integral part of the Group’s operations and a key element of the Group’s risk management programme. 36 Genus plc Annual Report 2012 Genus operates an active policy of environmental compliance. This involves assessing environmental risks associated with existing and new facilities and establishing controls to ensure that any risks remain at an acceptable level. Employees at our facilities receive a high level of training in environmental compliance matters. Comprehensive environmental protocols are in operation at our facilities that are subject to independent checks. our employees Genus places considerable value on employee involvement and commitment. Our staff play a vital role in building a sustainable business and their skills, qualities and well-being underpin the Company’s success. Details of the Genus approach to its employees can be found in the Our People section of this report on pages 34 to 35. HealtH and saFety Genus is committed to providing safe working environments wherever we operate. We also proactively monitor compliance with local regulations. This commitment is supported by a comprehensive training regime for the Group’s employees. Genus has developed best practice farm and animal handling protocols that we deploy at all farm locations. These deal with the potential dangers of working with livestock and operating equipment and the provision of a safe working environment. The monitoring and reporting on the Group’s health and safety performance are an integral part of the Group’s operations and key to the Group’s risk management programme. Maintaining a consistently safe and healthy workplace for our people requires effective management. Under the supervision of the Global Health & Safety Officer and regional health and safety teams, Genus operates a proactive network of health and safety personnel in our global facilities that share knowledge and experience with the aim of cross-fertilising best practice and ensuring consistently high standards of safety across the Group. The Global Health & Safety Officer is responsible for monitoring and reporting adherence by the Company to the Group’s health and safety protocols and global health and safety staff regularly inspect the Company’s sites. Good Corporate CitizensHip nourishing the world animal welfare Genus has developed best practice farm and animal handling protocols that we deploy at all farm locations. Between 1950 and 2012, the world’s population grew from 2.6 billion to over 7 billion, 82% of whom live in developing economies. More people will accelerate the growth of urbanisation to encompass 70% of the population. Increasing demand for high-quality food, coupled with finite land, water and energy resources, is forcing farmers to seek new ways of improving their productivity. Genus plays an increasingly important social and economic role in this crowded new world, enabling our global customers to produce quality foods efficiently and to meet the increasing demands of sustainable agriculture. Our animals are our business. Genus is committed to providing the highest level of care and treatment for our herds, which rely on us for a safe and comfortable environment. Therefore, we make certain that Genus employees responsible for animal handling are appropriately trained and qualified. Our facilities are designed and are maintained to ensure best practice in animal husbandry. Fully qualified inspectors provide regular health assessments. All of this is in line with the Genus Animal Welfare Code of Conduct. Using a recently introduced global Health & Safety Management System, the Group has been able to track, monitor and evaluate health and safety incidences and trends worldwide and to communicate learnings from any incidences at a particular location to all facilities via the global health and safety network. Adopting an increasingly standardised approach to health and safety management has meant the Group’s total recordable case incidence rate has decreased by 1.5 cases to 0.65 cases per 100 full-time workers in the 2012 financial year as compared to the 2011 financial year and a 4% reduction in the number of incidents in the year compared to the prior year. our staKeHolder relationsHips Customers Genus aims to provide products and services of the highest quality and technical standards appropriate to our customers’ own requirements. At all times, we take all reasonable steps to ensure the safety and quality of the products and services that Genus provides, including compliance with all applicable regulatory requirements. suppliers Genus is committed to working with suppliers in mutually beneficial ways, and, so far as is practicable, requires that suppliers and contractors act in accordance with Genus’ values and policies. our Community As a responsible member of the communities in which we operate, Genus actively encourages the Group’s operating companies to engage positively with the local community in their areas. Genus plc Annual Report 2012 37 company overviewbusiness reviewcorporate governancefinancial statementsBoard of directors Top row, left to right: Bob Lawson John Worby Mike Buzzacott Ian Farrelly Bottom row, left to right: Karim Bitar Nigel Turner Professor Barry Furr BoB lawson (67) non-exeCutive CHairman Appointed to the Board: November 2010 JoHn worBy (61) Group FinanCe direCtor Appointed to the Board: September 2004 Experience: Bob Lawson was appointed Chairman of the Board and the Nomination Committee in November 2010. He is Non- Executive Chairman of Barratt Developments plc. He is also a Director of The Federation of Groundwork Trusts. His career has spanned several UK and continental groups including, ten years as Chief Executive of Electrocomponents plc leading its successful expansion into new international markets, and three years as Managing Director of Vitec Group plc. Experience: John Worby joined the Board in September 2004 and was Chairman of the Audit Committee until he became Group Finance Director in February 2009. He is a Non-Executive Director of Cranswick plc and Smiths News plc, and was previously Deputy Chairman and Finance Director of Uniq plc (formerly Unigate plc), having been Finance Director of Wincanton Ltd. He is a member of the Financial Reporting Review Panel. Committee memberships: Chairman of the Nomination Committee and member of the Remuneration Committee. niGel turner (63) senior non-exeCutive direCtor Appointed to the Board: January 2008 Karim Bitar (47) CHieF exeCutive Appointed to the Board: September 2011 Experience: Karim Bitar joined the Board in September 2011. He worked for over 15 years with Eli Lilly and Company and was President of Lilly Europe, Canada and Australia before joining Genus. An ex-McKinsey & Company consultant, who worked across Asia and in Europe, he has also held management roles at Johnson & Johnson and the Dow Chemical Company. Committee memberships: Member of the Nomination Committee. Experience: Nigel Turner joined the Board in January 2008 and is Chairman of the Remuneration Committee. He was the Chairman of Numis Securities Ltd and Deputy Chairman of Numis Corporation plc from December 2005 to November 2007. He is currently a Non-Executive Director of Croda plc. Previously he was Vice Chairman of ABN AMRO’s Wholesale and Investment Bank in which he had specific responsibility for the Global Corporate Finance and Equity businesses. He joined the Dutch bank in 2000 from Lazard, where he was a partner for 15 years and also sat on its Supervisory Board. Committee memberships: Chairman of the Remuneration Committee and member of the Audit and Nomination Committees. 38 Genus plc Annual Report 2012 ian Farrelly (43) Group Company seCretary & General Counsel Appointed: June 2006 Experience: Ian Farrelly is a solicitor and joined Genus in June 2006 from Microgen plc where he was Group General Counsel. Previously he was Group Solicitor & Company Secretary of Diagonal plc and Solicitor to Hays plc. miKe BuzzaCott (64) non-exeCutive direCtor Appointed to the Board: May 2009 Experience: Mike Buzzacott is a qualified accountant. He joined the Board in May 2009 and is Chairman of the Audit Committee. He spent 34 years at BP prior to his retirement in 2004, holding a number of international roles including Finance & Control Director Asia Pacific, CFO BP Nutrition and Group Vice President Petrochemicals. He is currently a Non-Executive Director of Scapa Plc. He retired as a Non- Executive Director of Croda plc in August 2011 and was formerly a Non-Executive Director of Rexam plc and Chairman of Biofuels plc. Committee memberships: Chairman of the Audit Committee and member of the Remuneration and Nomination Committees. proFessor Barry Furr (68) non-exeCutive direCtor Appointed to the Board: December 2006 Experience: Professor Furr retired as Chief Scientist and Head of Project Evaluation for AstraZeneca plc in 2005 after 34 years of service. He is a Non-Executive Director of the Medicines and Healthcare Products Regulatory Agency and the American Pharmaceutical company GTx Inc. He was awarded an OBE in 2000 for his services to cancer drug discovery. He joined the Board in December 2006 and acts as Scientific Advisor to Genus’ Research & Development Portfolio Management Team, which replaced the Science Committee with effect from 1 July 2012. He is the author of more than 160 papers on reproductive endocrinology and antihormones. Committee memberships: Member of the Audit, Remuneration and Nomination Committees. Genus plc Annual Report 2012 39 company overviewbusiness reviewcorporate governancefinancial statementsGenus executive leadership team Left to right: Ian Farrelly Dr Denny Funk Jerry Thompson John Worby Karim Bitar Catherine Glickman Ricardo Campos Bill Christianson Following the appointment of Karim Bitar in september 2011, members of the Genus executive leadership team (‘Gelt’) have been specially chosen for their individual and collective strengths, expertise and experience. Gelt exists to help deliver the Genus strategy and reinforce the Company values that underpin our business. Gelt responsiBilities GELT’s first task was to determine the Company’s vision and values, described in the Company Overview. An ongoing role is to ensure organisational alignment, engagement and efficient execution throughout the Group. Inevitably, this also involves making crucial personnel, operational and commercial decisions. Equally important is GELT’s stewardship of the Genus reputation. More widely, GELT is ensuring that Genus delivers on several fronts: }} corporate strategy – primary responsibility for developing and implementing the Company’s strategy alongside operational excellence, through embedding and strengthening key capabilities; }} people – promoting and ensuring talent management and people development throughout the organisation; and resources – including corporate procurement and investments. }} divisional struCture The new structure based on business units rather than the previous geographical split, with focus on our developing markets in Asia, provides for the best delivery of the following key elements: }} }} strategic marketing; }} strong product development; }} sales and technical services; }} optimised supply chain; and }} developing markets. insight-driven research; }} operations management – driving Members of GELT are as follows: organisational profits and results; ensuring core processes are reliable and efficient; annually reviewing R & D plans; managing risk, including risk mitigation; managing the Genus balanced scorecard, including customer equity metrics; Karim Bitar CHieF exeCutive JoHn worBy Group FinanCe direCtor ian Farrelly Group Company seCretary & General Counsel See pages 38 to 39 for Karim’s, John’s and Ian’s biographies. 40 Genus plc Annual Report 2012 dr denny FunK CHieF sCientiFiC oFFiCer Denny has a strong genetics background, with a PhD in animal breeding from Iowa State University. He joined Genus in 1995 and prior to his role as Chief Scientific Officer, held various positions in research, product development and production. Prior to joining Genus, he was an Associate Professor with tenure at the University of Wisconsin, Madison for seven years following five years with the US Holstein Association. Jerry tHompson CHieF operatinG oFFiCer, Genus asia Jerry graduated with a BSc Hons in Agriculture from Seale Hayne College, Devon and has worked for PIC and subsequently Genus for almost 20 years. After two years in the UK business he moved to Eastern Europe where he has held a number of roles including Key Account Manager in Siberia, Managing Director for PIC Romania and for the Central and Eastern European PIC business. In 2008, Jerry moved to the position of Regional Director for PIC Europe. He became Regional Director for the Russia and Asia Pacific Region based in Shanghai in 2010 before being appointed into his current role on 1 July 2012. Bill CHristianson CHieF operatinG oFFiCer, Genus piC Bill has doctorates in Veterinary Medicine and in Philosophy from the University of Minnesota. He joined Genus in 1993. Before his current appointment in July of this year, he held various operational roles within Genus, including serving as General Manager of the PIC North America business in 2007 and as Chief Operating Officer of the Americas from March 2010. riCardo Campos CHieF operatinG oFFiCer, Genus aBs Ricardo has degrees in Business Administration, Agribusiness Administration and Management from the SNA Agribusiness School, Santiago, Chile. Having joined Genus in 2004 from an ABS distributor that was purchased by the Group, he was instrumental in establishing ABS businesses in Chile, Argentina, Uruguay and Colombia – all of which enabled the Latin America business to achieve double-digit growth. Subsequent roles included leadership of the genetic business in the Caribbean and Marketing Specialist for non-genetic products and Genus Latin America Managing Director. Ricardo was appointed to his present position on 1 July 2012. CatHerine GliCKman Group Human resourCes direCtor Catherine joined Genus in January 2012 in the newly created role of Group HR Director. For the previous 20 years, she worked for Tesco plc in a variety of positions. For the last four years she was Group HR Director, where she focused on talent development, succession and leadership development. She held HR Director roles supporting the international rollout of Tesco into Asia, Central Europe and the States, and led HR for the UK Stores during a period of major expansion. Prior to Tesco, she worked in HR for Somerfield plc and Boots plc. Catherine holds a degree in English Language and Literature from Durham University and is a member of the Institute of Personnel and Development. Genus plc Annual Report 2012 41 company overviewbusiness reviewcorporate governancefinancial statementsDirectors’ Report The Directors present their annual report on the affairs of the Group, together with the Financial Statements and Auditors’ Report, for the year ended 30 June 2012. PRinciPal activities The principal activities of the Group comprise the global application of quantitative genetics and biotechnology to animal breeding in porcine and dairy/artificial insemination (‘AI’) beef sectors. The principal subsidiary and associated undertakings are listed in note 36 to the Financial Statements. Business Review A review of the business of the Group during the financial year ended 30 June 2012, the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group can be found within the Company Overview and Business Review on pages 2 to 37. The Company Overview and Business Review also includes details of expected future developments in the business of the Group, an indication of its activities in the field of research and development and details of the key performance indicators used by management, together with details of the Company’s approach to corporate responsibility. The Company Overview and Business Review also contain a description of treasury policies and financial instruments used by the Group, which should be read in conjunction with note 25 to the Financial Statements. DiviDenDs The Directors recommend an increase in the final dividend for the year ended 30 June 2012 of 10% to 10.1 pence per ordinary share. Subject to shareholder approval at the Company’s Annual General Meeting to be held on 8 November 2012, this dividend will be paid on 23 November 2012 to ordinary shareholders on the register on 9 November 2012 and, together with the interim dividend of 4.5 pence paid on 30 March 2012, makes a total dividend of 14.6 pence for the year (2011: 13.3 pence). DiRectoRs The Directors, who served throughout the year and to the date of signing of this report were as follows: Bob Lawson Karim Bitar John Worby Nigel Turner Mike Buzzacott – Non-Executive Director – Non-Executive Director Barry Furr – Non-Executive Chairman – Chief Executive (appointed 1 September 2011)* – Group Finance Director – Senior Non-Executive Director * On 25 May 2011, the Company announced the retirement of Richard Wood with effect from 30 September 2011 and the appointment of Karim Bitar as a Director with effect from 1 September 2011 and as Chief Executive of the Company with effect from 30 September 2011. In compliance with the UK Corporate Governance Code, all Directors will offer themselves for annual re-election at the next Annual General Meeting. The Board considers that all Directors make an effective and valuable contribution to the Board and demonstrate commitment to their respective roles. Biographical details on the Directors of the Company can be found on pages 38 and 39. With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Acts and related legislation. The articles themselves may be amended by special resolution of the shareholders. The powers of Directors are described in the Matters Reserved for the Board, copies of which are available on request, and the Corporate Governance Statement on pages 47 to 51. 42 Genus plc Annual Report 2012 DiRectoRs’ inteRests The Directors who held office at 30 June 2012 had the following interests in the shares of the Company: Bob Lawson Karim Bitar John Worby Nigel Turner Mike Buzzacott Barry Furr total number 5,150 17,551 10,000 15,000 3,000 8,000 58,701 Number 5,150 – 10,000 15,000 3,000 8,000 41,150 at 30 June 2012 At 30 June 2011 No changes took place in the interests of Directors between 30 June 2012 and the date of this report. DiRectoRs’ shaRe oPtions anD shaRe awaRDs Details of Directors’ share options and share awards are provided in the Directors’ Remuneration Report on pages 64 to 66. suPPlieR Payment Policy The Company’s policy is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and ensure that the Company abides by the terms of payment. Trade creditors of the Group at 30 June 2012 were equivalent to 26 days’ purchases (2011: 25 days), based on the average daily amount invoiced by suppliers during the year. chaRitaBle anD Political contRiButions During the year, the Group made no charitable donations (2011: £6,150). caPital stRuctuRe Details of the Company’s authorised and issued share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 30. The Company has one class of ordinary share. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions either on the size of a holding or on the transfer of shares, which are both governed by the provisions of the Company’s Articles of Association and prevailing legislation. Details of the Company’s employee share schemes are set out in note 29. In connection with these schemes, the Genus plc Employee Benefit Trust holds shares in the Company from time to time and abstains from voting in respect of any such shares held. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. suBstantial shaReholDings As at 30 August 2012, the following material interests in the Company’s issued ordinary share capital were held: Lansdowne Partners 12.67%, NFU Mutual 7.80%, Baillie Gifford & Co 7.21%, Standard Life Investments 5.48%, M&G Investments 5.37% and Legal & General Investment Management 3.83%. No other person has notified an interest in the ordinary shares of the Company which is required to be disclosed to the Company. authoRity to acquiRe the comPany’s own shaRes At the end of the year, the Directors had authority, under the shareholders’ resolutions of 10 November 2011, until the earlier of 18 months after the passing of such resolutions or the conclusion of the Company’s next Annual General Meeting, to buy back shares on the open market to a limit of £599,330 in nominal value, representing 10% of the Company’s issued share capital as at the date of the resolution at a price between 10 pence (exclusive of expenses) and 105% of the average of the middle market quotation for ordinary shares in the Company for the five business days prior to the date of purchase (exclusive of expenses). No shares were bought back by the Company in the period since 11 November 2011 and the date of this report. Genus plc Annual Report 2012 43 business reviewfinancial statementscompany overviewcorporate governanceDirectors’ Report continued coRPoRate goveRnance The Company’s Corporate Governance Statement is set out on pages 47 to 51 and forms part of this Directors’ Report. coRPoRate social ResPonsiBility Details of the Company’s approach to corporate social responsibility are contained in the Corporate Social Responsibility section of the Business Review on page 36. oRDinaRy anD sPecial Business at the annual geneRal meeting At the Annual General Meeting to be held on 8 November 2012 resolutions 1 to 11 are termed ordinary business, while resolutions 12 to 15 will be special business. The ordinary business includes: }} approval of the Company’s audited Financial Statements and Directors’ and Auditors’ Reports for the year ended 30 June 2012 (resolution 1) }} approval of the Directors’ Remuneration Report for the year ended 30 June 2012 (resolution 2) }} declaration of a final dividend of 10.1 pence per ordinary share (resolution 3) }} re-election of Directors in compliance with the UK Corporate Governance Code (resolutions 4 to 9) re-appointment of the Company’s auditors and the agreement of their remuneration (resolution 10) }} }} grant of authority to the Directors to allot authorised and unissued ordinary shares up to an aggregate nominal amount of £1,569,374 without having to obtain prior approval from shareholders on each occasion (resolution 11) The special business covers the following matters: }} an amendment to the rules of the Genus plc 2004 Performance Share Plan (the ‘PSP’) (resolution 12) }} partial disapplication of pre-emption rights attaching to the Company’s shares (resolution 13) }} }} renewal of the Company’s authority to buy back the Company’s shares (resolution 14) the ability to convene general meetings (other than Annual General Meetings) on 14 days’ notice (resolution 15) The resolutions are set out in the Notice of Annual General Meeting on pages 124 to 127. The passing of resolution 11, as an ordinary resolution, will permit the Directors for a period expiring at the conclusion of the Company’s next Annual General Meeting to allot shares up to a maximum aggregate nominal amount of £1,569,374 being 15,693,749 ordinary shares of 10 pence each representing 26% of the issued ordinary share capital of the Company as at 30 June 2012. The Directors do not have an intention to exercise this authority at the present time. The Company currently holds no shares in treasury. The passing of resolution 12, as an ordinary resolution, will enable the Company to provide the Directors with the opportunity to earn an upper quartile total remuneration quantum, subject to the delivery of very demanding performance targets. The performance targets have been set in light of the Company’s above-market, long-term growth aspirations which were identified as part of the comprehensive strategic review undertaken by the Company. Specifically, the Remuneration Committee of the Company is proposing to amend the PSP to increase the aggregate market value of shares over which an individual may receive an award of shares in any one financial year from 125% of salary to 200% of salary. All other aspects of the PSP will remain unchanged. The Remuneration Committee has consulted with the Company’s major shareholders on the proposed amendment to the PSP. The following information is intended to provide further background for shareholders but is not subject to shareholder approval. Further details in respect of the award policy that is anticipated to operate in the current financial year for the Executive Directors are set out on pages 60 and 61. With regard to the 2012–13 financial year, the Company intends to grant awards under the PSP with a market value of 125% of salary to the Chief Executive Officer and 100% of salary to the Group Finance Director, subject to the adjusted earnings per share growth targets described below, measured over three financial years ending 30 June 2015. This range of targets is consistent with those that operated for the awards granted during the year under review. 44 Genus plc Annual Report 2012 Per annum growth in adjusted ePs* % of additional award vesting** Per annum growth in adjusted ePs* % of additional award vesting**

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