A WORLD-LEADING BUSINESS Genus plc Annual Report 2014 A World Leader in Agriculture Global demand for pork, beef and milk continues to increase, driven by urbanisation, population growth and rising incomes. Our genetics enable farmers to meet this demand with quality and efficiency. We are world leaders in our markets, with pioneering technology and a deep understanding of our customers’ needs. “ We achieved a good performance in PIC and ABS in 2014, whilst Asia and specifically China was impacted by poor market conditions and the planned investments in expanding our porcine capacity. The strategic progress we have made positions us well to take advantage of improving market conditions. Although we face some continuing headwinds, we expect to perform in line with expectations in 2015.” Karim Bitar Chief Executive 01 Strategic Report 02 Genus at a Glance 04 Chairman’s Statement 06 Chief Executive’s Review 08 Market Opportunities 10 Our Business Model 16 Strategic Framework 18 Key Performance Indicators 20 Principal Risks and Uncertainties 22 Divisional Review 38 Financial Review 42 People 44 Corporate Social Responsibility Corporate Governance 48 Letter from the Chairman 50 Board of Directors and Company Secretary 52 Genus Executive Leadership Team 54 Corporate Governance Statement 60 Audit Committee Report 64 Directors’ Remuneration Report 84 Nomination Committee Report 86 Directors’ Responsibilities Statement Financial Statements 87 Independent Auditor’s Report – Group Financial Statements 91 Group Income Statement 92 Group Statement of Comprehensive Income 93 Group Statement of Changes in Equity 94 Group Balance Sheet 95 Group Statement of Cash Flows 96 Notes to the Group Financial Statements 143 Parent Company Balance Sheet 144 Notes to the Parent Company Financial Statements Additional Information 152 Five Year Record – Consolidated Results 153 Notice of Annual General Meeting IBC Advisers 2014 Highlights GROUP REVENUE £m ADJUSTED PROFIT BEFORE TA X £m 2014 2013 2012 2011 372.2 345.3 341.8 309.9 2014 2013 2012 2011 39.3 42.5 43.7 36.7 ADJUSTED BASIC EPS PENCE DIVIDEND PER SHARE PENCE 2014 2013 2012 2011 46.5 49.1 50.0 41.9 2014 2013 2012 2011 17.7 16.1 14.6 13.3 Financial Highlights1 • Adjusted profit before tax of £39.3m, unchanged in constant currency (down 8% in actual currency) • Adjusted earnings per share of 46.5p, up 3% in constant currency (down 5% in actual currency) with benefit of lower tax rate • Statutory profit before tax up 14% to £38.2m and earnings per share up 23% to 47.7p • Substantially improved cash conversion of 103% (2013: 77%) • Healthy after tax return on invested capital of 19.2% (2013: 19.9%) • Dividend increased by 10% to 17.7p, well covered at 2.6 times Business Highlights • Volume growth of 8% in porcine and 5% in dairy and beef • Double digit profit growth in PIC, in constant currency, despite industry disease challenges • Strong ABS rebound with profits up 12% in constant currency • Asia results down 49% due to China investment costs and market conditions • Acquisition and successful integration of Génétiporc strengthens PIC leadership • Acceleration of the rate of porcine genetic improvement by 35% and further reduction in genetic lag • First porcine commercial multiplication agreement signed in China with Riverstone • First bovine royalty agreement with ABP Food Group for beef genetics 1 For definitions of adjusted profit, cash conversion and return on invested capital, see Financial Review on pages 38 to 41. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 02 Genus at a Glance Pioneering Animal Genetic Improvement Genus provides farmers with superior genetics, so they can efficiently produce high-quality meat and milk. Our success has given us market- leading positions. We have 26% of the porcine market, excluding China, more than double our nearest competitor, as well as 24% in beef and 8% of global dairy sales. The majority of our competitors are co-operatives, making Genus unique as a listed company. 100m+ pigs with our genetics taken to market (MPEs) 2,300+ employees 17m+ doses of semen per year delivered What We Do Genus is a world leader in applying biotechnology to advance the science of animal breeding and genetic improvement. Our technology is applicable to all livestock species and we currently commercialise it in dairy, beef and pork. We breed the world’s best pigs and bulls, scientifically selecting livestock whose offspring will increase value for farmers and food producers around the world. In the porcine market, we offer genetically superior boars and sows that produce offspring with higher carcass value and desirable characteristics, such as feed- efficient growth or leaner meat. In the dairy and beef markets, our primary product is bull semen, enabling our customers to use artificial insemination to improve their herds and their efficiency. How We Operate Genus sells under well-known trademarks: ‘PIC’ for pigs and ‘ABS’ for dairy and beef cattle. Our three business units are: • Genus PIC, which serves porcine customers in North America, Latin America and Europe • Genus ABS, which serves dairy and beef customers in North America, Latin America and Europe • Genus Asia, which covers both porcine and bovine species in the fast-growing Asian market Genus employs over 2,300 people, including 79 PhD scientists. We have five bull studs worldwide, and two porcine genetic nucleus farms, in South Dakota, US, and Saskatchewan, Canada. We use the porcine farms to improve the genetics we supply to both customers and third-party producers. These producers, known as multipliers, carry out most of our pig breeding needs. Where We Operate Genus companies operate in over 25 countries on six continents. We also sell to customers in another 50 countries, through distribution partners. North America accounts for about 41% of sales, with Europe 33% and Latin America and Asia each representing 13%. A shared research and development function supports our operating divisions, with laboratories in Madison, Wisconsin, US. Our corporate headquarters are in Basingstoke, UK. Genus plc Annual Report 2014Strategic Report 03 REVENUE BY GEOGRAPHY (%) REVENUE BY SPECIES (%) 13 North America Latin America Europe Asia Porcine Bovine 33 41 46 54 13 £27m+ spend on R&D per year 75+ country sales Our Vision Pioneering animal genetic improvement to help nourish the world. Our Values Our values are integral to our role as a company that helps to meet a basic human need: nourishment. Customer Centric 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 for our customers, we stop and think again. People Focused 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. Results Driven We are proactive, determined to be the best we can be and to 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. Pioneering 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. Responsible 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 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 04 Chairman’s Statement “ The Board is focused on the Group’s continued growth, its research and development capabilities, and its expansion into new markets. We will continue to support the implementation of our strategy, as Genus seeks to benefit from the large and growing opportunity for animal genetics.” 2014 was a challenging year for Genus and the Board is well aware that it was not a rewarding year for shareholders. The Group’s results for the year were unchanged in constant currency but lower in actual currency, due to the strength of Sterling in the year. Despite the challenging environment resulting from unexpected disease outbreaks and Chinese market conditions, our team of 2,300 employees in over 25 countries has enabled Genus to achieve much more significant progress than the headline numbers suggest. I thank them for their commitment and hard work during the year. The most visible evidence of this strategic progress is the acquisition of Génétiporc, which is meeting its objectives and already making an important contribution to performance as well as strengthening the genetic pool within PIC. We also made important progress in areas such as accelerating genetic improvement and adjusting the way we address key markets such as China. You can read more about the Group’s performance and progress in Karim’s report on pages 6 and 7. Tough conditions within our markets have challenged us to sharpen our knowledge of the dynamics and risks of our business, and how we can respond effectively. Such capabilities can only be deployed if the management team is of sufficient calibre. Since Karim became CEO, he has created an outstanding leadership team with a mix of existing people in revised roles and new recruits to fill the gaps. As a Board we are now witnessing the impact that this team is beginning to have and it reinforces our confidence in our ability to create sustainable value from the large strategic opportunity which Genus has. Strengthening the Board The appointments of two new Non-Executive Directors strengthen the Board, as we seek to grow the business. Both of them bring experience and knowledge that will have great value to Genus. Professor Duncan Maskell joined us on 1 April 2014. He is one of the most senior scientists at Cambridge University and has been instrumental in co-founding several biotech companies. He also has extensive experience in advising companies on science and innovation. Lykele van der Broek joined the Board on 1 July 2014. Before his retirement from Bayer CropScience, a division of Bayer AG, he held a number of senior international roles, including heading its BioScience division. After eight years on the Board, Professor Barry Furr has indicated that he feels it is time to step down and so will retire at the Annual General Meeting in November 2014. Barry has provided invaluable scientific advice, in his role as Scientific Adviser to our Research and Development Portfolio Management Team and the Science Committee he chaired before that. On behalf of the Board, I would like to thank him for his enormous contribution and to wish him well for the future. Duncan Maskell will become our Scientific Adviser on Barry’s retirement. During the year, we also welcomed Dan Hartley as our new Group General Counsel and Company Secretary. Dan brings a wealth of legal and biotech experience to Genus. Genus plc Annual Report 2014Strategic Report 05 It is important that as a Board we are close to the markets in which Genus operates, so we can make the right strategic choices. This year the Board visited China, which was extremely valuable given the impact it had on the Group’s results. Our visit helped us to understand at first hand the customers and markets there, as we refined our strategy for the country. In 2013, the Board visited Italy and in 2015 we plan to visit Brazil, enabling us to cover three key continents over a three-year period. You can read more about how the Board operated in 2014 and the importance we attach to good governance in the Corporate Governance section on pages 48 to 86. Dividend The Board is always aware that it directs the Company on the shareholders’ behalf. Providing attractive returns to shareholders is an important part of our corporate goals. The Board is therefore recommending a final dividend of 12.2 pence per share, which together with the interim dividend of 5.5 pence per share, will result in a dividend for the year of 17.7 pence per share, an increase of 10% over last year’s dividend. This continues our progressive dividend policy and reflects the Board’s confidence in Genus’s future. It is proposed that the final dividend will be paid on 5 December 2014 to shareholders on the register at the close of business on 21 November 2014. Summary In summary, the Board is focused on the Group’s continued growth, its research and development capabilities, and its expansion into new markets. We will continue to support the implementation of our strategy, as Genus seeks to benefit from the large and growing opportunity for animal genetics. Bob Lawson Chairman 2 September 2014 “The Board is recommending a final dividend of 12.2 pence per share.” Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 06 Chief Executive’s Review We experienced a challenging year in 2014. While our overall results fell short of our growth objectives, our performance across most of the world outside China was strong. This was encouraging given challenges previously announced such as porcine epidemic diarrhoea virus (‘PEDv’). Despite our results in China, we continue to believe the opportunity there is large, that we are laying the right foundations for long-term success and have adapted our strategy to ensure this. We continued to make good progress across our key strategic initiatives, with the acquisition and successful integration of Génétiporc in October 2013 being a highlight. We accelerated genetic improvement across our species, which will help extend our product leadership and as market conditions improve, we are well positioned to accelerate growth. Group Performance Overall performance across Genus was mixed. Genus ABS and PIC grew in double digits, in constant currency, but profits in Asia, and specifically China, were sharply lower. Sterling’s strength also substantially affected our reported results, as we earn much of our profit in US Dollars or related currencies. Adjusted profit before tax including joint ventures was £39.3m, 8% lower than in 2013 but unchanged in constant currency. Volumes grew 8% in porcine and 5% in dairy and beef, contributing to 8% revenue growth (12% in constant currency). Génétiporc and Asia led porcine volume growth. In bovine, Latin America rebounded strongly and our Indian business performed well. Genus ABS increased profits by 12% in constant currency, with all regions contributing, and a strong performance from our beef business. Genus PIC profits rose 10% in constant currency, with contributions from the Génétiporc acquisition, continued good growth in Latin America and solid trading in North America, despite disease affecting the industry. In Asia, the reduction in Chinese porcine profit was principally caused by our planned investments in capacity combined with very adverse market conditions for pig producers in the first half of this calendar year, but there is evidence these conditions are improving. Strategy The market opportunity for animal genetics is large and growing, driven by increasing animal protein consumption by a rising and increasingly urban global population. To meet this demand, farmers are increasingly employing technology, larger-scale production and the best genetics. Genus’s clear global leadership in porcine, dairy and beef is a firm foundation for growth. We have continued to execute vigorously the strategy we announced in 2012 and made substantial progress during the year. In October 2013, we acquired Génétiporc, the Americas’ second- largest porcine genetics company, for £22m. In February 2014, our Brazilian joint venture acquired Génétiporc do Brasil. This has enhanced our leadership in the Americas and brought valuable additional genetic traits into our porcine pure lines. We have rapidly integrated their operations and are on track to deliver the expected US$11m (£6.7m) of annual synergies by the end of the second year. In China, our joint venture with Besun and our wholly-owned porcine nucleus farm, Chun Hua, became fully operational. These have enabled us to introduce new products and the latest genetics into China, and more than doubled our capacity there. We are already seeing the benefit, with customers such as New Hope, China’s largest feed producer and a top ten integrated pork producer, selecting PIC genetics. Our additional Chinese capacity brought expected start-up costs and greater exposure to commodity prices at a challenging time in the porcine market there. We are adjusting our strategy to deliver, where possible, future capacity increments through commercial multiplication agreements. We recently announced an agreement with Riverstone, a US-led group investing in China, to become a commercial multiplier and a royalty- based customer there. This approach will reduce the number of porcine joint ventures we execute and reduce investment and commodity risk. Genus plc Annual Report 2014Strategic Report 07 Our People In November 2013, Dr Denny Funk retired as Chief Scientific Officer and head of R&D after 19 years of service. We wish him well and are grateful for his many contributions. Dr Jonathan Lightner has joined us from DuPont Pioneer, where he was head of agricultural biotechnology, to replace Dr Funk. His broad experience in genetics and focus on intellectual property is already proving very valuable. Saskia Korink Romani became Chief Operating Officer of ABS and has moved to Madison, Wisconsin to lead that business. Tom Kilroy, our Group General Counsel and Company Secretary, left to pursue a commercial career and Dan Hartley replaced him, joining from Shire plc where he was Senior Vice President and International Counsel. Overall, our Genus Executive Leadership Team (‘GELT’) is highly talented and working well together. Our employees’ energy, ability and passion are fundamental to our success. During the year, we further strengthened our people management practices, training and talent development. We also conducted our first employee survey, with 80% participating. The results showed significant commitment to our vision, values and strategy. Outlook We are cautiously optimistic that 2014’s challenges are starting to abate. While PEDv is still affecting our royalty revenues, there are signs that producers are learning to cope with it. The severe downturn in Chinese pig prices in 2014 has led to a reduction in the sow herd, which should better balance supply and demand in 2015. Additionally, the outlook for harvests in the Northern Hemisphere appears favourable which should lead to lower input costs for our customers. Although some headwinds remain, our business is positioned to accelerate growth and we expect to perform in line with expectations in 2015. Karim Bitar Chief Executive 2 September 2014 During the year, we signed our first bovine royalty agreement with ABP Food Group, the UK’s largest integrated beef processor, to develop proprietary indices for beef bulls and deliver superior genetics into their supply chain. We are also creating a beef nucleus herd, to accelerate genetic gain and increase our control of the resulting genetics. Our Research and Development (‘R&D’) programmes used advanced selection techniques to accelerate genetic gain in the porcine nucleus herds. We also reduced further the lag between the genetics in the porcine nucleus and those on customers’ farms so they see the benefits of improved genetics more quickly. In dairy, the initial bull calves born from our recently established elite female herd included two with genomic test scores among the highest ABS has ever seen. These should start producing in late 2015. The project to develop a novel proprietary method of producing sexed bovine semen achieved an important milestone in successfully completing large-scale field trials. In July 2014, we initiated US legal proceedings against Sexing Technologies, the current provider of sexed semen, alleging abuse of its monopoly position. “Although some headwinds remain, our business is positioned to accelerate growth and we expect to perform in line with expectations in 2015.” Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 08 Market Opportunities The Animal Genetics Market – Large and Growing Global demand for animal protein is significant and growing. Meeting this demand is becoming more difficult as urbanisation increases, competing needs for land and water intensify and consumers require affordable, safe and high-quality animal protein. Genetics is critical to solving this global challenge, presenting a £3–4 billion gross profit opportunity. Three key drivers impact the use of high-quality animal genetics. Growth in Protein Consumption Animal protein consumption affects demand for animal genetics globally. Demand for animal protein continues to grow by 1–3% per year, and is rising particularly in emerging markets such as Brazil, Russia, India and China, where urbanisation is increasing rapidly. The chart below shows that this powerful trend – coupled with a continually rising global population – will continue for decades to come. WORLD POPULATION GROWTH 1990 –2050 BILLION WORLD PRODUCTION 1 M TONNES Milk Pork Beef +1.8% 2022 2014 p.a. 905 786 +1.3% 2022 2014 p.a. 127 114 +1.5% 2022 2014 p.a. 77 68 6.3 6.0 5.7 5.4 3.2 3.3 3.3 3.3 3.4 3.4 3.4 3.4 GROSS PROFIT POTENTIAL OPPORTUNIT Y IN THE GENETIC IMPROVEMENT MARKET M TONNES (2014) 2 Milk Pork Beef 100%=786m tonnes 100%=114m tonnes 100%=68m tonnes 30-40% 60-70% 93-95% 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 5.1 4.7 4.3 4.0 3.6 3.2 2.9 3.3 3.3 3.3 1995 1990 2.6 2.3 3.2 3.0 Urban Rural Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). As consumers move from an agricultural lifestyle to an urban setting, they become wealthier and keener on consuming animal proteins such as milk in India and pork in Russia, where consumption in the last five years has increased by 21% and 25% respectively. 55-65% 5% 20-30% 10% 5% 1-2% £1.0bn £1.3bn Value of Genetics Gross Profit Potential £1.5bn n Remaining market n Other genetically improved material2 n Genus’s footprint3 1. FAO Stat; OECD-FAO. 2. FAO: ‘State of the world’s genetic resources’ (Rome, 2007). 3. Estimates based on Genus data. Genus plc Annual Report 2014Strategic Report 09 “Demand for animal protein continues to grow by 1–3% per year particularly in emerging markets.” Farmers’ Use of Technology Farmer Profitability Farmers increasingly use high-quality genetics to meet demand. In dairy, artificial insemination (‘AI’) use has reached 70% in the US, with large enterprise and commercial herds providing half of US milk production. In Mexico and India, AI is now used in around 50% of the herds, while in Brazil it is 13%. In porcine, scale and integration drive the use of high-quality genetics. Large-scale integrated pork production continues to grow and now accounts for 60% of production in the US and 85% in Brazil. Large-scaled farming production in China grew from 11% in 2008 to 20% in 2014. Short-term, farmer profitability also affects the use of high-quality animal genetics. Low feed costs and high output prices give farmers cash flow to invest in genetics that can significantly boost their efficiency and long-term profitability. Milk, pork and beef profitability varies around the world, with markets at different stages of the cycle. For example, in the US, pork producers are considering expansion due to record pig prices, while Chinese pig producers await a market rebound before upgrading their genetics. Summary In summary, the animal genetics market is large and continues to grow, as more technology is used to address the productivity challenge and meet the growing demand for milk, pork and beef. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 10 Our Business Model Genus’s Competitive Advantages Genus’s business model is built on a number of competitive advantages, which help us to create value. Our strategy (see pages 16 and 17) helps us to reinforce and build on these advantages. Our competitive edge comes from: • continuously improving our proprietary lines of breeding animals, using the best science available; • our global distribution capability, through our supply chain, technical service and sales network; • long-lasting customer relationships, enhanced by our services to help farmers get the best from our products; and • a business model and multi-species approach that allow us to continually strengthen and leverage our technology platform. s h i p r e o t n u e m e t n d a e Glo b al L Key A c c M an a g i n Animal Genetic Im Robust G Improve p r o v e m e n t e n m e e ti t n c PIONEERING T e c h n i c a l S u S p e r p v o i c r t e s t c u d o r n o i t a ti n d P e er e Diff Realis Global Su p p l y C h a i n Robust Genetic Improvement Genus accelerates genetic improvement by exploiting the rapid advances in molecular and genetic biology. Our proprietary techniques help us determine the best animals to mate, so our customers see faster genetic gains. We use proprietary indices of desirable animal traits to determine breeding goals. We have our own elite animals, which we supplement with genetics from outside our herds. Our research division supports these programmes, through its work in areas such as gender skew and disease resistance (see pages 34 to 37). We employ more than 100 scientists and technicians, and collaborate with universities, consortia and others. Realised Product Differentiation Understanding customers’ needs helps us to develop outstanding and differentiated products and services. Consumers around the world have different preferences and we tailor our genetic programmes to deliver a wide range of products to help our customers meet these needs. Global Supply Chain Supplying a biological product globally requires complex supply chain operations. In our porcine business, third-party multipliers and customers provide more than 95% of our pig-breeding requirements. This network of multiplication partners is a significant strength, allowing us to meet demand for our genetics while reducing our exposure to farming and commodity risk. In dairy and beef, Genus ABS uses a mix of employees, independent representatives and distributors, to efficiently reach customers and build loyalty. Technical Support Services Ensuring our products meet expectations is critical to customer loyalty. Experienced technical service teams therefore help our customers to achieve the best results in areas such as nutrition, reproduction, health management and genetics. For example, our global Genetic Management System helps dairy customers select the right bulls to meet their genetic goals. In porcine, we provide performance comparisons across our customers, so they can benchmark the benefit they get from our genetics against industry peers. Key Account Management Genus has long-lasting customer relationships. In porcine, our customers are increasingly under multi-year royalty contracts, through which customers pay us for the performance and value we deliver. In 2014, 70% of our global porcine volumes were under royalty contracts. In bovine, we sell most of our semen by the dose and use our services to build strong relationships. Our customer segmentation and account management allow us to focus on customers who value these relationships most. Genus plc Annual Report 2014Strategic Report 11 Genomic Based Pedigree Selection (‘GBPS’) PIC leads the way in using genomics to make breeding more accurate. Over the last two years, our R&D team has increased selection accuracy by 35%, with a marked effect on the rate of genetic progress. The team has developed proprietary genomic chips for sampling pigs’ DNA more intensively and uses sophisticated statistical techniques of imputation to enhance this genetic information at lower cost. Faster genetic improvement strengthens customer loyalty and increases our competitive lead. PIC has implemented GBPS throughout its global supply chain and, during 2015, customers should start to see the benefits, worth an estimated 60 cents per pig per annum to them. We are now exploring the same techniques to increase product differentiation in Genus ABS, by applying genomic prediction of proprietary traits developed through our Real World Data programme. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information1. Robust Genetic Improvement 12 2. Realised Product Differentiation Embryo Transfer into India India is the world’s largest dairy market but a typical Indian cow produces only 2,000 litres of milk, compared with 10,000 litres in the US, per annum. Indian farmers therefore want access to high-quality genes, to improve milk yield, quality and sustainability. However, local conditions have prevented genetic improvement, including a ban on importing live bulls and restrictions on importing semen. To address this, ABS imported embryos from elite North American genetics and implanted them in carefully selected heifers. The first resulting embryo transfer (‘ET’) bull, Pioneer, was born in 2012 and began producing semen within a year. Genus now has five ET bulls and two ET heifer calves, with more pregnancies in progress. Compared with local bulls, farmers have been willing to pay significant premiums for access to these differentiated genetics. Genus plc Annual Report 2014Strategic Report 3. Global Supply Chain 13 Reducing Genetic Lag PIC’s genetic nucleus herds contain 6,000 sows. Along with the 170,000 sows in our global supply chain, they support our customers in producing 110m pigs annually. Two years ago, PIC implemented a unique global genetic dissemination programme, so customers would benefit more quickly from accelerated genetic improvements in the nucleus herds. A single global team using consistent tools and methods ensures optimum gene dissemination, by controlling and monitoring matings throughout the supply chain. We also rationalised capacity and invested to provide a critical mass of animals by region. Now, elite animals anywhere in the supply chain can provide quick dissemination up or down the chain. Over a two-year period, this programme has reduced global genetic lag – the difference in genetic merit from the nucleus herd to the commercial pig – by 0.9 years to 3.5 years, delivering an extra US$2.21 of genetic value per slaughter animal to customers. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 14 4. Technical Support Services Valiant Foam-Active Wipes Disinfecting cows’ teats is essential for preventing environmental mastitis, which affects the cow’s health and milk quality. Existing cleaning methods add time and labour to the milking process, while the quick and easy wipes used on many farms are less effective. To solve this problem, Genus ABS invented Valiant Foam-Active Wipes, the only foaming chlorine dioxide pre-wipe on the market, which is 100 times more effective than other teat wipe products. The wipes particularly help customers with larger herds to protect their animals, without adding time to milking routines. Since its UK launch in 2013, sales have been double our expectations, as farmers see real productivity and health improvements in their herds. We are now rolling out the wipes internationally, so our other customers can benefit too. Genus plc Annual Report 2014Strategic Report 5. Key Account Management 15 Groundbreaking Partnership in the Philippines Commercial pig production involves high up-front investment and a long production cycle. This can be a barrier for existing or aspiring producers, particularly in developing countries like the Philippines. But through our innovative partnership with the Bank of the Philippine Islands, producers can now access funding on favourable terms – together with technical insight and support from Genus PIC – if they set up, expand or improve their herds with our genetics. Producers receive a package of valuable financial and technical support while our team builds a relationship with them, demonstrating our expertise and the value of our products and services. The partnership has already helped three customers to secure loans totalling £4.6m, with a range of other projects in development or under discussion. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 16 Strategic Framework Goals and Strategy for Growth Genus has a robust strategy to meet its corporate goals and capture the very significant growth opportunities in the animal genetics market. Find Out More Corporate Goals Performance Our key performance indicators measure how we are achieving our goals. Read more about this on pages 18 and 19 Risk We look to understand and mitigate the risks to achieving our strategic goals. Read more about this on pages 20 and 21 Strategic Progress Each of our divisions and our R&D function has strategic priorities that support our Group strategy. Read more about this on pages 22 to 37 Our corporate goals are to: 1. Create Genetic Improvement Being the pioneer and leading in genetics is vital for our continued success 2. Deliver Volume Growth Our market relevance is measured by the number of animals on farms using our genetics 3. Drive Profitability To capture our share of the value we create through superior genetics 4. Generate Cash To return to shareholders in increasing dividends and to reinvest in the business Genus plc Annual Report 2014Strategic Report 17 Our Strategy Our strategy for growth has four elements: Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Tailoring the Business Model Strengthening Core Competencies To maintain and enhance our product leadership To have the right offering for the right customers To adapt our approach to suit different markets To have the skills we need to implement our strategy We do this by: • enhancing our use of genomics, to strongly accelerate the rate of genetic improvement; • increasing our control of bovine genetic development, through elite female herds and proprietary indices; • investing in proprietary technologies, with a focus on disease resistance and gender skew; and • collaborating with universities and biotechnology companies on the latest developments in quantitative and molecular genetics. We do this by: • ensuring we have the right products, in the critical geographies, to meet the needs of our target customers, which are typically: – integrated pork producers and farrow-to-finish pig producers – enterprise and large commercial dairies • aligning our products and services to key customer segments, which value our genetics and technical services; and • investing for growth in the BRIC economies, while strengthening our position in more mature markets such as the US and Europe. We do this by: • developing products that meet each market’s specific requirements; • ensuring we have the right commercial model, notably: – transitioning from direct sales to royalties in our porcine business, where appropriate – matching our resources to customers, using cost to serve and customer segmentation • working with joint venture partners, to access or create capacity to serve new markets. We do this by: • developing our marketing capability and strengthening our key account management; • strengthening our supply chain, allowing us to deploy genetics more efficiently and cost effectively to our customers; • stepping up our technical support to customers; and • enhancing our people management, and transferring people and skills to key target markets. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 18 Key Performance Indicators We monitor and measure our strategic progress by reference to our four corporate objectives: 1. Create Genetic Improvement 3. Drive Profitability 2. Deliver Volume Growth 4. Generate Cash 1. Create Genetic Improvement PORCINE GENETIC IMPROVEMENT INDEX (US$) Measures the genetic gain we achieve in our porcine nucleus herds. 2014 2013 2012 2011 0.90 1.80 1.40 2.40 Performance Genetic gain worth US$2.40, up US$0.60, as a direct result of implementing genomic selection technology. $2.40 Definition The index measures the marginal economic value improvement in customers’ US$ profitability, per commercial pig per year, on a rolling three-year average. The prior year’s index has been updated to fully reflect the inclusion of genomic selection and updated economic values of pork production. NET MERIT RANKINGS (DAUGHTER-PROVEN BULLS) Monitors our success in developing bulls that are highly ranked, because of their genetic performance and economic merit. 2014 2013 2012 2011 30 30 31 28 33 Performance Genus maintained a strong industry- leading line-up, demonstrating the quality of the product. Currently, more than 80% of Genus’s bovine sales come from proven bulls. Definition The number of our bulls listed in the top 100 Net Merit US$ rankings, for Holstein progeny tested generally available sires. 2. Deliver Volume Growth DAIRY AND BEEF VOLUME GROWTH (%) Tracks our global unit sales growth in dairy and beef. 5 5 8 2014 2013 2012 2011 5% PORCINE VOLUME GROWTH (%) 11 8 2014 2013 2012 2011 8% 6 6 7 PORCINE GENETIC IMPROVEMENT INDEX (US$) Performance Volumes grew over 5% to 17.4m doses, with the strongest growth in Brazil and particularly India, where we benefited from increased sales of lower-priced locally produced semen. Definition The change in volume of dairy, beef and sorted units of semen, delivered to customers in the year. Tracks the growth in the number of pigs with PIC genetics globally. Performance Volumes grew 8% to 108.8m MPEs with growth coming from our Génétiporc acquisition, Asia and Latin America. Royalty volumes were adversely affected by PEDv during the year. Definition The change in volume of both direct and royalty animal sales, using a standardised market pig equivalents (‘MPEs’) measure of the slaughter animals that contain our genetics. Genus plc Annual Report 2014Strategic Report 19 3. Drive Profitability ADJUSTED OPERATING PROFIT INCLUDING JOINT VENTURES (£M) To track underlying profit generation. 2014 2013 2012 2011 £44.8m 44.8 48.2 48.0 44.8 Performance £44.8m, down £3.4m (flat in constant currency) due to a strong performance in ABS and PIC, offset by challenges in Asia. Definition Operating profit including share of joint ventures, adjusted to exclude IAS 41 valuation movements on biological assets, amortisation of acquired intangible assets, share-based payments and exceptional items. OPERATING PROFIT PER MARKET PIG EQUIVALENT (£) Monitors porcine profitability by unit. 2014 2013 2012 2011 £0.37 0.37 0.40 0.41 0.35 Performance £0.37, down £0.03 (down £0.01 in constant currency) due largely to the dilution impact from lower Génétiporc margins, as well as the results in China. Definition Net porcine operating profit globally, expressed per MPE. OPERATING PROFIT PER DOSE OF SEMEN (£) Monitors bovine profitability by unit. 2014 2013 2012 2011 £1.03 1.03 1.19 1.26 1.25 Performance £1.03, down £0.16 (down £0.09 in constant currency) due primarily to Asia, where we transitioned our distribution business in China and undertook some restructuring in Australia. Definition Net dairy and beef operating profit globally, expressed per dose of semen delivered. Excludes India, as its characteristics are substantially different to the rest of our bovine business. 4. Generate Cash CASH CONVERSION (%) Monitors our success in converting profits into cash. 2014 2013 2012 2011 77 103 96 92 Performance 103% conversion, up 26 percentage points due to solid working capital management, particularly in receivables. The prior year included the stocking of the Besun farm in China and our investment in stocking the Chun Hua porcine nucleus farm. Definition Cash generated by operations before interest and taxes, expressed as a percentage of adjusted operating profit (excluding JVs). PORCINE GENETIC IMPROVEMENT INDEX (US$) 1.2 1.0 1.1 1.4 Ensures we have a strong balance sheet and the financial capability to execute our strategy. Performance 1.2, up 0.2, reflecting the increase in net debt from £52.9m to £63.9m as a result of our investments of £34m in Génétiporc and the Besun joint venture. Definition The ratio of net debt (being gross debt including finance lease obligations less cash held), to adjusted earnings before interest, tax, depreciation and amortisation (excluding JVs). 103% NET DEBT : EBITDA 2014 2013 2012 2011 1.2 Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 20 Principal Risks and Uncertainties Genus supplies biological products to agricultural customers and is exposed to a wide range of risks and uncertainties. Disease outbreaks in the porcine industry and volatility in emerging markets, such as China, are examples of challenges we faced in 2014. The table below outlines the principal risks and uncertainties affecting Genus and how we manage them. More information on how we identify and manage risks can be found in the Corporate Governance Statement on pages 58 and 59. Strategic Risks Risk Description How We Manage Risk Risk Change in FY14 Product Development and Competitive Edge • Development programme fails to produce best genetics for customers • Increased competition in developed and emerging markets reduces market share and margins We have dedicated teams who align our product development to customer requirements, while our technical services help customers to make best use of our products. We frequently measure our performance against competitors in customers’ systems to ensure the value added by our genetics remains competitive. Commercialisation of Research • Failure to focus research initiatives on commercially important areas • Failure to lead on ‘game-changing’ technology or to make new initiatives commercially viable • Failure to commercialise new technology due to third-party intellectual property (‘IP’) Capturing Value Through Acquisitions • Failure to identify appropriate investment opportunities or to perform sound due diligence • Failure to successfully integrate an acquired business Emerging Markets • Failure to appropriately develop business in China and emerging markets Our R&D Portfolio Management Team oversees our research, ensures we are correctly prioritising our R&D investments and assesses the adequacy of resources and its IP freedom to operate. The Board is updated regularly on key development projects. We have a rigorous acquisition analysis and due diligence process, with the Board reviewing and signing-off all projects. We also have a structured post- acquisition integration planning and execution process. We have a robust organisation, blending local and expatriate executives supported by the global species teams, to ensure we comply with our global standards. The Board provides regular oversight and visited China in April 2014. Key initiatives are at an advanced stage of the R&D lifecycle. In 2014, we successfully acquired and integrated Génétiporc, showing that our processes are robust. Volatility in China increased our exposure in 2014. In response, we adjusted our plans and approach to the Chinese market. Genus plc Annual Report 2014Strategic Report Operational Risks Risk Description How We Manage Risk Risk Change in FY14 21 We have a global, cross-functional process to identify and protect our IP. Our customer contracts and our selection of multipliers and joint venture partners include appropriate measures to protect our IP. We have stringent biosecurity standards, with independent reviews throughout the year to ensure compliance. We continue to extend the geographical diversity of our production facilities, to avoid over-reliance on single sites. Intellectual Property Protection • Genus-developed genetic material, methods and technology could become freely available to third parties Biosecurity and Continuity of Supply • Loss of key livestock, owing to disease outbreak • Loss of ability to move animals or semen freely (including across borders) due to disease outbreak, environmental incident or international trade sanctions • Industry-wide disease outbreaks affecting demand for Genus products Human Resources • Failure to attract or retain skills and experience within our executive, management and employee cohorts We manage our talent risk through comprehensive people plans, covering recruitment, performance management, reward, succession planning, communication and engagement. The porcine industry was affected by an outbreak of PEDv in North America. In response, we further strengthened our health management and supply chain resilience. Financial Risks Risk Description How We Manage Risk Risk Change in FY14 Agricultural Market and Commodity Prices Volatility • Fluctuations in agricultural markets affect customer profitability and demand for our products and services • Increase in our operating costs, due to commodity pricing volatility Pensions • Exposure to costs associated with failure of third-party members of joint and several pension scheme • Exposure to costs as a result of external factors (such as mortality rates or investment values) affecting the size of the pension deficit We actively monitor and update our hedging strategy to manage our exposure. Our porcine royalty model mitigates the impact of cyclical price reductions or cost increases in pig production. We are the principal employer for the Milk Pension Fund and chair the group of participating employers. The fund is now closed to future service and an agreed deficit recovery plan is in place, based on the 2012 actuarial valuation. We continue to monitor joint and several liabilities in the fund. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 22 Genus PIC Strategic Progress “ PIC made strong progress in 2014, delivering double- digit profit growth despite the disease challenges being experienced in the industry. We also extended our leadership in the Americas, through the strategically important acquisition of Génétiporc.” Bill Christianson Chief Operating Officer, Genus PIC Case Study Strengthening Our Position in Major Markets In October 2013, we acquired Génétiporc from Aliments Breton Foods Group, North America’s largest producer and processor of organic and natural pork. Génétiporc is a porcine genetics business with operations in the US, Canada, Mexico and a joint venture in Brazil. The business is an excellent fit for PIC, with similar values and an emphasis on meat quality, product development, biosecurity and health. The rapid integration of Génétiporc with PIC’s operations has further strengthened our position in the Americas, increasing our market share by six percentage points. Its complementary product portfolio expands PIC’s genetic diversity and supports future product development worldwide. The broader supply chain and multiplier base mean we can better serve our customers, and we can also offer our market-leading technical and health services to Génétiporc’s customers, more than 95% of which have stayed with us since the acquisition. Acquiring Génétiporc is an important step in Genus’s strategic development, as we focus on providing the very best genetics particularly to integrated pork producers. Increasing Genetic Control and Product Differentiation Progress Against 2014 Objectives 2015 Priorities We aimed to: We will: • accelerate genetic improvement, by aggressively • harness the benefits of investing in genomics for our implementing advanced genomic tools such as imputation; further reduce genetic lag in our supply chain; and develop new terminal sire products, with an emphasis on robust and efficient growth. customers, by increasing the rate of genetic gain by a further 10%; • deliver product enhancements for customers, by completing the integration of Génétiporc; and • continue to enhance the dissemination of our genetics across key markets, to reduce genetic lag by a further During the year, we: • achieved a world first by implementing imputation in four months. routine genetic evaluations for livestock, improving the rate of genetic gain by 35%; • reduced genetic lag globally by a further 0.4 years, to 3.5 years; and • began field testing two new terminal sire products, evolved through our development process and the pipeline from Génétiporc. Targeting Key Markets and Segments We aimed to: We will: • further develop key account plans for our strategic • build on our strength in the Americas; global customers; and support the expansion of • focus on increasing our presence in the top 40 genetic production and gilt supply, to help us provide accounts in Europe; and high merit animals in growth markets. • introduce an innovative relationship management system, to better align our global Key Account Management and Technical Service teams with customer needs. During the year, we: • acquired Génétiporc, strengthening our leadership with strategic customers in North America, Mexico and Brazil; and • expanded and strengthened our supply capability, by integrating Génétiporc’s supply chain operations. Tailoring the Business Model • Génétiporc presence in the Americas We aimed to: We will: • capitalise on growth opportunities for terminal sires • continue the transition to a royalty pricing model in by developing consistent product offerings, aligning South America, Europe and Asia; supply chain capacity and applying value-based business models; continue to expand the royalty model; and • establish and stock three new sire line nucleus farms across the US and Latin America; and • explore opportunities to further increase supply • develop targeted combinations of products and services. chain efficiency. Strengthening Core Competencies We aimed to: We will: • leverage our product validation process and infrastructure across Europe and Asia; improve our ability to work with key accounts; and build on our • complete our first product validation trials in Asia; and • develop and roll-out further training modules through our Key Account Manager Academy. • introduced value-based pricing for terminal sire During the year, we: offerings in Europe; • expanded the availability of our leading Camborough female product in Europe; and • increased our royalty revenue across key markets, with 79% of our volumes in the year under royalty contracts in PIC. talent management process. During the year, we: • more than doubled product validation trials in Europe and started product validation trials in Asia; • launched our Academy for Key Account Managers, building knowledge and skills in areas such as genetics and PIC product differentiation; and • continued to embed talent management and strengthen our global team, including appointing a new global Head of PIC Marketing. Genus plc Annual Report 2014Strategic Report Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Tailoring the Business Model Strengthening Core Competencies 23 Progress Against 2014 Objectives 2015 Priorities We aimed to: • accelerate genetic improvement, by aggressively implementing advanced genomic tools such as imputation; further reduce genetic lag in our supply chain; and develop new terminal sire products, with an emphasis on robust and efficient growth. During the year, we: • achieved a world first by implementing imputation in routine genetic evaluations for livestock, improving the rate of genetic gain by 35%; • reduced genetic lag globally by a further 0.4 years, to 3.5 years; and • began field testing two new terminal sire products, evolved through our development process and the pipeline from Génétiporc. We aimed to: • further develop key account plans for our strategic global customers; and support the expansion of genetic production and gilt supply, to help us provide high merit animals in growth markets. During the year, we: • acquired Génétiporc, strengthening our leadership with strategic customers in North America, Mexico and Brazil; and • expanded and strengthened our supply capability, by integrating Génétiporc’s supply chain operations. We will: • harness the benefits of investing in genomics for our customers, by increasing the rate of genetic gain by a further 10%; • deliver product enhancements for customers, by completing the integration of Génétiporc; and • continue to enhance the dissemination of our genetics across key markets, to reduce genetic lag by a further four months. We will: • build on our strength in the Americas; • focus on increasing our presence in the top 40 accounts in Europe; and • introduce an innovative relationship management system, to better align our global Key Account Management and Technical Service teams with customer needs. We aimed to: • capitalise on growth opportunities for terminal sires by developing consistent product offerings, aligning supply chain capacity and applying value-based business models; continue to expand the royalty model; and We will: • continue the transition to a royalty pricing model in South America, Europe and Asia; • establish and stock three new sire line nucleus farms across the US and Latin America; and • explore opportunities to further increase supply • develop targeted combinations of products and services. chain efficiency. During the year, we: • introduced value-based pricing for terminal sire offerings in Europe; • expanded the availability of our leading Camborough female product in Europe; and • increased our royalty revenue across key markets, with 79% of our volumes in the year under royalty contracts in PIC. We aimed to: • leverage our product validation process and infrastructure across Europe and Asia; improve our ability to work with key accounts; and build on our talent management process. During the year, we: • more than doubled product validation trials in Europe and started product validation trials in Asia; • launched our Academy for Key Account Managers, building knowledge and skills in areas such as genetics and PIC product differentiation; and • continued to embed talent management and strengthen our global team, including appointing a new global Head of PIC Marketing. We will: • complete our first product validation trials in Asia; and • develop and roll-out further training modules through our Key Account Manager Academy. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 24 Genus PIC Operating Review “ Genus PIC performed well in FY14 and is strongly positioned to benefit from a resumption of growth in the industry.” CORN – KEY MARKETS (£ PER TONNE) PORK – KEY MARKETS (£ PER KG) 300 250 200 150 100 50 0 Aug 11 US Aug 12 Brazil Case Study 2.5 1.5 0.5 Aug 13 Aug 14 Aug 11 Aug 12 Aug 13 Aug 14 EU China US Brazil EU China Russia Adding Value with Our Technical Services Vall Companys in Spain is PIC’s largest European customer. Through its fully integrated production, 190,000 sows produce more than 245,000 tonnes of pork each year. In February, a dozen members of PIC’s Global Technical Services team travelled from around the world to work in collaboration with Vall’s production leadership. This was the culmination of months of preparation. Through presentations, site visits and roundtable discussions, we covered topics ranging from boar stud optimisation to gilt development principles. As the customer’s Production Director, Albert Vidal, said: “It was an excellent experience and a great opportunity to have so many experts helping our company.” Market Market conditions were challenging for PIC in 2014 particularly in the US, due to PEDv. This has affected well over half the US and Mexican pig herds, as well as herds in Canada, South Korea and Japan. PEDv results in severe mortality in young piglets and has led to an approximately 5–10% decline in weekly US pig slaughter since March 2014. Whilst some of this reduction has been offset by higher weights, the decline in slaughter is expected to accelerate in the second half of the calendar year. This has led to record high US pork prices and futures, making pork production very profitable for farmers despite the disease challenges. In addition, farmers have benefited from lower input costs following good harvests in 2013. However, the industry has not yet expanded to take advantage of these conditions, as it deals with the operational issues caused by PEDv. Health concerns led to a number of border closures, to try and halt the spread of PEDv. In addition, Russia closed its border to the EU, due to African Swine Fever. This reduced exports from the EU and held back EU pork prices, while in Russia pork prices rose sharply. Performance Volume growth of 5% was driven by the Génétiporc acquisition, with underlying royalty volumes in North America and Mexico affected by PEDv losses and limited sow herd expansion. Revenue increased by 19%, but margins were lower due to higher animal sales as a result of Génétiporc, whose business model is currently based more on up-front sales than PIC’s. Adjusted operating profit increased by 10%, benefiting from the expected initial contribution of Génétiporc and another year of robust growth in Latin America. In North America, profits were up 6%. Royalty income was 7% higher than the previous year and animal sales were up by more than 100%, driven primarily by Génétiporc. Genus plc Annual Report 2014Strategic Report 25 Revenue Adjusted operating profit excluding JV Adjusted operating profit including JV Actual currency 2014 £m 152.8 50.0 52.7 2013 £m 133.5 48.2 50.6 Constant currency Movement % Movement % 14 4 4 19 9 10 Adjusted operating margin 32.7% 36.1% (3.4) pts (3.1) pts During the year, we successfully acquired and integrated Génétiporc into our operations. The acquisition has expanded our supply chain for boars and gilts, which has played a significant role in enabling us to maintain supply availability in the face of industry disease challenges. We remain on track to deliver the expected synergies from the acquisition in the planned timeframe. PIC also continued to invest in technology (particularly genomics), distribution networks, technical service capabilities and key account management, to help us add even greater value for customers. Summary Favourable margin expectations for producers, combined with greater experience in managing PEDv, should encourage industry expansion as FY15 progresses. PIC performed well in FY14 with a 10% increase in profits and is strongly positioned to benefit from a resumption of growth in the industry. “Volume growth of 5% was driven by the Génétiporc acquisition.” The business performed well in difficult circumstances, through focusing on meeting customer needs and maintaining supply availability. In Latin America, volumes grew by 3%, with another 2% shift to royalty contracts. Profits were up 20%, with around half of this growth coming from Génétiporc. Our joint venture in Brazil had a very successful year, increasing adjusted profits by 35% and making progress across all its strategic initiatives. In line with our strategy, the European business is shifting its business model to target the larger integrated pork producers and reduce its exposure to directly owned operations. It increased revenue by 4% and profit by 1% in FY14, on lower volumes. Strategic progress included closing an owned farm in Poland; further streamlining the UK boar stud operations, along with bringing the studs into line with global standards; establishing European focused support in Technical Services, Genetic Services, Health Assurance and Supply Chain; and developing a strong supply of high indexing animals at multiplication partners, to supply our best products to European customers. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 26 Genus ABS Strategic Progress “ Genus ABS performed well in 2014, with profits growing in double digits. At the same time we made solid strategic progress in developing a more differentiated business, working closely with customers to provide them with genetics and services tailored to their needs.” Saskia Korink Romani Chief Operating Officer, Genus ABS Progress Against 2014 Objectives 2015 Priorities Increasing Genetic Control and Product Differentiation We aimed to: We will: • expand the Real World Data platform by developing • implement our plans to further increase genetic additional indexes; further strengthen the male and control and bovine product differentiation; female genetic platforms; and enhance our proven bull • upgrade our Genetic Management System to help portfolio and genomic bull offering. customers select products for a broader range of breeding situations; and • continue to strengthen our range of genomic bulls and develop a beef genetic nucleus herd. During the year, we: • developed proprietary genetic indices focused on customer needs and soft-launched them in selected regions; • strengthened our elite female programme, to increase genetic control, and had two bull calves born with the highest ever ABS genomic test scores; and • significantly enhanced our genomic bull portfolio and sustained our strong position in the proven bull segment. Targeting Key Markets and Segments Case Study Improving Our Customers’ Efficiency Tailoring the Business Model Genus ABS’s dairy technicians analysed data from hundreds of farms who use ABS Monitor, our new online service that simplifies real-time measurement of reproductive efficiency. This highlighted ways to improve our customers’ reproductive and financial efficiency. For this targeted segment, the Genus ABS team in Brazil is tailoring its dairy business model through a new programme called DEL160, which uses intensified technical service support and a unique genetic selection index based on Brazilian economics, to help customers improve production. A novel payment system shares the programme’s economic impact, reducing our selected customers’ production costs by 15–20%, while improving profit for Genus ABS. Strengthening Core Competencies We aimed to: We will: • introduce a global approach to key account • continue to refine our supply chain processes, to improve product availability globally; • deploy new systems and processes, so our sales and technical service teams can deliver more for customers and us; and • engage and equip our people to enhance customer loyalty, and continue to transfer talent and skills across our global organisation. We aimed to: We will: • position ourselves better with dairy processors in • continue to implement our segmentation model North America; and implement our global customer around the world, helping us identify and meet the segmentation in the remaining target markets. needs of each customer segment; During the year, we: • grew volumes in seven of our eight target markets, • pursue further agreements with integrated beef or by harnessing our strong product portfolio and global dairy suppliers. • drive growth in our existing dairy markets and explore opportunities in new markets; and team; and • agreed a five-year strategic partnership with ABP Food Group, to provide a customised index for beef bulls, giving ABP superior genetics and providing future royalty income to Genus ABS. We aimed to: We will: • develop a differentiated approach for our target • further develop the ‘value creation’ selling approach to better demonstrate the benefits of our genetics to customer segments; implement best practices in customer interfacing teams; and focus on value creation as one of the drivers of our business growth. • work with major beef supply chain players, to validate the impact of our genetics in our combined beef-on- customers; and dairy offering. During the year, we: • developed a ‘value creation’ selling proposition and started pilots to explore how we can enhance customer benefits; • redesigned our commercial organisation in the US, to improve customer service through best practice and better use of our team; and • analysed and strengthened our channels to market, so we have the right model in every area. management in key markets; continue to develop and implement systems to improve supply-chain effectiveness and better integrate product development; and continue to roll-out technical services and tools across the BRIC countries. During the year, we: • introduced an account manager role in selected markets, to improve the way we deal with larger customers; • implemented global production and planning systems, to deploy genetics to customers more efficiently; and • put the final building blocks in place for effective deployment of technical services and tools. Genus plc Annual Report 2014Strategic Report Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Tailoring the Business Model Strengthening Core Competencies 27 Progress Against 2014 Objectives 2015 Priorities We aimed to: • expand the Real World Data platform by developing additional indexes; further strengthen the male and female genetic platforms; and enhance our proven bull portfolio and genomic bull offering. During the year, we: • developed proprietary genetic indices focused on customer needs and soft-launched them in selected regions; • strengthened our elite female programme, to increase genetic control, and had two bull calves born with the highest ever ABS genomic test scores; and • significantly enhanced our genomic bull portfolio and sustained our strong position in the proven bull segment. We will: • implement our plans to further increase genetic control and bovine product differentiation; • upgrade our Genetic Management System to help customers select products for a broader range of breeding situations; and • continue to strengthen our range of genomic bulls and develop a beef genetic nucleus herd. We aimed to: • position ourselves better with dairy processors in We will: • continue to implement our segmentation model North America; and implement our global customer segmentation in the remaining target markets. around the world, helping us identify and meet the needs of each customer segment; During the year, we: • grew volumes in seven of our eight target markets, by harnessing our strong product portfolio and global team; and • agreed a five-year strategic partnership with ABP Food Group, to provide a customised index for beef bulls, giving ABP superior genetics and providing future royalty income to Genus ABS. We aimed to: • develop a differentiated approach for our target customer segments; implement best practices in customer interfacing teams; and focus on value creation as one of the drivers of our business growth. During the year, we: • developed a ‘value creation’ selling proposition and started pilots to explore how we can enhance customer benefits; • redesigned our commercial organisation in the US, to improve customer service through best practice and better use of our team; and • analysed and strengthened our channels to market, so we have the right model in every area. We aimed to: • introduce a global approach to key account management in key markets; continue to develop and implement systems to improve supply-chain effectiveness and better integrate product development; and continue to roll-out technical services and tools across the BRIC countries. During the year, we: • introduced an account manager role in selected markets, to improve the way we deal with larger customers; • implemented global production and planning systems, to deploy genetics to customers more efficiently; and • put the final building blocks in place for effective deployment of technical services and tools. • drive growth in our existing dairy markets and explore opportunities in new markets; and • pursue further agreements with integrated beef or dairy suppliers. We will: • further develop the ‘value creation’ selling approach to better demonstrate the benefits of our genetics to customers; and • work with major beef supply chain players, to validate the impact of our genetics in our combined beef-on- dairy offering. We will: • continue to refine our supply chain processes, to improve product availability globally; • deploy new systems and processes, so our sales and technical service teams can deliver more for customers and us; and • engage and equip our people to enhance customer loyalty, and continue to transfer talent and skills across our global organisation. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 28 Genus ABS Operating Review “ Profits grew in all regions in Genus ABS as we regained momentum in our core markets.” DAIRY – KEY MARKETS (PENCE PER LITRE) BEEF – KEY MARKETS (£ PER KG) 45 40 35 30 25 20 15 Aug 11 Aug 12 Aug 13 Aug 14 US China Brazil Russia EU India Case Study 2.5 2.0 1.5 1.0 0.5 0 Aug 11 Aug 12 Aug 13 Aug 14 US Brazil Creating a Closed-Loop Supply Chain in UK Beef we are developing a custom index to identify bulls from our beef nucleus herd. The resulting progeny will be more feed-efficient, higher value and consistent quality. Only dairy producers supplying calves to ABP will have access to the bulls. They will benefit from ABP’s expertise, while Genus will receive a payment for the genetic value. This closed-loop supply chain will be a significant step towards delivering differentiation and upstream royalties. In 2014, Genus and ABP signed an agreement to deliver the first proprietary beef genetics index for use on the UK dairy herd, which supplies nearly 52% of UK-processed beef. Using ABP’s assessments and data, Market Dairy market conditions were favourable during the financial year, with milk prices strong in all regions and feed costs significantly lower as well. Weather conditions during the year were also generally favourable for producers in most countries, although the US was affected by a severe winter and parts of the south and west of the country continued to experience drought. High Chinese demand for imported milk supported milk prices globally and encouraged key exporters such as New Zealand and the EU to increase production yield from their herds, eventually leading to a moderation of milk prices towards the end of the period. With increased supply now meeting demand, prices are expected to stabilise. During the year, we saw a gradual return of customer confidence as their finances improved. The beef cattle price saw substantial gains, of around 15%, in the main US and Brazilian markets, with all- time record prices being set during the year. Low US cattle inventories from previous years, combined with female retention by growers wanting to increase calf production to rebuild herd sizes, led to tight supply in the US. In South America, cattle availability and slaughter have been rising following two years of herd rebuilding. Demand for exports from key countries was also strong. These factors generated good market conditions for our beef business, which are currently expected to continue into the next year. Genus plc Annual Report 2014Strategic Report 29 Revenue Adjusted operating profit Adjusted operating margin Actual currency Constant currency 2014 £m 157.4 24.2 15.4% 2013 £m Movement % Movement % 146.8 22.8 15.5% 7 6 10 12 (0.1) pts 0.2 pts “Good overall trading with disciplined price and cost management resulted in a 12% increase in profits for Genus ABS.” Performance Genus ABS had a strong year, benefiting from the positive market and weather conditions in most of the world. Profits grew in all regions, as Genus ABS regained momentum in our core markets. Overall, volumes for Genus ABS were up 5%, led by Latin America. Effective sales management enabled us to achieve a 2% improvement in average selling prices (‘blend’) across the business which, along with strong ancillary product sales, contributed to an increase in profit of 12%. In North America, profits grew by 9% on flat volumes, due to increased blend, strong cost management and significant contributions from adjacent products. Beef performance was very strong, with volumes up 21% over the prior year, including an increasing use of beef semen in dairy cows. In Europe, profits were 5% up last year with 3% growth in volumes driven by France, the UK and Italy as well as a 3% blend increase. In May 2014, we signed an innovative five-year partnership with ABP Food Group, the largest beef processor in the UK. Genus will develop a customised index for beef bulls tailored to economic traits important to ABP. Dairy farmers producing calves using Genus beef semen will deliver superior genetics into the ABP supply chain. This arrangement marks the first time that Genus ABS has agreed a royalty-based fee structure. Across Latin America, profits were up 19% on a 13% increase in volumes, combined with a flat blend. This performance was driven by an exceptional recovery in Brazil, after the previous year’s difficult weather conditions, and a strong year-on- year performance in Mexico. Beef volumes were exceptionally strong in the region, reflecting both the favourable market conditions and the strength of our product portfolio. Summary Good overall trading with disciplined price and cost management resulted in a 12% increase in profits for Genus ABS. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 30 Genus Asia Strategic Progress “ Genus made significant strategic progress in Asia this year, although our operational results were affected by our investments to increase capacity and by volatile commodity prices in China. We are well positioned to capture the significant opportunity from Asia’s growth, as commodity markets improve.” Jerry Thompson Chief Operating Officer, Genus Asia Case Study Growing Our Partnership with GreenFeed Progress Against 2014 Objectives 2015 Priorities Increasing Genetic Control and Product Differentiation We aimed to: We will: • expand our portfolio of tailored bulls in India; make • further expand our range of genomic bulls and porcine genetic updates in key markets; and consider options for sire line nucleus units in Russia, China and our embryo programme in India; • harness our new product lines in China, to drive growth in key accounts; and • use trials to demonstrate the value of our porcine products, to enhance price differentiation. Targeting Key Markets and Segments We aimed to: We will: • leverage our strong positions in Russia, India and China, • continue to implement PIC’s key account strategy, by developing our business with key accounts through a to grow presence with leading integrated pork continuously improving range of products and services. producers in China; During the year, we: • grew porcine volumes by 22%, with particular strength in • further expand our sales channels in India. • drive growth and support partners in Japan, Korea and Vietnam; and Tailoring the Business Model • pursue further joint ventures in China; expand our semen • complete and populate the Chitale stud, while production capacity in India; implement our new strategy improving genomic semen sales and prices in India; in the Philippines; and simplify our operations and grow • pursue opportunities for third-party production through our key account strategy. arrangements and increase our royalty business in During the year, we: • signed an agreement with BG Chitale in India for a new pyramid, our BPI partnership and key accounts. China porcine; and • grow in the Philippines, through the new breeding We will: Our partner in Vietnam is GreenFeed, the country’s fourth largest animal feed supplier. During the year, we stocked their new nucleus farm at Cujut with 1,400 gilts and grew semen sales by 275%, as stud capacity came online and PIC-sired progeny on customer farms excelled in growth rate, feed conversion, carcass yield and pork quality. The first sales of parent gilts from the multiplication units stocked in FY13 began ahead of schedule and productivity exceeded expectations, resulting in significantly higher selection rates. These achievements grew royalty income by more than 300%. We now plan to double the nucleus farm’s capacity in the next 12 months. Strengthening Core Competencies We aimed to: We will: • build on the sound platform established in our key • develop employees’ knowledge and expertise, markets, strengthening our teams through training and through expatriate assignments and training; and developing the necessary key account and technical • continue cross-fertilisation of skills from other parts of the Group. the Philippines. During the year, we: • increased the number of genomic bulls in India, grew the embryo pipeline and started selling genomic semen; • introduced genetic updates into porcine markets across the region, which reduced genetic lag; • launched new dam and sire line products from the Chun Hua nucleus farm in China, which we stocked in 2013; and • established a new breeding pyramid for San Miguel Foods Corporation in the Philippines and populated a nucleus herd in Vietnam. Russia and Vietnam, and grew bovine volumes by 7%, led by more than 40% growth in India; • developed new key accounts in China porcine and renegotiated the relationship with our bovine partner, SKX, so we can sell directly; and • grew our business in the Philippines by 41% and continued our partnership with the Bank of the Philippine Islands (‘BPI’). We aimed to: bull stud, and increased genomic semen sales by adding distributors and retail outlets; • strengthened our porcine joint venture in China with Besun, but did not proceed with a joint venture with Shennong; and • grew our royalty revenue in the Philippines in key accounts such as San Miguel Food Corporation, and increased Vietnamese royalty revenue by more than 300% through our GreenFeed partnership. service skills. During the year, we: • developed our Chinese team through training and expatriate appointments; • relocated the global Director of Genetic Services from the US to Shanghai, to work with the local team and key accounts; and • harnessed the PIC and ABS technical teams, to strengthen our skills and expertise. Genus plc Annual Report 2014Strategic Report Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Tailoring the Business Model 31 Progress Against 2014 Objectives 2015 Priorities We aimed to: • expand our portfolio of tailored bulls in India; make We will: • further expand our range of genomic bulls and porcine genetic updates in key markets; and consider options for sire line nucleus units in Russia, China and the Philippines. During the year, we: • increased the number of genomic bulls in India, grew the embryo pipeline and started selling genomic semen; • introduced genetic updates into porcine markets across the region, which reduced genetic lag; • launched new dam and sire line products from the Chun Hua nucleus farm in China, which we stocked in 2013; and • established a new breeding pyramid for San Miguel Foods Corporation in the Philippines and populated a nucleus herd in Vietnam. We aimed to: • leverage our strong positions in Russia, India and China, by developing our business with key accounts through a continuously improving range of products and services. During the year, we: • grew porcine volumes by 22%, with particular strength in Russia and Vietnam, and grew bovine volumes by 7%, led by more than 40% growth in India; • developed new key accounts in China porcine and renegotiated the relationship with our bovine partner, SKX, so we can sell directly; and • grew our business in the Philippines by 41% and continued our partnership with the Bank of the Philippine Islands (‘BPI’). We aimed to: • pursue further joint ventures in China; expand our semen production capacity in India; implement our new strategy in the Philippines; and simplify our operations and grow through our key account strategy. During the year, we: • signed an agreement with BG Chitale in India for a new bull stud, and increased genomic semen sales by adding distributors and retail outlets; • strengthened our porcine joint venture in China with Besun, but did not proceed with a joint venture with Shennong; and • grew our royalty revenue in the Philippines in key accounts such as San Miguel Food Corporation, and increased Vietnamese royalty revenue by more than 300% through our GreenFeed partnership. our embryo programme in India; • harness our new product lines in China, to drive growth in key accounts; and • use trials to demonstrate the value of our porcine products, to enhance price differentiation. We will: • continue to implement PIC’s key account strategy, to grow presence with leading integrated pork producers in China; • drive growth and support partners in Japan, Korea and Vietnam; and • further expand our sales channels in India. We will: • complete and populate the Chitale stud, while improving genomic semen sales and prices in India; • pursue opportunities for third-party production arrangements and increase our royalty business in China porcine; and • grow in the Philippines, through the new breeding pyramid, our BPI partnership and key accounts. Strengthening Core Competencies We aimed to: • build on the sound platform established in our key markets, strengthening our teams through training and developing the necessary key account and technical service skills. We will: • develop employees’ knowledge and expertise, through expatriate assignments and training; and • continue cross-fertilisation of skills from other parts of the Group. During the year, we: • developed our Chinese team through training and expatriate appointments; • relocated the global Director of Genetic Services from the US to Shanghai, to work with the local team and key accounts; and • harnessed the PIC and ABS technical teams, to strengthen our skills and expertise. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 32 Genus Asia Operating Review “ 2014 was a challenging year operationally in China, but saw strong results in other growth markets.” CHINA PIG, CORN AND P/C RATIO ) g k / n a u Y ( e c i r p g P i 16 12 8 P/C=6.0 Corn price Pig price ) g k / n a u Y ( e c i r p n r o C 3.0 2.5 2.0 1.5 Producer profitability 3 1 n u J 3 1 g u A 3 1 t c O 3 1 c e D 4 1 b e F 4 1 r p A 4 1 n u J 4 1 g u A Market Porcine Chinese pork producers were profitable in the first half but pork prices fell by more than 25% in the first few months of 2014, causing producers to lose up to £50 per pig in the second half. This significantly reduced the larger producers’ planned expansion projects and the demand for breeding stock. The losses meant many less-efficient farmers left the industry. As a result, figures from the Chinese Ministry of Agriculture suggest the sow herd has reduced by around 4m heads (8%) since the start of the year, making stronger prices likely in 2015. Widespread PEDv also made animal movements difficult. Case Study Supporting a Major New Customer in China New Hope Group is China’s largest private company and its biggest animal feed producer, as well as one of the country’s leading dairy and meat producers. Its Xiajin project is one of the most advanced farms in China and aims to provide around 340,000 slaughter pigs annually. In 2013, New Hope decided to use only PIC genetics at Xiajin and signed a stocking supply agreement with us. In June 2014, we successfully delivered 4,200 gilts, including new lines we imported to the Chun Hua nucleus farm last year. The second 5,400 gilts stocking is due this autumn, to complete Xiajin’s capacity. In Russia, low pig prices and high feed costs in the first half resulted in losses for producers and limited investments. However, the pig price rebounded strongly in the second half, following the Russian border’s closure to pigs from the EU, due to African Swine Fever, and the temporary restriction of North American imports due to PEDv. The Ukraine political crisis has raised interest rates and devalued the Rouble, adding to uncertainty in Russia. Pig prices in the Philippines were consistently high, reaching a record at year end. Prices are expected to remain firm, due to PEDv. Producers are profitable and the industry is attracting investment. Bovine Australian milk prices improved during the year. However, the price may come under pressure, due to higher global production. Milk prices in Russia started lower than FY13 but increased steadily from October and were about 30% up by year end. Processors were short of milk, especially after import restrictions from some countries were implemented. Dairy cow numbers have further reduced and the drive for beef production has moderated. The milk price in China remained high and import demand was strong. Consolidation of farms and dairy processors continued. Indian milk prices have increased strongly, as processors compete for supply. Tight import restrictions on semen and embryos validate our strategy to establish local production. Performance Revenue reduced by 8% and adjusted operating profit was 49% lower than the strong FY13, caused by results in China being more than £6m lower year-on- year in constant currency. Outside China, good performances in Russia and the Philippines were counter-balanced by more difficult trading in Australia and our bovine distributor markets. Russia and India respectively led volume growth of 22% in porcine and 7% in bovine. Genus plc Annual Report 2014Strategic Report 33 Revenue Adjusted operating profit excluding JV Adjusted operating profit including JV Actual currency 2014 £m 46.5 6.8 6.0 2013 £m 55.5 12.3 13.1 Constant currency Movement % Movement % (16) (45) (54) (8) (38) (49) Adjusted operating margin 14.6% 22.2% (7.6) pts (7.1) pts “We continued to expand our business with leading integrators.” Porcine China porcine operating profit fell more than £5m, as a result of the prior year profit from stocking the Besun joint venture farm; expected investment in start-up losses from capacity increases at Besun and the Chun Hua nucleus farm; and very poor market conditions. Volume growth of 9% was below expectations, as many producers halted new stockings. Our supply chain also incurred production losses due to low pig prices. Despite these difficulties, we made significant strategic progress in China. We launched an updated product range from Chun Hua and Besun is now fully operational. These units have more than doubled our Chinese capacity. We continued to expand our business with leading integrators, including delivering 4,200 animals to New Hope, China’s leading animal feed producer and a top-ten pig producer. In addition, since the year end, we signed a commercial multiplication agreement with Riverstone, a pig production joint venture in China between Cargill’s Black River and Pipestone, and a royalty agreement for their future pig production using PIC genetics. As our Chinese business matures, we will seek to lower farming risk and investment cost by adding capacity through multiplication contracts where possible, creating fewer new joint ventures and increasing the proportion of royalty-based arrangements. Operating profit grew by 23% in Russia and 41% in the Philippines, as both businesses grew royalty revenues with leading integrators. We imported over 1,200 animals into the Philippines, to stock a new pyramid for future expansion. Elsewhere in the region, we stocked a nucleus unit in Vietnam, as we expanded our business with our local partner, GreenFeed. Bovine In China, we restructured our relationship with SKX to a non- exclusive basis and now sell directly to key dairies and other distribution channels. This transition reduced first half results but led to a stronger second half. Indian dairy volumes grew strongly, as our business gained momentum. We incorporated a joint venture with BG Chitale, to construct and operate a bull stud to expand production capacity. We grew domestic volumes by 50% to 2.2m doses and launched a range of genomic bulls, improving overall domestic blend by 17% and demonstrating solid demand for differentiated genetics in India. The Australian business had a challenging year but was restructured to cost-effectively service the Australian industry. Distributor markets were lower due to the timing of shipments year to year. Summary 2014 was a challenging year operationally in China, but saw strong results in other growth markets. We remain confident that our investment in the important Chinese market and strengthening strategic position will yield benefits as the market recovers. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 34 Genus R&D Strategic Progress “ Genus is committed to exceeding customer expectations, so our research and development activities are based on understanding and anticipating their needs.” Dr Jonathan Lightner Chief R&D and Scientific Officer Case Study Exploring the Limits of Resolution of Genetic Information In 2014, in collaboration with Edinburgh Genomics and The Roslin Institute at the University of Edinburgh, we completed the first full exome sequencing in pigs. This examines the most important parts of an animal’s DNA, the expressed genome (‘exome’). Our team sequenced the exomes of 96 pigs, representing the known variation in one of PIC’s leading global proprietary populations, to capture as many genetic variants as possible. Combining these results with our unique phenotype data on the same animals shows associations between sequence variation and commercially beneficial traits. PIC will use this information to improve genomic selection accuracy, including better reproductive outcomes. Meeting Customer Needs Today, Anticipating their Needs for Tomorrow Delivering the genetic improvements our customers want requires a team effort, involving our technologists, business people and our customers. Our decades long customer relationships give us critical insights that guide our research. Because genetic improvement is a long-term process, the ability to anticipate customer needs over several years is often what separates failure from success. We use a portfolio process with business input to select, target and manage our R&D efforts across three core platforms: disease resilience and resistance; gender skew; and genomic selection. Disease Resilience and Resistance Our open innovation model for collaborative R&D made great progress in 2014. To solve complex problems, we bring together our own capabilities with the best of the public sector. Our work with The Roslin Institute has progressed projects addressing resistance and resilience to key porcine diseases, such as porcine respiratory and reproductive syndrome (‘PRRS’) and African Swine Fever. In seeking to solve complex challenges like PRRS, we use numerous technical approaches, to increase the probability of success. Genus plc Annual Report 2014Strategic Report 35 Gender Skew Livestock producers often benefit from having offspring of one sex result from a mating. For example, dairy producers prefer to have female calves result from matings, so they have ample, high-quality replacement heifers to choose from. Our gender skew initiative aims to create technology to realise this benefit at greater efficiency and reduced cost, compared to current technologies. We have continued to make progress pursuing multiple technical approaches to sexed semen technology. We are advancing a biomechanical technology that will offer a more efficient gender skewed product for our customers globally. This technology is in late stage development and completed successful field trials in 2014. It is on track for commercial deployment in the second half of the decade. We believe gender skew has applications beyond dairy and that it can benefit from delivery approaches that do not depend on manipulation after collection. Subsequent generations of the technology will be based on multiple approaches that we are pursuing in the research phase. Our aim with these successor technologies is to use genetic controls to produce ejaculate that is already optimised for the desired gender, opening up the benefit of gender skewing to markets and animals that current technologies cannot practically serve. Genomic Selection The foundation of our business is genetic improvement through natural mating and selection. Genomic selection improves the speed and quality of outcomes from this process, by using contemporary molecular genetic information and tools. Today, we lead the animal genetic industry in applying single nucleotide polymorphisms (‘SNPs’), imputation and single step genomic prediction to improving livestock. We genotype tens of thousands of animals annually, generating hundreds of millions of data points. We then combine this information with proprietary animal performance information, imputation and predictive modelling. This allows us to identify the most elite animals, select the optimum matings and advance the most economically advantaged progeny for sale to our customers. Genomics advances rapidly. In addition to our day-to-day application of genomics in our breeding processes, our research team is exploring the limits of genome information content, through projects such as porcine exome sequencing. This saw us sequence the expressed genes of 96 elite proprietary animals from the PIC product line. The highest possible resolution of genomic information is the physical DNA sequence itself, and our research team is probing the extremes of both capabilities and the practical applications of this type of information. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 36 Genus R&D Operating Review “ We focused our research expenditure in the areas of genomic evaluation, gender skew and animal health.” Performance Investment in R&D for the year increased by 5%. This reflected a further increase in research expenditure and growth in both dairy and beef product development. In porcine product development, growth investments in product validation and genomic testing were offset by moderating feed costs and improved slaughter prices in the genetic nucleus farms. Spending on the Génétiporc nucleus herds was also partially offset by the receipt of back-payments under a Canadian government agricultural support programme. Case Study We focused our research expenditure in the areas of genomic evaluation, gender skew and animal health. In genomic evaluation, we completed the first ever porcine exome sequencing project, producing a comprehensive examination of the expressed genes in nearly 96 animals from an elite PIC sire line. In gender skew, we successfully tested our sexed semen technology in field trials and in disease we progressed our efforts to produce gene edited animals. Increasing Genetic Control and Product Differentiation In 2013, our dairy product development team started a key project to develop a proprietary genetic nucleus of elite Holstein females. By owning elite females, we can control both sides of the matings that produce elite sires. This controls the cost of acquiring those sires and allows us to emphasise the genetics that will drive our customers’ profitability and our differentiation. Within 18 months, we are already producing unique elite young sires, including one in the ABS top 10 of all time for the US TPI and NM$ indices and another best ever young sire for ABS within international rankings (top 35 US, top 15 Canada, top 3 UK, top 10 Italy). This gives us confidence that we will create improved products at lower costs than buying on the open breeding market. Bovine product development investment grew 17% year over year, reflecting our continued investments to deliver genetic control, differentiated products and customer focused genetic improvement. We continued to grow our investment in our Real World Data (‘RWD’) infrastructure, enabling us to develop new genetic traits and customer profit-focused indices, to further our genetic differentiation. Our RWD system grew considerably in 2014. The number of farms it covers has increased 50% year over year and now includes operations in the US, UK, Mexico and Chile. Animal numbers have similarly increased and we now have more than 18m cow records in our RWD set. Using this information in 2014, we developed and implemented two custom dairy indices focused on specific operational types, for the unique needs of global customers. We are implementing these dairy indices with select customer pilots in Brazil and the US. Our RWD data set also gives us unique information on economic events that are critical to profitable dairy farming, such as disease occurrence. In 2014, we used this information to identify unique genetic traits which reduce the occurrence of negative events. To increase our differentiation and control in the Holstein breed, we have created a genetic nucleus of elite females. By controlling both sides of the matings used to create new sires, we enhance our genetic control and enable our breeding programme to pursue unique targets, such as these proprietary traits and indices. We also increased our investment in beef product development, naming a global product development director for beef, Dr Matthew Cleveland, and beginning to establish a beef genetic nucleus. Genus plc Annual Report 2014Strategic Report 37 Research Porcine product development Bovine product development Actual currency 2014 £m 3.1 13.0 11.6 27.7 2013 £m 2.7 14.7 10.6 28.0 Constant currency Movement % Movement % 15 (12) 9 (1) 19 (6) 17 5 “ Investment in R&D for the year increased by 5%.” Porcine product development investment declined 6% year over year. The product development group increased staffing and investment in product validation around the world. These costs were offset by improved feed costs in the genetic nucleus farms, improved slaughter prices and the Canadian government support payment. We integrated the germplasm made available through the Génétiporc acquisition into the PIC breeding programme, creating new products and further product improvement opportunities. We completed global implementation of single step genomic prediction and relationship based selection with imputation for all traits and animals around the world in the PIC product development pipeline. We increased the rate of overall genetic improvement by 35%. The number of product validation comparisons doubled year over year and we initiated the first product validation trials in Asia. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 38 Financial Review Our financial results in 2014 were mixed, with strength in PIC and ABS offset by challenging conditions in Asia, and specifically China. In the rest of the world outside China, we achieved double digit constant currency profit growth but including China, overall adjusted profit before tax was flat in constant currency. The effect of the stronger pound during the year on the translation of our overseas profits reduced the Group’s adjusted profit before tax by £3.2m or 8% compared with FY13. Constant currency growth rates better reflect the Group’s underlying performance and are quoted in the financial review unless stated otherwise. On a statutory basis, profit before tax was 14% higher in actual currency primarily due to an increase in the value of biological assets. However, we continue to use adjusted results as our prime measures of financial performance as they better reflect our underlying progress. 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) Revenue Revenue grew 8% in actual currency (12% in constant currency) to £372.2m (2013: £345.3m) with Genus PIC growing at 19% with the benefit of the Génétiporc acquisition and Genus ABS also growing in double digits at 10%. This growth was partially offset by an 8% revenue decline in Asia, primarily in China. Adjusted Operating Profit Adjusted operating profit including joint ventures of £44.8m (2013: £48.2m) was unchanged in constant currency and 7% lower in actual currency. Genus’s share of joint venture profits was lower at £1.9m (2013: £3.2m), as strong growth at Agroceres PIC in Brazil was not enough to offset the start- up losses incurred by Besun in China. Actual currency Constant currency** 2013 £m Movement % Movement % 345.3 45.0 48.2 42.5 49.1 8 (5) (7) (8) (5) 12 2 – – 3 2013 £m Movement % 345.3 36.3 33.4 38.8 16.1 8 15 14 23 10 2014 £m 372.2 42.9 44.8 39.3 46.5 2014 £m 372.2 41.8 38.2 47.7 17.7 * Adjusted operating profit, adjusted profit before tax and adjusted basic earnings per share are before net IAS 41 valuation movement in biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. Adjusted measures are used by the Board to measure underlying performance. ** Constant currency percentage movements are calculated by restating 2014 results at the exchange rate applied in 2013. The key average and year-end exchange rates used to translate the results were: US Dollar/£ Euro/£ Brazilian Real/£ Mexican Peso/£ Average Closing 2014 1.64 1.20 3.75 21.44 2013 1.57 1.21 3.22 20.16 2014 1.71 1.25 3.77 22.18 2013 1.52 1.17 3.35 19.76 Genus plc Annual Report 2014Strategic Report 39 Actual currency 2013 £m 48.2 22.8 12.3 (28.0) (10.3) 45.0 3.2 48.2 (5.7) 42.5 2014 £m 50.0 24.2 6.8 (27.7) (10.4) 42.9 1.9 44.8 (5.5) 39.3 Constant currency Movement % Movement % 4 6 (45) 1 (1) (5) (41) (7) 4 (8) 9 12 (38) (5) (3) 2 (28) – 4 – Profits in Genus Asia excluding joint ventures decreased by 38%, against a strong prior year which included stocking Besun. This was mainly due to our performance in China, where we invested in capacity and porcine market conditions were poor. Genus Asia’s bovine results were also lower but the porcine businesses in Russia and the Philippines performed well. In research and development, costs were 5% higher than in 2013, reflecting an increase in research and growth in both dairy and beef product development. In porcine product development, our additional investments in product validation and genomic testing were offset by moderating feed costs and improved slaughter prices in the genetic nucleus farms. Adjusted Profit Before Tax Genus PIC Genus ABS Genus Asia Research and development Central costs 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. Profit growth was strongest in Genus ABS, up 12%, benefiting from positive market and weather conditions. Profits grew in all regions and we had good momentum in our core markets. Overall, volumes for Genus ABS were up 5%, principally driven by Latin America. Genus PIC also had a strong year, with profits including joint ventures up 10%. Volume growth of 5% was driven by the Génétiporc acquisition and another good year in Latin America. This result was achieved despite underlying royalty volumes in North America and Mexico being affected by PEDv and limited sow herd expansion. “Revenue grew 8% in actual currency (12% in constant currency) to £372.2m (2013: £345.3m) with Genus PIC growing at 19% with the benefit of the Génétiporc acquisition and Genus ABS also growing in double digits at 10%.” Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 40 Financial Review continued Performance by Species Revenue Dairy and beef Porcine Research and development Adjusted operating profit inc JV Dairy and beef Porcine Central costs and research Actual currency Constant currency 2013 £m Movement % Movement % 167.2 168.6 9.5 345.3 17.7 43.5 (13.0) 48.2 3 10 63 8 (11) (2) (4) (7) 7 14 73 12 (6) 4 (6) – 2014 £m 171.8 184.9 15.5 372.2 15.7 42.6 (13.5) 44.8 Performance by Species The table above shows our performance by species on a global basis, after allocating product development costs specific to each species. Dairy and beef revenues grew 7% on volumes up by 5%, with growth strongest in Brazil and India, where we benefited from increased sales of lower-priced locally produced semen. Sales of semen from our global studs, which represent 76% of semen sales by volume, increased by 2%. Profits decreased by 6% on last year, primarily due to lower sales in Asian markets and higher product development costs. Porcine revenues grew by 14%, with royalty income up 13% to £67.1m. Volumes were up 8%, mainly due to growth from our Génétiporc acquisition, Asia and Latin America. Royalty volumes were adversely affected by PEDv during the year. Profits were up 4% on 2013, with Latin America’s continued robust growth and the initial contribution from Génétiporc partially offset by results in China. Finance Costs Net finance costs reduced by £0.2m to £5.5m (2013: £5.7m) and include IAS 19 pension interest of £2.9m (2013: £3.1m). Higher net borrowings following the acquisition of Génétiporc were offset by lower average interest rates, following our refinancing in August 2013. Exceptional Items There was a £2.0m net exceptional expense in 2014 (2013: £4.2m credit), mainly related to the acquisition and integration of Génétiporc, £1.8m. Also included were £0.8m of net income, which relates to a cash settlement received in the period from a long-standing legal claim, £0.6m of legal fees incurred in an action brought by Genus ABS against Sexing Technologies (see note 38) and £0.4m of restructuring costs. Statutory Profit Before Tax Operating profit on a statutory basis was £41.8m, (2013: £36.3m) while our statutory profit before tax was £38.2m (2013: £33.4m). The statutory results benefit from an increase in the net IAS 41 valuation movement on biological assets and a reduction in share-based payment expense. Amortisation of acquired intangible assets and exceptional items increased following the Génétiporc acquisition. The Board believes the volatile nature of these items, most of which are non- cash, is less representative of the Group’s underlying performance than adjusted measures. Taxation The effective rate of tax for the year, based on adjusted profit before tax, was 28.2% (2013: 30.4%), with the decrease primarily due to a lower impact from unprovided losses and taking advantage of the recently introduced UK finance company tax regime. 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 the United States, where the statutory tax rate is approximately 39%, and the impact of withholding taxes on the repatriation of funds to the UK. The tax rate on statutory profits was 24.3% (2013: 30.0%). In addition to the factors mentioned above, there was a favourable impact due to the revaluation at lower tax rates of deferred tax liabilities associated with biological and intangible assets. Earnings Per Share Adjusted basic earnings per share declined by 5% to 46.5 pence (2013: 49.1 pence), reflecting the impact of exchange rates, but rose 3% in constant currency. Basic earnings per share on a statutory basis were 47.7 pence (2013: 38.8 pence), benefiting from an increase in the value of biological assets and the lower statutory tax rate. Biological Assets A feature of the Group’s net assets is its substantial investment in biological assets, which IAS 41 requires us to state at fair value. At 30 June 2014, the carrying value of biological assets was £275.5m (2013: £289.0m), as set out in the table on page 41. Genus plc Annual Report 2014Strategic Report 41 2013 £m 224.0 40.5 24.5 289.0 117.5 171.5 289.0 2013 £m 34.9 (20.0) – (8.6) 1.8 8.1 45.0 77% 2014 £m 208.9 44.1 22.5 275.5 124.4 151.1 275.5 2014 £m 44.3 (22.1) (34.1) (6.6) 0.5 (18.0) 42.9 103% Biological Assets Non-current assets Current assets Inventory Represented by: Porcine Dairy and beef Cash Flow (before debt repayments) Cash generated by operations Interest, tax and dividends Investments Capital expenditure Other Adjusted operating profit Cash conversion The cash outflow from investments and capital expenditures of £39.5m (2013: £6.9m) increased significantly due to the acquisition of Génétiporc and the investment in the Besun joint venture. The total cash outflow for the year after these investments, interest, tax and dividends was £18.0m (2013: inflow £8.1m). Net Debt Net debt increased from £52.9m to £63.9m at 30 June 2014, due to the cash outflow of £18.0m partially offset by a favourable exchange movement, as our borrowings are denominated primarily in US Dollars. The Group’s financial position remains strong and there is substantial headroom of £55.4m under our borrowing facilities of £138.1m, which we renegotiated in August 2013 and extended to September 2017 on improved terms. Our borrowing ratios are strong. Interest cover was at 20.6 times (2013: 21.6 times). The ratio of net debt to EBITDA, as calculated under our financing facilities was 1.2 times, up from 1.0 times. Return on Invested Capital We measure our return on invested capital on the basis of adjusted operating profit including joint ventures after tax divided by the operating net assets of the business stated on the basis of historical cost, excluding net debt and pension liability. This removes the impact of IAS 41 fair value accounting, the related deferred tax and goodwill. The return on invested capital was a healthy 19.2% after tax (2013: 19.9%), despite the investment in Génétiporc contributing for only part of the year and Besun experiencing start up losses. Dividend The Board is recommending to shareholders a final dividend of 12.2 pence per ordinary share, resulting in a total dividend for the year of 17.7 pence per ordinary share, an increase of 10% for the year. Dividend cover remains strong, with the dividend covered 2.6 times by adjusted earnings (2013: 3.0 times). Stephen Wilson Group Finance Director 2 September 2014 The movement in the overall carrying value of biological assets, excluding the effect of exchange rate translation changes, includes: • a £13.7m increase in the carrying value of porcine biological assets, due principally to higher value animals, particularly boars, in the pure line herds; and • a £6.2m decrease in dairy and beef biological assets, arising from a combination of the change in the assessment of bovine volumes and the mix of genomic semen expected to be sold, partially offset by an increase in expected realisable prices achieved from those units. The historical cost of these assets, less depreciation, was £36.2m at 30 June 2014 (2013: £34.4m), which is the basis used for the adjusted results. Retirement Benefit Obligations The Group’s retirement benefit obligations at 30 June 2014, calculated in accordance with IAS 19, were £58.2m (2013: £65.0m) before tax and £46.1m (2013: £49.9m) net of related deferred tax. The largest element of the liability relates to the multi-employer Milk Pension Fund where we continue to account on the basis of Genus being responsible for 75% of the plan’s funding. During the year, contributions payable in respect of the Group’s defined benefit schemes amounted to £5.6m (2013: £2.9m). Cash contributions were higher during the year, following the conclusion of the Milk Pension Fund valuation towards the end of FY13. Cash Flow Cash generated by operations was strong at £44.3m (2013: £34.9m). Cash conversion of adjusted operating profit was 103% (2013: 77%) before capital expenditure, investments, interest, tax and dividends. This improvement was generated by better working capital cash flow of £12.6m year to year, reflecting a solid performance in receivables, as well as the reduction of prior year balances related to stocking the Besun farm in China and our investment in stocking the Chun Hua porcine nucleus farm. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 42 People Unlocking Our Potential During 2013/14, we continued to extend our people management initiatives in order to engage, equip and develop our people to deliver our business strategy. We continued to recruit high-quality individuals into the business, and extended our talent management and succession planning to cover more than 1,400 employees. Our senior leaders represent a truly international cadre of managers. We work to develop our leaders through international experience and exposure, with an active programme of international assignments to develop global experience. European, Latin and North American countries are very strongly represented, and as we expand in Asia, we are working to identify talented local staff who we can develop into our senior managers of the future. In the last two years, we have appointed two women onto GELT, Saskia Korink as COO for Genus ABS and Catherine Glickman as Group HR Director. Women now represent 25% of the GELT membership. We have appointed women into senior positions in finance, global marketing and operations, and women are increasingly represented at all levels in our technical and research teams. The increase in female role models will encourage other women to develop through to senior roles in Genus. We extended online performance management to almost half our staff, and trained managers and colleagues in setting objectives and holding valuable reviews. Those on the new approach have two reviews per year, with 65% saying it helps them perform better. We invested in development at all levels, from operational training for those who work with our animals, to management development. Initiatives included establishing Key Account Manager and Technical Case Study Supporting Our People’s Learning and Development Service Academies, and developing training with global relevance. In a major initiative, we piloted a bespoke programme called ‘High Performing Teams’. This helps line managers unlock their people’s potential and drive growth. It includes performance management, values-led leadership, coaching and using data to improve business performance. We enhanced the cross-fertilisation of skills and experience across the Group. Our teams in the US share best practice and current thinking with people who are new to their roles or to Genus. We also network our expertise, by relocating senior managers to lead operations in other regions or parts of the business. All vacancies are offered internally, through our in-Company job posting. “ We invested in development at all levels, from operational training for those who work with our animals, to management development.” With the need to adapt more quickly, manage more information and capture and apply our people’s expertise, we convened 41 PIC leaders and key account managers. This allowed us to share knowledge and best practices, and unveil PIC’s Global Key Account Management Academy (‘KAMA’). KAMA offers instructor-led training, online learning through Genus University and on-the-job training. Product Differentiation and PIC Genetics 101 are the first of many modules that will standardise and expand our capabilities, ensuring PIC communicates effectively and delivers the value customers need. We delivered these first modules in classrooms to our Chinese and American staff, allowing us to network the knowledge of our US-based experts. Working with the operational teams, we have identified and will roll out seven priorities for FY15. Currently we are training all PIC staff on our ‘Targeted Customer Interface’, which will enhance our customer account planning and facilitate business planning across customers and regions. Genus plc Annual Report 2014Strategic Report 43 We continued to recruit high- calibre professionals to our senior team, as well as strengthening our Marketing and Technical Service teams in ABS and PIC, and the Key Account Management team in China. Our first employee survey, Genus Pulse, saw 80% of our workforce give us their views. Among the many strong results, 91% understood our vision, 83% understood what they need to do to deliver our strategy and 89% are committed to our values. Local teams have developed action plans to maintain strengths and address areas for improvement. Gearing Up for Growth We have a comprehensive plan to help our people drive growth. This includes having lean and simple structures, investing in targeted new roles and tightly managing headcount. Our employees said they want us to invest in personal and career development. By the end of 2014/15, almost everyone in Genus will be covered by performance management. This will give them clear objectives, performance criteria and individual development plans. In 2014/15, we will run our first development programme for our top 70 leaders. This will include exploring how to work profitably with our customers, accelerate our strategy and nurturing a culture of innovation. It will also strengthen networks, so we can rapidly disseminate our knowledge. We will extend High Performing Teams to managers around the world and complement this with communication skills training, coaching and mentoring. We will also expand our operational training for Key Account Managers in ABS and PIC. The most consistent feedback in Genus Pulse was for more communication. In response, we are enhancing our internal communications to help align everyone with our business priorities. This will include new ways of sharing information and building dialogue. Together, these steps will help our people to fulfil their potential and enable Genus to make the most of the opportunities ahead. Case Study Networking Our Global Expertise “ We have a comprehensive plan to help our people drive growth.” To develop our teams and businesses, we draw on the expertise of our global product development, genetic services, production and animal health assurance teams, and our North American sales and distribution teams. Through a tailored programme, new appointees shadow team members, observing our operations and gaining knowledge. This builds relationships across regions and networks our thinking and best practice. It also ensures we understand different customer needs, so our offerings appeal worldwide. International placements for key PIC personnel also support the business and their personal development. David Casey has relocated to Shanghai to help develop PIC China, while leading global Genetic Services. He is focused on maximising our customers’ and supply chain partners’ use and understanding of PIC genetics. Our Director of Technical Services, PJ Corns, is on assignment in Europe. He is accelerating the knowledge of best management practices and US product success stories among PIC Europe and its customer and prospect base. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 44 Corporate Social Responsibility To achieve our vision, we need to enhance food affordability, safety and quality; improve animal welfare; and reduce the environmental impact of protein production. We see ourselves as a responsible and valued neighbour, a good employer and a standard setter wherever we operate. animal handling, laboratories and maintenance, allowing us to network best practices globally. We used risk assessments to identify our highest priority locations and audited almost half of them. Most were laboratories, distribution hubs, and production and animal housing facilities. We reviewed health and safety design and work practices, and defined improvement strategies and corrective actions where needed. Using our Safety Management System (‘SMS’) we tracked more than 100 corrective actions. At the year end, 14 remained open and will be resolved within four months in the new financial year. Rate of Minor Incidents The annual rate of minor incidents rose from 1.28 in 2013 to 1.87 per 100 employees. During the year, we increased staff awareness of our SMS and the importance of reporting work-related injuries and illnesses. Around 40% of incidents are caused by animals’ unpredictable behaviour. We continue to develop best practice animal handling techniques, to ensure we protect our people and animals. We have clear targets to continue to improve our health and safety practices in 2015. MINOR INCIDENTS RATE PER 100 EMPLOYEES 1.87 1.27 2014 2013 2012 0.63 2011 2.17 Our Corporate Social Responsibility (‘CSR’) framework covers five key areas: health and safety, employees, animal welfare, community and the environment. In last year’s report, we noted our intention to establish a Committee to lead our CSR efforts. As discussed on page 55, formation of the committee was delayed. However, we still made substantial progress towards our CSR objectives for the year, as described below. Health and Safety Health and safety is critical in our business and a priority for the Board. We have a global team of specialists, who operate alongside our line managers and HR teams. During 2013/14, we strengthened the team and raised its profile by appointing Lori Hellenbrand as our first Health and Safety Director, reporting directly to the Group HR Director. Our objectives for 2013/14 were to roll-out our health and safety framework and principles, improve internal communication and engage employees, and to visit all our facilities, to ensure compliance with standards and regulations. During the year, we set out our framework and principles by implementing our global policies in eight languages, including cryogenics, safe lone working, incident reporting and safe animal handling. Karim Bitar signed these policies, demonstrating our commitment to health and safety. We improved communication by providing leaders with monthly reports of incident data and trends, facility audit schedules and findings, and corrective action assignments. These reports are discussed at management meetings, ensuring health and safety is seen as a priority, with strong and active leadership from the top. We developed a library of best practice risk-reduction strategies, relating to farms and Employees Our employees are fundamental to our business success and we work hard to attract, retain and develop the best people. Our objectives for 2013/14 were to give every employee the opportunity to develop their career, with an annual discussion and a commitment to look internally to fill a role; to develop all staff through equal access to training; to ask staff how they feel about working for Genus and act on their feedback; and to provide interesting, valuable and secure work within local communities. During the year, we extended performance management to more than half our staff and now offer all vacancies internally through our in-company job posting. We undertook our first employee survey, and within our local communities we provide training in all our roles and ensure we are offering long-term, secure employment. More about our approach to people management can be found on pages 42 and 43. Diversity Genus takes diversity seriously. We appoint the best people to do the job, with a focus on talent right across the leadership team. On gender, we have actively recruited more women into senior roles. In the last two years, we have appointed two women to GELT, including one as a divisional Chief Operating Officer, providing role models at the highest level of our business. We have also appointed our first women to the Finance Directorate and the PIC Leadership team. We continue, through our talent planning process, to identify those with potential to develop, and ensure they are given the right opportunities to move into senior roles. We recognise that we need to continue to work on this area, as we grow the business. Work Levels Board Directors GELT Other employees No. of employees at 30 June 2014 Male 8 6 1,770 Female Total % Female – 2 707 8 8 2,477 – 25% 29% Genus plc Annual Report 2014Strategic Report 45 Our leadership team is genuinely global, with 13 nationalities represented at GELT and those reporting into them, from the UK, Ireland, the Netherlands, Germany, Denmark, the United States, Chile, Mexico, Colombia, China, India, New Zealand and Australia. We believe that this international mix ensures that people of all nationalities know we take the best people for the job, and that they can progress regardless of the country or continent they come from. Human Rights We do not believe that human rights are a significant issue for Genus but we are committed to protecting the human rights of our employees and the people who come into contact with our business. During the year, we continued to comply with our human rights policy. Animal Welfare We are responsible for thousands of animals across our porcine and bovine businesses. The welfare of those animals is our highest priority: it is important to all of us personally and it is important to our business. This means we see caring for our animals as a moral duty, not just a commercial imperative. The Genus Animal Welfare Code of Conduct ensures we provide the highest standards of animal husbandry. All employees who handle our animals are trained and qualified, and we design and maintain our facilities to ensure best practice. Our veterinary advisers and health assurance team are fully integrated with the operational teams and regularly assess the animals’ health. We have a policy of zero tolerance towards animal abuse: staff must report any animal mishandling and we require regular written statements that they have not observed any incidents. Our objectives for 2013/14 were to roll-out Pork Quality Assurance (‘PQA’) style training to all production staff in Genus PIC’s owned facilities, and begin construction of a biosecure bull admittance facility and vehicle disinfection station at Genus ABS. During the year, we focused on rolling out PQA training to our larger farms and those that would be operated by PIC or our joint ventures in the medium to long- term. 83% of our sow farms are now under the PQA programme. Construction of the new bull admittance facility began in June 2014 (see case study), while the vehicle disinfection station is nearing completion. In addition, we carried out biosecurity audits at our main ABS production facilities in Brazil, Canada, the UK and the US. These audits ensured we are meeting our global standards, and improved our information sharing around ABS. Community We encourage community engagement and pursue programmes that will improve education and life chances, with a view to boosting our pool of potential employees. Our objectives for 2013/14 were to develop the pool of potential employees, by helping local populations to improve their education and skills, and to work with communities to support social initiatives. One significant example of our work during the year was our fundraising to help our people and the wider community who were affected by the devastation from Typhoon Haiyan in the Philippines (see case study). Case Study We have continued to recruit from the local talent pools around our farms and offices, as well as bringing in post-graduates from the best agricultural schools around the world. Our policy is to grow our business sustainably, ensuring we create long-term, secure jobs in the communities in which we operate, providing entry level roles on farm and into our departments to develop staff through. Protecting Our Animals and Ensuring Biosecurity In June 2014, we began construction of a new admittance facility at our bull stud in Dekorra, Wisconsin. The facility will have a biosecure entrance building and four bull barns, allowing us to keep animals of differing ages and health statuses apart. It will include the latest design for bull comfort and welfare, as well as providing a safe and efficient working environment for our staff and veterinarians. With wildlife- proof fencing completely enclosing the site and a new wash bay for disinfecting vehicles, the facility gives us a significant improvement in protection for our bulls. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 46 Corporate Social Responsibility continued The Environment We respect our communities’ environmental needs. Environmental management and reporting is integral to the way we run the business and manage risk. We assess the environmental risks of existing and new facilities, and establish controls to keep these risks at acceptable levels. We train employees in environmental compliance and have comprehensive protocols, which are independently checked. Our objectives for 2013/14 were to increase the proportion of Genus PIC farms that have their waste management systems independently checked; to obtain baseline soil test data for Genus PIC’s locations outside North America; and to consider processes for using or recycling manure from Genus ABS. During the year, we increased the proportion of PIC farms that have their systems independently checked from 42% (based on the number of animals) to 73%, covering farms in North America, Brazil and China. We chose to delay soil testing while we identified appropriate laboratories and took actions that were required ahead of testing, such as verifying our storage capacity and correcting deficiencies, and implementing weekly and monthly inspections of our storage facilities. We continued to look at ways to use manure. To date, we have investigated more than ten systems, although ongoing evolution of the technology means we have not yet finalised our choice. Emissions from Scope 1 – combustion of fuel and livestock emissions Scope 2 – electricity, steam, heat and cooling purchased Total scope 1 & 2 Scope 3 – material usage and waste, third party distribution and business travel Total emissions Primary intensity measure – Animal weight (tonne) Secondary intensity measure – Turnover (£m) Intensity ratio – Scope 1 & 2 (tCO2e/tonne animal weight) Intensity ratio – Scope 1, 2 & 3 (tCO2e/£m turnover) 20141,2 Tonnes of CO2e 20133 Tonnes of CO2e 83,409 23,449 106,858 19,218 126,076 14,030 372.2 7.62 339 62,719 15,636 78,355 23,166 101,521 10,087 345.3 7.77 294 1. May and June 2014 emissions data was extrapolated based on average monthly 2014 data. Génétiporc was acquired in October 2013 but emissions for the Génétiporc operations have been extrapolated and included for the full year. 2. 2014 is designated as our base year. 3. 2013 data does not include emissions from Génétiporc, which was acquired in October 2013. Greenhouse Gas (‘GHG’) Reporting Our GHG emissions primarily result from housing livestock and our production facilities. Managing approximately 192,000 pigs and 1,800 bulls results in significant emissions from enteric fermentation (methane production) and slurry/ manure. We also have emissions from consuming fuel and other materials, as well as transport associated with housing livestock. We have selected our primary intensity ratio based on animal weight, as we believe this is a key driver of our GHG emissions, as well as reporting a more general intensity ratio based on turnover. Emissions increased during the year due to the acquisition of Génétiporc. GHG EMISSIONS FOR 2014 (%) 15 12 73 From livestock From third-party distribution and business travel From other activities Our Reporting Approach We have adopted operational control as our reporting approach. We have determined and reported the emissions we are responsible for within this boundary and do not believe there are any material omissions. GHG data is therefore reported for assets, which are mainly rented or leased, that are otherwise not referred to across the rest of the financial statements. We omitted other assets on the grounds of our limited authority to introduce and implement operating policies. These are mainly our joint ventures, where we have up to 50% share, and some livestock held at third parties. Assessment methodology World Resources Institute/World Business Council for Sustainable Development. ‘The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard’ DEFRA ‘Guidance on how to measure and report your greenhouse gas emissions’ DEFRA ‘Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance’ Emissions factor data source IPCC ‘Guidelines for National Greenhouse Gas Inventories’ DEFRA/DECC ‘Conversion Factors for Company Reporting’ Genus plc Annual Report 2014Strategic Report 47 Case Study Responding to Help People in Urgent Need When Typhoon Haiyan hit the Philippines, it left over 6,200 people dead, 4.0m displaced. To help our people and the wider community, PIC Philippines immediately created a fund for donations. Within hours, money began pouring in from Genus employees around the world. Along with a matching donation from the business, we raised a total of US$31,000, which went towards providing vital supplies and shelter, including contributions towards rebuilding homes of affected families. We have also extended support in recent weeks to those affected by Typhoon Yolanda, providing supplies and financial support to help those we work with to rebuild homes. 3 Animal Welfare • Continue with PQA training in all Genus PIC’s owned farms. • Develop a questionnaire for use in ABS Genus’s animal welfare audits, based on the five freedoms: Freedom from Hunger and Thirst, Freedom from Discomfort, Freedom from Pain, Injury or Disease, Freedom to Express Normal Behaviour and Freedom from Fear and Distress. • Complete animal welfare audits of ABS Genus’s main export centres in the UK, Canada, Brazil and the US. • Expand the tree planting programme at Genus ABS’s Uberaba stud in Brazil, to provide essential shade for our bulls. 4 Community • Continue to support those who work for and with us, who are affected by natural or other disasters, by providing practical help and resources. • Support investment in agricultural education and science, to build animal agricultural capacity within our industry – in 2014/15, we will develop the approach in our US and European businesses. • Support charities that sponsor agricultural initiatives globally, to build knowledge and understanding on animal husbandry, self sufficiency through livestock and good farming practice. • Continue to recruit into our farms from our local communities, providing valuable jobs, training and income for those that work with us. 5 Environment • Continue annual independent audits of Genus PIC’s waste management systems, covering at least 80% of our owned animals. • Produce more home-grown feed for Genus ABS’s bulls, to reduce reliance on purchased feed, reduce emissions from transporting feed and improve biosecurity. • Explore opportunities to recycle the manure produced by Genus ABS’s bulls, both on crop land producing our feed and by converting it to heat or electricity, for example by using a furnace-type recycler. n m e n t En vir o Health a n d S a f e t y C o m m u n i t y s e e y plo m E Animal Wel f a r e 1 Health and Safety • Conduct audits on all Genus facilities and implement corrective action plans as needed within six months. • 90%+ of staff complete a minimum of one health and safety training session appropriate to their job. • Reduce the number of reportable incidents on Genus owned property by 20%. • Every manager to meet with their teams annually to review incidents and audit findings in their business to increase awareness and identify improvement actions. 2 Employees • Deliver on the action plans drawn up following the Genus Pulse survey and conduct our sample check, with the target of improving or maintaining the high results. • Ensure that every member of staff has clear objectives, a career discussion and a personal development plan. • Continue to develop our staff, delivering operational, management and leadership training, communication skills and anti-bribery training. • Continue to provide interesting and secure work within local communities. The Strategic Report was approved by the Board of Directors on 2 September 2014 and signed on its behalf by: Karim Bitar Chief Executive Stephen Wilson Group Finance Director Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional InformationCSR Objectives – 2014/15 48 “The Board is determined to maintain and further enhance Genus’s high standards of corporate governance.” Bob Lawson Chairman Genus plc Annual Report 2014Corporate Governance 49 Considering Diversity Genus takes diversity seriously. In particular, we are fully aware of Lord Davies’s recommendations on gender diversity and always consider this when recruiting. However, our primary aim is to appoint the best person to do the job. The appointments of Duncan Maskell and Lykele van der Broek have increased the diversity of skills and experience on the Board, by adding to our scientific and international breadth and understanding. This will be vital as Genus continues to develop its research and development pipeline and grow the reach of its product portfolio into new markets. Summary The Board is determined to maintain and further enhance Genus’s high standards of corporate governance, with the objective of ensuring that Genus captures the large and growing opportunity for animal genetics to the benefit of our shareholders. Bob Lawson Chairman 2 September 2014 “ The Board’s strengths include its cohesiveness, engagement, transparency and communication.” Letter from the Chairman Dear Shareholder The Critical Role of Good Governance The profile of corporate governance has risen sharply in recent years. This reflects its critical role in promoting long-term success and protecting the interests of investors and other stakeholders. The Board’s grasp of the business and its markets, its understanding and control of risk, its approval of management’s strategic choices and the interactions between individual members and the Board as a whole, have a profound effect on the Group’s future. In turn, this determines our ability to serve our customers, create rewarding jobs for employees, support our suppliers and communities, and ultimately deliver growth and returns to shareholders. Recognising the importance of this subject, we continue to improve the way we disclose our governance arrangements and the Board’s work during the year. I am pleased that the standard of governance in Genus is high and we aim to show this through the information we provide. Complying with the Code We remain supportive of the UK Corporate Governance Code (the ‘Code’) and its principles- based approach. We believe this is the right way to encourage high standards, while recognising that companies need to adopt and apply governance structures that best suit their business needs. Genus continued to comply with all of the provisions in the 2012 edition of the Code, which was the applicable standard for this financial year. We remain aware of proposed changes to the Code, so we can continue to adopt best practice in the future. Evaluating the Board’s Effectiveness Knowing where the Board performs well and where it can improve is a key part of ensuring ongoing improvement and effectiveness. Genus has a three- year Board evaluation cycle. The previous year was the first in that cycle, which saw us undergo a full external evaluation by independent consultants. This year our consultants, Boardroom Review, ran a workshop with the Board. This involved detailed questionnaires, review of case studies, and Board performance analysis and discussions, as described on page 57. The evaluation found that the Board’s strengths include its cohesiveness, engagement, transparency and communication. Challenges include the Group’s international development, the complex science in the sector and diversity. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 50 Board of Directors and Company Secretary has spanned several UK and continental groups, including ten years as Chief Executive of Electrocomponents plc, where he led its successful expansion into new international markets, and three years as Managing Director of Vitec Group plc. he worked across Asia and in Europe, and also held management roles at Johnson and Johnson and the Dow Chemical Company. Bob Lawson Ü Non-Executive Chairman Board appointment November 2010 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 and a Director of The Federation of Groundwork Trusts. His career Karim Bitar Chief Executive Board appointment 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 and Company consultant, Stephen Wilson Group Finance Director Board appointment January 2013 Experience Stephen Wilson joined the Board in January 2013 and was appointed Group Finance Director on 1 March 2013. He was previously Executive Vice President and Chief Financial Officer of Misys plc, the financial services software provider that was a FTSE 250 company until its acquisition by Vista Equity Partners. Prior to Misys, Stephen was Vice President and CFO of IBM United Kingdom Limited. He is a Fellow of the Chartered Institute of Management Accountants and is a Non-Executive Director and Chairman of the Audit Committee of Xchanging plc. He holds a degree in Mathematics from the University of Cambridge. Nigel Turner ܸ Senior Non-Executive Director Board appointment January 2008 Experience Nigel Turner joined the Board in January 2008 and is Chairman of the Remuneration Committee. He was Chairman of Numis Securities Ltd and Deputy Chairman of Numis Corporation plc from December 2005 to November 2007. He is Mike Buzzacott ܸ Non-Executive Director Board appointment 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 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. and 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. Genus plc Annual Report 2014Corporate Governance 51 Professor Barry Furr, OBE ܸ Non-Executive Director Board appointment December 2006 Experience Professor Furr joined the Board in December 2006 and acts as Scientific Adviser to Genus’s Research and Development Portfolio Management Team. He 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 is also the author of more than 160 papers on reproductive endocrinology and antihormones, and was awarded an OBE in 2000 for his services to cancer drug discovery. Professor Duncan Maskell ܸ Non-Executive Director Board appointment April 2014 Experience Duncan Maskell joined the Board in April 2014. He is Head of the School of the Biological Sciences, University of Cambridge, one of the University’s most senior positions. He has been instrumental in co-founding several biotech companies and has extensive experience of advising companies on science and innovation. In the past, he has worked on new vaccines against salmonella and bordetella at Wellcome Biotech, and on bacteria that cause childhood meningitis at the Institute of Molecular Medicine, University of Oxford. He currently heads a large research group at Cambridge, working on infectious diseases of livestock and people. Lykele van der Broek ܸ Non-Executive Director Board appointment July 2014 Experience Lykele van der Broek joined the Board in July 2014. He has a Master of Science degree from the Agricultural University in Wageningen, the Netherlands. Prior to his retirement as a member of the Executive Committee of Dan Hartley Group General Counsel and Company Secretary Board appointment June 2014 Experience Dan Hartley joined Genus in June 2014 from Shire plc, where he was Senior Vice President and International Counsel. An Australian national, Dan received a BSc in Organic Chemistry from Sydney Bayer CropScience, a division of Bayer AG, on 31 July 2014, he held various senior international roles, including Head of the Bayer CropScience BioScience division and President of the Bayer HealthCare Animal Health division. University, before obtaining a law degree. He qualified as an intellectual property lawyer, working with Allen Arthur Robinson, before moving to the UK to work for Freshfields Bruckhaus Deringer. Dan joined Shire in 2002, where he held a number of increasingly senior roles. Member of Nomination Committee Ü Member of Remuneration Committee ¸ Member of Audit Committee Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 52 Genus Executive Leadership Team Over the last year, we have continued to build the Genus Executive Leadership Team (‘GELT’). Our Chief Scientific Officer, Dr Denny Funk, retired after 19 years of distinguished service, giving us the opportunity to add new skills and expertise to an already strong team. GELT’s Responsibilities GELT leads our strategic delivery and demonstrates the values at the heart of our business. Our vision and values are fully embedded in the business, giving the entire Genus team a clear and compelling culture, purpose and direction. GELT also ensures organisational alignment, engagement and efficient execution throughout the Group. This involves crucial commercial, scientific, operational and people decisions. Equally important is GELT’s stewardship of Genus’s reputation, ethical working and compliance. To achieve its objectives, GELT focuses on the following areas: • corporate strategy – implementing the Board’s strategy to achieve sustained growth, and strengthening key capabilities such as our world- class product development; • performance management – driving operational results; ensuring core processes are reliable and efficient; regularly reviewing R&D plans; managing risk, including risk mitigation; and managing the Genus balanced scorecard, including customer equity metrics; • people – developing high- performing teams by rigorous selection, development and setting stretching goals, together with nurturing talent to bring through the next generation of leaders; and • resources – judicious investment in the business, including capital expenditure and human resources. GELT’s members are as follows: Karim Bitar Chief Executive Stephen Wilson Group Finance Director Dan Hartley Group General Counsel and Company Secretary See pages 50 and 51 for Karim’s, Stephen’s and Dan’s biographies. Genus plc Annual Report 2014Corporate Governance 53 Bill Christianson Chief Operating Officer, Genus PIC Bill has doctorates (DVM and PhD) in Veterinary Medicine from the University of Minnesota. He joined Genus in 1993. Before his current appointment in July 2012, 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. Saskia Korink Romani Chief Operating Officer, Genus ABS Saskia joined Genus in January 2013 as Chief Marketing Officer. She was Acting Chief Operating Officer for Genus ABS from July 2013, before being appointed permanently in January 2014. For the previous ten years, she worked for Cargill Inc., most recently as the Vice President of Marketing for Cargill’s animal nutrition business. Saskia has worked across Europe, Latin America and North America, and brings significant business experience having been at Boston Consulting Group for seven years. She is originally a physicist and began her career in engineering and packaging design with Unilever PLC. She has an MBA from Columbia Business School. 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 over 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, and 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 to his current role on 1 July 2012. Dr Jonathan Lightner Chief R&D and Scientific Officer Jonathan is a world renowned molecular and quantitative geneticist, whose career has encompassed R&D, regulatory and commercial activities. He joined us in October 2013 from Pioneer Hi-bred International Inc, a DuPont business, where he was Vice President of Agricultural Biotechnology, leading a global team focused on new genetic solutions to enhance agricultural productivity. He obtained his Doctorate in Plant Physiology at the Institute of Biological Chemistry at Washington State University in 1994. He also holds a Masters in Systems Engineering from Iowa State (2009) and an MBA from the University of Iowa (2009). 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 Tesco’s roll-out into Asia, Central Europe and the United 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 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 54 Corporate Governance Statement Adding value through strong governance Strong corporate governance and business success go hand in hand. The Board’s decisions are critical to the Group’s future, from approving and monitoring our strategy to the way we identify, monitor and manage risks. We therefore look to ensure that the Board has the right mix of skills and experience, that it has a deep understanding of the Group and that its members work well together, in a spirit of openness and constructive challenge. This section explains our approach to corporate governance, including how we structure the Board and its committees, its oversight of the Group, and its performance and principal activities during the financial year. Who is on the Board? At the date of this report, the Board had a large majority of independent Non-Executive Directors. AN INDEPENDENT BOARD 2 1 5 Executive Directors Independent Non-Executive Chairman Independent Non-Executive Directors In recent months, we have added to what was already a strong, well- functioning Board by appointing two new Non-Executive Directors. Professor Duncan Maskell and Lykele van der Broek joined us on 1 April and 1 July 2014 respectively, bringing impressive scientific expertise and experience of international agricultural markets. As the chart above shows, these appointments mean that our Board has a good mix of well-established and new Non-Executive Directors. The blend of our Non-Executive Directors’ general experience and areas of expertise, together with a depth of knowledge about the Group’s operations, result in an even-handed oversight of the business and its growth strategy. This balance allows the Board to operate in a constructive and focused manner, with the new Non-Executive Directors adding fresh insights and perspectives. BOARD TENURE: A MIX OF WELL-ESTABLISHED AND NEW NON-EXECUTIVES Less than 1 year 3 to 6 years 6 to 9 years 2 2 2 2011 Number of Non-Executive Directors (including the Chairman) As required by the UK Corporate Governance Code, all the Directors, except Barry Furr who is retiring, will offer themselves for election or re-election at the next AGM, details of which can be found in the Notice of AGM at the end of this report. Following the performance evaluation described on page 57, the Board confirms that all the Directors continue to be effective and demonstrate their commitment to their roles. What are the Board’s responsibilities? To ensure we have clear responsibilities at the top of the Company, the Board has set out the Chairman’s and Chief Executive’s roles. Our Chairman, Bob Lawson, is responsible for running the Board. Karim Bitar, our Chief Executive, runs the Group, making sure we implement our strategy and achieve our operational and financial targets. Nigel Turner is our Senior Non- Executive Director and Chairman of the Remuneration Committee. He is available to help shareholders with concerns that they cannot resolve through our Chairman, Chief Executive or Group Finance Director. Some issues and decisions are so important that only the Board as a whole can consider them. The Board is therefore responsible for: • approving and monitoring our strategy; • approving our corporate goals; • reviewing our operational performance against these goals; • approving the corporate budget and ensuring we have the right funding; • approving material contracts; • approving material acquisitions and investments; and • reporting to shareholders. However, the Board cannot – and should not – get involved in the day-to-day running of the business. The Board therefore delegates operating decisions to the Chief Executive, Group Finance Director and other members of the Genus Executive Leadership Team (‘GELT’). In turn, GELT’s members recommend strategy and plans to the Board, make day-to-day decisions about the resources we need and how we use them, and How is the Board structured? The diagram below shows the Board and the Committees that report to it. GENUS PLC BOARD BOARD COMMITTEES EXECUTIVE COMMITTEES AUDIT COMMITTEE NOMINATION COMMITTEE GENUS EXECUTIVE LEADERSHIP TEAM R&D PORTFOLIO MANAGEMENT TEAM REMUNERATION COMMITTEE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE Genus plc Annual Report 2014Corporate Governance 55 ensure we have robust controls over our operations and finances. More information about the roles and work of the Audit, Remuneration and Nomination Committees can be found in their statements on pages 60 to 84. GELT’s role and membership is covered on pages 52 and 53. In last year’s report, we explained our intention to establish a Corporate Social Responsibility (‘CSR’) Committee, to set our CSR strategy and objectives, ensure we implement them and to monitor our performance. The Committee was to be chaired by Tom Kilroy, our Group General Counsel and Company Secretary at the time, who left Genus in January 2014. His departure delayed the Committee’s formation and meant that it did not meet during the year. The Committee is scheduled to have its first meeting by the end of 2014 chaired by Catherine Glickman, Group HR Director, to build on our CSR strategy and implementation. The delay in setting up the Committee did not detract from our CSR efforts and we continued to make good progress against our objectives, as described on page 47. The R&D Portfolio Management Team meets twice a year. It gives us a comprehensive view of our R&D programme and involves our business units in prioritising our R&D initiatives. Its key discussions in the year are summarised below. R&D PMT Key Discussions • Continued operation of the ideation management process • Ongoing review and prioritisation of new ideas and ongoing research projects • Approving patent strategies for new technologies, based on business and technical opportunity Does the Board have the right balance of skills and experience? Genus operates in a complex and evolving global business environment. To lead us effectively, the Board must have the skills and experience to manage the associated challenges. Almost all our Directors have held leadership positions in international companies, with several having run businesses overseas. Half our Directors have strong backgrounds in scientific research or in leading science-based businesses, while more than a third have significant financial experience. A BROAD BASE OF RELEVANT EXPERIENCE International business Scientific/biotech 4 Finance 3 2011 Number of Directors 7 As Genus grows, the Board must evolve to keep pace. Our recent Non-Executive appointments have enhanced our expertise in biotechnology, agricultural science and international markets. While we consider diversity in its broadest sense when recruiting, our aim is to ensure that the Board has the right skills to manage the evolving nature of the business. A good induction is a key part of ensuring new Board members can fully contribute, so we get the most benefit from their experience. Our induction programme has three main elements: • helping our Board members to conduct themselves effectively, through a course run by Spencer Stuart, one of the world’s leading global executive search and leadership consulting firms; • ensuring our Directors understand the legal and regulatory aspects of being a Board member, and how to maintain their independence; and • an introduction to our business, through site visits and meetings with our management teams (see case study). Non-Executive Inductions Site visits and meetings with management are a key part of getting new Non-Executive Directors up to speed with our business. Following Lykele van der Broek’s joining on 1 July 2014, he and Duncan Maskell visited one of our European operations, ABS Italia, where they met the general manager, staff and a customer. We are also planning for them to visit our US operations, covering Genus ABS and our R&D operations in Madison, and Genus PIC in Hendersonville. Here they will meet a cross section of senior management and some of our customers. These visits include presentations about each business and a tour of the operations. Duncan Maskell’s earlier appointment meant he also went on the Board visit to China, as discussed below. We also want to ensure that the Board as a whole has first-hand experience of key areas of our business and markets, so we include an annual site visit in the Board calendar. This year, the Board visited China (see case study below). As well as benefiting our Directors, these visits allow our local management teams to meet the Board and to discuss their operations directly with them. Case Study – Board Visit to China In April 2014, the Board visited our operations in China. Over three days, the Directors visited a bull stud and met customers, partners and officials from the Ministry of Agriculture. The Board also met with Jerry Thompson, the Chief Operating Officer of Genus Asia, and the senior management team and staff in our Shanghai office. The visit gave the Board greater clarity of the Chinese bovine and porcine markets, as well as insights into the country’s key trends and risks, including disease. The Directors also gained a better understanding of the political, economic and social landscape in China. This is an exciting market with great opportunities for the Group, where we hope to expand our footprint and develop operations that underpin our continued growth. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 56 Corporate Governance Statement continued How does the Board review and approve the Company’s strategy? One of the Board’s key responsibilities is to review, approve and monitor our strategy. To understand how well our strategy is working and to ensure it remains appropriate, the Board holds an annual strategy review each January, lasting a day and a half. This includes presentations from GELT members and external perspectives. At this year’s review, the Board was taken through a market overview and competitive landscape, which included: • dairy, beef and pork genetic market projections, including growth drivers and potential new markets; and • current and emerging industry trends, such as consolidation and integration of customers, market volatility, supply chains, and the necessary people and skills to achieve the strategy. The Board then considered our strategy in light of this, including opportunities and challenges, focus areas and business recommendations for moving forwards. What did the Board do during the year? The table below shows how many Board and Committee meetings each Director attended during the year. Non-Executive Chairman Bob Lawson Executive Directors Karim Bitar Stephen Wilson Non-Executive Directors Nigel Turner Mike Buzzacott Barry Furr Duncan Maskell** Board Audit Committee Remuneration Committee Nomination Committee 10 (10) 10 (10) 10 (10) 10 (10) 10 (10) 8 (10) 3 (4) 3* 3* 3* 3 (3) 3 (3) 2 (3) 1 (1) 6 (6) 1 (1) 6* 6* 6 (6) 6 (6) 4 (6) 3 (3) 1 (1) 1* 1 (1) 1 (1) 1 (1) n/a Note: Figures in brackets are the maximum number of Board or Committee meetings the Director could have attended. * Attendance by invitation. ** Duncan Maskell joined the Board on 1 April 2014. The Board’s main activities during the year are set out below. The Board’s Main Activities During the Year Leadership • Appointed two Non-Executive Directors, adding significant scientific and international experience to the Board • Appointed Dan Hartley as Group General Counsel and Company Secretary, bringing wide-ranging legal, scientific and international experience Business Development/Strategy • Held a strategic meeting with GELT, as described above • Reviewed and approved business development opportunities such as Génétiporc • Visited China (see above) to understand better the business environment • Received regular updates on disease issues, health and biosecurity • Reviewed and approved the initiation of US legal proceedings against the current provider of sexed semen (see note 38) Research & Development • Received regular updates on R&D developments, new initiatives and potential collaborations Performance • Received monthly updates on the operational performance of the business and market conditions for each of the Company’s divisions • Carefully monitored the performance of the Company against its goals Employees • Reviewed and monitored the health and safety performance of the Company • Updated on the new performance management framework and the results of an all employee survey • Updated on the High Performance Teams’ training programme • Held session on the Talent Review, including updates on executive succession planning and development • Received update on alignment of global employee pay with GELT, and global short- and long-term bonuses and core awards Effectiveness • Second year external Board evaluation and workshop carried out by Boardroom Review Genus plc Annual Report 2014Corporate Governance 57 How well is the Board functioning? We assess the Board’s effectiveness over a three-year cycle, using a mixture of internal and external evaluations: Year 1 External Board effectiveness review produces an action plan for areas of focus Year 2 Follow up questionnaires by same external evaluation consultant, to monitor progress with the focus areas Year 3 Internal questionnaires and interviews with the Chairman and Group General Counsel and Company Secretary This year was the second in the review cycle, following last year’s external evaluation. Boardroom Review held a workshop with the Board, involving: • effectiveness questionnaires conducted by Boardroom Review with each Board member, following which the Board discussed the strengths and challenges identified by the process; • examination and discussion of a case study, based on strengths and challenges similar to Genus’s, which was facilitated by the external consultant; and • discussion of how the Board could optimise its contribution to the Company. The Review’s Conclusion The strengths identified included: • the Board’s cohesiveness; • its transparent and respectful communications; • the Chairman’s experience and governance; and • the Board’s engaged and supportive nature. The challenges identified included: • the Group’s international development; • the Board’s limited diversity; and • the complex science in the sector. Areas of Focus for 2014/15 This year’s evaluation identified the following areas for the Board to consider in 2014/15: • sharper focus on technology across the Board, both in R&D and the use of technology in commercial sales; • continued focus on competitors; • consideration of how risk is disclosed and considered through the Audit Committee and through the Board; • consideration of communications with shareholders and other external stakeholders; and • consideration of other skill sets required by the Board, such as diversity, agri-business and international markets. Progress Against the 2013/14 Evaluation Last year’s external review identified a number of areas for the Board to consider this year. The Board also set itself a number of other priorities. The table below shows our progress against these objectives. Focus Areas from the Board Evaluation Progress The evolution of the Board’s composition We appointed two Non-Executive Directors, as discussed above The quality of discussion and information regarding the competitive landscape Senior management provided more written and verbal updates at Board meetings and the strategic session was focused on the competitive landscape A deeper review of executive succession planning In December 2013, the Board was updated on the succession plan for GELT members Improving reporting cycles, communication and use of Board time Board meetings have been better scheduled across the year, with shorter meetings and improved Board papers. To focus discussion, Board members are given clear direction on the outcome required. Financial reporting is also quicker, to give the Board the latest data Board Priorities for the Year Continuing global site visits Progress The Board visited China during the year and is scheduled to hold a Board meeting in Brazil in 2015 Developing the Board in the area of CSR, aligning CSR with the Group’s strategic objectives and establishing the new CSR Committee Progress against CSR objectives has been included in the Board and GELT meeting agendas. Meetings of the CSR Committee have been scheduled for the remainder of 2014 and 2015 Continuing to ensure the Board’s development in governance The Board received updates and briefings on recent governance developments Increasing focus on the talent review A talent review of GELT was carried out in December 2013 Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 58 Corporate Governance Statement continued How does the Board ensure it understands and manages risk? The diagram below shows our risk management framework. The Board has ultimate responsibility for risk management and our internal controls, and is supported by GELT, the Audit Committee and our risk management and internal audit function. Risk Management Our risk management system identifies, evaluates and prioritises the risks and uncertainties we face, and reviews our controls and how we mitigate those risks. The system applies to the Board, the Audit Committee, GELT, our businesses and our divisional business reviews. The main risks we face and our mitigations for them are summarised on pages 20 and 21. The Board undertook a number of activities to address specific risks during the year, including its work on: • talent management and succession planning; • reviewing biosecurity, particularly in light of the disease outbreaks discussed in the Strategic Report; • reviewing our strategy and understanding of the competitive landscape; and • enhancing the Board’s cultural understanding through visits to the local operations and political, economic and social risk updates from the relevant business groups. The Board will also receive updates on health and safety. More generally, the Group continues its relentless focus on operational execution. Internal Control The Board, with the help of the Audit Committee, has reviewed the effectiveness of our internal control system, as well as our financial, operational and compliance controls and our risk management. The review covered our internal audit programme and the reports our management prepared when the Board approved our interim and final reports and financial statements. It also assessed: • whether we had identified, evaluated, managed and controlled significant risks; and • whether any significant weaknesses had arisen, and if so, whether we had addressed them. Risk Management Framework THE BOARD • Sets strategic objectives • Has overall responsibility for the Group’s risk management and internal control systems • 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 AUDIT COMMITTEE RISK MANAGEMENT AND INTERNAL AUDIT FUNCTION • Identifies, addresses and mitigates risks Group-wide • Monitors our risk management process and internal controls • Supports the Board in monitoring risk exposure against risk appetite • Reviews the effectiveness of our risk management and internal control system • Overseas the risk management process and provides guidance on risk management • Engages with senior management to review risks and their mitigation The assessment also took into account any risk or control issues we identified through our divisional business reviews, Board and GELT meetings, and insurers’ reviews. These assessments routinely identify areas for improvement. However, the Board has not identified or been told of any significant weaknesses in our internal controls. Our Internal Control System An internal control system cannot completely eliminate the risks we face or ensure we do not have a material misstatement or loss. The key elements of our internal control systems are as follows: Management Structure The Board sets formal authorisation levels and other controls that allow it to delegate authority to run our businesses to the Chief Executive, GELT and their management teams. Our management supplement these controls by setting the operating standards that each subsidiary needs for its business and location. GELT regularly reviews our performance against strategy, budget, and a defined set of operational key performance indicators. The Chief Executive, Group Finance Director, Group General Counsel and Company Secretary and the Group Financial Controller also hold monthly reviews with each business unit. Quality and Integrity of Our People Everything we do has the highest integrity at its core. Our control environment depends on high- quality people who maintain our ethical standards. We ensure our people’s ability and integrity through our high recruitment standards, training and consistent performance management. The Board approves appointments to our most senior management positions. Genus plc Annual Report 2014Corporate Governance 59 Information and Financial Reporting Systems We create detailed operational budgets for the year ahead, along with five year strategic plans, which the Board reviews and approves. We then monitor our performance throughout the year, so we can address any issues. The information we consider includes our monthly financial results, key performance indicators and variances, updated full- year forecasts and key business risks. The main internal control and risk management processes relating to our preparation of consolidated accounts are our Group-wide accounting policies and procedures, segregation of duties, a robust consolidation and reporting system, various levels of management review and centrally defined process control points and reconciliation processes. Investment Appraisal We control our capital expenditure through our budget process and by having clear authorisation levels, above which our businesses must submit detailed written proposals to the Board for approval. We carry out due diligence for business acquisitions and review major projects and all acquisitions after we complete them, so we can identify and correct any underperformance or overspend. Internal Audit Our internal audit activities are provided by both in-house and external resources, under the leadership of our Head of Internal Audit and Risk Management. During the year, Internal Audit completed a risk-based audit programme agreed by the Audit Committee. The Audit Committee reviews the results of these audits and the subsequent actions we take, which we also communicate to the external auditor. The regions and businesses complete risk and control self assessments twice a year. Internal Audit reviews these to identify any deficiencies in our controls and how we should address them. The results are communicated to senior management and the Audit Committee. How does the Board ensure it understands shareholders’ views? Our Chief Executive and Group Finance Director regularly meet institutional investors and private client brokers, to discuss our strategy and progress, and to understand how investors view our business. The Chairman also attends certain meetings. During the year, our investor relations programme included meetings in London, Edinburgh, New York, Chicago and Geneva. The Board sets time aside during the Board meetings to discuss feedback from these meetings, including feedback obtained by independent brokers and our advisers. This allows all Directors to understand major shareholders’ views. The Chairman and Senior Non- Executive Director also maintain contact with major shareholders, having met with two earlier in the year and another meeting planned for later this year as part of our remuneration consultation. The AGM gives the Board an opportunity to communicate with both private and institutional investors, and we welcome their involvement. All our Board members will be available to answer questions at the AGM on 14 November 2014. Our Risk Management Priorities The table below shows our risk management priorities for the last year and our progress against them. Risk Management Priority Progress Further embedding risk management into our day-to-day decision-making process Test many of our risk mitigation activities as we deliver our FY14 internal audit plan, to provide assurance that they operate effectively We held regular executive management reviews of our significant risks and implemented a continuous improvement process for our mitigating activities We delivered a risk-based audit plan which tested key areas of our mitigation efforts Our Priorities for 2015 For the coming year, we have set the following priorities: • to expand our operational KPIs to include performance metrics relevant to key risk mitigation activities; and • to continue to improve our ability to identify emerging risks and potential changes in risk evaluation throughout the year. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 60 Audit Committee Report Chairman’s Overview The Audit Committee acts on behalf of the Board and shareholders, to ensure the integrity of the Company’s financial reporting, evaluate its system of risk management and internal control, and oversee the performance of the internal and external auditors. Our annual work programme is designed to deliver this commitment. During the year, the Committee met three times and invited the Company’s Chairman, Chief Executive, the Group Finance Director, the Group Financial Controller, the Head of Risk Management and Internal Audit, and senior representatives of the external auditor to attend its meetings. The Committee also held separate private sessions during the year with external audit, internal audit and the Group Finance Director. The Committee reviewed the appropriateness of the half-year and annual financial statements. Among other matters, we focused on critical accounting policies, key assumptions and judgements, the quality of disclosures and compliance with financial reporting standards, and all material issues affecting the financial statements. The Committee reviewed the Group’s tax and treasury strategy and its pension arrangements. The Committee also reviewed the Annual Report and Accounts taken as a whole, to ensure they are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company’s strategy, business model and performance. In meeting its commitment to oversee the performance of our internal and external auditor, the Committee reviewed and agreed internal audit’s terms of reference and work plans, as well as the scope, fees and work undertaken by the external auditor. The Committee reviewed the effectiveness of internal and external audit, discussed the outcomes of these assessments and agreed any actions that were needed. The Committee was satisfied with the performance of the internal audit function and the external auditor during the year. The Committee discussed the current partner’s tenure, which is due to end after the 2015 audit and agreed to start a process in the coming year to retender the audit for fiscal year 2016. Mike Buzzacott Chairman of the Audit Committee 2 September 2014 “The Committee ensures the integrity of the Company’s financial reporting.” Genus plc Annual Report 2014Corporate Governance 61 The Committee reports its findings to the Board, identifying any matters that require action or improvement, and making recommendations about the steps to be taken. Committee Role and Responsibilities The Committee’s role and responsibilities include reviewing and monitoring; the financial reporting process; the integrity of the Group’s financial statements; the Company’s reporting to shareholders; the effectiveness of the Group’s accounting systems and control environment, including risk management and the internal audit function; and the effectiveness and independence of the Group’s external auditor, including any non-audit services they provide to the Group. The Committee also ensures that the Company maintains suitable confidential arrangements for employees to raise concerns and reviews the Company’s systems and controls for preventing bribery. Risk Man and Intern a g e m al e C n o t n t r o l t i d u al A Intern • Monitoring and evaluating the adequacy and effectiveness of the risk management and internal controls systems • Approval of scope and plans • Monitoring management’s implementation of remedial actions • Evaluating performance g cial Rep orti n n a in F E x t e r n al Audit Committee Composition and Governance The Committee’s members are Non-Executive Directors with a wide range of financial, commercial and scientific research expertise, appropriate for fulfilling the Committee’s duties. In FY14, the Committee met the UK Corporate Governance Code’s requirement that at least one Committee member should have recent and relevant financial experience. The Committee has formal terms of reference, approved by the Board, that comply with the UK Corporate Governance Code. These are available from our website: www.genusplc.com. Our annual review of these terms took place during the year. The Committee also assessed its own effectiveness. • Reviewing of annual and half-year financial statements • Evaluating critical accounting policies, key assumptions and judgements • Monitoring the quality of disclosures and compliance with financial reporting standards • Monitoring of independence and objectivity • Agreeing scope and fees • Monitoring level of non-audit services • Evaluating performance Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 62 Audit Committee Report continued The Committee’s Main Activities During the Year At its three meetings during the year, the Committee focused on: Financial Reporting The main areas of focus and matters where the Committee specifically considered management’s judgements are set out below: Financial Reporting Area Biological assets valuation Intangible assets – capitalisation and impairment of development costs Acquisitions – Génétiporc Pensions Judgement and Assumptions Considered In compliance with IAS 41, Genus records its biological assets at fair value in the Group balance sheet (£275m), with the net valuation movement shown in the income statement. At each reporting period, the Committee was updated on the methodology and outcomes of the biological assets valuation. Having noted that the methodology was unchanged during the year, the Committee debated and considered management’s assumptions and estimates, and discussed and reviewed the external auditor’s report on this area. The Committee was satisfied with management’s accounting treatment. Genus’s policy is to capitalise certain development costs and to perform periodic impairment reviews, to ensure that the cumulative carrying value is justified. At the balance sheet date, the Group had £8m of capitalised development. During the year, the Committee received reports from management detailing the cost incurred and the outcome of the impairment reviews. The Committee also reviewed progress against plans and the projects’ timelines to full operation. The Committee discussed management’s reports in detail, including whether any known issues might block the projects’ completion. The Committee reviewed the external auditor’s work, including their assessment of management’s models supporting the estimates and judgements. After due challenge and debate, the Committee was satisfied with management’s assumptions and judgements. During the financial year, Genus acquired Génétiporc, the porcine genetics business of Aliments Breton Foods Group, for £22m. The acquisition included the share capital of certain legal entities, as well as biological and intangible assets. This transaction is described in note 37 to the accounts. The Committee received an update on the transaction’s structure and reviewed management’s proposed accounting treatment. The external auditor’s views supported these proposals. After discussing the accounting options available, the Committee agreed with management’s recommendations. During the year, Genus adopted the revised IAS 19 for its pension accounting. The accounting changes to the calculation of the net interest cost and the treatment of fund administration expenses are detailed in note 28 to the accounts. The Committee received and reviewed management reports on the treatment of pension costs, including the restatement of prior years for comparative purposes. The Committee also received and considered the external auditor’s pensions accounting input. The Committee considered management’s recommendations were appropriate. The Committee continued to review the status of the other parties who are jointly and severally liable for the Milk Pension Fund deficit and concurred with management’s assumptions for reporting Genus’s share of the fund. Genus plc Annual Report 2014Corporate Governance 63 Monitoring Business Risks The Committee reviewed the Group-wide risk management process designed to identify, evaluate and mitigate risks. In the external auditor’s presence, the Committee discussed the risks identified with the Chief Executive and Group Finance Director, along with management’s plans to mitigate them. In view of their importance during the year, the Committee ensured that the Board received and discussed detailed input from management on the following key risks and mitigations: • China and emerging markets: this risk is the threat to our growth if we are unable to appropriately develop business in China and emerging markets. With a focus on China, the Board discussed with management the current farming environment in China and the actions taken by both regional and global management teams to minimise the impact on our strategy execution. • Biosecurity and continuity of supply: this is the risk of negative outcome for Genus if we lose key livestock or lose our ability to move animals and/or semen freely (including across borders), due to disease outbreak, an environmental incident or international trade sanctions. The Board discussed the outbreak of PEDv in North America and its impact on the entire porcine industry. PIC’s management presented to the Board on the additional measures being taken to strengthen health management and supply chain resilience. Internal Control System The Committee conducted its annual review of the effectiveness of the Group’s internal controls and disclosures, and reviewed the findings of internal audit at each scheduled meeting. This included reviewing the Group’s whistleblowing policy and bribery prevention procedures. Oversight of External Audit and Internal Audit Internal Audit The Committee reviewed and agreed the internal audit function’s scope, terms of reference, resources and activities. The Committee received regular reports from the Head of Risk Management and Internal Audit on the work undertaken and management’s responses to proposals made in the internal audit reports issued during the year. The practice of meeting the Head of Risk Management and Internal Audit without management being present continued during the year. The Committee reviewed and was satisfied with the internal audit function’s performance. External Audit The Committee reviewed and agreed the scope and fees of the audit work to be undertaken by the external auditor and held detailed discussions of the results of their audits. The Committee continued its practice of meeting the external auditor without management being present. The Committee reviewed the external auditor’s objectivity and independence and the Company’s policy on engaging the external auditor to supply non-audit services. The Committee assessed the external auditor’s performance, based on questionnaires completed by key finance staff and Committee members, covering the external auditor’s fulfilment of the audit plan, the auditor’s robustness and perceptiveness in their handling of key accounting and audit judgements, the content of the external auditor’s reports, and cost effectiveness. The Committee also considered any regulatory reviews performed on the external auditor. The Committee concluded that the external auditor was effective. External Auditor’s Appointment The external auditor, Deloitte LLP, was first appointed as the Company’s external auditor for the period ended 30 June 2006, following a formal tender process. The current audit partner’s first audit period was the financial year ended 30 June 2011. The Committee reviewed the nature and monetary levels of the external auditor’s non-audit services and compliance with the Company’s Non-Audit Services by Auditor Policy. The Committee is satisfied that the use of Deloitte for such services does not impair their independence as the Group’s external auditor. As a consequence of its satisfaction with Deloitte’s independence and effectiveness, the Committee has recommended to the Board that the external auditor be reappointed for a further year. However, after the 2015 audit, the audit partner is due to rotate and the Committee intends to retender the audit for the subsequent year. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 64 Directors’ Remuneration Report Annual Statement Letter from the Chairman Dear Shareholder On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for 2013/14. This report covers the remuneration of Executive and Non-Executive Directors. The Remuneration Committee (the ‘Committee’) believes that the purpose of its remuneration policy is to support the Company’s strategy for growth and deliver value to stakeholders by focusing on delivering sustainable profit growth, measured through EPS. The remuneration policy therefore has a strong focus on strategic alignment of corporate performance and individual remuneration, with a significant proportion delivered in shares and vesting over the longer-term. It also recognises that we compete internationally, targeting growth in key markets, such as China and India. This is our first report since the introduction of the new regulations and guidelines. In our 2013 report, we adopted a number of the guidelines laid out in the new reporting regulations. This year, in line with the best practice encompassed in the new regulations and guidelines, we have split the report into two sections: • a Directors’ Remuneration Policy Report (‘Policy Report’), which sets out the Group’s remuneration policy for Executive and Non-Executive Directors; and • an Annual Report on Remuneration (‘ARR’), which discloses how we applied our remuneration policy in the year ended 30 June 2014. We will be seeking your support for both parts of the report, through a binding vote on the Policy Report and an advisory vote on the ARR at the AGM on 14 November 2014. Performance and Reward for 2013/14 As highlighted in the Strategic Report, 2013/14 was a challenging year, with mixed performance across the business. Our ABS and PIC businesses had strong performances and grew profits in double digits in constant currency. However, our Asian business saw challenging conditions, specifically in China which has been impacted by poor market conditions and the costs of our investments in the country. During the year, we executed a number of strategic business developments, such as our successful acquisition and integration of Génétiporc, and established a joint venture in India with B G Chitale. This continues our strategy to be the leading animal genetic provider in both mature and developing markets, with increased capacity in both porcine and bovine, and to take advantage of future growth opportunities. adjusted operating profit at 103%. Despite strong performance against strategic objectives and exceptional management effort, the profit objective was not achieved and this element of bonuses was not awarded. Cash performance exceeded the target maximum. The financial results, coupled with the Executive Directors’ achievements against personal targets, delivered bonuses for the Executive Directors in the region of 32–35% of maximum. Performance Share Plan (‘PSP’) awards granted in 2011 lapsed in September 2014 as three year EPS targets were not met. Remuneration Policy for 2014/15 Our 2004 PSP expired this year. The Committee took the opportunity of the PSP renewal and the vote on the Policy Report to review thoroughly executive remuneration at Genus. The key conclusion was that our remuneration policy generally remains fit for purpose, given the substantial weighting placed on long-term performance, which supports our focus on delivering above-market long-term returns to our shareholders. However, we do need to make a number of modifications for 2014/15. The main changes relate to renewing the PSP and recent developments in investors’ best practice expectations. The changes include: • Simplifying the performance targets and moving to straight-line vesting for the long-term incentive awards we will grant in 2014/15, while fine tuning the range of performance targets, which we continue to believe are very demanding. For example, Genus must deliver a minimum of 20% average annual growth in EPS over three years, for full vesting to take place. • Requiring management to retain the number of vested shares they receive, after tax, for two years. This will operate alongside clawback provisions. • Reducing the aggregate (all share plan) dilution limit, so it is consistent with current institutional investors’ best practice expectations. These revisions will better align our remuneration policy with delivery of our strategic plan, and only reward at maximum levels for the delivery of market-leading returns for our shareholders. In addition, we have amended the annual bonus plan to ensure it continues to support the delivery of the Company’s growth agenda. The change for 2014/15 will require a minimum of 15% growth in profits in constant currency from the 2013/14 result, for the part of the bonus relating to profit growth to pay out in full. From a financial perspective, our operating results were affected by the performance in China, the strengthening of Sterling and the impact of disease, specifically PEDv. Overall, profit in constant currency for the year was unchanged and with the impact of strong Sterling, profit before tax in actual currency was down 8% at £39.3m. Performance on cash generation was strong with cash conversion of Full details of our revised remuneration policy are set out in the Policy Report. We are seeking shareholder approval at the AGM for a replacement PSP, with the Notice of Meeting including a full summary of the plan’s principal terms. Summary details are also set out in the Directors’ Remuneration Report that follows, specifically in relation to its anticipated operation in 2014/15. Genus plc Annual Report 2014Corporate Governance 65 This Directors’ Remuneration Report has been prepared so it complies with the Companies Act 2006 – provisions of the Large and Medium-sized Companies and Groups (Accounts & Reports) (Amendment) Regulations 2013, which set out the disclosures required for Directors’ remuneration as at the reporting date. The report is also in accordance with the requirements of the Listing Rules and the Financial Conduct Authority. The legislation requires the auditor to report to the Company’s members on the ‘auditable parts’ of the Directors’ Remuneration Report and to state whether, in their opinion, the parts of the report that have been subject to audit have been properly prepared in accordance with the legislation. We have highlighted the parts of this report which have been audited. The ARR sets out what our Directors were paid in respect of the year under review. The Policy Report sets out the policy that will apply from the effective date of 14 November 2014 until the 2017 AGM, if approved by shareholders, and in practice will be applied for the year from 1 July 2014. The report has been approved by the Board and signed on its behalf by the Chairman of the Committee. The Committee is satisfied that the remuneration policy for 2014/15 will not encourage undue risk taking, as the performance metrics are fully aligned with targeted improvements in the Group’s key performance indicators, incentive pay (in the form of both the annual bonus and replacement PSP) is subject to clawback provisions, and part of the annual bonus must be deferred into the Company’s shares. These features, allied to our share ownership guidelines, align our remuneration policy with long-term shareholders’ interests. Shareholders’ Views The Committee takes an active interest in shareholders’ views and developments in best practice. The Committee held a constructive consultation with major shareholders about our remuneration policy for 2014/15. This included considering feedback about simplifying the replacement PSP’s performance targets and the metrics to apply to the 2014 awards. As a result of this dialogue, the holding period was extended to two years from the one year originally proposed. We will continue to take shareholders’ views into account in this and subsequent reviews. On behalf of the Board, I would like to thank shareholders for their continued support. The Committee hopes that the new form of report is clear and would welcome feedback from shareholders. If you wish to contact me, please email me at remunerationchair@genusplc.com. The Committee looks forward to your support for our remuneration policy at the 2014 AGM. Nigel Turner Senior Independent Director and Chairman of the Remuneration Committee “ The Remuneration Committee believes that the purpose of its remuneration policy is to support the Company’s strategy for growth and deliver value to stakeholders” Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 66 Directors’ Remuneration Report continued Directors’ Remuneration Policy Report (Unaudited Information) The key objectives of Genus’s Executive remuneration policy are that: • pay should be competitive, so we can recruit and retain the best people; • fixed pay (base salary, pension and benefits) should take account of comparable external benchmarks and pay for our other employees; • incentive pay (short- and long-term incentives) should provide the opportunity to earn upper quartile total remuneration, subject to delivering our above-market long-term growth aspirations; • incentive pay should be directly linked to the Group’s strategy, with targets relating to our key performance indicators (using non-financial ‘input’ measures and/or ‘output’ measures such as earnings per share) and should be stretching, in light of our strategic plan; • incentive structures should be simple, easy to understand and reward long-term sustained growth, rather than volatile performance; • remuneration policy should be clearly aligned with shareholders’ interests, take due account of current best practice guidance and not encourage undue risk taking; and • policy principles for Executive Directors should apply to the members of the Genus Executive Leadership Team (‘GELT’), with appropriate tiering through the wider workforce. In applying these principles, the Committee is sensitive to institutional investors’ views on the use of benchmark pay data and only periodically benchmarks pay. The Committee considers multiple sources of pay data, as well as individual performance, calibre and experience, and the Group’s performance. The Committee also considers Group-wide salary budgets and the wider economic environment. The table below summarises the main components of Genus’s remuneration policy, which is derived from the policy principles above: Element, Purpose and Link to Strategy Base Salary To provide competitive fixed remuneration that will attract and retain key employees and reflect their experience and position in the Group. Operation Normally reviewed annually, with increases normally effective from 1 July. Periodically benchmarked against relevant market comparators, reflecting the size and nature of the role, individual performance and experience, increases awarded to other employees, Group performance and broader economic conditions. Benefits To provide competitive benefits and to attract and retain high calibre employees. Benefits generally include a car allowance and insured benefits (e.g. life assurance and private medical insurance). Where Executive Directors are recruited from overseas, or required to relocate on an international assignment, benefits more tailored to their geographical location may be provided and may include relocation costs and/or tax equalisation arrangements as necessary. Where revised benefits are offered in a geographic location or across the Group, Executive Directors are likely to be eligible to receive those benefits on similar terms. If the Company introduces an all- employee share plan, Executive Directors will be eligible to participate on the same terms as other employees. Genus plc Annual Report 2014Corporate Governance 67 Base Salary Benefits Maximum Performance Conditions Salaries for 2014/15 are as follows: • Chief Executive: £526,830. • Group Finance Director: £357,000. A broad assessment of individual and Company performance is used as part of the salary review. Annual percentage increases are generally consistent with the range awarded across the Group. Percentage increases in salary above this level may be made in certain circumstances, such as a change in responsibility or a significant increase in the role’s scale or the Group’s size and complexity. The car allowance value is limited to £20,000 per annum. None. The value of insured benefits will vary year on year, based on the cost of providing insured benefits, and is included in the total single figure table on page 77. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 68 Directors’ Remuneration Report continued Element, Purpose and Link to Strategy Pension To provide a competitive company contribution that enables effective retirement planning. Annual Bonus Incentivises achievement of annual objectives which support the Group’s short-term performance goals. Operation Only basic salary is pensionable. Pension is provided by way of contribution to a personal pension or as a salary supplement in lieu of pension provision. Payments under the annual bonus plan are subject to: • compulsory deferral of 25% of any bonus earned into the Company’s shares; and • clawback provisions for a period of three years, which may apply in the event of a material misstatement of the Group’s financial results. Deferred Share Bonus Plan (‘DSBP’) awards will vest after three years subject to continued service. A dividend equivalent provision operates, enabling dividends to be paid (in cash or shares) on deferred shares that vest. Performance Share Plan (‘PSP’) The PSP incentivises executives to achieve superior returns to shareholders over a three-year period, to retain key individuals and align their interests with shareholders. Eligibility to receive awards is at the discretion of the Committee each year. Awards vest three years from grant, subject to continued employment and satisfaction of challenging three-year performance targets. A dividend equivalent provision enables dividends to be paid (in cash or shares) on shares that vest. Clawback provisions may apply for a period of three years, in the event of a material misstatement of the Group’s financial results. For awards granted from 2014, the after tax number of vested shares must be held for at least a two-year period. Genus plc Annual Report 2014Corporate Governance Pension Annual Bonus Performance Share Plan (‘PSP’) 69 Maximum Performance Conditions Pension contribution or salary supplements in lieu of pension are provided to a maximum of 25% of basic salary. None. 125% of salary. Maximum annual award of 200% of salary (300% of salary in exceptional circumstances such as recruitment). Bonus awards are subject to achievement against a sliding scale of challenging financial targets and personal objectives, which the Committee sets each year to reflect the priorities for the year ahead. Financial targets govern the majority of bonus payments and are typically linked to the Group’s key performance indicators (e.g. profit and cash generation), with a minority earned based on performance against personal objectives. Awards vest based on three- year performance against a challenging range of targets, aligned with the delivery of the Company’s long-term strategy. Financial targets (including adjusted EPS growth) will determine the vesting of a majority of awards granted in any year. Targets are typically structured as a challenging sliding scale, with no more than 20% of the maximum award vesting for achieving the threshold performance level through to full vesting for substantial out- performance of the threshold. The awards will also be subject to an underpin that enables the Committee to scale back (but not scale up) vesting, if the Group’s performance over the period is not considered to reflect the progress made against its strategic business targets. For financial performance targets, bonus is earned on a graduated scale, with 0% payable up to a predetermined threshold, through to a maximum payment for substantial out-performance of the threshold (100% payable). A summary of the performance targets for 2014/15 is included on pages 75 and 76. A summary of the performance targets for 2014/15 is included on page 76. The Committee will review performance conditions annually, in terms of the range of EPS targets and the metrics and weightings applied to each element of the PSP. Any revisions to the metrics and/or weightings will only take place if it is necessary because of developments in the Company’s strategy and, where these are material, following dialogue with the Company’s major shareholders. Should the Committee believe that a major change of the current approach is appropriate (for example, replacing a primary performance metric with an alternative), this would only take place following a revised Directors’ Remuneration Policy being tabled to shareholders. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 70 Directors’ Remuneration Report continued Element, Purpose and Link to Strategy Share Ownership Guidelines To align Executives and shareholders. Operation Executives are expected to achieve a shareholding of 100% of salary, by retaining 50% of the net of tax number of vested shares under the Company’s DSBP and PSP. Non-Executive Directors To provide compensation that attracts high calibre individuals and reflects their experience and knowledge. The Committee determines the Chairman’s fee. The Board periodically reviews Non-Executive Directors’ fees. No Directors take part in meetings where their own remuneration is discussed. In addition, the Chief Executive will retain the entire after tax number of Restricted Stock that was granted to him shortly after his appointment (see page 77). Fees are based on the time commitments involved in each role and set with reference to the fees paid in other similarly sized UK listed companies. Choice of Performance Conditions As set out in the Strategic Report on pages 2 to 47, the Company targets profitable growth through a combination of organic growth, expansion into key markets and segments, and product differentiation. The annual bonus plan uses adjusted profit growth, as defined on page 75, cash generation and personal targets. It encourages our short-term success in delivering profitable growth at the same time as converting profit to cash to use for investment and dividends. The 2014/15 bonus structure (as detailed on page 75) is aligned fully therefore with the Company’s strategy. Our use of adjusted EPS growth to measure long-term performance, in tandem with a strategic underpin, assesses how successful we are at delivering profitable growth from our existing business and the businesses we acquire or establish with joint venture partners. The Committee reviews the performance metrics each year to ensure they remain appropriate. Likewise, the Committee will review the appropriateness of performance conditions for the PSP each year, to ensure they remain aligned with our long-term corporate strategy. When setting financial targets, the Committee will consider internal budgets and external forecasts. For financial targets, a sliding scale is applied, with a minority of the bonus being payable for threshold levels of performance. • adjustments required in certain circumstances such as rights issues, corporate restructuring, events and special dividends; and • the annual review of performance conditions for the annual bonus plan and PSP. Operation of the Annual Bonus Plan and PSP Policy The Committee will operate the annual bonus plan and PSP in accordance with their rules and, where relevant, the Listing Rules. As part of the rules, the Committee has discretions which are required to efficiently operate and administer these plans, and are consistent with standard market practice. These include, for example: • the participants in the plans; • the timing of grant of awards and payments; • the size of awards and payments, although with quantum and performance targets restricted to those detailed in the policy table above; • the determination of vesting; • dealing with a change of control (for example, the timing of testing performance targets) or restructuring of the Group; • determining a good or bad leaver for incentive plan purposes, based on the rules of each plan and the appropriate treatment chosen; If some events occur, such as a material divestment or acquisition of a Group business, which mean the original performance conditions are no longer appropriate, the Committee can adjust the targets, set different measures and alter weightings as necessary, to ensure the conditions achieve their original purpose and are not materially more or less difficult to satisfy. The outstanding share incentive awards detailed on pages 79 and 80 of the ARR will remain eligible to vest, based on their original award terms. In addition, all arrangements disclosed in previous Directors’ Remuneration Reports (such as bonuses earned in relation to 2013/14 performance) will remain eligible to vest or become payable on their original terms. Genus plc Annual Report 2014Corporate Governance Share Ownership Guidelines Non-Executive Directors Maximum Performance Conditions None. None. Fees for 2014/15 are as follows: • Non-Executive Chairman: £140,000. • Non-Executive Directors: £50,000. None. Fees include chairing a Committee or any additional time commitments or responsibilities. Any increase in Non-Executive Director fees may be above the level awarded to other employees, given that they may only be reviewed periodically and may need to reflect any changes to time commitments or responsibilities. Non-Executive Directors also receive reimbursement of reasonable travel related expenses incurred undertaking Company business. Remuneration Scenarios for Executive Directors The charts below show how the Group’s remuneration policy affects the composition of the Executive Directors’ remuneration at different levels of performance, both as a percentage of the total remuneration opportunity and as a total value: Chief Executive Officer £000 Group Finance Director £000 2,500 2,000 1,500 1,000 500 0 2,395 44% 27% 1,354 26% 24% 683 100% 50% 29% 2,500 2,000 1,500 1,000 500 0 850 24% 26% 50% 424 100% 1,495 42% 30% 28% Fixed pay Target Maximum Fixed pay Target Maximum Long-term incentives Short-term incentives Fixed pay • Fixed pay – salaries as at 1 July 2014 + benefits (using the value to 30 June 2014 as a proxy) + pension (25% of salary for the Chief Executive Officer and 15% of salary for the Group Finance Director). • Below threshold – fixed pay only. • Target – annual bonus pays at 50% of the maximum, PSP vests at 32.5% of the maximum award. • Maximum – annual bonus and PSP pay out in full. • Share price growth has been ignored. 71 How Employees’ Pay is Taken into Account While the Company does not consult employees on matters of Executive Director remuneration, the Committee does take account of the policy for employees across the workforce when determining the remuneration policy for Executive Directors, with specific regard to each Executive’s geographical location. The Group HR Director facilitates this process, presenting to the Committee on pay structures across the organisation and how they fit the Group’s Remuneration Policy. The process includes consulting employees informally on their views of the current overall remuneration policy, which forms part of the feedback provided to the Committee and is used by the HR Director to assess the policy’s ongoing effectiveness. When setting the Executive Directors’ base salaries, the Committee compares the salary increases proposed for each Executive Director within those proposed for employees in their geographical location, as well as considering the typical increase proposed across the Group as a whole. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 72 Directors’ Remuneration Report continued How Executive Directors’ Remuneration Policy Relates to the Wider Group The remuneration policy summarised above and described in detail below operates for the Executive Directors. The same broad structure also operates for the other members of GELT. Below GELT, these remuneration principles continue to apply. However, the structure and amount of remuneration vary by work level, reflecting the specialist nature of many employees’ roles, as well as local market practice and employee feedback. Generally, at less senior levels of the Group, total remuneration is less weighted towards performance-related pay. How Shareholders’ Views are Taken into Account As part of the Company’s ongoing review of remuneration policy, the Committee considers shareholder feedback received each year in relation to the AGM, as well as guidance from shareholder representative bodies and any additional feedback received during shareholder meetings. The Committee will consult shareholders if any significant policy changes are proposed in the future. Recruitment and Promotion Policy For Executive Director recruitment or promotions, the Committee follows the guidelines outlined below: Remuneration Element Policy Base Salary Salary for a new hire or promotion to Executive Director is set at a level sufficient to attract the best candidate available to fill the role, taking into account the Group’s position, strategy and the country in which the Executive Director will live and work. Benefits Pension Annual Bonus Long-Term Incentives Buy-out Awards In the event that the salary is initially set at a discount to those offered in companies of a similar size, geographical reach and complexity (for example, in the event of an internal promotion), a series of planned increases above those of the wider workforce may be made over subsequent years, to bring the salary to the desired level, subject to individual performance. Benefits are set in accordance with the Company’s remuneration policy. In addition, where necessary, the Committee may approve the payment of relocation expenses to facilitate recruitment, and flexibility is retained to pay for legal fees and other costs incurred by the individual in relation to their appointment. Consideration may need to be given to offer different or additional elements of the benefit package if a new Director is recruited outside the UK, to meet local market norms or legislation. A defined contribution or cash supplement of up to 25% of salary. The annual bonus will operate as outlined for current Executive Directors, with the respective maximum opportunity, albeit usually pro-rated for the period of employment. Depending on the timing and responsibilities of the appointment, it may be necessary to set different initial performance measures and targets. The maximum ongoing incentive opportunity under the Company’s policy is 125% of salary. PSP awards are granted in line with the policy outlined for the current Executive Directors. An award may (and usually will) be made upon appointment, subject to the Company not being prohibited from doing so. For an internal hire, existing awards will continue over their original vesting period and remain subject to their terms at the date of grant, and further awards may also be considered. The normal maximum ongoing annual award level is 200% of salary (with a limit of 300% of salary in exceptional circumstances). In the case of an external hire, the Committee may offer additional cash and/or share- based elements to facilitate the buy-out of value forfeited on joining the Company, when it considers these to be in the best interests of the Company and therefore of shareholders. The Committee will seek to ensure that a meaningful proportion of the replacement awards which are not attributable to long-term incentives foregone will be delivered in Genus deferred shares, released at a later date and subject to continued employment. This includes using awards made under Rule 9.4.2 of the Listing Rules. Such payments would take account of remuneration relinquished when leaving a former employer and would reflect (as far as possible) the nature and time horizons attached to that remuneration and the impact of any performance conditions. Shareholders will be informed of any such payments at the time of appointment. Genus plc Annual Report 2014Corporate Governance 73 Service Contracts, Compensation for Loss of Office and External Appointments Policy Executive Directors Under the Executive Directors’ service contracts, the Company is required to give 12 months’ notice of termination of employment while the Executive Directors are required to give six months’ notice. If either party serves notice, the executives can continue to receive basic salary, benefits and pension for the duration of their notice period, during which time the Company may require the individual to fulfil their duties or assign a period of garden leave. Under the Chief Executive’s contract, the Company may elect to make a payment in lieu of notice of up to 12 months’ base salary and benefits, in the event of it terminating his employment. These payments may be made on a monthly basis, in which case the principles of mitigation apply and he would be obliged to seek alternative employment, with the payments reducing to the extent that he receives alternative income. Under the Group Finance Director’s contract, the Company may elect to make a payment in lieu of notice of up to 12 months’ base salary, in the event of it terminating his employment. These payments may be made on a monthly basis, in which case he would be required to take all reasonable steps to find alternative employment. The principles of mitigation may apply, which means the Company may reduce the monthly payments based on his actual earnings during the period for which the monthly payments are made, or the Company’s assessment of the earnings that he could have received if he had sought alternative employment. In certain circumstances, such as gross misconduct, the Company may terminate employment immediately without notice or payment. The Committee may make any statutory entitlements or payments to settle or compromise claims in connection with a termination of any existing or future Executive Director as necessary. The Committee also retains the discretion to meet any outplacement and/or legal costs if deemed necessary. There are no enhanced provisions in the event of a change of control. Executive Directors’ service contracts, which include details of remuneration, will be available for inspection at the AGM on 14 November 2014 or at the Company’s registered office. The policy for a new hire would be based on terms that are consistent with these provisions and, in respect of the ability to make a payment in lieu of notice, terms that are consistent with those of the Group Finance Director. Paying the cash element of annual bonuses is normally contingent on the executive being in employment and not under notice at the payment date, unless the Committee determines otherwise, for example in the event of a good leaver circumstance such as death, retirement, injury or disability, redundancy or employment being transferred outside the Group. The payment of any bonus will be pro- rated for the period of service and subject to the relevant performance conditions being achieved. The vesting of any deferred bonus awards is determined by the plan’s rules. In general, awards lapse when employment ceases. However, the deferred bonus award will vest in certain good leaver circumstances, such as death, retirement, injury or disability, redundancy, employment being transferred outside the Group or any other reason the Committee decides. The vesting of any awards granted under the 2004 PSP is determined by the plan’s rules. In general, awards lapse when employment ceases. However, awards may vest in certain good leaver circumstances, such as death or any other reason the Committee decides. This vesting is based on the extent to which the performance target has been satisfied. The Committee may decide to reduce the award pro rata, reflecting the proportion of the performance period that has elapsed. The rules of the 2014 PSP, for which shareholder approval is being sought at the 2014 AGM, include a similar definition of a good leaver to the 2004 PSP and also the provision that awards will generally lapse when employment ceases (see the Company’s Explanatory Notes to AGM on pages 156 to 165. In the case of the 2014 PSP, however, good leavers’ awards will ordinarily vest on the date when they would have vested had they not ceased employment, subject to the extent to which the performance target has been satisfied as determined by the Committee and as measured over the normal measurement period. Such good leaver awards will normally be pro-rated based on the time that the individual was employed during the normal vesting period, although the Committee can decide not to pro-rate an award if it thinks it is appropriate to do so. Alternatively, the Committee can decide that a good leaver’s award will vest when he leaves, subject to the performance conditions measured at that time and pro- rating, although, as described above, the Committee can decide not to pro-rate an award if it thinks it is appropriate to do so. Such early vesting treatment will also apply in the case of death. In the event of a change of control, the treatment detailed above for good leavers under the 2004 PSP and 2014 PSP would apply, albeit with performance tested over the shortened performance period. Non-Executive Directors All Non-Executive Directors have specific terms of engagement. Their appointment is for a fixed term of three years and is subject to one month’s notice of termination by either the Company or the Non- Executive Director, and to annual re-election at the Company’s AGM, in accordance with the UK Corporate Governance Code. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 74 Directors’ Remuneration Report continued Specific Contracts Details of the Executive Directors’ service contracts and the terms of appointment of the Non-Executive Directors are set out below: Director Executives Karim Bitar Contract Date Expiry Date 24 May 2011 n/a n/a Stephen Wilson 12 December 2012 Non-Executives Bob Lawson Nigel Turner Mike Buzzacott Barry Furr Duncan Maskell Lykele van der Broek 11 November 2010 16 January 2011 6 May 2012 1 December 2006 1 April 2014 1 July 2014 10 November 2016 15 January 2017 5 May 2015 30 November 2015 31 March 2017 30 June 2017 Notice Period (Months) 12 (from Company) 6 (from Executive) 12 (from Company) 6 (from Executive) 1 1 1 1 1 1 Outside Appointments The Company recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that this can broaden the Director’s skills and experience. When Stephen Wilson was appointed in January 2013, he was permitted to retain his Non-Executive Directorship of Xchanging plc and the associated remuneration. ANNUAL REPORT ON REMUNERATION (UNAUDITED INFORMATION) The Role of the Remuneration Committee The Company’s Committee complies with the UK Corporate Governance Code. The Committee makes recommendations to the Board, within agreed terms of reference, on remuneration for the Executive Directors and other members of GELT. The Committee’s full terms of reference are available on the Company’s website at www.genusplc.com. The Committee comprises independent Non-Executive Directors Nigel Turner (Chairman), Mike Buzzacott, Barry Furr, Duncan Maskell, Lykele van der Broek and also the Company’s Non-Executive Chairman, Bob Lawson, whom the Board considered to be independent at the time of his appointment to the Board. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day- to-day involvement in running the business. Karim Bitar, Chief Executive Officer, and Stephen Wilson, the Group Finance Director, attend meetings at the invitation of the Committee. They are not present when their own remuneration is being discussed. The Committee is supported by the Group HR Director, Finance and Company Secretariat functions. During the year to 30 June 2014, the Committee met six times and considered the following matters: • the continuing appropriateness of the Company’s remuneration policy and the remuneration arrangements for the Executive Directors and GELT; • salary levels for the Executive Directors and GELT members; • the terms of the 2013/14 and 2014/15 Executive Annual Bonus Plan, and the individual bonuses payable for 2012/13, in light of the Group’s and individual’s performances; • the individual long-term share incentive awards under the Company’s 2004 PSP and 2004 Executive Share Option Plan, and the associated performance measures and targets; • testing of the performance conditions and approval of the vesting levels of long-term share incentive awards granted in 2010/2011; • the establishment of a 2014 PSP and a DSBP; • the approval of the Directors’ Remuneration Report for 2012/13; • the implications of revised reporting requirements for the Directors’ Remuneration Report for 2013/14; and • current institutional investors’ guidelines on executive remuneration. Genus plc Annual Report 2014Corporate Governance 75 In determining the Executive Directors’ remuneration for the year, the Committee consulted the Chief Executive, Group Finance Director and the Group HR Director about its proposals, although none of these individuals are involved in determining their own remuneration. it does not target median market positioning for each Executive Director each year) and takes into account a broad range of factors when setting pay, such as the experience, calibre and performance of the individual, and salary increases across the Group. The Committee also appointed New Bridge Street (part of Aon plc) to provide benchmarking advice on the remuneration packages for the Executive Directors, members of GELT and the Non-Executive Directors. New Bridge Street is a member of the Remuneration Consultants Group and complies with its Code of Conduct. Aon plc acts as insurance broker to the Group. New Bridge Street’s fees for services to the Committee during the year were £90,643, which included £14,296 of implementation advice in relation to the operation of the Company’s share incentive plans. The Committee considered New Bridge Street’s performance during the year, in terms of the quality and independence of its advice, the potential for conflicts of interest (which are actively managed within Aon plc) and its knowledge and understanding of market practice. Having reviewed these factors, the Committee decided to retain New Bridge Street as its advisers. Shareholder Voting at the 2013 AGM At last year’s AGM, the Directors’ Remuneration Report received the following votes from shareholders: For Against Total number of shares in respect of which votes were validly made Abstentions Total number % of of votes votes cast 37,823,988 1,771,889 39,595,877 1,190,785 95.53 4.47 100 Implementation of Policy for 2014/15 (Unaudited Information) Base Salary The Committee reviews the Executive Directors’ base salaries prior to each financial year, taking into account individual and corporate performance, an assessment of comparator companies, wider economic conditions and levels of increases applicable to the Group’s other employees. The Executive Directors’ current salary levels (with effect from 1 July 2014) are as follows: • Karim Bitar: £526,830 (2% increase from 2013/14); and • Stephen Wilson: £357,000 (2% increase from 2013/14). The Committee determined that salaries would be increased by 2%, reflecting the average increase awarded across the UK employee population. When setting pay, the Committee periodically considers external benchmark data for comparable roles in companies of broadly similar size, international scope of operations, and complexity. Given there are few direct comparator listed companies, the Committee considers general market data. The Committee is careful in its use of benchmark pay data (for example, Pension and Other Benefits The Executive Directors receive certain benefits-in-kind, principally a car or car allowance, life assurance and private medical insurance. In lieu of company pension contributions, the Company has agreed to pay Karim Bitar and Stephen Wilson a taxable pension allowance of 25% and 15% of basic salary per annum respectively. Performance-Related Annual Bonus The Company bonus scheme for the 2014/15 financial year for its Directors and senior executives will incentivise and reward the delivery of challenging adjusted profit growth targets (60% of the bonus opportunity), cash generation (15% of the bonus opportunity) and personal targets (25% of the bonus opportunity). The maximum bonus opportunity for the Chief Executive and Group Finance Director is 125% of salary. The metrics for 2014/15 capture performance against a range of key performance indicators. Profit is an ‘output’ metric that captures our success against a range of other KPIs, which we assess on an ongoing basis, such as growing volumes and revenue while maintaining appropriate profit per transaction and royalty rates. Cash targets measure our success in generating funds to invest in growing the business or paying dividends. Progress with implementing our strategy forms a central part of the personal performance targets for each position. The above structure includes a slight adjustment to that for 2013/14, in that the weightings have been adjusted (25% based on personal targets as opposed to 20%, and 15% on cash generation as opposed to 20%). This better reflects the increased focus on delivery against personal (largely strategic) objectives, which will unlock the Group’s growth potential. For the adjusted profit target, no bonus is payable unless the prior year’s result is exceeded, at which point 0% of this part of the bonus is payable. Bonus thereafter is earned on a graduated scale, with 50% of this part of the bonus earned for growing adjusted profit by 10% and a maximum bonus is earned for growing adjusted profit by 15%. The Committee considers this year’s financial targets are appropriately demanding, requiring growth in profits in line with the strategic plan and significant double digit growth to achieve the maximum award. A graduated scale also operates for cash generation for the year. Bonuses are earned based on financial performance measured in constant currency, which replicates the approach to target setting across the Group as a whole. Personal targets are linked to successful implementation of the Company’s strategy, with the targets being both quantifiable and stretching. Achievement of these targets is central to unlocking the growth potential we want to target through the revisions to our PSP as described in this report. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 76 Directors’ Remuneration Report continued Full disclosure is not provided in relation to the targets set for 2014/15, since the Committee considers the targets are commercially sensitive. The ARR for 2014/15 will include retrospective disclosure of the targets, subject to the information not being considered prejudicial to the Group. Overall, the Committee believes the above targets are appropriately challenging. They incentivise executives to deliver the Company’s growth strategy and are therefore aligned with shareholders’ interests. They also adhere to the principles of transparency and simplicity, to maximise the PSP’s incentivisation for participants. As with awards currently granted under the PSP, the Committee will retain the ability to scale back vesting based on EPS performance if it does not consider the vesting result to be consistent with the progress achieved against the Company’s strategy during the performance period. This is considered appropriate, to broaden the executive team’s focus beyond financial performance. Other key features of the awards to be granted under the 2014 PSP include a requirement to retain the after tax number of shares vesting in 2017 for two years, and clawback provisions which may be applied at the Committee’s discretion if the Company’s results are found to have been misstated within three years of vesting and the vesting result was artificially high. Non-Executive Director Fees The current total fees payable to the Non-Executive Directors per annum are as follows: Position Chairman Other Non-Executive Directors Fees £140,000 £50,000 There were no increases from the fees paid in 2013/14. The fees payable to Non-Executive Directors include any fees for chairing our Board Committees, which are described in the Corporate Governance Report. Of the bonus earned against the targets described above, 25% will be deferred by way of shares for three years and will vest subject to continued employment, other than in certain good leaver circumstances. Deferral ensures there is a continued link between achieving our short-term financial targets and the longer-term delivery of our growth strategy. Clawback provisions apply to the annual bonus, which will enable the Committee to claw back any element of bonuses that should not have been paid, in the event of a material misstatement of the Group’s annual results. Long-Term Incentives Long-term share awards were previously granted under the Genus plc 2004 PSP, which was amended following shareholder approval at the 2012 AGM. As the plan has now expired, the Committee is proposing a new PSP scheme for shareholder approval at the 2014 AGM. This follows an extensive consultation exercise with the Company’s major shareholders and the leading shareholder protection bodies. Details of the plan are included in the Notice of AGM. Subject to this approval, the Committee intends to grant awards in 2014 of 200% of salary for the Chief Executive and 175% of salary for the Group Finance Director. These awards are in line with those in 2013. The intended performance targets for the awards to be granted in 2014 will primarily relate to average annual growth in adjusted EPS, measured over three years. The range of targets for the 2014 awards is as follows: Average Annual Growth in Adjusted Earnings Per Share (‘EPS’)* (% Award) Vesting Less than 6% p.a. 6% p.a. 20% p.a. Straight-line vesting between performance points 0% 20% 100% * Growth in adjusted EPS over the three-year performance period was calculated on a simple average annual growth rate. This range is simpler than for awards granted in 2013 (detailed on page 79), which had two distinct ranges of EPS targets with overlapping scales. The previous targets were also set as growth in excess of UK RPI. The Committee believes this is no longer appropriate, as the Group is subject to different inflationary pressures in the many countries it operates in. As a result, the potential impact of inflation has been incorporated in the above range of targets. The Committee remains comfortable with using adjusted EPS as the primary performance metric for long-term incentives, since EPS is an all- encompassing figure which is highly visible and well understood by both participants and shareholders. Genus plc Annual Report 2014Corporate Governance 77 Total Single Figure of Remuneration (Audited) Executive Directors Karim Bitar Stephen Wilson Non-Executive Directors Bob Lawson Nigel Turner Mike Buzzacott Barry Furr Duncan Maskell7 Total Executive Directors Karim Bitar5 Stephen Wilson8 Non-Executive Directors Bob Lawson Nigel Turner Mike Buzzacott Barry Furr Total Salary and fees £000 Benefits1 £000 Pension2 £000 Bonus3 £000 Long-Term Incentives4 £000 Total 2014 £000 517 350 140 50 50 50 13 24 13 – – – – – 129 53 207 153 – – – – – – – – – – 1,170 37 182 360 – – – – – – – – Salary and fees £000 Benefits1 £000 Pension2 £000 Bonus £000 Long-Term Incentives £000 517 165 140 50 50 50 972 246 6 – – – – 30 129 25 – – – – 198 59 – – – – 154 257 – – – – – – – 877 569 140 50 50 50 13 1,749 Total 2013 £000 868 255 140 50 50 50 1,413 1. Benefits related to a car allowance which was provided to a maximum annualised value of £20,000 for Karim Bitar and £12,000 for Stephen Wilson and insured benefits including life assurance and private medical insurance. 2. Cash allowance in lieu of pension and pension entitlement has been included in the Pension column. 3. Bonus earned includes the 25% which is deferred into Company shares for three years. 4. The value of long-term incentive is determined by the expected number of awards vesting in relation to performance ended 30 June (see page 78 for more details). 5. In line with the new regulations, the Restricted Stock award granted to Karim Bitar that vested in the year ended 30 June 2013 has been excluded from the Single Figure of Remuneration. As previously disclosed, this award was granted in connection with his recruitment, replacing value forfeited on leaving his former employer. The value of the shares vesting in the year ended 30 June 2013 was £584,000 (40,574 shares vesting on 25 February 2013 at a share price of £14.38). 6. Restated. 7. Appointed on 1 April 2014. 8. Appointed on 14 January 2013. Genus plc Annual Report 2014Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 78 Directors’ Remuneration Report continued Details of Variable Pay Earned in Respect of 2013/14 (Audited) As detailed in last year’s Directors’ Remuneration Report, the 2013/14 bonuses for Executive Directors were calculated by reference to performance against a challenging sliding scale of profit, cash/debt and personal targets, with the outcomes set out in the table below: Bonus Target Adjusted PBT1,2,4 Cashflow1,3,4 Non-financial strategic objectives5 Strategic Objective Increase profitability Proportion of Total Bonus Available Actual Performance 60% £39.3m/£42.5m (actual/constant currency basis) Proportion of maximum target met (%) 0% Resulting Bonus Out-turn (% Maximum Bonus) Resulting Bonus Out-turn (% Salary) 0% 0% Generate cash for reinvestment and dividend payments To build the foundation for future growth 20% £26.2m 100% 20% 25% 20% See note 5 CEO: 60% GFD: 75% CEO: 12% GFD: 75% CEO: 15% GFD: 18.8% Total 100% CEO: 32% GFD: 35% CEO: 40% GFD: 43.8% 1. The financial elements of the bonus are payable on a straight-line basis between each target level. 2. Adjusted profit before tax (on an actual currency basis: £39.3m, constant currency basis: £42.5m) was below threshold level and so no bonus was payable in relation to this element. 3. Cash flow (excluding dividends and investments in joint ventures and acquisitions: £26.2m) exceeded the maximum level and so a maximum bonus was payable in relation to this element. 4. The Committee considers that the actual financial targets remain commercially sensitive and therefore are not disclosed. In the future, the Committee will disclose financial targets when they consider these concerns have been removed. 5. Performance against non-financial strategic objectives related to targets set in a number of areas that included customer, people and product and process improvement. Specific targets relating to performance objectives were set at the beginning of the year and measured at the year end. In undertaking a broad assessment of performance, the Committee considered both qualitative and quantitative information when determining the extent to which the targets were achieved. Commercial targets are sensitive and therefore it is not appropriate to disclose them in this transition year. The bonus earned by the Chief Executive included (but was not limited to) progress achieved in accelerating genetic improvement and dissemination, progress in beef and dairy proprietary indices and products, developing the senior leadership capability and succession planning. The bonus earned by the Group Finance Director included (but was not limited to) the successful acquisition and the integration of Génétiporc and delivering Group-wide improvements in finance process and practices. As noted in the Strategic Report, there has been significant progress on key strategic areas. These include the acquisition and integration of Génétiporc, improvements in genetic dissemination, PIC product differentiation, delivery of volume growth in both ABS and PIC, and improved succession and management capability. Total bonuses earned against the targets set at the start of the year were equivalent to 40% of salary or 32% of maximum potential for Karim Bitar, and 43.8% of salary or 35% of maximum potential for Stephen Wilson. The Committee feels comfortable that these represent appropriate out-turns for the year for the two executives for the performance achieved. In line with our policy, 25% of the bonuses earned were deferred into the Company’s shares for three years. Performance Share Awards Vesting in Relation to 2013/14 (Audited) Karim Bitar’s PSP award granted in September 2011 was subject to an EPS performance condition which is measured over the three financial years ended 30 June 2014. Per annum growth in adjusted EPS* vesting** Per annum growth in adjusted EPS* % of award