LEADERSHIP THROUGH INNOVATION Genus plc Annual Report 2016 A World Leader in Animal Genetic Improvement 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. Strategic Report 01 2016 Highlights 02 Genus at a Glance 04 Chairman’s Introduction 06 Year in Review 08 Our Investment Case 10 Our Market 12 Our Business Model 14 Strategic Framework 16 Key Performance Indicators 18 Principal Risks and Uncertainties 20 Leadership Through Innovation 26 Chief Executive’s Review 28 Divisional Reviews 36 Financial Review 40 Our People and Culture 42 Responsible Business Corporate Governance 44 Letter from the Chairman 46 Board of Directors and Company Secretary 48 Genus Executive Leadership Team 50 Corporate Governance Statement 57 Nomination Committee Report 59 Audit Committee Report 62 Directors’ Remuneration Report 86 Other Statutory Disclosures 88 Directors’ Responsibilities Statement Financial Statements Independent Auditor’s Report 89 95 Group Income Statement Group Statement of 96 Comprehensive Income 97 Group Statement of Changes in Equity 98 Group Balance Sheet 99 Group Statement of Cash Flows 100 Notes to the Group Financial Statements 144 Parent Company Balance Sheet 145 Parent Company Statement of Changes in Equity 146 Notes to the Parent Company Financial Statements Additional Information 154 Five Year Record – Consolidated Results 155 Glossary 156 Notice of Annual General Meeting IBC Advisers 2016 Highlights Colour the individual bits on top of each curve Group Revenue £m Colour the individual bits on top of each curve Adjusted Profit Before Tax £m Colour the individual bits on top of each curve Statutory Profit Before Tax £m 01 2016 2015 2014 2013 388.3 398.5 372.2 345.3 2016 2015 2014 2013 49.7 46.6 39.3 42.5 2012 Colour the individual bits on top of each curve 341.8 2012 Colour the individual bits on top of each curve 43.7 Adjusted Basic EPS Pence Dividend Per Share Pence 2016 2015 2014 2013 2012 60.7 56.8 46.5 49.1 50.0 2016 2015 2014 2013 2012 21.4 19.5 17.7 16.1 14.6 2016 2015 2014 2013 2012 60.9 57.8 38.2 33.4 51.6 Financial Highlights1 • Adjusted profit before tax up 7% to £49.7m (up 10% in constant currency), driven by strong performances in Genus PIC and Genus Asia, particularly China • Statutory profit before tax up 5% to £60.9m includes a pension related exceptional credit of £44.2m (2015: £0.4m) and a reduction in the value of biological assets £17.1m (2015: £24.9m increase) • Adjusted basic earnings per share up 7% to 60.7p (up 10% in constant currency) and statutory basic earnings per share up 23% to 81.1p reflecting a lower statutory tax rate on adjusting items • Revenue of £388.3m, reduced 3% due to lower bovine volumes in tough dairy markets, and lower porcine by- product and up-front sales. Growth of 17% (14% in constant currency) in strategically important royalty revenues • Solid cash conversion as expected of 88% (2015: 107%) after two years of exceptional performance above 100% • After tax return on invested capital of 19.1% (2015: 21.7%), impacted by year end currency translation on our US asset base following the recent strengthening of the US Dollar against Sterling • Dividend increased by 10% to 21.4p, well covered by adjusted earnings at 2.8 times (2015: 2.9 times) Operational and Strategic Highlights • Continued volume growth of 4% in porcine, however bovine volumes 6% lower in tough dairy markets • Very strong results across Asia, more than doubling operating profit including joint ventures – China delivered over £6m in additional operating profit, benefiting from market tailwinds and strong product performance – Signed three new large porcine royalty customers in China and a commercial multiplier agreement with Yunnan Shennong • Strong profit growth in Genus PIC of 9% in constant currency, with growth in royalty volumes and revenues • Genus ABS had a challenging year in very difficult dairy markets and took action to reduce costs, manage margins and improve pricing; however, profits were 16% lower in constant currency. The pace of strategic change was accelerated through: – In Vitro Brasil S.A. (‘IVB’), our world leading bovine in vitro fertilisation (‘IVF’) business focused on driving genetic improvement via embryos, was rapidly integrated and performed ahead of expectations in its first full year in Genus – Introduced proprietary TransitionRight™ genetic indices for Holstein and Jersey breeds focused on key dairy health traits – Formed De Novo Genetics on 1 September 2016, a majority-owned strategic partnership combining the elite Holstein breeding programmes of ABS and De-Su, the world’s leading independent Holstein breeder, to accelerate internal production of elite bulls • Scaled up Genus Sexed Semen (‘GSS’) technology to commercial launch readiness – Outcome of litigation against Sexing Technologies (‘ST’) announced post-period end provides a path towards commercialisation, with further Court rulings to provide additional clarity expected in the coming months • Achieved substantial progress in establishing gene editing as a key strategic platform for future growth and transformation of Genus – In collaboration with the University of Missouri, discovered a major breakthrough to create pigs resistant to the devastating Porcine Reproductive and Respiratory Syndrome Virus (‘PRRSv’) disease through gene editing – Exclusive strategic collaboration with Caribou Biosciences to licence leading CRISPR-Cas9 gene editing technology, enabling further development of PRRSv resistant pigs and multiple other applications – Exclusive licence from Washington State University to use gene editing to target bovine respiratory disease (‘BRD’), a major disease challenge for beef and dairy producers 1 For definitions of adjusted profit, adjusted EPS, cash conversion and return on invested capital, see Financial Review on pages 36 to 39. Results discussed throughout the Annual Report are on an adjusted basis unless otherwise stated. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 02 Genus at a Glance Pioneering Animal Genetic Improvement Genus is a world-leading animal genetics company. We provide farmers with superior genetics that enable them to produce higher-quality animal protein more efficiently, in the form of meat and milk. Genus is a market leader in porcine, dairy and beef genetics and is uniquely positioned as a global player, with a dedicated, multi-species research and development (‘R&D’) function and an international distribution network. What We Do How We Operate Genus applies DNA analysis to accelerate genetic improvement and deliver it to our customers, quickly and efficiently. We breed and distribute the genes of the world’s best pigs and bulls, scientifically selecting livestock whose offspring are designed to increase the profitability of our customers, who are some of the world’s leading farmers and food producers. In the porcine market, we sell genetically superior boars and sows that produce offspring with desirable characteristics, such as feed-efficient growth or leaner meat. In the dairy and beef markets, our primary product is bull semen, which is delivered through artificial insemination to improve our customers’ herds and their efficiency. We also offer genetically superior embryos, through our subsidiary IVB. Revenue by Species % Bovine Porcine 55 45 Genus sells under well-known trademarks: ‘PIC’ for pigs and ‘ABS’ for dairy and beef cattle. During the year, we served our customers through three business units: 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 serves porcine, dairy and beef customers in fast-growing Asian markets. Our Asia unit was established in 2012 to create a strong base in the region’s diverse and fast-changing markets. In FY17, we will integrate the Asia unit’s porcine and bovine operations into the global PIC and ABS units, respectively. This Strategic Report was approved by the Board of Directors on 7 September 2016 and signed on its behalf by: Karim Bitar Chief Executive Stephen Wilson Group Finance Director Genus plcAnnual Report 2016 03 Where We Operate Our porcine business has a network of over 600 breeding herds in over 40 countries. Over 95% of these herds are owned by third parties or our customers. Our bovine business owns bull studs in Europe, North America, Latin America and India, and sells genetics in more than 70 countries, both directly and through distributors. Genus’s head office in Basingstoke, UK, provides shared services support to our international operations. Our R&D laboratories are based in Madison, Wisconsin, USA. Revenue by Geography % 12 27 46 15 North America Latin America Europe Asia £34m Spend on R&D per year PIC 40+Country operations ABS 70+Country operations 2,600 Employees worldwide 136m Market pig equivalents with our genetics taken to market (‘MPEs’) Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 04 Chairman’s Introduction Implementing a Successful Strategy “ Genus delivered another strong performance in 2016, with a second consecutive year of robust profit growth.” Genus PIC and our Asian operations were the driving forces behind this growth, with Genus ABS seeing profits decline as its dairy customers faced further falls in milk prices. The Group’s strategy focuses on creating differentiated products, targeting key markets, and sharing in the value we deliver to customers. We made further strong progress against each of these objectives. Our research and development programmes are producing genetic gains that offer increased productivity, efficiency and profit to our customers. We aim to be at the forefront of science in our field and in the year developed or acquired exclusive rights to gene editing technology and applications. We also made good progress in preparing our Genus Sexed Semen technology for commercialisation. China and India are the world’s largest porcine and dairy markets respectively. We signed further royalty agreements in China and opened a world-class bull stud in India, positioning us for future growth in these markets. As well as increasing our strategically important royalty revenues, we continued to demonstrate the value of our genetics through new proprietary indices targeted at traits that create value for commercial customers thus helping customers to understand the benefits of our superior genetics and allowing us to share in the value we add. Developing our Board and People The latest independent evaluation of the Board and its Committees shows that the Board continues to provide strong and effective leadership. Succession planning and diversity are important focus areas for us and having previously identified the need for an additional Non-Executive Director, we were delighted to appoint Lysanne Gray to the Board during the year. Lysanne brings considerable experience of risk management, audit, business operations and the food sector, broadening the range of skills and knowledge on the Board. Mike Buzzacott will be retiring from the Board at this year’s Annual General Meeting, after more than seven years as a Non-Executive Director and chairman of the Audit Committee. On behalf of the Board I want to acknowledge his significant contribution during this time, particularly in transforming the Committee into an effective value adding resource, whilst developing and embedding our risk management processes. We thank him for his contributions and wish him well for the future. More information on the Board and our corporate governance arrangements can be found on pages 44 to 87. Bob Lawson Chairman of the Board Genus plcAnnual Report 2016 05 Genus employs over 2,600 people in 26 countries, whose expertise and dedication enable us to innovate and deliver for customers. I want to thank everyone for helping to make this another successful year. In recognition of our people’s importance, we continue to invest in developing their skills and ensuring we have a strong pipeline of critical talent coming through the organisation. To enhance our proprietary, differentiated products for customers, in the last year we have focused on recruiting, retaining and developing employees who can help us explore and harness outstanding science. The Board recognises its responsibility for setting the behaviours and ethical standards we want to see throughout Genus. Our values (see right) underpin our culture, which is one of respect, openness and fairness. Since the year end, we have been focused on the court case with Inguran LLC trading as Sexing Technologies (‘ST’) in Madison, Wisconsin. The jury’s verdict, delivered in mid-August, confirmed that ST had wilfully maintained monopoly power in the market for processing bovine sexed semen since July 2012, but that ABS had infringed two patents and breached confidentiality under our existing contract with ST. We are currently awaiting the court’s decision on our request for an injunction which, if granted, will allow us to terminate the existing ST contract and remove the contractual prohibitions preventing the launch of our GSS product in the short term. Full details of the case can be found in note 7 but as shareholders will readily understand this is an important milestone in the development of the ABS dairy business. Our Values Customer Centric Results Driven Pioneering Returns to Shareholders The Board aims to balance the need to invest in the business, so we can capture the growth opportunities we see in front of us, with the requirement to offer shareholders an attractive return on capital and rising dividends. People Focused We are recommending a final dividend of 14.7 pence per share, giving a total dividend for the year of 21.4 pence per share, following the interim dividend of 6.7 pence. This represents an increase of 10% over last year’s total dividend of 19.5 pence. The final dividend will be paid on 2 December 2016, to shareholders on the register at the close of business on 18 November 2016. Summary This was a pleasing year for Genus, with robust financial performance in often difficult markets, and good progress with our strategy. In the coming year, the Board will continue to focus on successfully implementing the Group’s strategy, the competitive landscape, managing risk and continuing to enhance governance. 2017 will see us step up our investment in research and development, as we look to further develop and progress our differentiated product offerings and position the business for long-term success. Responsible Bob Lawson Chairman 7 September 2016 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. 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. We are an innovative, forward- thinking company. We have the courage and confidence to explore new ideas and the energy and enthusiasm to deliver them. We are creative, tenacious and resourceful in every area of our work. We are a business rooted in science but built around our people. We inspire, challenge and support everyone to perform, develop and grow. We treat others with respect and we invite views and feedback to help us improve. We are ethical to our core. We feel a deep sense of responsibility to our customers, colleagues, animals, communities and shareholders. We are honest, reliable and trustworthy. We mean what we say and do what we say. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 06 Year in Review Significant Strategic and Operational Progress August 2015 September 2015 November 2015 December 2015 ABS launches TransitionRight™ index for Holstein cattle TransitionRight™ is a proprietary index aimed at minimising post-calving metabolic disorders in dairy cattle Imports of boars to Russia recommence Follows reopening of the Russian border for imports of pigs from Canada New nucleus farms in the Philippines Stocked two new third-party porcine sire line nucleus farms to expand capacity Launch of IVB USA IVB began serving large commercial dairies and beef producers in the US Technological breakthrough in PRRSv resistance Paper published in ‘Nature Biotechnology’ announces the development of the first PRRSv-resistant pigs, in collaboration with the University of Missouri Nature Biotechnology, December 2015 Weak dairy markets impact ABS Milk prices in the US and Europe fall for a third consecutive six-month period, resulting in a 9% fall in dairy semen volumes at ABS through the year Genus plcAnnual Report 2016 07 January 2016 February 2016 March 2016 Launch of ABS Neo in Brazil Commercial launch of elite genetic embryos, frozen using an advanced proprietary freezing technology Refinancing of Group debt facilities New five-year, £170m multi-currency facilities with improved terms Launch of TransitionRight™ index for Jersey cattle TransitionRight™ index extended to Jersey cattle April 2016 May 2016 June 20161 ABS acquires St. Jacobs ABC Vermont-based St. Jacobs is the world’s leading provider of show ring and high type dairy sires New bull stud opens in India New stud opened in Maharashtra, with capacity for 116 bulls and a new laboratory Strategic collaboration signed with Caribou Biosciences Providing Genus with access to CRISPR-Cas9 (gene editing) technology Landmark royalty agreements with key Chinese customers Expanded capacity with existing partners and signed three new customer royalty agreements including a contract with Yunnan Shennong 1 Refers to signing date of Shennong agreement. Genus plc Annual Report 2016Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 08 Our Investment Case Rapid Innovation and Strong Fundamentals Genus is a leader in the porcine and bovine genetics markets and benefits from significant barriers to entry supported by its investment in technology. Leading international market position Genus is a world leading provider of genetically elite breeding stock to pork, beef and milk producers globally, competing largely with national and regional farmer-owned cooperatives. Our international breadth reduces our reliance on any individual market or segment. Focused, multi-species, technology-driven business model Genus is exclusively focused on pioneering animal genetic improvement, by leading the way in adopting new technology. Our proprietary genomic selection and gene editing capabilities can be applied across multiple species. Genus plcAnnual Report 2016 09 Positive long-term market fundamentals Barriers to entry Growth in global demand for animal protein increases competition for finite resources, such as water and land. Farmers are increasingly looking to genetics and technology to help them meet this demand more efficiently, so they can compete effectively. Genus invests heavily in proprietary technologies to produce ever-higher performing animals, raising the bar for our competitors. Our branded, strategic distribution network serves more than 40,000 customers globally. Cash generative with a strong financial position In the last five years we have converted over 90% of our adjusted operating profit into cash and maintained net debt below 1.5 times EBITDA. Our recently renewed debt facilities provide us with £50m of headroom and expire in 2021. This enables us to invest in technology and accelerate genetic gain, further differentiating our products from the competition’s. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 10 Our Market Long-Term Demand Drivers for Animal Genetic Improvement There are sustainable long-term drivers of global demand for animal protein and the way it is supplied. Genetic improvement is critical to addressing the associated challenges. 1. Growing Demand for Animal Protein The global population is expected to grow by over 1 billion between 2015 and 2030, with the proportion of urbanised populations increasing from 54% to 60% of the total over the same period. Urbanised populations tend to become wealthier, leading to greater appetite for animal protein. Colour the individual bits on top of each curve World Population Growth 1990–2050 Billion 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 1995 1990 6.3 6.0 5.7 5.4 5.1 4.7 4.3 4.0 3.2 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.6 3.3 3.2 2.9 2.6 2.3 3.3 3.3 3.2 3.0 Urban Rural Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). 2. Supply Constraints and Uncertainty Volatile weather and increasing competition for scarce resources, such as water and land, can constrain animal protein production. These factors can also affect the availability of raw materials, particularly animal feed, which indirectly impacts protein production. This puts pressure on producers to be as efficient as possible. 3. More Integrated Supply Chains Supply chains are vertically integrating, resulting in fewer participants in the chain. This increases transparency of where food comes from, giving consumers more influence over food producers, and driving demand for higher-quality animal protein and more disease-resistant animals, with less use of drugs. 4. Protein Producers Becoming Larger and Increasing Use of Technology Producers are increasingly looking to technology to become more efficient. For example, dairy farmers are rapidly adopting embryo technology, so they can select both male and female parents and deliver a step change in the quality of their milking herds. Producers also seek efficiency gains through scale. In porcine, large scale integrated production represents the majority of capacity in the US and Brazil, and is growing fast in China. Larger producers typically measure performance in more detail and better understand the benefits of superior genetics. Comparing PIC’s and ABS’s Markets Genus PIC and Genus ABS operate in markets with different dynamics. The table below summarises the key characteristics of our addressable markets. Porcine Dairy & Beef Industry Significant barriers to entry, with high product differentiation Lower barriers to entry, with less product differentiation Customer landscape Consolidated and highly technified, with royalty contracts linking price to value added Fragmented and some technification, with prices per unit of sale Genus plcAnnual Report 2016 11 Colour the individual bits on top of each curve Changes in Pig Production by Size of Farm in China 6% 37% 57% 12% 49% 18% 54% 22% 30% 58% 60% Commercial size farms (3,000+ heads/farm) Mid size farms (50–3,000 heads/farm) Small size farms (1–49 heads/farm) 39% 28% 20% 10% Source: Rabobank. 2006 2009 2012 2015 2020F Over 1.2 billion pigs are produced for slaughter globally each year in the markets in which PIC operates, of which around half are produced in China. The majority of pigs in Asia come from small scale production facilities, which typically employ less technology. However, the drive for efficiency is causing a shift in production towards larger, more integrated production with higher use of technology. This will lead to an increased demand for higher quality genetics, growing PIC’s addressable market. PIC currently supplies over 60% of the world’s top pork producers. The vast majority of beef cattle in our target markets are bred on pasture by releasing bulls for natural breeding. Less than 10% of beef animals in these markets are serviced through AI, although this offers access to elite genetics. Competing demands for land and resources are expected to increase the drive for efficiency and quality. This is expected to give rise to demand for better genetics delivered through AI, as well as new technology, including IVF and gender skew. ABS currently has around a 20% share of the addressable AI market. 480 68 Colour the individual bits on top of each curve Market Opportunity in Porcine Pig Population Heads, million 38 28 27 27 China USA Brazil Germany Vietnam Spain Russia Mexico Myanmar France Canada Denmark Netherlands Philippines Poland Source: FAO 2014. 19 16 14 13 13 12 12 12 12 Colour the individual bits on top of each curve Market Opportunity in Beef Beef production Tonnes, million 11.7 9.7 6.4 USA Brazil China Argentina Australia Mexico Russia France Germany Canada India Turkey 2.8 2.3 1.8 1.6 1.4 1.1 1.1 1.0 0.9 South Africa 0.9 Colombia UK 0.8 0.8 Source: FAO 2013, total cattle meat produced. Market Opportunity in Dairy Market Opportunity in Dairy Elite genetics are sourced internationally from donor parents and delivered through artificial insemination (‘AI’). As the use of AI increases, so does ABS’s market. There is also a large spread in milk yield between countries with similar AI levels, presenting an opportunity to increase productivity by displacing locally sourced semen with elite genetics, and through adopting technology. To compete in this market, genetics providers must be able to produce elite genetics, distribute them globally and effectively communicate their benefits. A small but growing market segment is also adopting in vitro fertilisation (‘IVF’) and gender skew technologies, to accelerate genetic improvement in their herds. In the short term, milk prices affect farmer profitability and their demand for elite genetics. The past two years have seen falling milk prices in key markets, reducing demand for elite genetics. 12,000 10,000 8,000 6,000 4,000 Top 10 dairy producing countries Top 30 dairy producing countries United States Germany France Poland New Zealand Turkey Russia i l d e y k l i M 2,000 Brazil China India 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Adoption of artificial insemination Source: Genus estimates, OECD, NAAB, Eurostat, DEFRA, ASBIA, IFCN, NHIA. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 12 Our Business Model Genus uses genome science to produce more efficient pigs and cattle for farmers. We deliver these animals into our customers’ herds as efficiently as possible and we link the amount we charge our customers to the benefits our superior animals deliver for them. Our Core Strengths Our Business Model Genetically elite animals We own genetically elite pork, beef and dairy breeding herds, and also have strategic partnerships with third-party bovine breeders. Leading technology and know-how We have a team of over 90 PhD scientists in-house, and collaborative relationships with leading research institutions. We also have cutting-edge technologies that enable us to skew the chances of getting male or female offspring, produce embryos and edit animals’ genes. Global supply chain and distribution We produce bovine semen from our facilities across four continents, and sell it through our own staff and independent third-party resellers. We also produce embryos in the US and Latin America. In porcine, we genetically manage herds in over 40 countries. More than 95% of these herds are third-party owned, reducing our farming and commodity risk. Strong customer base In bovine, we serve over 40,000 customers globally, including some of the world’s leading beef and dairy producers. In porcine, we serve over 60% of the world’s leading pork producers, and engage most of them in multi-year supply agreements. Produce differentiated products Our customers want higher performing animals that require less feed to grow, are more resistant to disease and produce higher quality protein. We produce animals with desirable characteristics by continuously selecting the highest performing animals in our herds and throughout our supply chain to breed superior generations using our technology and know-how, in a continuous cycle. Distribute genetics quickly and efficiently to our customers To give our customers the number of elite pigs they need, we deliver live animals and semen to third-party ‘multipliers’ or our customers, who then multiply our pigs over four generations to deliver slaughter pigs. Our global supply chain and distribution quickly gets our latest genetics to customers. We distribute bovine genetics as semen, embryos and live animals. We produce and process these in strategically located studs and laboratories, both owned and third party, and sell them directly in 21 countries, and through distributors in approximately 50 countries. We offer sexed bovine genetics, as well as elite frozen embryos. To maximise our products’ performance in customer herds, our global technical service teams advise on nutrition, reproduction, health and other areas. Genus plcAnnual Report 2016 13 Delivering For Our Stakeholders Customers Our genetically superior animals help our customers to produce better quality and quantity of meat or milk at lower cost. Consumers and communities Our animals help to reduce the volume of feed and water required to produce meat and milk. This lessens our customers’ environmental impact and increases the availability of safe, affordable animal protein for all. Our people Genus employees have the opportunity to develop themselves and harness cutting edge science to deliver value for our customers, whilst benefiting communities, animal welfare and the environment. Investors As we share in the value that our products deliver to customers, we deliver attractive returns to our investors. Share in the value created We price our products to reflect the value they deliver for our customers. Our bovine genetics sold as semen are valued using both public and, increasingly, proprietary economic indices, which capture a weighted basket of desirable characteristics. Embryos are priced based on the genetic merit of both parents, determined through their respective index rankings. Our porcine genetics are measured through our indices aimed at customer profitability, and are primarily sold on multi-year pricing models, with an upfront payment equal to the cost of production and a deferred royalty linked to the volume of pigs produced. This creates customer loyalty and aligns our interests with theirs. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 14 Strategic Framework Genus has a robust strategy to meet its corporate goals and capture the significant growth opportunities in the animal genetics market. Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Sharing in the Value Delivered To maintain and enhance our product leadership We do this by leveraging our genomic selection and broader genome science capabilities to continuously improve our herds, and investing in new technology and tools to strengthen our capabilities. To deliver the right offering for the right customers We do this by targeting meat and milk producers globally who understand the impact of genetics, offering them products, support and technical services tailored to their needs. To capture an appropriate share of the value we deliver to customers We do this by demonstrating the value of our genetics and indices through trials and aligning our interests with our customers’, by linking our revenues to their productivity. Achievements in 2015/16 Achievements in 2015/16 Achievements in 2015/16 Pork • Developed PRRSv-resistant pigs and secured Pork • Grew presence with leading pork producers exclusive global licence in Europe and Asia • Accelerated rate of genetic improvement • Signed new supply chain agreements in China • Grew proportion of our business under royalty Beef & Dairy • Won our first IVF customers in the US • Began selling elite frozen embryos in Brazil • Launched a new bull stud in India Beef & Dairy • Sourced 20% of all new US Holstein bulls from our internal breeding programme • Formed a strategic partnership with the world’s leading independent Holstein breeder1 • Launched proprietary health indices for Holstein and Jersey cattle • Secured an exclusive licence for technology to combat BRD Technology • Prepared GSS for launch • Secured access to CRISPR-Cas9 gene editing technology, through collaboration with Caribou Biosciences • Signed three new royalty agreements with large Pork customers in China by 2 percentage points Beef & Dairy • Achieved over 7% price increase for high health status bulls, and grew their share of total volumes by 1.7 percentage points2 • Achieved over 20% aggregate price increase in Latin America Key performance indicators Key performance indicators Key performance indicators • See our Increasing Genetic Control and Product Differentiation KPIs See page 16 • See our Targeting Key Markets and • See our Sharing in the Value Delivered KPIs Segments KPIs See page 16 See page 17 1 In September 2016. Genus plcAnnual Report 2016 15 Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Sharing in the Value Delivered To maintain and enhance our product leadership We do this by leveraging our genomic selection and broader genome science capabilities to continuously improve our herds, and investing in new technology and tools to strengthen our capabilities. To deliver the right offering for the right customers We do this by targeting meat and milk producers globally who understand the impact of genetics, offering them products, support and technical services tailored to their needs. To capture an appropriate share of the value we deliver to customers We do this by demonstrating the value of our genetics and indices through trials and aligning our interests with our customers’, by linking our revenues to their productivity. Achievements in 2015/16 Achievements in 2015/16 Achievements in 2015/16 Pork Pork • Developed PRRSv-resistant pigs and secured • Grew presence with leading pork producers exclusive global licence in Europe and Asia Pork • Signed three new royalty agreements with large customers in China • Accelerated rate of genetic improvement • Signed new supply chain agreements in China • Grew proportion of our business under royalty Beef & Dairy Beef & Dairy • Sourced 20% of all new US Holstein bulls from • Won our first IVF customers in the US our internal breeding programme • Began selling elite frozen embryos in Brazil • Formed a strategic partnership with the world’s • Launched a new bull stud in India leading independent Holstein breeder1 • Launched proprietary health indices for Holstein and Jersey cattle • Secured an exclusive licence for technology to combat BRD Technology • Prepared GSS for launch • Secured access to CRISPR-Cas9 gene editing technology, through collaboration with Caribou Biosciences by 2 percentage points Beef & Dairy • Achieved over 7% price increase for high health status bulls, and grew their share of total volumes by 1.7 percentage points2 • Achieved over 20% aggregate price increase in Latin America Key performance indicators Key performance indicators Key performance indicators • See our Increasing Genetic Control and Product Differentiation KPIs See page 16 Segments KPIs See page 16 • See our Targeting Key Markets and • See our Sharing in the Value Delivered KPIs See page 17 2 When comparing average unit blend prices and share of total volumes of Holstein bulls ranked as 5* under TransitionRight™ for the periods Apr – Jul and Aug – Dec 2015. TransitionRight™ bulls are ranked from 1* to 5*. Performance Our key performance indicators measure how well we are achieving our goals See pages 16 to 17 Risk We look to understand and mitigate the risks to achieving our strategic goals See pages 18 to 19 Divisional Progress Each of our divisions and our R&D function has strategic priorities that support our Group strategy See pages 28 to 35 Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 16 Key Performance Indicators We monitor and measure our strategic progress by reference to the three parts of our strategy: increasing genetic control and product differentiation; targeting key markets and segments; and sharing in the value delivered. Increasing Genetic Control and Product Differentiation Colour the individual bits on top of each curve Colour the individual bits on top of each curve Porcine Genetic Improvement Index US$ Net Merit Rankings Genomic and daughter-proven bulls Genomic Proven 3.15 4.45 3.72 2016 2015 2014 2013 2012 1.90 2.00 2016 2015 2014 2013 18 13 11 11 17 23 30 31 2012 6 28 Measures the genetic gain we achieve in our porcine nucleus herds. Definition The index measures the marginal economic value improvement in customers’ US$ profitability, per commercial pig per year, on a rolling three-year average. Prior years’ index ratings have been updated, to reflect the latest results from genomic selection and the economic values of pork production. Performance Implementing genomic selection technology in 2013 led to an immediate step change in genetic gain value improvement. This continued in 2016, with an improvement of US$3.15. Monitors our success in developing bulls that are highly ranked, because of their genetic performance and economic merit. Definition The number of our generally available Holstein bulls listed in the top 100 Net Merit US$ rankings for progeny tested and the top 100 Genomic Net Merit rankings for genomically tested sires. Performance Genus maintained a competitive industry line-up. Holstein proven bulls declined due to a limited pipeline of genomic bulls several years ago. We have continued to strengthen our current position in the genomic bull category. Targeting Key Markets and Segments Colour the individual bits on top of each curve Colour the individual bits on top of each curve Dairy and Beef Volume Growth % Porcine Volume Growth % 2016 (6) 2015 2014 2013 2012 6 5 5 8 2016 2015 2014 2013 2012 4 6 6 5 9 Tracks our global unit sales growth in dairy and beef. Tracks the growth in the number of pigs with PIC genetics globally. Definition The change in volume of dairy, beef and sorted units of semen, delivered to customers in the year. Performance Total bovine volumes declined 6% to 17.3 million doses in tough dairy markets, with Europe and North America particularly challenging. Beef units grew 4% as farmers continued to increase use of beef semen in dairy cows. Definition The change in volume of both direct and royalty animal sales, using a standardised MPEs measure of the slaughter animals that contain our genetics. Results include MPEs from Agroceres PIC, our Brazilian JV, and prior years have been restated for consistency. Performance Volumes grew 4% to 136 million MPEs with strong double digit growth in Asia from our China, Russia and Vietnam businesses and strong royalty volume growth across all regions. Volumes of upfront animals, where MPEs are counted at the time of initial sale, declined as planned. Genus plcAnnual Report 2016 17 Sharing in the Value Delivered Colour the individual bits on top of each curve Colour the individual bits on top of each curve Colour the individual bits on top of each curve Adjusted Operating Profit (including JVs) £m Operating Profit per MPE £ Operating Profit per Dose of Bovine Semen £ 2016 2015 2014 2013 2012 54.3 51.2 44.8 48.2 48.0 2016 2015 2014 2013 2012 0.51 0.43 0.38 0.41 0.43 2016 2015 2014 2013 2012 0.60 0.88 1.03 1.19 1.26 To track underlying profit generation. Monitors porcine profitability by unit. Monitors bovine profitability by unit. Definition Net dairy and beef adjusted operating profit globally, expressed per dose of semen delivered. Excludes India, as its characteristics are substantially different to the rest of our bovine business. Performance £0.60, down £0.28 (down £0.23 in constant currency) due to weak dairy markets in Europe and North America, along with impacts from foreign exchange rates. The longer term trend has been caused by higher cost of genomic bulls, increased product development to build our own genetic improvement capability and currency impacts, particularly in Latin America. Initiatives to address this trend include producing bulls internally, launching our GSS technology and building IVF capability, along with cost efficiency and pricing actions. Definition Operating profit including share of JVs, adjusted to exclude IAS 41 valuation movements on biological assets, amortisation of acquired intangible assets, share-based payments and exceptional items. Performance £54.3m, up £3.1m (up £4.6m in constant currency) due to strong performances across our porcine businesses, particularly in China, partially offset by declines in our Europe and North America dairy businesses and increased investment in R&D. Definition Net porcine adjusted operating profit globally, expressed per MPE. Results include share of Agroceres PIC, our Brazilian JV. Performance £0.51, up £0.08 in actual and constant currency, helped by strong growth in our China porcine business and higher royalty volumes across all sales regions. Colour the individual bits on top of each curve Cash Conversion % Colour the individual bits on top of each curve Net Debt : EBITDA 2016 2015 2014 2013 2012 88 107 103 77 96 2016 2015 2014 2013 2012 1.4 1.2 1.2 1.0 1.1 Monitors our success in converting profits into cash. Ensures we have a strong balance sheet and the financial capability to execute our strategy. Definition Cash generated by operations before capital expenditure, investments, interest, tax and dividends, expressed as a percentage of adjusted operating profit (excluding JVs). 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). Performance Cash conversion of 88% was consistent with historical averages, following two very strong years that benefited from a step change in working capital management and the benefit of the exit from the Quebec nucleus in 2015. Performance 1.4, up 0.2 on last year, reflecting the increase in net debt from £71.8m to £89.7m primarily as a result of foreign exchange movement on our US Dollar borrowings, partially offset by higher EBITDA. Genus plc Annual Report 2016Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 18 Principal Risks and Uncertainties Genus supplies biological products to agricultural customers and is exposed to a wide range of risks and uncertainties. Some of these risks relate to current business operations in our global agricultural markets, while others relate to future commercial exploitation of our extensive R&D portfolio. The table below outlines the principal risks and uncertainties affecting Genus and how we manage them. The Directors confirm that they have undertaken a robust assessment of the principal risks and uncertainties facing the Group. More information on the types and levels of risks the Board is prepared to seek and accept in executing the strategy, and how we define risk appetite and identify and manage risks, can be found in the Corporate Governance Statement on page 55. Link to Strategy 1 Increasing Genetic Control and Product Differentiation 2 Targeting Key Markets and Segments 3 Sharing in the Value Delivered How we manage risk Strategy Risk change in 2015/16 Strategic Risks Risk description Developing products with competitive advantage • Development programmes fail to • produce best genetics for customers. Increased competition to secure elite genetics. Commercialising GSS technology • Launching a new product technology carries technical, production and financial risks. Failure to commercialise our GSS technology due to intellectual property (‘IP’) and other disputes. • 1, 2 Dedicated teams align our product development to customer requirements, while our technical services help customers 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. We have a rigorous process to prepare for the successful commercial launch of our GSS technology, supported by dedicated internal resources and external expert advice. 1 We also initiated legal proceedings in the US, in relation to anti-trust issues which, together with patent counter- claims, went to trial in August 2016. Developing and commercialising gene editing technologies Failure to successfully develop • and commercialise gene editing technologies due to technical, IP, market, regulatory or financial barriers. ‘Game-changing’ technology secured by competitors. • 1, 2 Our R&D Portfolio Management Team oversees our research, ensures we correctly prioritise our R&D investments and assesses the adequacy of resources and its IP freedom to operate. Formal collaboration agreements are in place with key partners to ensure responsible exploration and development of the technologies and the protection of IP. The Board is updated regularly on key development projects. No change in porcine but increased in bovine due to continuing trend to genomic bulls. No change. The initial verdicts in the legal proceedings create a path to commercialisation but further rulings by the Court are awaited to bring clarity to the next steps. Technical progress to scale up for commercial launch also progressed well, reducing launch risk. Increased due to the discovery and pursuit of new gene editing applications and consequent higher investment in 2015/16 and beyond. All key initiatives are progressing through the R&D life cycle. Capturing value through acquisitions Failure to identify appropriate • investment opportunities or to perform sound due diligence. Failure to successfully integrate an acquired business. • 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. 1, 2, 3 No change. Genus plcAnnual Report 2016 19 How we manage risk Strategy Risk change in 2015/16 2 3 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 dedicated significant time in 2015/16 to discussing our strategy and the results of our operations in China. We have a global, cross-functional process to identify and protect our IP. Our customer contracts and our selection of multipliers and JV partners include appropriate measures to protect our IP. We conduct robust ‘Freedom To Operate’ searches to identify third-party rights to technology. 1, 2 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. 3 We continuously monitor markets and seek to balance our costs and resources in response to market demand. We actively monitor and update our hedging strategy to manage our exposure. Our porcine royalty model and extensive use of third- party multipliers mitigates the impact of cyclical price reductions or cost increases in pig production. No change. Revised plans and approach to the market in China and other emerging markets continue to improve our ability to control and mitigate the risk. No change. No change. No change. Strategic Risks Risk description Growing in emerging markets • Failure to appropriately develop business in China and other emerging markets. Operational Risks Protecting IP • Failure to protect our IP means Genus- developed genetic material, methods, systems and technology could become freely available to third parties. Ensuring 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. • • Financial Risks Managing agricultural market and commodity prices volatility • Fluctuations in agricultural markets affect customer profitability and therefore demand for our products and services. Increase in our operating costs, due to commodity pricing volatility. • Funding pensions • Exposure to costs associated with failure of third-party members of joint and several liabilities pension scheme. • Exposure to costs as a result of external factors (such as mortality rates, interest rates or investment values) affecting the size of the pension deficit. 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 has an agreed deficit recovery plan, based on the 2015 actuarial valuation. We monitor the strengths of other employers in the fund and have retained external consultants to provide expert advice. n/a No change. The trustees’ decision to grant future pension increases on the basis of the movement in CPI, rather than RPI, will reduce costs. However, this is currently being partially offset by the impact of falling bond yields following the EU referendum in the UK. Genus plc Annual Report 2016Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 20 Leadership Through Innovation Increasing Genetic Control and Product Differentiation Case Study Tackling Disease with Breakthrough Technology Porcine Reproductive and Respiratory Syndrome Virus (‘PRRSv’) is the most significant and harmful disease faced by pig farmers. Millions of pigs and piglets suffer from the virus each year, which causes reproductive failure, reduced growth and premature death. Despite being a challenge for the pork industry for more than a quarter of a century, there is still no cure. Nature Biotechnology, December 2015 In December 2015, we announced that our long-standing collaboration with the University of Missouri had produced a major breakthrough – the first pigs resistant to this devastating disease. Using gene editing, the University was able to breed pigs that do not produce a protein necessary for PRRSv to spread. Early stage studies showed that these pigs stayed healthy and gained weight normally when exposed to the virus. We are now working to further develop this technology and expect that it will take at least five years to obtain any required regulatory approvals and make PRRSv resistant animals available to farmers. Our work will be aided by our new strategic collaboration with Caribou Biosciences – our largest technology driven alliance to date. Caribou is a leader in the revolutionary field of CRISPR-Cas9 gene editing, which allows precise and controllable changes to the genome. Genus has a worldwide exclusive licence to use the technology to develop new traits in pigs, cows and potentially other livestock species, with PRRSv being one of our first targets. This collaboration will ensure that Genus remains at the forefront of developing and applying technology to support animal well-being. Genus plcAnnual Report 2016 21 “ In December 2015, we announced a major breakthrough – the first pigs resistant to Porcine Reproductive and Respiratory Syndrome Virus.” Genus plc Annual Report 2016Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 22 Leadership Through Innovation Targeting Key Markets and Segments Case Study Pursuing Growth in the World’s Largest Dairy Market India offers a major opportunity for Genus. With a population of 1.25 billion people, it is the biggest dairy market in the world. However, milk yield and production efficiency are low and local restrictions have hindered genetic improvement, including a ban on importing bulls and limits on importing semen. In view of these restrictions, we explored other ways of giving farmers access to our much-needed genetics, and identified a way of importing elite North American genetics in the form of embryos, and implanting them in carefully selected animals. We needed a local partner to help with the process and joined forces with the Chitale family, who owned the only private stud in India. As we grew the range of locally housed bulls, it became clear that we needed a larger production facility. We formed a joint venture with the Chitale family and in early 2016, opened a truly world-class facility, incorporating the very latest practice in areas such as bull handling, production and health and safety. The stud is the leading facility of its type in India and one of the most advanced in the world. At full capacity, the stud will be able to produce more than 7 million semen straws a year. It also has room for expansion and is compliant with our GSS project, so we are ready to implement this when it comes on stream. Increasing production is being supported by further development of our commercial infrastructure and offer within India. This includes expanding our range of distributors and distribution models and developing a tailored Indian index for genetics, so we can breed for Indian conditions and economics. Genus plcAnnual Report 2016 Case Study Expanding Our IVF Offering In 2015 we acquired a majority holding in IVB, the world leader in bovine in vitro fertilisation (‘IVF’). While IVF and artificial insemination (‘AI’) both allow farmers to improve their herds’ genetics on the male side, IVF enables them to select elite female genetics as well. This allows our customers to accelerate annual genetic improvement in their herds. In 2015/16, ABS and IVB have worked together to expand IVB’s geographical footprint and its product offering. IVB has established a new presence in Mexico, which is an exciting market with the largest ‘cow pocket’ in Latin America. Mexico offers tremendous potential to implement IVF technology and to leverage ABS’s strong presence. The new operation includes a laboratory equipped with the very latest technology. IVB has also relocated a complete team from Brazil, to ensure its technicians in Mexico have substantial experience of IVF. This will ensure Mexican producers receive the same high quality as our Brazilian customers. The laboratory in Mexico can produce either fresh or frozen embryos for dairy producers. IVB’s new Direct Transfer process has simplified the freezing and transferring of embryos, so they can be implanted in one step, similar to AI. Early results show this new methodology is achieving equal or better results than previous freezing techniques, strengthening customers’ confidence in Direct Transfer. IVB and ABS have also begun selling high genetic merit embryos in Brazil and we continue to target the progressive farms segment, which has a high level of technology adoption and the scale to implement it. 23 “ In 2015, we acquired a majority holding in IVB, the world leader in bovine IVF.” Genus plc Annual Report 2016Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 24 Leadership Through Innovation Sharing in the Value Delivered Case Study Positioning Genus for Further Success in China China is the world’s largest porcine market and offers major long-term opportunities for us. When we first established a presence in China, its differing risk profile led us to operate through owned and joint venture farms. In line with our global strategy, we are now transitioning to contracted production with trusted partners, helping to mitigate our exposure to farming and commodity price risk. Riverstone became our first multiplier and royalty-based customer in 2014. This year we signed a seven-year agreement with the Yunnan Shennong Agricultural Industry Group, to enable them to establish 50,000 sows for a new production facility. The agreement includes a multiplication farm, with the capacity to produce 30,000 grandparent gilts a year, and the establishment of a sire line nucleus, which will double our capacity to produce high-quality terminal boars in China. Both will initially be stocked with the latest high-health great- grandparent animals from PIC’s genetic nucleus in the US. In addition, we signed an agreement with Jinluo group, China’s biggest slaughter plant, to supply terminal boars for its 50,000 sow commercial system. These agreements, and the long-term royalty arrangements involved, give us resilient revenues and enable us to share in the value created by our proprietary genetics. With this firm foundation in place, we will now be integrating our porcine operations in China and our other Asian markets into the global PIC organisation. This will help us deliver a consistent customer experience worldwide, while maintaining flexibility to address local market needs. Genus plcAnnual Report 2016 25 Case Study Preventing Post-Calving Disorders Through Advanced Genetics Cows making the transition from giving birth to becoming productive members of the milking herd can suffer from a number of significant health problems. In fact, three-quarters of disease in dairy cows occurs in their first 30 days in milk and as many as half of high-producing cows are affected. This means dairies can lose up to 10% of the herd each year due to transition cow problems, resulting in substantial time, money and productivity costs. In August 2015, we launched our TransitionRight™ genetics, giving farmers the first genetic solution to multiple post-calving disorders. Some of the key problems TransitionRight™ addresses are mastitis, metritis and ketosis, which typically cost US farmers between US$200 and US$350 per case. By choosing a 5-star TransitionRight™ sire, farmers can save an average of US$100 per lactation compared with a 3-star sire and US$200 compared with a 1-star sire. This saving reflects lower treatment costs, labour and lost profits, as well as avoiding additional housing, care, monitoring and feeding expense. At the same time, reducing the incidence of post-calving disorders is beneficial for animal welfare. Customers worldwide have responded positively to TransitionRight™’s introduction and have quickly incorporated TransitionRight™ into their genetic selection criteria. As a result, we have seen growing demand for high-ranking 4-star or 5-star TransitionRight™ units. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 26 Chief Executive’s Review Robust Performance “ In 2017, we will further accelerate our efforts to develop and apply the science and technology that is essential to our longer-term success.” 2016 was another good year for Genus. The Group performed well overall and we met our financial and operational goals, as the breadth of our business by geography and species helped drive growth, despite challenges in some of our markets. We also made strong progress with implementing our innovation- led strategy, as we develop Genus into a company, based on leading-edge science and biotechnology. Group Performance Genus achieved a robust performance in 2016, with adjusted profit before tax including joint ventures (‘JVs’) rising 7% (10% in constant currency) to £49.7m. On a statutory basis, profit before tax rose 5% to £60.9m. Porcine volumes rose by 4%, although bovine volumes were 6% lower in tough dairy markets. Strategically important revenues such as porcine royalties rose strongly, however, total revenue was 3% lower. Genus PIC had another strong and successful year, despite challenging conditions for our customers in most regions, achieving a 9% growth in adjusted operating profit including JVs in constant currency. Profits were up in all regions and the business achieved strong growth in royalty volumes and revenues. Over the last few years we have repositioned PIC’s European operations away from low margin up-front parent gilt sales towards royalty contracts, particularly with integrated pork producers, and we saw encouraging results in the year from this work. Karim Bitar Chief Executive Genus plcAnnual Report 2016 27 With dairy customers facing depressed milk prices across major markets, Genus ABS had a tough year and saw adjusted operating profits fall by 16% in constant currency. We took tactical actions on costs and margins to protect short-term performance and strategic actions outlined below to position the business for long-term growth. IVB, the world’s leading supplier of bovine IVF services and products, was successfully integrated following our acquisition of 51% in March 2015 and delivered an encouraging performance in its first full year in Genus. Our Asian operations achieved very strong results across the region, more than doubling operating profit including joint ventures. Growth in China stood out, as we saw the benefit of our work to focus on large scale pork producers while reducing farming risk in this business. We also benefited from strong porcine market conditions in China. Performance in Russia also improved as porcine import restrictions were lifted. biotechnology pioneer Caribou Biosciences. This gives us an exclusive worldwide licence to use the revolutionary CRISPR- Cas9 gene editing technology to develop new traits in pigs, cows and potentially other livestock species. Since the end of the year, we have also announced an exclusive worldwide licence with Washington State University, for patents and know-how relating to gene editing targets for BRD. Genus continued to target key growth markets during the year, with particular progress in India and China. India is the world’s largest dairy market and the opening of our joint venture’s new bull stud was an important milestone for Genus. This new stud is one of the most advanced designs in the world. China is the biggest pork producer globally and we strengthened our position by signing landmark royalty agreements with three key Chinese integrated pork producers. Strategic Progress R&D is the starting point for our innovation-led strategy to enable us to increase genetic control and product differentiation. Genomic selection techniques continue to advance and our application of them to accelerate genetic gains in porcine continues in our nucleus herds and is now starting to feed into performance gains for our customers. We also apply these techniques in bovine, developing proprietary indices such as TransitionRight™ (see the case study on page 25) focused on dairy health traits and progressing our internal breeding programme, which is now producing some of our most elite bulls. On 1 September 2016, we formed De Novo Genetics, a majority- owned Holstein breeding strategic partnership, with De-Su, the world’s leading independent Holstein breeder. De Novo will further accelerate the proportion of bulls Genus produces internally by combining ABS’s and De-Su’s elite Holstein breeding programmes. This will gives us greater control of the genetics we need in order to create differentiated solutions that help commercial dairy farmers increase profitability through improved herd productivity, health and efficiency. We made excellent technical progress with our GSS technology in 2016, as we prepared it for commercialisation. Our litigation against ST went to trial in August 2016 and, while there are several issues still pending with the Court, the initial verdict’s finding that ST had wilfully maintained a monopoly should give us a path to the commercial launch of the technology. This could be within the next few months if our request for an injunction releasing us from our contract with ST is granted. The jury’s findings that our technology infringes two of ST’s patents and specifying royalties to be paid to ST will be subject to further review by the Court and is not expected to delay commercialisation. We look forward to bringing competition to this important market. Gene editing is becoming a key part of our technology platform that could transform Genus over time. Our collaboration with the University of Missouri produced a major breakthrough during the year, by using gene editing to create the first pigs resistant to the devastating PRRSv disease. We are working to develop this technology, aided by our new strategic collaboration with People and Organisation With Genus Asia now well established and growing successfully, we intend to integrate its porcine and bovine operations into PIC and ABS in the coming year. This will support our strategy for each species and help us to deliver a consistent experience to customers around the world. Jerry Thompson, who has successfully led Asia, will take on a new role to further focus our efforts in establishing a greater presence with beef customers globally as COO Genus ABS Beef. He will work closely with Saskia Korink, who will now lead our global Genus ABS Dairy operations. Our employee pulse survey continued to show that our people find Genus an engaging and stimulating place to work. They are committed to our vision and understand our strategy for achieving it. I want to thank all my colleagues for their contribution to delivering for our customers, which in turn enables Genus to succeed. Outlook Over the last two years, Genus has grown adjusted profit before tax in double digits in constant currency. In 2017, we will further accelerate our efforts to develop and apply the science and technology that is essential to our longer-term success. This will lead to a significant step up in R&D investment in 2017 resulting in profit for the year being similar to 2016 in constant currency. However, we anticipate a benefit from exchange rates, with Sterling having declined sharply towards the end of 2015/16. Overall, we expect to make further strategic progress in 2017 and to perform in line with market expectations. Karim Bitar Chief Executive 7 September 2016 Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 28 Genus PIC Strategic Progress – Genus PIC “ We have strengthened our foundations for long-term success by harnessing leading- edge technologies.” Bill Christianson Chief Operating Officer, Genus PIC We have continued to grow our porcine business by accelerating increases in genetic gain and providing world-class products and services. In parallel, we have strengthened our foundations for long-term success by harnessing leading-edge technologies. During the year, we made the following progress against our strategic objectives: Increasing Genetic Control and Product Differentiation • Harnessed genomics to accelerate genetic gain and completed assimilation of genes from Génétiporc into our genetic improvement programme. • Streamlined our range of Camborough gilts and elite terminal boars, to help provide a clear and consistent product offering. • Worked with R&D colleagues on technologies that could aid development of new proprietary products; examples include our ground-breaking work to develop pigs resistant to Porcine Reproductive and Respiratory Syndrome Virus (‘PRRSv’), undertaken in collaboration with the University of Missouri. Targeting Key Markets and Segments • Strengthened relationship with large accounts; we are currently doing business with more than 60% of the globally largest accounts. • Standardised processes and ways of working, such as a global approach to key account management. • Explored new ways of working with smaller customers, to help meet their needs effectively and efficiently. • Achieved particular success in Europe following our restructuring in 2013, with growth of 22%. • Continued to build relationships with key industry stakeholders, including holding our latest global symposium in May 2016: this was attended by around 300 customers, helping us to strengthen existing contacts, make new connections and associate PIC with the latest thinking. Sharing in the Value Delivered • Ran more product validation trials in more regions than ever before, consistently demonstrating the value of our products and enabling us to strengthen our pricing-for-value strategy in several markets. • Continued to transition to a royalty pricing model in regions where this is relatively new, with volume increases of 8% in Europe, 16% in Latin America and 6% in Asia, resulting in 76% of our global business utilising the royalty model. Priorities for FY17 • Continue to pursue our global strategy, tailored as • needed for local markets. Integrate our Asian porcine operations into our global structure, to help deliver a consistent customer experience worldwide. • Significantly expand our global supply chain. Genus plcAnnual Report 2016 Operating Review – Genus PIC Revenue Adjusted operating profit exc JV Adjusted operating profit inc JV Adjusted operating margin exc JV Corn – Key Markets £ per tonne 300 250 200 150 100 50 0 Aug 13 29 Actual currency Constant currency 2016 £m 176.5 64.2 68.7 36.4% 2015 £m Movement % Movement % 175.5 57.2 61.9 32.6% 1 12 11 (2) 9 9 3.8pts 3.7pts Pork – Key Markets £ per kg 3.0 2.5 2.0 1.5 1.0 0.5 Aug 14 Aug 15 Aug 16 Aug 13 Aug 14 Aug 15 Aug 16 US Brazil EU China US Brazil EU China Russia Market Market conditions for Genus’s porcine customers were challenging in most regions over the past year. High output, along with geopolitical instability in Brazil, Russia and the EU, significantly affected profitability across the animal protein value chain. Global meat price indices for pork reached a 12-year low. North American producers maintained a positive net return for the fiscal year, despite these challenging macroeconomic factors. A strong export programme, coupled with relatively low cost of production, delivered an estimated average of £5 profit per head to producers in the United States. Additionally, farm debt ratios in the US were low which continued to support expansion in 2015/16. The outlook for prices in North America is challenging in the near term, but a 6% forecast increase in slaughter capacity in the US during 2017 is providing some optimism to the industry. This will support overall demand, along with an expected 5% increase in exports. In Europe, the porcine industry suffered from increased production and export bans. This led to oversupply and pork prices declining around 9% compared with the previous year, leaving prices about 20% below the average for the last five years and resulting in producers making significant losses. The outlook for producers is a bit more encouraging, as prices have recently started to rise and some herd contraction has taken place. It is also anticipated that exports to China should remain stable. In Latin America, disease and economic volatility continue to challenge producers’ profitability. In Mexico, porcine epidemic diarrhoea virus (‘PEDv’) and PRRSv have affected supply and contributed to higher pig prices. The political turmoil and recession in Brazil have hampered the otherwise promising performance of the Latin America pig industry. Even so, Brazil was the fourth largest pork producer in 2015/16 and continues to be a major participant in the global market. Firm exports to Russia and China, in conjunction with strong domestic demand, has Brazil on track to increase pork production 3% by the end of the calendar year, in spite of elevated input costs. Despite these challenges, Latin America remains a growth market. Overall, market conditions are mixed heading into FY17. China will continue to be a driving force globally and exporting nations will rely on their consumption to bolster production and financial performance. Performance During 2015/16, Genus PIC performed strongly. Adjusted operating profits including joint ventures were £68.7m, up 9% in constant currency, and margins expanded by 4% to 36%. Volumes grew by 2%, with all regions contributing strong growth in royalty volumes. Revenue was 2% lower, primarily due to lower sales of up-front animals. However, strategically important royalty revenues rose by 13% in constant currency. In North America, profits were up 8% in constant currency, on volume growth of 3%. Strong customer uptake of high genetic merit boars through the CBV plus and CBV max pricing structures, in addition to high health in customer herds, contributed to royalty growth of 9%. A number of customers expanded their herds, which contributed to high breeding stock sales volumes. Latin American profits improved 12% in constant currency, on 3% volume increases, helped by a strong operating profit performance in Mexico, up 29%. In Brazil, the PIC Agroceres joint venture also performed well, with a 23% increase in constant currency operating profit, but the rest of the region declined due to lower animal shipments to Venezuela, where customers’ access to foreign currency was curtailed. In Europe, volumes were slightly down, with an 8% increase in royalty volumes and a 14% decline in up-front volumes, in line with the strategic direction of the business. Revenue declined by 9% due to the lower up-front sales but operating profit increased 22% in constant currency. The strategic repositioning of the PIC Europe business over the last few years, to focus on royalty business with larger producers, is starting to show benefits despite the tough trading environment in the European pig industry. Overall, PIC’s successful execution of its strategy has enabled continued positive momentum globally. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 30 Genus ABS Strategic Progress – Genus ABS “ Despite difficult conditions in the global dairy market, ABS has continued to evolve a broader and increasingly differentiated range of solutions…” Saskia Korink Romani Chief Operating Officer, Genus ABS Despite difficult conditions in the global dairy market, ABS has continued to evolve a broader and increasingly differentiated range of solutions to help dairy and beef customers ‘Profit from Genetic Progress’. During the year, we made the following progress against our strategic objectives, whilst also implementing a number of short-term, profit- focused initiatives to counter the market headwinds: Increasing Genetic Control and Product Differentiation • Expanded our elite dairy female programme with 20% of our new bulls sourced from it in 2016. In September 2016 we formed De Novo Genetics in partnership with the US’s leading independent Holstein breeder. • Strengthened our beef nucleus herd, which is • expected to deliver 900 bulls to our PowerLine beef bull programme by 2019. Launched proprietary indices to help customers identify dairy sires with offspring more resistant to diseases after giving birth, resulting in price and volume increases for high health status bulls. • Harnessed IVB’s IVF technology to expand our genetic improvement solutions and launched new direct transfer frozen embryos in Brazil combining elite female and male genetics. • Supplied IVF services to a major US dairy customer. • Prepared to launch our proprietary Genus Sexed Semen technology in key markets. Targeting Key Markets and Segments • Embedded customer segmentation in our dairy business and created a distinct customer experience for different segments. • Upgraded our proprietary Genetic Management System (GMS 2.0), enabling advanced customisation and incorporation of genomic data. • Established IVB’s operations with new laboratories in the US and Mexico, and expanded operations in Mozambique. • Delivered efficiency savings by reducing sales and service staff in Europe and reduced distribution costs. Sharing in the Value Delivered • Implemented a new pricing-to-value strategy in the US and UK, based on an ‘ABS Value Index’. • Demonstrated and captured a share of the value of higher fertility genetics with customers in Brazil. Increased prices in Latin America by over 20% to counter the impact of exchange rate devaluations. • Priorities for FY17 • Drive profit recovery through focus on value and cost initiatives. • Accelerate delivery of differentiated genetics produced internally through De Novo partnership. • Harness new technologies and roll out our proprietary GSS, to build business with new and existing customers. • Continue to grow IVB with large enterprise customers • and distribute frozen direct transfer embryos to medium size customers. Focus on the exciting opportunities in beef, by establishing a global team to help us evolve proprietary products, continue developing our technology and enhance differentiation. Genus plcAnnual Report 2016 Operating Review – Genus ABS Revenue Adjusted operating profit Adjusted operating profit inc non-controlling interest Adjusted operating margin Dairy – Key Markets Pence per litre 50 45 40 35 30 25 20 15 31 Actual currency Constant currency 2016 £m 158.7 19.5 18.2 12.3% 2015 £m Movement % Movement % 167.8 24.0 23.5 14.3% (5) (19) (23) (3) (16) (21) (2.0)pts (1.8)pts Beef – Key Markets Live cattle £ per kg 2.5 2.0 1.5 1.0 0.5 10 Aug 13 Aug 14 Aug 15 Aug 16 0 Aug 13 US Brazil EU China Russia India US Brazil Aug 14 Aug 15 Aug 16 Market Conditions in the dairy and beef markets affect our customers’ profitability and in turn their willingness, at least in the short term, to invest in genetics. During the year, milk prices remained depressed across major markets, with further declines in the US and Europe. Continued milk production growth in key regions such as EMEA and continued weak import demand from markets such as Russia, China and the Middle East led to prices of the main dairy commodities being between 20% and 50% below their three-year averages. It looks likely that prices will not improve sustainably until early 2017. In Europe, the continuing trade ban imposed by Russia and weak exports to China, following previous stockpiling, were exacerbated by a supply increase as quotas were lifted and mild weather helped production. In the US, demand has remained solid and milk production growth has slowed, but higher milk imports have affected the supply/demand equation. However, lower feed costs have reduced the impact on operating margins compared with the rest of the globe. In Brazil, the deepening economic recession has led to a further deterioration in dairy demand and a fall in farm-gate prices of 18% in real terms, resulting in the first contraction in milk production since 1993. Meanwhile, the Argentina dairy industry has been badly affected by some of the worst flooding in over a decade. Beef prices in the US were volatile, with a downward trend in the first half of 2015/16 and a return towards normal levels by the end of the year. In Brazil, cattle prices remained stable in the worsening economy, helped by a combination of female retention, which has reduced finished cattle going to market, and higher exports with the opening of the US as an export destination and the devaluation of the Brazilian Real. The outlook for global beef prices is broadly stable. volume decrease and a 3% decline in revenues. Excluding IVB, Genus ABS’s revenues were 9% lower. Europe, and to a lesser extent North America, were key contributors to the lower results. In response to the challenging conditions, ABS took robust actions to reduce costs, particularly in Europe, and to raise prices, especially in Latin America to counteract the significant currency depreciation there. Global beef volumes and revenues increased in the year. In North America, profits decreased by 8% in constant currency, driven by a 9% conventional dairy volume decrease, although this was partially offset by increased sorted semen volumes (up 14%), a higher blend and strong cost management. Beef had another strong year, with volumes up 1% over the record prior year, including the continued increased use of beef semen in dairy cows. In Europe, profits decreased by 16% in constant currency. The severe weakness in the dairy market drove significant volume decreases in the UK, France and the European distributor business. However, beef volumes increased by 13% as customers sought to trim dairy herd sizes by producing beef cross-bred offspring for slaughter. A strong focus on cost reduction, including reducing employee numbers and improving service margins, also helped to mitigate profit pressures in the second half, even as the market prices fell further. In Latin America, profits were up 20% in constant currency, despite volumes declining 10% in tough dairy markets, exacerbated by drought in Brazil and flooding in Argentina. In actual currencies, profits reduced as a result of the significant devaluations across the region. In response, Genus ABS took the lead in increasing selling prices in key markets such as Brazil, Argentina and Mexico and by June, prices were on average 24% higher. Our ongoing efforts to manage local supply chain costs and operating expenses have also been beneficial. Beef performed solidly, given the adverse conditions in Brazil and Argentina, with flat volumes. Performance Adjusted operating profits for Genus ABS fell by 16% in constant currency (21% after minority interest), on the back of a 9% IVB made a strong contribution to the full year results and exceeded our expectations, delivering revenues of £9.3m and total operating profit of £2.3m in its first full year of ownership. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 32 Genus Asia Strategic Progress – Genus Asia “ We made significant strategic progress with tailoring our global porcine and bovine business models to help us grasp Asia’s exciting opportunities for long- term growth, while further mitigating short-term risks.” Jerry Thompson Chief Operating Officer, Genus Asia During the year, we made the following progress against our strategic objectives: Increasing Genetic Control and Product Differentiation • Strengthened relationships and expanded our share of business with large integrated pork producers in China, Russia and the Philippines. • Resumed imports of our latest proprietary genetics to Russia and populated two new contracted nucleus facilities in the Philippines. • Completed and populated our bull stud in India, a joint venture with BG Chitale, increasing the availability of differentiated elite genetics in the world’s largest dairy market, and made our first export from the new facility. • Reached a historic agreement with the Indian government to import live bulls from the US with the import successfully completed in August 2016. • Seven of our animals ranked in the top ten Holstein bulls on the Australian national index, following genomic testing. Targeting Key Markets and Segments • Continued to move from owned facilities to contracted porcine production in China, establishing a nucleus partnership for 5,000 sows with Shennong. • Significantly grew our business in Vietnam, through our partnership with GreenFeed. • Continued to develop direct relationships with large milk producers in India and grew our distribution network. Increased our focus on key accounts and distribution partnerships in other bovine markets. • Sharing in the Value Delivered • Invested in product validation trials, to demonstrate the superior performance of PIC’s products. • Extended our use of the porcine royalty model, including three further contracts in China. • Maintained our bovine pricing-to-value strategy in India, reflecting our higher quality genetics. • Rolled out value-selling training to our bovine and porcine teams across the region. Priorities for FY17 • Integrate our Asian porcine and bovine operations into the global PIC and ABS businesses, to support the established strategy for each species and help deliver a consistent and compelling customer experience across the world. • Continue to tailor each strategy for the needs of our Asian markets, to help deliver long-term success. Genus plcAnnual Report 2016 33 Actual currency Constant currency 2016 £m 45.1 11.3 13.1 2015 £m 41.4 5.7 5.5 Movement % Movement % 9 98 138 10 98 138 29.0% 13.3% 15.7pts 15.6pts Operating Review – Genus Asia Revenue Adjusted operating profit exc JV Adjusted operating profit inc JV Adjusted operating margin inc JV China Pork Producer Profitability ) g k r e p £ ( s s o L / t fi o r P 1.2 1.0 0.8 0.6 0.4 0.2 0 -0.2 -0.4 ) g k r e p £ ( e c i r P 3.0 2.6 2.2 1.8 1.4 1.0 0.6 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16 Aug 16 n Profit n Loss — Liveweight price Market Conditions for our porcine business improved significantly from the previous year. In particular, we saw a recovery within China, the world’s largest porcine market, following two years of losses in the industry. Rising demand, coupled with limited supplies following reductions in the country’s sow herd, placed a premium on available animals and pushed up prices to record highs. In Russia, we increased profits by 75% in constant currency through growth in key accounts, following the re-starting of imports to the country. This was also aided by more than doubling our sire-line pricing, to reflect the value delivered by our high- quality genetics. In contrast, profit in the Philippines fell by 9%, mainly due to lower up-front margins during the transition to a royalty business model. In parallel, the market within Russia rebounded as the country reopened its borders to imports of pigs from North America and the EU. Demand for pork also remained high in our other target markets. In contrast, conditions for our bovine business were challenging. Dairy prices remained low, reflecting the global picture. Milk prices fell in Australia and are likely to reduce the number of cows and farms within the country. Low prices within China continue to drive consolidation of the country’s dairy industry. Although prices in India remained stable, the country experienced a major drought which affected production and demand. Performance 2016 was a year of significantly improved performance, increasing operating profit by 138%, with tailwinds from the revitalisation of porcine markets in China and Russia. The performance, however, also shows that the business has benefited from the strategic decisions and investments made in recent years and the tailoring of our business model to the needs of each market. Porcine Overall results were significantly higher than for the preceding year. Volumes rose by 19%, leading to increases of 22% in revenue and over 300% in operating profit including joint ventures in constant currency. Operating profits in China rose by over £6m, as prices increased and demand for breeding animals grew. Our business also continued to reap the benefits of our move away from owned farms to a more contracted production model, which is helping us reduce farming exposure and commodity price risk. During the year, we signed further multiplication and royalty-based contracts with major producers, as summarised in the case study on page 24. In Vietnam, where we operate in partnership with GreenFeed, profits rose by 92%. We also renewed our porcine franchises in Australia and Korea on improved terms, increasing sire- line pricing significantly in the process, and we signed a new franchise in Ukraine. Across the region, we continued to expand the use of our royalty model, which provides extra revenue streams and additional resilience in the event of a fall in demand for new breeding animals. Royalty revenues across the region rose by 32%. Bovine Despite difficult market conditions, bovine volumes rose by 2% and operating profits by 8%. In China, we further strengthened our relationships with key distributors and in Russia, performance improved following the refocusing of the business in the prior year. We continued to build our business in India and strengthened our capabilities in the country with the beginning of operations at our new Brahma stud, a joint venture with BG Chitale (see case study on page 22). Our Australian business increased operating profit, aided by innovative promotions to mitigate the impact of falling milk prices. Operating profit fell in Japan, however, influenced by fewer top bulls in local rankings and the strength of the US Dollar. We also invested in skills and structure to drive performance of our bovine business, including appointing our first Regional Director for bovine. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 34 Genus R&D Strategic Progress – Genus R&D “ Our R&D programme delivers increased genetic control and differentiated products for customers, by applying pioneering technologies.” Dr Jonathan Lightner Chief Scientific Officer and Head of Genus R&D During the year, we made significant progress on several fronts, with potentially major benefits for animal well- being, customer productivity and the sustainability of protein production. Genomic Selection • Accelerated genetic gain for porcine customers by harnessing genomics and integrated Génétiporc’s genes into our genetic improvement programme. • Expanded our elite dairy female programme from which we sourced 20% of our new Holstein bulls in the US in 2016. In September 2016, we entered into partnership with the US’s leading independent Holstein breeder thereby significantly increasing our ability to produce bulls internally. • Strengthened our beef nucleus herd, which is expected to deliver 900 bulls to our Powerline programme by 2019. Introduced TransitionRight™ indices, enabling customers to identify dairy sires that produce daughters more resilient to health problems after giving birth. • Gene Editing • Demonstrated the potential benefits of this pioneering technology for animals, customers and consumers, during a transformative year. • Secured an exclusive global licence to the IP involved in our ground-breaking work with the University of Missouri, which used gene editing to develop the first pigs resistant to PRRSv. • Agreed an exclusive licence and collaboration with Caribou Biosciences, giving us access to its market-leading and proprietary CRISPR-Cas9 gene editing technology and know-how, which will help us accelerate our work on PRRSv and explore other applications. • Secured an exclusive global licence from the Washington State University to gene editing work targeting BRD. Gender Skew • Continued to invest in our proprietary GSS technology, thoroughly testing it to ensure it can deliver the highest calibre product on a global and commercial scale, with field trials resulting in thousands of successful pregnancies. • Pursued our legal case with ST. Priorities for FY17 • Continue to develop proprietary indices, built around traits of economic importance to customers. • Continue to work with the Roslin Institute on genotype by sequencing, which has the potential to be the next leap in genomic science. • Harness our collaboration with Caribou Biosciences and strengthen internal skills, to help build a gene editing trait development capability. • Prioritise the successful launch and roll-out of GSS. • Develop our elite dairy female programme and ability to produce bulls internally, working closely with our new partner. • Develop relationships with regulatory authorities to facilitate the future approval of gene edited products. Genus plcAnnual Report 2016 Operating Review – Genus R&D Research Porcine product development Bovine product development Net expenditure in R&D Performance Our investment in R&D for the year increased by 16% in constant currency and capital spending also increased. This reflected our investments in gene editing capabilities and licensing, genome science, advancing our GSS initiative, and furthering our computational capabilities in bovine and beef product development. In porcine product development, increases in global volume and related dissemination costs, along with lower slaughter prices and higher product validation costs, drove the year over year increase. In September 2016, we also formed a new strategic partnership (De Novo Genetics) with the world’s leading independent Holstein breeder, strengthening our ability to produce our own elite bulls. As in previous years, our research focused on genomic evaluation, gender skew and animal health and welfare. Research expenditure increased by 67% this year, in part due to significant advancements in gene editing and our partnerships with the University of Missouri and Caribou Biosciences, as well as related legal expenses and capability building. We also invested in core informatics capabilities and expanded research efforts in a number of promising areas. In genomic evaluation, we continued to explore the frontiers of genomic information and its use in animal genetic improvement. We are actively exploring genotype by sequencing approaches that could be applied across our animal systems. We successfully initiated our multi-year collaboration with the Roslin institute, exploring genotype by sequencing opportunities in our PIC system. This project is partially funded by a grant from the UK government. In gender skew, where costs were largely capitalised, we completed additional testing of our commercial scale capabilities. We completed final commercial performance tests of our GSS technology, refined our manufacturing processes and initiated the production and inventory of units for commercial sale, pending the outcome of our Court proceedings. We also invested 35 Actual currency Constant currency 2015 £m Movement % Movement % 4.6 11.6 12.4 28.6 74 16 4 20 67 12 – 16 2016 £m 8.0 13.5 12.9 34.4 in technology improvements to the current GSS system, which included new detection approaches with the promise of further improvements in fertility. We also continue to build our internal capabilities in intellectual property development, regulatory affairs and research strategy. Bovine product development expenditure was unchanged in constant currency. We invested in both dairy and beef in our internal heifer nucleus breeding programmes, and in genetic services resources to develop proprietary breeding indices and predictive genomic mating, to deliver higher genetic control and differentiation. We also made several key dairy bull acquisitions to strengthen our global line up. Depreciation of dairy bulls increased year over year, reflecting the continued rising cost of competitive bulls in the genomic era, however progeny testing costs and management overheads were reduced. Porcine product development expenditure increased by 12%, driven in large part by a decline in slaughter by-product revenues from our nucleus herds resulting from lower pork prices, partially offset by lower feed prices, and by the non-recurrence of a Canadian government support payment in FY15. We also increased investment in growing the breadth and depth of our genomic testing of animals and continued to expand our global product validation programme. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 36 Financial Review “ Genus delivered a solid financial performance in the year ended 30 June 2016.” Genus delivered a solid financial performance in the year ended 30 June 2016, with adjusted profit before tax up 7% (up 10% in constant currency) and cash conversion of 88%. Adjusted earnings per share were also up 7% (10% in constant currency). On a statutory basis, profit before tax was 5% higher and earnings per share were 23% higher in actual currency, primarily due to a lower statutory tax rate. We continue to use adjusted results as our primary measures of financial performance as they better reflect our underlying progress. Unless stated otherwise, this financial review quotes constant currency adjusted growth rates, which better reflect the Group’s underlying performance. The effect of exchange rate movements on the translation of our overseas profits was to reduce the Group’s adjusted profit before tax for the year by £1.5m or 3% compared with FY15. At the end of the period, Sterling devalued sharply following the UK referendum on Brexit. While this had little effect on 2015/16 profits, it had a significant translational impact on the year-end balance sheet. Revenue Revenue declined by 3% in actual and constant currency to £388.3m (2015: £398.5m) during the period. In porcine, Asia revenue growth of 22%, primarily in Russia and China, was offset by the planned continued reduction in up-front sales in Europe. Lower porcine by-product sales were the result of lower pig prices and there was a 4% decline in global bovine revenue, due to the poor dairy market conditions. Adjusted Operating Profit Including Joint Ventures Adjusted operating profit including JVs was £54.3m (2015: £51.2m), up 9% in constant currency and 6% in actual currency. Genus’s share of JV profits was higher at £6.4m (2015: £4.6m), helped by the strong performance of the Besun JV in China due to improved market conditions and lower production costs. Profits in Genus Asia, excluding JVs, almost doubled with 98% growth, helped by Asia Porcine growing by more than 200%. PIC China performed very strongly, buoyed by exceptional market conditions and reduced production costs resulting from the shift from owned farms to more contracted production. The Russia, Vietnam and franchise porcine businesses also achieved strong double-digit growth, with Russia helped by the country reopening its borders to pig imports. Asia Bovine grew 8%, helped by improvements in our Australia and Russia businesses following restructuring in the prior year. Genus PIC had a strong year, with profits up 9%. Volume growth of 2% continues to be affected by the shift to royalty contracts, with volumes recognised later in the sales cycle. There was also some reduction in up-front volumes in Europe during the second half of the year, as market conditions remained challenging for our customers. Stephen Wilson Group Finance Director Genus plcAnnual Report 2016 Adjusted results* Revenue Operating profit Operating profit inc JVs Profit before tax Basic earnings per share (pence) Statutory results Revenue Operating profit Profit before tax Basic earnings per share (pence) Dividend per share (pence) 37 Actual currency Constant currency** 2015 £m Movement % Movement % 398.5 47.2 51.2 46.6 56.8 (3) 4 6 7 7 (3) 6 9 10 10 2015 £m Movement % 398.5 59.5 57.8 65.7 19.5 (3) (2) 5 23 10 2016 £m 388.3 49.3 54.3 49.7 60.7 2016 £m 388.3 58.6 60.9 81.1 21.4 * Adjusted results are before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. Adjusted results are the measures used by the Board to monitor underlying performance at a Group and operating segment level. ** Constant currency percentage movements are calculated by restating 2015/16 results at the average exchange rates applied in FY15. Exchange rates US Dollar/£ Euro/£ Brazilian Real/£ Mexican Peso/£ Adjusted profit before tax Genus PIC Genus ABS Genus Asia R&D Central Adjusted operating profit Attributable to non-controlling interest Share of JV profits* Adjusted operating profit inc JV Net finance costs Adjusted profit before tax Average Closing 2016 1.47 1.33 5.47 25.38 2016 £m 64.2 19.5 11.3 (34.4) (11.3) 49.3 (1.4) 6.4 54.3 (4.6) 49.7 2015 1.57 1.32 4.26 22.68 2016 1.34 1.20 4.28 24.66 Actual currency 2015 1.57 1.41 4.89 24.68 Constant currency 2015 £m 57.2 24.0 5.7 (28.6) (11.1) 47.2 (0.6) 4.6 51.2 (4.6) 46.6 Movement % Movement % 12 (19) 98 (20) (2) 4 (133) 39 6 – 7 9 (16) 98 (16) 4 6 (183) 61 9 2 10 * Excludes net IAS 41 valuation movement in biological assets and taxation. Dairy producers have suffered two years of reducing milk prices and Genus ABS began a vigorous drive to mitigate the profit impact of these weak market conditions. Operating profit fell 16% before minority interest, on a volume decline of 9%. The actions focused on cost efficiencies in Europe and North America and pricing in Latin America. IVB performed ahead of expectations in its first full year of ownership. R&D costs increased by 16%, as planned, as Genus pursued key strategic initiatives to further strengthen its proprietary differentiated offerings. This included intellectual property creation and protection in gene editing capabilities, aided by our new partnerships with the University of Missouri and Caribou Biosciences, and further advances in our GSS initiative. We also continued to invest in product development, including expansion of the beef and dairy elite heifer programmes, which produced encouraging results. Net porcine product development costs also increased, driven largely by the decline in slaughter by-product revenues from our nucleus herds resulting from lower pork prices. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 38 Financial Review continued Performance by Species The table below shows our global performance by species, after allocating product development costs specific to each species. Dairy and beef revenues declined 4% and volumes declined 6% in tough dairy markets, with Europe and North America particularly challenging. Operating profit declined by 32% due to lower volumes and adverse currency cross rates. Actions are continuing to reduce cost run rates and increase selling prices in key markets. Porcine revenues grew by 1%, with royalty income up 17% to £97.8m. Volumes were up 4% (including Agroceres PIC, our JV in Brazil), with growth strongest in Asia. Profits were up 22% on 2015, with growth in all regions, a focus on pricing appropriately for the value of our genetics and strong execution of our business model. Performance by species Revenue Dairy and beef Porcine R&D Adjusted operating profit inc JV Dairy and beef Porcine Central and research Actual currency Constant currency 2016 £m 2015 £m Movement % Movement % 172.8 207.5 8.0 388.3 9.1 64.5 (19.3) 54.3 183.4 201.3 13.8 398.5 14.5 52.4 (15.7) 51.2 (6) 3 (42) (3) (37) 23 (23) 6 (4) 1 (43) (3) (32) 22 (16) 9 Finance Costs Net finance costs remained at £4.6m (2015: £4.6m) and include IAS 19 pension interest of £2.2m (2015: £2.3m). The cost of higher average borrowings in the year, following recent acquisitions and the investment in GSS technology, was offset by interest savings from the lower financing rates achieved in the new facility agreement and the maturing of fixed interest rate swaps. Exceptional Items There was a £36.3m net exceptional credit in 2016 (2015: £5.1m expense), including an exceptional credit of £43.9m, from changing the index used for pension and deferred pension increases in the Milk Pension Fund from RPI to CPI, and a £0.3m settlement gain related to the Milk Pension Fund. Exceptional costs were £6.9m for ongoing legal fees and damages in Genus ABS’s case against ST, £0.2m for acquisition and integration related expenses, primarily St Jacobs and IVB, and other items of £0.8m including restructuring costs. Statutory Profit Before Tax The table below sets out a reconciliation between adjusted profit before tax and statutory profit before tax: Adjusted profit before tax Operating profit attributable to non-controlling interest Net IAS 41 valuation movement on biological assets in joint ventures and associates Tax on joint ventures and associates Adjusting items: Net IAS 41 valuation movement on biological assets Amortisation of acquired intangible assets Share-based payment expense Exceptional items Statutory profit before tax 2016 £m 49.7 1.4 1.9 (1.4) (17.1) (6.1) (3.8) 36.3 60.9 2015 £m 46.6 0.6 (1.0) (0.7) 24.9 (6.1) (1.4) (5.1) 57.8 Our statutory profit before tax was £60.9m (2015: £57.8m). The statutory results benefited from the £36.3m net exceptional credit described above but were reduced by a £17.1m decline (2015: £24.9m increase) in the net IAS 41 valuation of biological assets (see below). These items, which tend to be volatile and mostly non-cash, are less representative of the Group’s underlying performance and have been excluded from adjusted results. Taxation The effective rate of tax for the year, based on adjusted profit before tax, was 25.8% (2015: 26.0%). 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 US and Latin America, where the statutory tax rates are typically between 30 and 39%, and the impact of withholding taxes on the repatriation of funds to the UK. The tax rate on statutory profits was 19.7% (2015: 31.1%). In addition to the factors mentioned above, there was a favourable impact on the statutory tax rate in the year, due to the reversal of deferred tax at US rates on the reduction in the IAS 41 biological assets valuation, while the exceptional pension credit carried deferred tax at 18%. Genus plcAnnual Report 2016 Earnings Per Share Adjusted basic earnings per share increased by 7% to 60.7 pence (2015: 56.8 pence) and rose 10% in constant currency. Basic earnings per share on a statutory basis were 81.1 pence (2015: 65.7 pence), an increase of 23%, reflecting the lower statutory tax rate in the year. Biological Assets A feature of the Group’s net assets is its substantial investment in biological assets, which under IAS 41 are stated at fair value. At 30 June 2016, the carrying value of biological assets was £354.4m (2015: £315.9m), as set out in the table below: Biological assets Non-current assets Current assets Inventory Represented by: Porcine Dairy and beef 2016 £m 2015 £m 264.6 66.4 23.4 354.4 184.7 169.7 354.4 242.7 50.2 23.0 315.9 148.1 167.8 315.9 The movement in the overall carrying value of biological assets, excluding the effect of exchange rate translation increases of £49.8m, includes: • a £9.4m increase in the carrying value of porcine biological assets, due principally to an increase in the number of animals sold on royalty contracts; and • a £26.5m decrease in the carrying value of dairy and beef biological assets, arising from the impact of lower current year volumes from dairy bulls and an increase in the proportion of future semen sales from younger genomic animals not yet in our asset base. The historical cost of these assets, less depreciation, was £42.5m at 30 June 2016 (2015: £34.1m), which is the basis used for the adjusted results. Retirement Benefit Obligations The Group’s retirement benefit obligations at 30 June 2016, calculated in accordance with IAS 19 and IFRIC 14, were £44.5m (2015: £63.1m) before tax and £34.9m (2015: £49.9m) net of related deferred tax. The largest element of the liability relates to the multi-employer Milk Pension Fund, where the deficit reduced due to the change in pension increases from RPI to CPI, partially offset by the impact of falling bond yields. We account for this scheme on the basis of Genus being responsible for 75% of the plan’s IAS 19 deficit, together with the IFRIC 14 additional liability for agreed deficit repair contributions in excess of this valuation. During the year, contributions payable in respect of the Group’s defined benefit schemes amounted to £6.7m (2015: £6.1m). Cash Flow Cash generated by operations remained solid at £43.3m (2015: £50.7m). Conversion of adjusted operating profit into cash was 88% (2015: 107%) before capital expenditure, investments, interest, tax and dividends, with 2015 benefiting from the exit from the Quebec porcine nucleus. 39 The cash outflow from investments was £7.2m, primarily relating to the acquisition of St Jacobs and an investment in Caribou Biosciences. This compares with £9.6m, net of cash acquired, from the acquisition of Birchwood and IVB in 2015. The increase in capital expenditure of £3.8m to £18.6m (2015: £14.8m) included investment in a licence to Caribou Bioscience’s gene editing technology and in GSS capacity and technology. The total cash outflow for the year after these investments, interest, tax and dividends was £3.7m (2015: inflow £1.9m). Cash flow (before debt repayments) Cash generated by operations Interest, tax and dividends Investments, net of cash acquired Capital expenditure Other Adjusted operating profit Cash conversion 2016 £m 43.3 (25.5) (7.2) (18.6) 4.3 (3.7) 49.3 88% 2015 £m 50.7 (27.0) (9.6) (14.8) 2.6 1.9 47.2 107% Net Debt Net debt increased from £71.8m to £89.7m at 30 June 2016, primarily due to exchange movements increasing net debt by £13.6m, as most of our borrowings are in US Dollars. These exchange movements were particularly pronounced following the UK’s decision to leave the EU. During the year, we agreed new five-year borrowing facilities on improved terms. At the end of June 2016 there was substantial headroom of £49.8m under the renewed facilities of £169.7m, which run to February 2021. The Group’s financial position remains strong. Our borrowing ratios are strong. Interest cover was 35 times (2015: 32 times). The ratio of net debt to EBITDA, as calculated under our financing facilities, moderately increased to 1.4 times (2015: 1.2 times) primarily due to the impact of exchange rate movements on our US Dollar borrowing. Return on Invested Capital We measure our return on invested capital on the basis of adjusted operating profit including JVs 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 decreased to 19.1% after tax (2015: 21.7%). This reduction largely reflects the translational impact on the balance sheet of exchange rate movements at the end of the year. Dividend Reflecting the Board’s continuing confidence in the Group’s prospects, it is recommending to shareholders a final dividend of 14.7 pence per ordinary share, resulting in a total dividend for the year of 21.4 pence per ordinary share, an increase of 10% for the year. Dividend cover remains consistently strong, with the dividend covered 2.8 times by adjusted earnings (2015: 2.9 times). Stephen Wilson Group Finance Director 7 September 2016 Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 40 Our People and Culture “ We are a business rooted in science but built around our people.” Catherine Glickman Group HR Director and Chair of the CSR Committee l v a r b u y e d g l o e s e y n S e c o p l o m e More than three-quarters of employees responded and among the highlights were that: • 89% of respondents understood the Genus vision and 78% felt regularly informed about business progress and plans (an increase of 8% on the previous survey). • 87% felt Genus to be pioneering animal genetic improvement and 79% understood our business strategy. • 83% said they enjoy working at Genus and the same number planned to be working here in a year. Our Approach We are a business rooted in science but built around our people. We have employees in 26 countries covering a wide range of disciplines, from PhD qualified geneticists and veterinarians to livestock technicians and accountants. Over the last year, to support the development of an increasingly proprietary offer for customers, we have focused on recruiting, retaining and developing employees who can help us explore and harness what science makes possible. Our global framework consists of ways to attract, engage, motivate and reward: it is now well embedded in every business. The framework is built on our values, which were developed with input from colleagues. The values underpin our culture of respect, openness and fairness, guiding how we work and behave. Using Our Diversity Genus takes diversity seriously. We appoint the best people to do the job, with a focus on talent right across the leadership team. The appointment of Lysanne Gray as a Non-Executive Director has enhanced Board diversity. Lysanne brings financial and operational expertise to the Board from the food sector. We continue to deploy our expert teams globally, particularly in Technical Services, Genetic Services and Animal Health, using their performance m Consolidatin ana g o g e m ur glo t p r e n b o a l c e s s All staff have clear performance objectives and two reviews per year. These assess progress, enable career discussions and inform talent management. d e c n a h n E t n e m e g a g n e e e y o l p m e We have maintained our systematic programme that shares information about the business and nurtures effective dialogue with employees. We also introduced innovations, such as broadcasting our 2015 Global Leadership Conference to all employees through a live webcast and Q&A session. Our progress The policies and practices that helped our Company increase performance during the year are also unlocking potential for the future. Key achievements in the year have included: Processes have been embedded across the business, with robust discussions on the quality and depth of successors, emergency cover and stretching development plans. s u c c e s s i o n p l a n n i n g T a l e n t a n d We have embraced important areas such as anti-bribery and corruption, training 96% of staff and exceeding our FY17 target, animal well-being, safe animal handling and health and safety, which has been a core focus for us this year. We have also continued to strengthen our sales academies for both ABS and PIC, which deliver training for key account managers around the world and help us enhance our relationships with current and potential customers. O p tr ainin erational g expansion We aim for every employee to have a development plan and offer support to help them succeed, from formal training to coaching and mentoring. We have also continued to roll out bespoke development programmes, including our Advanced Leadership Programme for senior managers, for which we ran a very successful event in Dublin, and our programme for people managers, Managing High-Performing Teams, which we extended to our managers in Asia. e d e v elo p m ent n i fi c a nt e y d s i g e u n t i n C o i n v e s t m e n t i n e m p l o Genus plcAnnual Report 2016 skills and expertise to support local operations. We continued to bring in new talent: a particular focus this year has been in building our Research & Development team, with the recruitment of PhD geneticists, molecular biologists and embryologists. The table below shows our gender diversity across the business. Work levels Male Female Board Directors GELT Other employees 7 6 1,856 1 2 799 Total 8 8 2,655 % Female 13 25 30 Human Rights 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. Looking Further Ahead In 2017, our focus will be on resourcing business growth and training staff to support the initiatives we are delivering, whilst sustaining performance management, development and talent management. We will also review our reward mechanisms, specifically our Group incentive plans and staff commission structures, to ensure they are aligned with the needs of the business. 41 Case Study Enhancing Recruitment We are committed to nurturing talent to create a strong internal succession plan, coupled with recruiting new and specialist skills, as we evolve as an agricultural biotechnology company. During the year, we launched a dedicated recruitment portal – linked to our corporate website – to showcase what is special about our Company and outline the wide range of roles we offer. The site contains short films of colleagues giving their views and provides links to our global business websites for specific vacancies. We have also encouraged employee referrals for recruitment, with colleagues across the Company harnessing their personal networks to bring in talent. We recruited across a range of roles, including a production team to deliver our new GSS products offer for bovine customers and personnel to help us offer IVF in the United States and Mexico. We invested in senior roles for our R&D team, including applied genomics, trait development and intellectual property expertise. We also continued to promote talent from within, with examples including the promotion of Dr Katie Olson to Global Director for Dairy Product Development within ABS. s u c c e s s i o n p l a n n i n g T a l e n t a n d Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 42 Responsible Business We are committed to delivering results responsibly. ‘Responsible’ is one of our core values as a business and we have developed policies, practices and an organisational culture that ensures our Company and all the people within it act in an ethical, honest and trustworthy manner at all times. This year, we have developed a new online portal to communicate our approach, practices and impact. This can be found by visiting our website at www.genusplc.com. The portal provides more detailed and regularly updated information, to complement the summary we provide below. Our Foundation for Success Our commitment to operating responsibly is overseen by the Board. The Corporate Social Responsibility (‘CSR’) Committee defines our strategy, reviews our policies and practices, monitors external developments and advises the Genus Executive Leadership Team (GELT) and the Audit Committee. Greenhouse Gas (‘GHG’) Reporting Our GHG emissions are primarily methane produced by our animals and carbon dioxide (‘CO2’) from consuming fuel and other materials, and transport. Our primary intensity ratio is based on animal weight, which is a key driver of our GHG emissions. Our secondary intensity ratio is based on turnover. Our primary intensity ratio includes emissions which are impacted mainly by the number and age of animals but also by emissions from our direct distribution and travel. Animal weight reduced by 2,500 tonnes, driven by exiting owned farms in the US and China, and emissions reduced as a result. However, emissions from other sources such as direct distribution remained constant and as a result the primary intensity ratio increased. Our secondary intensity ratio was stable year to year. Our Reporting Approach We use operational control as our reporting approach. We have determined and reported the emissions we are responsible for within this boundary and believe there are no material omissions. It recommends annual goals and initiatives, and identifies the key performance indicators for monitoring and reporting our performance, which are summarised opposite. The Committee comprises senior leaders who lead different aspects of the programme. They meet quarterly to set objectives and review progress. The full list of members is provided on our website. A dedicated sub-committee focuses on animal well-being. Among its achievements this year were an update of the Company’s global principles for animal well-being, including global standards and policies, and the introduction of new online training, which is mandatory for all employees, irrespective of their role. The membership of this sub-committee can also be found on our dedicated ‘Responsibility’ page on our website. Our Framework and Performance We translate our commitment to responsible business into a framework involving five pillars, which are summarised opposite together with our key achievements and objectives. More detailed information on our performance is included on our website. We have previously included a section on employees in this framework but have removed this to avoid duplication of material in the ‘Our People and Culture’ section of this report. Achievements against the targets are included on page 40. GHG Emissions for 2016 % 14 21 65 From livestock From third-party distribution and business travel From other activities GHG data is therefore reported for assets, which are mainly rented or leased, that are otherwise not referred to elsewhere in the financial statements. We omitted JVs and some livestock held at third-parties due to our limited authority to introduce and implement operating policies. Emissions from Scope 1 – combustion of fuel, livestock emissions and direct distribution and travel Scope 2 – electricity, steam, heat and cooling purchased Total scope 1 & 2 Scope 3 – material usage and waste and indirect distribution and travel Total emissions 2016 Tonnes of CO2e 2015 Tonnes of CO2e 64,655 16,798 81,453 68,562 22,569 91,131 28,433 21,160 109,886 112,291 Primary intensity measure – Animal weight (tonne) Secondary intensity measure – Turnover (£m) Primary intensity ratio – Scope 1 & 2 (tCO2e/tonne animal weight) Secondary intensity ratio – Scope 1, 2 & 3 (tCO2e/£m turnover) 10,249 388.3 7.95 283 12,723 398.5 7.16 282 Annual emissions figures have been calculated based on actual ten-month data for July to April extrapolated to full year. 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 plcAnnual Report 2016 43 Link to Strategy 1 2 3 Increasing Genetic Control and Product Differentiation Targeting Key Markets and Segments Sharing in the Value Delivered Visit www.genusplc.com to read more about our Responsible Business What we do Highlights What we plan to do next Operate Safely Ensuring a safe working environment for our colleagues 1, 2 Animal Well-Being Continually improving animal welfare, through proven science-based initiatives 1, 2, 3 Community Being a responsible corporate citizen, within our communities 1, 2 Environment Reducing the environmental impact of protein production 1, 2 Food Quality and Security Providing expertise and products that increase the production of high- quality protein 1, 2, 3 • 83% of staff completed training tailored • Reduce our vehicle incident frequency to their role (target 90%). • • Significant improvement in incident reporting, and reviewed by COOs. Improved reporting resulted in an increase in incidents on owned property in 2015/16, with actions taken to mitigate risk. • As a result of incident types, 94% of those working directly with animals received advanced training in animal handling and we conducted a safe driving initiative in the UK. • rate in the UK and US fleets. Increase Near-Miss reporting for all owned production sites. • Reduce number of recordable incidents on non-owned premises. • Introduced new animal well-being training, completed by 97% of employees. • Continued our global Pork Quality Assurance (‘PQA’) based training in PIC owned production facilities. Introduced new diet to improve bull well- being in all ABS and JV studs. • • Continue our programme of PQA- based training. • Roll-out global animal care and well- being standards and processes in PIC owned production. • Continue audits at ABS owned and JV studs. • All ABS and JV studs were audited and • Continue upgrade of PIC owned actions executed. • Upgraded our Genetic Nucleus site in Canada, PIC Aurora. production facilities in the United States and Canada. • Continued to respond to crises that affected those who work with us, providing practical support. • Continued supporting the charity Send a Cow, with 61 cows now provided through the charity. • Recruited over 150 staff into our farms from local communities across our PIC and ABS production sites globally. • Continued external audits of Genus PIC’s waste management systems, to cover 80% of animals on owned sites. Improved feed efficiency by 0.02kg of feed per kg of pork. • • Upgraded the Genus ABS production estate, including landscaping our Dekorra site with 500 trees. • Continue to respond to crises, support Send a Cow and recruit into our farms from local communities. • Continue Genus PIC’s external audits, to cover 80% of animals on owned sites. Improve feed efficiency by 0.02kg of feed per kg of pork. • • Using genomic selection, the value of PIC genetics improved by $3.15, providing highly productive, high health pigs (see page 16 for more information). • Reduced genetic lag in the PIC supply chain • • to 3.45 years. Improved milk production and herd sustainability with TransitionRight™, Genetic Management Service (GMS 2.0), IVF technology and ABS Neo. Introduced high-quality dairy genetics into India through our new JV bull stud. • Continue to increase the rate of • genetic improvement to help produce highly productive, high health pigs. • Maintain current genetic lag levels across the global PIC supply chain. Improve milk production and herd sustainability through IVF technology, genetic audits and mating tools, and the use of relevant trait indices in genetic selection. • Export of live elite bulls to step up genetic merit in India. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 44 Letter from the Chairman “ The latest independent external evaluation of the Board shows that we continue to provide the strong and effective leadership Genus needs.” Dear Shareholder In my previous letters, I have noted that strong governance is a business necessity, with a critical influence on the Group’s ability to implement its strategy and achieve long-term success. I am pleased to report that the latest independent external evaluation of the Board shows that we continue to provide the strong and effective leadership Genus needs. At the same time, we recognise the need to further develop our governance practices. In the year ahead, we will maintain our focus on strategy, including the competitive landscape; developing our risk agenda in light of our strategy; and succession planning, including diversity and the skills mix on the Board. This will help us to ensure Genus creates value for all our stakeholders, whether through our high-quality and differentiated offer for customers, rewarding work for our people, support for suppliers and communities, or through growth and returns to shareholders. Set out opposite are some of the governance highlights of the year. More information on each area, and our governance activities more generally, can be found in the Corporate Governance Statement on pages 50 to 87. 7 September 2016 Bob Lawson Chairman of the Board Genus plcAnnual Report 2016 45 Corporate Governance Highlights Providing Effective Leadership An independent external review of the Board’s performance showed particular strengths in Board culture, strategy, financial reporting, remuneration and forward planning. See page 54 Increasing the Board’s Diversity and Experience The appointment of Lysanne Gray, our first female Non-Executive Director, adds further relevant experience to the Board, including knowledge of the food industry. See pages 57 to 58 Maintaining an Independent Board The Board has a large majority of independent Directors, with six Non-Executives (including the Chairman) and two Executive Directors. See pages 46 to 47 Ensuring Strategic Oversight The Board held its annual strategy review in January and received regular updates on strategy and business development during the year. See pages 52 to 53 Enhancing the Board’s Knowledge of the Business To give the Board first-hand experience of our business and markets, the Directors spent a week visiting our US operations. Lysanne Gray underwent a thorough induction, including site visits, workshops, and meetings with Executive Directors, senior management and the auditor Deloitte LLP. See pages 53 to 54 Continuing to Comply Genus complied in full with the UK Corporate Governance Code (the ‘Code’) except for provision E.2.3, as the CEO was unable to attend the 2015 AGM due to illness. Engaging our Shareholders The Executive Directors met institutional investors owning more than half our share capital, including eight of our ten largest shareholders, as well as many potential investors. See page 56 Our Approach to Reporting on Corporate Governance This year, we have used the key Code principles as the framework for our Corporate Governance Report. The content of each section is outlined below. Leadership Includes the composition of the Board and its Committees, the Directors’ roles and responsibilities, and the Board’s main activities in the year. See pages 46 to 53 Effectiveness Includes Board induction and training, the outcome of this year’s external Board evaluation, progress against the recommendations from the 2015 evaluation, and the Nomination Committee’s activities in the year. See page 54 and pages 57 to 58 Accountability Includes an explanation of our risk management and internal controls, and the Audit Committee’s activities during the year. See page 55 and pages 59 to 61 Relations with Shareholders Includes our investor relations calendar, data on the shareholders we met during the year, and the key themes discussed at investor meetings. See page 56 Remuneration Includes an explanation of our approach to remuneration, our revised remuneration policy (which is being put to shareholders at the AGM), and a report on the Directors’ remuneration for the year. See pages 62 to 85 Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 46 Board of Directors and Company Secretary Bob Lawson Ü Non-Executive Chairman Nomination Committee Chair Board Appointment – November 2010 Skills and Experience Bob has significant experience of leading international businesses, including through operational and culture changes, and a deep understanding of listed companies and corporate governance. Career Bob’s executive career spanned several UK and continental groups, including ten years as Chief Executive of Electrocomponents plc and three years as Managing Director of Vitec Group plc. He was appointed Non-Executive Chairman of Eurocell plc in January 2015 and retired as Chairman of the Federation of Groundwork Trusts in November 2015. Bob retired as Non-Executive Chairman of Barratt Developments plc in November 2014. Karim Bitar Chief Executive Stephen Wilson Group Finance Director Board Appointment – September 2011 Board Appointment – January 2013 Skills and Experience Karim has extensive experience of leading international, science-based organisations. His strategic review of Genus in 2012 resulted in a new vision, strategy, structure and core values. He has a BSc in Biochemistry from the University of Wisconsin and an MBA from the University of Michigan. Skills and Experience Stephen has worked in France and the US and has wide-ranging experience of mergers and acquisitions, financing, strategy and investor relations. He is a Fellow of the Chartered Institute of Management Accountants and holds a degree in Mathematics from the University of Cambridge. Career Prior to joining Genus, Karim worked for more than 15 years for Eli Lilly and Company, where he was President of Lilly Europe, Canada and Australia. An ex- McKinsey and Company consultant, he also held management roles at Johnson and Johnson, and the Dow Chemical Company. Career Stephen was previously Executive Vice President and Chief Financial Officer of Misys plc. Prior to Misys, he spent 25 years at IBM, in roles encompassing finance, business development and change programmes. He was a Non-Executive Director of Xchanging plc, where he chaired the Audit Committee until its acquisition by CSC in May 2016. Mike Buzzacott ܸ Non-Executive Director Audit Committee Chair Board Appointment – May 2009 Skills and Experience Mike has extensive experience of working in Asian and European markets, and of dealing with acquisitions, mergers and divestments. He is a Chartered Certified Accountant. Career Mike spent 34 years with BP, holding a number of international roles including Finance and Control Director Asia Pacific, Chief Financial Officer BP Nutrition and Group Vice President Petrochemicals. He is a former Non-Executive Director and Audit Committee Chairman at Scapa Plc, Rexam Plc and Croda Chemicals Plc. He was also Chairman of Biofuels Plc and adviser to the Ineos Group. Lysanne Gray ܸ Non-Executive Director Board Appointment – April 2016 Skills and Experience Lysanne has significant experience of risk management, audit, business operations, acquisitions and disposals, and corporate governance, gained within the food sector. She is a Chartered Accountant. Career Lysanne is Financial Controller at Unilever plc and Unilever NV. Prior to this she was Chief Auditor, working closely with Unilever’s Audit Committee, and before that Chief Financial Officer of Unilever’s global food service business. She has also held a number of other senior operational and financial positions within Unilever. Member of Nomination Committee Ü Member of Remuneration Committee ¸ Member of Audit Committee Genus plcAnnual Report 2016 47 Nigel Turner ܸ Senior Non-Executive Director Remuneration Committee Chair Board Appointment – January 2008 Skills and Experience Nigel has substantial experience of international business and corporate finance. Career Nigel was Chairman of Numis Securities Ltd and Deputy Chairman of Numis Corporation plc from December 2005 to November 2007. Prior to this he was Vice Chairman of ABN AMRO’s Wholesale and Investment Bank, having joined in 2000 from Lazard, where he was a Partner for 15 years and sat on its Supervisory Board. Nigel is a Non-Executive Director of Croda International plc. Professor Duncan Maskell ܸ Non-Executive Director Lykele van der Broek ܸ Non-Executive Director Board Appointment – April 2014 Board Appointment – July 2014 Skills and Experience Duncan has co-founded several biotech companies and has extensive experience of commercialising science and innovation. He is also an experienced scientific adviser to companies, using his broad perspective on life sciences. Career Duncan is Senior Pro-Vice Chancellor (‘PVC’) of the University of Cambridge, where he and the four other PVCs are responsible for the University’s strategy and policy development. He was previously Head of the School of the Biological Sciences at the University, where he led research on infectious diseases of livestock and people. Skills and Experience Lykele has vast experience of growing companies and working in agricultural businesses throughout the world, including in emerging markets. Career Lykele retired as a Member of the Board of Management of Bayer CropScience, a division of Bayer AG, in 2014, being responsible for the commercialisation of innovative agricultural products and services globally. Prior to this, he held senior international roles including the Head of Bayer CropScience’s BioScience division and President of the Bayer HealthCare Animal Health division. Dan Hartley Group General Counsel and Company Secretary Appointment – June 2014 Skills and Experience Dan has significant experience in multi- jurisdictional patent litigation, mergers and acquisitions, patent licensing and managing product life cycles in complex areas. He holds degrees in science and law. Career Dan joined Genus from Shire plc, where he was Senior Vice President and International Counsel. Dan joined Shire in 2002, after a number of years in private practice, and worked in increasingly senior and global roles in the UK and the US. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 48 Genus Executive Leadership Team (‘GELT’) GELT’s Responsibilities GELT shapes our Company vision, demonstrates the values at the heart of our business, and leads our strategic planning and delivery. 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 strategy approved by the Board to achieve sustained growth, and developing Genus as a science and intellectual property-based company; • performance management – driving operational results and delivery of corporate goals; 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 managing succession and nurturing talent to bring through the next generation of leaders; and • resources management – judiciously investing in the business for both organic and inorganic growth, including capital expenditure and human resources. GELT’s members are set out on this page. The executives form a high-functioning, high-performing team, combining professional expertise with commercial acumen to deliver the shared strategy for the Group. Karim Bitar Chief Executive Stephen Wilson Group Finance Director Saskia Korink Romani Chief Operating Officer, Genus ABS Jerry Thompson Chief Operating Officer, Genus Asia Skills and Experience Saskia has worked in Europe, Brazil and the US bringing extensive commercial and management experience gained from roles in sectors ranging from agriculture to consumer goods. She has highly developed strategic and business development skills, speaks several languages and holds an MBA from Columbia Business School. Skills and Experience Jerry is a natural entrepreneur and has brought his deep industry knowledge, commercial skills and international experience to develop the business in countries as diverse as the UK, Russia and China. He has helped the Company establish and grow its business in new markets, particularly those in Central and Eastern Europe and Asia. Career Saskia joined Genus in 2013 and became Chief Operating Officer of Genus ABS the following year. Prior to Genus, she spent ten years with Cargill Inc, becoming its first female business unit manager and rising to be Vice President of Marketing for its animal nutrition business. Before joining Cargill, she spent seven years with Boston Consulting Group. In July 2016, she became Chief Operating Officer of Genus ABS Dairy. Career Jerry has worked for PIC and subsequently Genus for more than 20 years. He joined as a graduate in the UK, subsequently working in both Siberia and Romania before taking on leadership of PIC in Central and Eastern Europe. In the following years, he led PIC Europe before becoming Regional Director for PIC and ABS in Russia & Asia Pacific and subsequently Chief Operating Officer for Genus Asia. In July 2016, he became Chief Operating Officer for Genus ABS Beef. Genus plcAnnual Report 2016 49 See pages 46 and 47 for Karim’s, Stephen’s and Dan’s biographies. Dan Hartley Group General Counsel and Company Secretary Dr Bill Christianson Chief Operating Officer, Genus PIC Skills and Experience Bill has spent his whole career at the intersection of agriculture and biotechnology. As a result, he brings a unique blend of deep industry knowledge and extensive commercial and global experience to Genus. He holds doctorates (DVM and PhD) in Veterinary Medicine from the University of Minnesota. Career Bill has worked for the business since 1993, when he joined as Manager of Veterinary R&D, based in the US. He subsequently worked in a range of operational roles spanning Europe, South America and the US, before being appointed as General Manager of PIC North America in 2007. He led the combined ABS and PIC business across the Americas from 2010, before becoming Chief Operating Officer of Genus PIC in 2012. Dr Jonathan Lightner Chief Scientific Officer and Head of Genus R&D Catherine Glickman Group HR Director Skills and Experience Jonathan is a world-renowned quantitative molecular geneticist with expertise spanning inter-related fields such as molecular biology, analytical chemistry and ‘omic’ technologies. He also has extensive regulatory and commercial experience. He holds a Masters in Systems Engineering from Iowa State, an MBA from the University of Iowa and a Doctorate in Plant Physiology from the Institute of Biological Chemistry at Washington State University. Career Jonathan joined Genus in 2013 from Pioneer Hi-Bred International Inc, a DuPont business, where he led a global team focused on genetic solutions to enhance agricultural productivity. His other leadership roles with DuPont Pioneer included Senior Research Director for Trait Characterization within Hi-Bred International. Jonathan’s previous experience included three years with Exelixis as Director of Biochemical Genomics. Skills and Experience Catherine brings more than 30 years of HR experience within multinational organisations, with particular emphasis on shaping and embedding approaches to talent management, succession planning, leadership development, employee relations and reward. She has also held positions on numerous Board Committees and acted as a pension trustee. Career Catherine joined Genus in 2012 after 20 years with Tesco, the international retailer, concluding with three years as Group HR Director. Prior to that, she had held HR roles supporting Tesco’s international roll-out and a period of major expansion in the UK. Before Tesco, she worked in HR for retailers Somerfield plc and Boots plc. She is a Non-Executive Director of Marston’s PLC. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 50 Corporate Governance Statement Leadership The Board’s Role The Board, under the Chairman’s leadership, is responsible for ensuring Genus’s long-term success. It approves our strategy and corporate goals and monitors our performance against them. It determines that we have the necessary resources, systems and controls to achieve our objectives, and it sets the culture and standards of behaviour we want to see throughout Genus. The Board is also responsible for other critical decisions, including approving the corporate budget and ensuring we have the right funding, approving material contracts, approving material acquisitions and investments, and reporting to shareholders. This Corporate Governance Statement explains how we structure the Board and its Committees, how the Board oversees the Group and its main activities during the financial year. Board Composition The Board comprises six independent Non- Executive Directors (‘NEDs’), including the Chairman, and two Executive Directors – the Chief Executive and the Group Finance Director. This gives us a large majority of independent Directors on the Board. An Independent Board 2 1 5 Colour the individual bits on top of each curve A Broad Base of Relevant Experience 7 International business Finance Scientific/biotech 4 3 Food industry 1 The Board has a good mix of well- established and newer NEDs. In recent years, we have broadened the range of skills and experience on the Board through Non-Executive appointments, giving us an appropriate blend of different areas of expertise, long-standing knowledge of the Group and its markets, and fresh perspectives. This helps to ensure the Board provides even-handed oversight, works in a constructive and focused manner and has the capabilities to manage the challenges of a complex and evolving global business environment. Almost all our Directors have held leadership positions in international companies, with several having run businesses overseas. Half our Directors, including the Chairman of the Audit Committee, have significant financial experience, while several have strong backgrounds in scientific research or in leading science-based businesses. As Genus grows, the Board must evolve to keep pace. We consider diversity in its broadest sense when recruiting, while ensuring the Board has the skills it needs. During the year we recruited our first female NED, Lysanne Gray, who brings a wide range of relevant experience to the Board, including knowledge of the food industry. More information about our approach to Board composition and recruitment can be found in the Nomination Committee report on pages 57 to 58. The Board believes that all of the NEDs are independent in character and judgement, and that there are no relationships or circumstances that are likely to affect (or could appear to affect) their judgement. Following the performance evaluation described on page 54, the Board also confirms that all the Directors continue to be effective and to demonstrate commitment to their roles. As required by the UK Corporate Governance Code, all the Directors will offer themselves for election at the next AGM, with the exception of Mike Buzzacott who is retiring. Details can be found in the Notice of AGM at the end of this report. If re-elected to the Board at the AGM, Nigel Turner will reach the ninth anniversary of his original appointment as a NED in January 2017. Following review, the Board is satisfied that Nigel remains independent and that he has no connection with the Company’s operational activities. Board Roles and Responsibilities To ensure we have clear responsibilities at the top of the Company, the Board has set out well-defined roles for the Chairman and Chief Executive. These, along with the responsibilities of our other Directors, are summarised in the table below. Title Individual(s) Responsibilities Chairman Bob Lawson Executive Directors Independent Non-Executive Chairman Independent Non-Executive Directors Chief Executive Karim Bitar The two charts that follow show the length of time our NEDs have served on the Board, and the number of Board members with experience of particular relevance to Genus. Colour the individual bits on top of each curve Non-Executive Tenure on the Board 6 to 9 years 3 to 6 years 1 to 3 years 0 to 1 years 1 1 2 2 Stephen Wilson Group Finance Director Nigel Turner Senior Independent Non-Executive Director Non-Executive Directors Mike Buzzacott, Lysanne Gray, Duncan Maskell, Lykele van der Broek As Chairman, Bob’s primary responsibility is to lead the Board and ensure it operates effectively. He achieves this in part through promoting an open culture, which gives people the courage to challenge the status quo, and holding meetings with the Non-Executive Directors without the Executives present. Bob is also responsible for the Board’s communications with shareholders. Karim is responsible for devising and implementing the Company’s strategy and managing the Company’s day-to-day operations. He is accountable to the Board for the Company’s development, in line with its strategy, and taking into account the risks, objectives and policies set out by the Board and its Committees. Stephen is responsible for supporting the Chief Executive in devising and implementing the strategy, and managing the Group’s financial and operational performance. Nigel provides a sounding board for the Chairman and is an alternative line of communication between the Chairman and other Directors. He leads meetings of the Non-Executive Directors, without the Chairman present, to appraise the Chairman’s performance and consults with shareholders in the absence of the Chairman and Chief Executive. The NEDs constructively challenge and assist with the development of the strategy, within the risk and control framework set by the Board. Genus plcAnnual Report 2016 51 The CSR Committee defines our Group- wide CSR strategy, reviews our policies and practices, monitors external developments, and advises GELT and the Board about CSR matters. It recommends annual goals and initiatives, and identifies the key performance indicators for monitoring and reporting our performance. More information about our CSR activities can be found in the Strategic Report, on pages 42 to 43, and at www.genusplc.com. The R&D Portfolio Management Team (‘R&D PMT’) meets twice a year. It provides a forum for prioritising our R&D programmes, monitoring their progress and assessing the quality of our R&D infrastructure, personnel and pipeline. The R&D PMT’s meetings during the year were held in Chicago and Basingstoke. The R&D PMT’s principal responsibilities are to periodically: • review and prioritise the Company’s investment in research, development and technology; • assess the quality and competitiveness of the Company’s R&D pipeline, including considering its risk profile; • oversee and encourage the ideation management process; and • approve patent and other IP strategies for new technologies, based on business and technical opportunities. R&D PMT Special Focus Areas in 2016 In addition to the standing agenda items, in 2016 the R&D PMT reviewed two strategic proposals. These were: • a comprehensive review of gene editing technology and IP, resulting in our collaboration with Caribou Biosciences; and • an organisational capability building plan, to support Genus’s advancing pipeline of gene editing traits, which was used when forming the FY17 budget. Board and Committee Structure The diagram below shows the Board and the Committees that report to it. o r t f o li o t T m e n D P R & M a n a g e e a m Com Au dit mitte e Gives us a comprehensive view of our R&D programme and involves our business units in prioritising our R&D initiatives. Ensures the integrity of our financial reporting, evaluates our risk management and internal control system, and oversees the internal and external auditors. e v i t u c e x E s u n e m a e T p h s r e d a i G e L Leads our strategic delivery and ensures organisational alignment, engagement and efficient execution. Genus plc Board Determines remuneration for our Executive Directors and senior management, to support our growth strategy and deliver value for stakeholders. Ensures that the Group continues to engage in business in a socially responsible and ethical manner. Reviews the Board’s structure, size and composition and proposes candidates for appointment to the Board. C o m m i t t e e R e m u n e r a t i o n C o m C SR mittee ● ● Board Committees Executive Committees Board Committees The table below shows Board Committee membership: Director Bob Lawson Karim Bitar Nigel Turner Mike Buzzacott Lysanne Gray Duncan Maskell Lykele van der Broek a tio n C o m m itt e e N o m i n Committee Audit Nomination Remuneration – – M C M M M C M M M M M M M – C M M M M M = Committee member C = Committee chairman The Committee Chairmen are responsible for overseeing the Committee’s activities, within the terms of reference, and for the Committees’ leadership and effective operation. More information about the roles and work of the Board Committees can be found in their statements on pages 57 to 85, and in their terms of reference on our website at www.genusplc.com. Executive Committees The Board delegates operating decisions to the Chief Executive, Group Finance Director and other members of the Genus Executive Leadership Team (‘GELT’). GELT’s responsibilities and membership are set out on pages 48 and 49. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 52 Corporate Governance Statement continued Leadership continued The Board’s Main Activities in 2016 Matters Considered at All Board Meetings • Update on strategic and business developments from CEO • Update on financial performance of businesses and forecasts from Group FD • Update on Corporate Governance and Legal issues from Group GC and CoSec, and external advisers Leadership and Effectiveness • Appointment of Lysanne Gray as a NED and induction process: – Interviews with senior management – Visited the US and customers (see page 53) to better understand the business operations and environment Research and Development • Received regular updates on R&D pipeline developments, new initiatives and potential collaborations • Attended a dedicated Board science education presentation • Received updates from Directors attending the R&D PMT • Updated on the recruitment of key R&D personnel Company Performance • Received updates on the operational performance of the business and market conditions for each division • Received updates on plans to address profitability in ABS • Monitored the Group’s performance against its goals Business Development and Strategy • Held strategic meeting with GELT (see below) • Reviewed and approved business development opportunities, such as: – Exclusive global licence with University of Missouri to develop and commercialise gene edited pigs resistant to PRRSv – Updated on IVB integration – New porcine royalty customers signed in China – New bull stud completion with Chitale JV in India – GSS development progress and US litigation proceedings (see note 7) – Exclusive licence of Caribou Biosciences’ leading CRISPR- Cas9 gene editing technology platform – Acquisition of St Jocobs – Exclusive global licence of IP relating to BRD from Wisconsin State University • Updated on numerous business development opportunities including summaries of due diligence reviews • Received updates on competitor landscape Attendance at Board and Committee Meetings The table below shows how many Board and Committee meetings each Director attended during the year. Board Audit Committee Remuneration Committee Nomination Committee Non-Executive Chairman Bob Lawson Executive Directors Karim Bitar Stephen Wilson Non-Executive Directors Nigel Turner Mike Buzzacott** 10 (10) 10 (10) 10 (10) 10 (10) 9 (10) Lysanne Gray Δ (appointed 1 April 2016) 2 (3) Duncan Maskell Lykele van der Broek 10 (10) 10 (10) 5* 5* 5* 5 (5) 5 (5) 1 (1) 5 (5) 5 (5) 6 (6) 4 (4) 6* 6* 6 (6) 6 (6) 2 (3) 6 (6) 6 (6) 4 (4) 4* 4 (4) 4 (4) 1 (2) 3 (4) 4 (4) Note: Figures in brackets are the maximum number of Board or Committee meetings the Director could have attended. * Attendance by invitation. ** Due to illness, Mike Buzzacott was unable to attend the Board meeting in May 2016. Mike was provided with Board materials and submitted feedback via the Chairman prior to the meeting. Δ Due to prior commitments pre-appointment, Lysanne Gray was unable to attend all meetings following her appointment. However, Lysanne was provided with all Board and Committee materials and submitted feedback via each respective Chairman prior to the meetings. Board Strategy Review One of the Board’s key responsibilities is to approve the Company’s strategy and monitor its performance against strategy. To understand how well our strategy is working and to ensure it remains appropriate, the Board holds an annual strategy review each January. Relevant members of GELT present to the Board on their business unit or function. Genus plcAnnual Report 2016 53 Employees • Received updates on the global all-staff survey results and follow-up actions • Received updates on key personnel appointments, assignments and developments across the Group Shareholders • Updated on meetings with shareholders, potential investors and analysts • Received a briefing ahead of the AGM • Approved 10% increase in the dividend payment Finance • Approved the annual and interim results and dividends • Approved the FY17 budget • Received tax and treasury updates • Received pension updates • Approved the facility renewal Executive/GELT Updates • Received monthly financial and Health and Safety • Reviewed and monitored the Group’s health and safety performance (monthly written updates and quarterly review) Risk Management • Monitored the Group risk register • Received monthly updates on GSS litigation (see note 7) operational performance updates • Updated on whistleblowing hotline • Received regular presentations reports and investigations from each business unit At this year’s review, the Board was taken through: • A review of global industry trends and challenges. • An update on each business unit’s and R&D’s strategic goals and ways to accelerate the time required to reach such goals. • An update on strategic initiatives and their anticipated financial impact over the next five years. • An overview of the likely transformation steps for the business in line with the strategic goals. • A review of projects designed to share the value of our differentiated products with our customers. Board Visit to the US We want to ensure that the Board has first-hand experience of key areas of our business and markets, so we include an annual site visit in the Board calendar. In May 2016, the Board spent a week visiting our operations and facilities in the US. This included meeting the senior management of ABS, PIC and R&D business units and key members of their North American teams, and receiving business update presentations. The Board also received presentations from leading industry experts and key customers. Board visits are designed to enhance the Board’s understanding of our North American business, its operations on the ground, the markets and the needs of our key customers. The Board met with some of the largest customers in the US, providing insight into customer perspectives of Genus and the drivers of their purchasing decisions. The visit was also motivating for our local management teams, enabling them to engage with the Board at a local level. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 54 Corporate Governance Statement continued Effectiveness Board Induction and Training 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 • an introduction to our business, through site visits and meetings with our management teams. Induction for Lysanne Gray Following Lysanne Gray’s appointment on 1 April 2016, she underwent a comprehensive induction. This included: • A visit to our US businesses in May 2016, as part of the May Board meeting. This covered a tour of our facilities in DeForest and Dekorra; a series of presentations from our ABS and PIC business teams, led by their Chief Operating Officers; presentations on our approach to R&D and a tour of our facilities; and visits to a number of PIC and ABS customers. • Ad hoc updates on the latest developments in corporate governance, provided by internal and external presenters. • Meetings with Executive Directors and the Company Secretary and senior managers. • A meeting with the auditor Deloitte LLP. Board Evaluation 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 questionnaire by same external evaluation consultant, to monitor progress with the focus areas Year 3 Internal questionnaires and interviews with the Chairman This was the first year in our three-year cycle and we therefore had a formal, rigorous and independent external review. This evaluation was facilitated by Dr Tracy Long of Boardroom Review, who has no other connection with the Group. The Chairman agreed the scope of the review, which included individual interviews with each of the Board members and observation at the February 2016 Board and Committee meetings. Boardroom Review generated a written report on areas for improvement for the Board which was followed up with a presentation to the Board at the May Board meeting and then separate discussion of the principal outcomes of the Board review. The Evaluation’s Conclusions During the review, the Board demonstrated particular strengths in the following areas: • Board culture, with an appropriate balance of challenge and support, and style of chairmanship; • strategic alignment and knowledge of the competitive landscape; • financial reporting and the oversight of risk management from the Audit Committee; • approach to remuneration and alignment with shareholders’ interests; and • effective forward agenda planning, prioritisation of issues and quality of information. In addition, it was noted that the skills and composition of the Board was adding value to the business and that it has a healthy blend of NED perspectives and experience, drawn from relevant executive and portfolio careers, a mix of longer serving and newer Directors, and a size which enables all the NEDs to contribute. Areas of Focus for 2017 The evaluation identified areas for the Board to consider during the next year, including continuing focus on: • strategy, including competitor landscape and shareholder expectations; • development of the risk agenda, in line with the Company’s strategic objectives; and • succession planning, including diversity and the mix of skills on the Board, to identify any current and future skills gaps. Progress Against 2016 Areas of Focus Last year’s internal Board effectiveness review identified a number of areas for the Board to focus on during 2016. The table below shows our progress against these objectives. Focus area Progress Continued oversight of competitor activity. Further training in corporate governance. Further exposure to the science that underpins our R&D programmes. Further focus on succession planning and gender diversity. Competitors’ ongoing activities are monitored through our business development team and the Board is updated at each Board meeting of material activities in the sector. Deep dives in the competitor activities are scheduled bi-annually. In addition to corporate governance updates provided by our auditor and Company Secretary, new corporate counsel was invited to brief the Board on recent legislation changes during the year. A dedicated Board science education session, presented by the Chief Scientific Officer, was held in December 2015, along with the periodic R&D updates provided to the Board. A formalised succession planning process, as part of Nomination Committee meetings, has been introduced to ensure that the Company is better prepared for Board succession. Genus plcAnnual Report 2016 55 Quality and Integrity of Our People We strive to operate with high integrity in everything we do. Our control environment depends on high-quality people who maintain our ethical standards. We ensure our people’s ability and integrity through our recruitment standards, training and consistent performance management. The Board approves appointments to our most senior management positions. 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, system access controls, 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 material licences, and conduct post-completion reviews of major projects, to ensure we identify areas for improvement and correct any areas of underperformance or overspend. Internal Audit Our internal audit activities are provided by in-house and external resources, under the leadership of our Head of Risk Management and Internal Audit. 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. All business units complete risk and control self-assessments twice a year. Internal Audit, as part of their work programme, perform independent reviews of these assessments to identify any deficiencies in our controls and how we should address them. External audit also provides observation on the control environment as part of their audit work. The results are communicated to senior management and the Audit Committee. 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. We have an internal control continuous improvement work programme and routinely identify opportunities to strengthen our control environment and improve our risk management capabilities. However, the Board has not identified or been told of any material weaknesses in our internal controls. Risk Management Framework The roles and responsibilities within our risk management framework are set out below: The Board • Has overall responsibility for the Group’s risk management and internal control systems. • Approves our strategic objectives. • 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. GELT • Identifies, addresses and mitigates risks Group-wide. • Monitors our risk management process and internal controls. Audit Committee • Supports the Board in monitoring risk exposure against risk appetite. • Reviews the effectiveness of our risk management and internal control system. Risk Management and Internal Audit Function • Oversees the risk management process and provides guidance on risk management. • Maintains the risk schedule created in consultation with senior management. • Engages with senior management, to review risks and their mitigation. Our Internal Control System The key elements of our internal control systems are set out below. An internal control system cannot completely eliminate the risks we face or ensure we do not have a material misstatement or loss. 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 supplements 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. Accountability Risk Management and Internal Control The Board is responsible for our risk management system and for reviewing our controls and risk mitigations. The risk management system is designed to identify, evaluate and prioritise the risks and uncertainties we face, and applies to the Board, the Audit Committee, GELT, our businesses and our divisional business reviews. The Board sets the Group’s risk appetite, which defines the types and levels of risks that the Board is prepared to seek and accept as the Company executes its strategy. The Board then monitors our risk exposure against the risk appetite for our principal risks and ensures appropriate executive ownership for all risks. This ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. Our principal risks and our mitigations for them are summarised on pages 18 and 19. The Board performed its annual risk review in May 2016. This review involved a review of its risk appetite and a fresh assessment of the types and levels of risk facing Genus as it executes its strategy. This top-down assessment was designed to identify and evaluate any new or emerging risks and identify whether the risk register covered all relevant risks. To further assist its understanding of risk, the Board continued its programme of visits to our local operations and received regular political, economic and industry risk updates from the relevant business groups. The Board also sought regular updates on a number of specific risks during the year, including the Group’s work on its: • emerging market strategy, in particular, • progress in China; the GSS project, particularly in light of the litigation the Group initiated, as detailed in note 7; the in-licensing of IP rights, particularly those relating to gene editing assets; and • acquisition and integration of companies. • 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 considered our internal control self-assessment process, designed to assess compliance with our minimum control standards, the independent internal audit programme and the reports management prepared when the Board approved the interim and final results 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. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 56 Corporate Governance Statement continued Relations with Shareholders Investor Relations Calendar Date Type of communication Location September 2015 October 2015 November 2015 Preliminary Results Roadshow London, Edinburgh Call Sydney AGM and Trading Update Basingstoke, London February 2016 & March 2016 Interim Results Roadshow London, Edinburgh, Los Angeles, Boston April 2016 June 2016 European Roadshow Calls Copenhagen, Frankfurt, London Canada, London, Madison, Paris Our Chief Executive and Group Finance Director regularly meet institutional investors, to discuss our strategy and progress, and to understand how investors view our business. The Chairman also attends certain meetings. The majority of these meetings take place after we release our interim and preliminary results. Key Themes Discussed in Shareholder Meetings Our meetings with shareholders during the year covered a wide range of topics. The common themes included: • Genus’s operational and financial performance. • Market conditions, particularly in dairy, and our initiatives to During the year, our investor relations programme included meetings in several global locations as set out in our Investor Relations Calendar. The Board sets time aside during its meetings to discuss feedback from shareholder meetings, including relevant feedback obtained by independent brokers and our advisers. This allows all Directors to understand major shareholders’ views. • Strategic progress across the Group. • Progress with R&D and our increased spending to accelerate the programme. • Progress with integrating and building on the IVB acquisition. • Capturing a share of the value we deliver to customers. • The opportunity for PRRSv resistant pigs. address them. The AGM also 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 17 November 2016. 8 Number of top 10 shareholders met 18 Number of non-holding institutions and potential investors 54% Proportion of shares held by institutions met during year Note: Shareholdings as at 30 June 2016. Genus plcAnnual Report 2016 Forward Focus “ The Committee spent considerable time overseeing the search for an additional NED, which culminated in the appointment of Lysanne Gray.” 57 Introduction The Nomination Committee’s primary role is to keep the Board’s structure, size and composition under review and to manage appointments to the Board. This year, the Committee increased its focus on formalising this review process and succession planning for the Board. This approach is in line with the increased importance being attached to the work of nomination committees more generally, recognising their critical role in ensuring companies have an effective and well-balanced Board. The Committee also spent considerable time overseeing the search for an additional NED, which culminated in the appointment of Lysanne Gray. Lysanne brings considerable experience of risk management, audit, business operations and the food sector. In addition, the Committee has progressed its review and analysis of each Board member’s skills and experience, to identify any current or future skills gaps that will need to be filled to successfully implement the Group’s strategy. 7 September 2016 Committee Composition and Governance Chairman Bob Lawson Members Nigel Turner Mike Buzzacott Duncan Maskell Lykele van der Broek Lysanne Gray Karim Bitar Focus Areas 2016 • Continued succession planning for the Board and senior management • Development of a documented skills matrix • Encourage development of internal high-calibre people to help develop a pipeline of potential Executive Directors Bob Lawson Chairman Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016Nomination Committee Report 58 Nomination Committee Report continued Lysanne Gray was the outstanding candidate and the Committee was pleased to appoint her. The Board considered that Lysanne’s great depth of experience in risk management, audit and business operations, together with her exposure to UK corporate governance and experience in the food sector, will bring additional value to the Board as Genus continues to deliver its strategy. Succession Planning Process During the year, the Committee formalised and committed to the following succession planning process. It has three phases: • Assessment. The Committee reviews the likely tenure of the NEDs, their independence and their skill sets and, in light of the Group’s direction, identifies possible skills gaps for future years. • Approach. The Committee encourages the development of high-calibre internal candidates, to create a pipeline of potential Executive Directors, and identifies potential new NEDs who could fill key positions (such as Committee chairs) or positions generated by the Group’s strategic direction. • Execution. The Committee holds at least two meetings each year, including one to discuss succession planning, and other meetings as required to discuss appointments or retirements. Diversity Policy Genus recognises and embraces the benefits of Board diversity. A diverse Board has members with different skills, backgrounds, regional and industry experiences, race, gender and other qualities. By bringing these differences to bear in its discussions and decision-making, a diverse Board can help Genus to maintain its competitive advantage. Diversity also links directly to our values, not only by being people focused and responsible, but by encouraging new ideas which deliver for our customers and ultimately drive our results. Our Board diversity policy therefore aims to ensure that we consider diversity in its broadest sense. Women make up 25% of our senior management and Genus will continue to make all Board appointments based on individual merit. Bob Lawson Chairman of the Nomination Committee 7 September 2016 The Committee has written terms of reference, which set out the authority delegated to it by the Board. These are available from our website: www.genusplc.com. Copies of contracts of service and letters of appointment between the Directors and the Company will be available for inspection at the Registered Office of the Company during normal business hours until the conclusion of the Annual General Meeting on 17 November 2016, and at the place of the Annual General Meeting from at least 15 minutes prior to the Annual General Meeting until its conclusion. The Committee’s biographies, along with information on Genus’s other Board members, can be found on pages 46 to 47. Committee Roles and Responsibilities The Committee is responsible for: • making recommendations to the Board on the structure, size and composition of the Board and its Committees; • evaluating the balance of skills, experience, independence, knowledge and diversity on the Board; • succession planning for the Directors and other senior executives; identifying suitable candidates to become Directors, based on merit; and recommending a candidate for Board approval. • • The Committee met three times in the year primarily to discuss the new NED appointment and succession planning. The Committee’s Main Activities During the Year Appointment of Lysanne Gray The Chairman leads the process for making appointments to the Board. In appointing a new NED, the Committee sought a candidate who could chair the Audit Committee, following Mike Buzzacott’s retirement at the 2016 AGM. The Committee also had a strong desire to increase the Board’s diversity. With this in mind, the Committee looked for candidates with the following attributes: • Functional experience – a serving or recently retired chief financial officer or senior divisional finance executive; and – experience of UK plc accounting. • Career experience – global experience, preferably in an adjacent sector; and – literate in IT systems for an expanding global business. • Personal characteristics – high integrity and honesty; – able to add value on ethics, stakeholder management and/or regulatory issues; – collegiate in style; and – willing to constructively challenge and support. To reach the widest possible candidate pool, we engaged Egon Zender, an executive search firm, which has also provided the business with occasional executive coaching services, and provided a clear recruitment brief, as well as seeking referrals from the Board. The Chairman identified candidates for interview, who were presented to the Committee and Executive Directors. Following a one-to-one interview process, the Committee received feedback on each candidate. Candidates were assessed consistently throughout the process, against the role specification. Genus plcAnnual Report 2016 59 Ensuring the Company’s Financial Reporting Integrity “ The Committee continued to focus its efforts on risk management, internal control and the Group’s financial reporting processes.” Mike Buzzacott Chairman of the Audit Committee Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016Dear ShareholderThe 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. We design our annual work programme to deliver these commitments.During the financial year, we focused on risk management, internal control and the Group’s financial reporting processes. We have supported the Board in considering its risk appetite and in reviewing the long-term viability statement and supporting analysis. We have carefully considered the critical accounting policies and judgements, the quality of disclosures, compliance with financial reporting standards and reviewed the half-year and Annual Report and Accounts, together with the related external audit reports. We have also 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.In April 2016, we welcomed a new member to the Committee with the appointment of Lysanne Gray. When I step down from the Board in November 2016, Lysanne will be appointed Chair of the Audit Committee. I am happy to report that the Committee membership continues to comply with the UK Corporate Governance Code and related guidance, with all members being NEDs, and maintains a sound range of financial, commercial and scientific expertise required to fulfil its role effectively. More details on this, and the appointment and induction process for new members, are in the Corporate Governance Statement of this Annual Report.7 September 2016Committee Composition and GovernanceChairmanMike BuzzacottMembersNigel TurnerLysanne GrayDuncan MaskellLykele van der BroekFocus Areas 2016• Biological assets valuation• Goodwill and intangible assets• PensionsAudit Committee Report 60 Audit Committee Report continued 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 FY16, the Committee met the UK Corporate Governance Code’s requirement that at least one Committee member should have recent and relevant financial experience, with Mike Buzzacott and Lysanne Gray both having this 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, through a structured questionnaire, and concluded that it was effective. Committee Role and Responsibilities The Committee’s role and responsibilities include reviewing and monitoring: • the financial reporting process and any significant financial reporting judgements; the integrity of the Group’s financial statements and any formal announcements relating to financial performance; 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, independence and objectivity of the Group’s external auditor, including any non-audit services it provides 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. 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. The Committee’s Main Activities During the Year During the year, the Committee held five meetings 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 these meetings. The Committee members and I also held separate private sessions during the year with the Head of Risk Management and Internal Audit and the external audit partner. At its five meetings, 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 Judgement and assumptions considered Biological assets valuation Goodwill and intangible assets Pensions In compliance with IAS 41, Genus records its biological assets at fair value in the Group balance sheet (£354.4m), with the net valuation movement excluding foreign exchange translation 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 including the income statement increase of £9.4m in the value of porcine and the reduction of £26.5m in the value of bovine biological assets. Genus has £86.0m of goodwill and £78.0m of intangible assets on the Group balance sheet. These balances are tested for any indications of impairment by reference to the forecasts for the relevant cash generating units. Within intangible assets, Genus’s policy is to capitalise certain development costs and to perform periodic impairment reviews of the carrying amounts. At the balance sheet date, the Group had £17.8m of capitalised development expenses in respect of GSS, as well as £7.7m in associated fixed assets. During the year, the Committee reviewed progress against plans, the costs incurred and the project’s timelines to full operation and the outcome of the litigation with ST. The Committee discussed management’s reports in detail, including whether any known issues might block the project’s completion. The Committee also discussed management’s goodwill and intangible asset impairment reviews, the external auditor’s work, including its 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. The Committee received and reviewed management reports on the treatment of pension costs and also received and considered the external auditor’s pensions accounting input. The Committee considered management’s recommendations were appropriate, including the treatment of the gain of £43.9m due to the change in pension increases from RPI to CPI and the use of the 2015 valuation schedule of contributions giving rise to the IFRIC 14 additional liability of £14.9m. 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 plcAnnual Report 2016 61 The Committee assessed the external auditor’s performance in conducting the audit for the June 2015 year end, based on questionnaires completed by key finance staff and Committee members. The questionnaires covered the external auditor’s fulfilment of the audit plan, the auditor’s robustness and perceptiveness in its 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. While noting some opportunities for further improvement, the Committee concluded that the external auditor was effective and was satisfied with the plan put forward by the external auditor to respond to the opportunities for improvement identified. Mike Buzzacott Chairman of the Audit Committee 7 September 2016 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 Head of Risk Management and Internal Audit provided regular reports to the Committee on the work undertaken and management’s responses to proposals made in the internal audit reports issued during the year. The Committee continued to meet the Head of Risk Management and Internal Audit without management being present. The Committee reviewed and was satisfied with the internal audit function’s performance. External Audit The external auditor, Deloitte LLP, was first appointed as the Company’s external auditor for the period ended 30 June 2006. In 2015, the Committee oversaw a formal audit retender process for the audit of the financial year ending 30 June 2016. The process concluded with the selection and subsequent reappointment of Deloitte LLP. The new audit partner’s first audit period is the financial year ended 30 June 2016. The Committee reviewed and agreed the external auditor’s scope of work and fees, held detailed discussions of the results of its audits and continued to meet 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 received details of the external auditor’s non-audit services to the Group, reviewed the nature and monetary levels of these services, which stood at 33% of audit fees, and reviewed compliance with the Company’s Non-Audit Services by Auditor Policy. See note 8 for further details. The Committee was satisfied that using Deloitte for such services did not impair its independence as the Group’s external auditor. 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: • GSS: this is the risk that we are unable to commercialise our GSS technology. The Board continued to receive regular updates throughout the year on go-to- market readiness, as well as the legal proceedings relating to the anti-trust and patent issues connected with this key initiative. • Pensions: the Board was updated on the status of discussions with the Milk Pension Fund in relation to the decision to move benefit indexation to CPI and the progress of the triennial valuation. • Health and Safety: the Board received updates on the controls and mitigation activities in place and/or being implemented to manage this risk, both on Company and third-party premises. The Committee also commissioned work on IT security and data protection from a new Group CIO and on biosecurity and continuity of supply, both of which will report back in FY17. Internal Control System Our risk management process and system of internal controls are described in detail on pages 18 and 19. The Committee reviewed a refreshed approach to monitoring the Group’s implementation of controls and the results of the key financial controls self-assessment process, which is performed on a six-monthly basis. The Committee further reviewed Internal Audit’s findings at each scheduled meeting, and the Group’s whistle blowing policy and bribery prevention procedures and conducted its annual review of the effectiveness of the Group’s internal controls and disclosures. The Committee’s review of the Group’s system of internal control did not identify any material deficiencies. However, Genus routinely identifies and actions control improvement opportunities and the Committee discussed with management various opportunities to further strengthen the Company’s system of internal control. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 62 A Pivotal Year for Genus in Advancing and Delivering Our Strategy “ Our strategy of transforming the business into an agricultural biotechnology pioneer requires important and necessary changes to the structure of reward at a pivotal time for the business.” Letter from the Chairman Dear Shareholder On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for 2016. Accelerating Strategic Progress We have seen a year of significant progress for Genus. We have reported a second year of double-digit adjusted profit before tax growth in constant currency coupled with significant advances in delivery of our strategy. You will see examples of this progress throughout the Annual Report, but particular highlights include the successful integration and growth of our IVB business, preparations for the commercial launch of our proprietary sexed semen technology and an industry breakthrough with the generation of the first PRRSv resistant pigs. Our strategy is transforming the business into an agricultural biotechnology pioneer, with a strong pipeline of innovation. Gene editing, in particular, has the potential to be transformative for our business, although the time frame to develop and realise these opportunities is long term. In light of this strategic progress, during the year the Remuneration Committee (the ‘Committee’) reviewed the Company’s Remuneration Policy to assess whether it supports delivery of the Group’s strategy. Maintaining this momentum requires stable leadership and aligning reward to reflect the progress made. We identified specific goals that we wanted to achieve through our approach to remuneration as follows: • flexibility to recognise very significant biotechnology and strategic Company milestones; • ability to retain and attract top talent from a global talent pool; • alignment of the interests of the executive and shareholders. Having considered the progress made and the strategic direction of Genus together with these goals, our conclusion is that changes to the executive reward structure are required. We believe that these are important and necessary changes at a pivotal time for the business. Having discussed this as a Committee and with a number of our key shareholders, we believe these are important changes for our Remuneration Policy for 2017 and beyond, and will be seeking approval for this at the AGM, one year ahead of the normal cycle. This remuneration report is therefore split into two sections: • the proposed new Directors’ Remuneration Policy (‘Remuneration Policy’); and the Annual Report on Remuneration (‘Remuneration Report’). • Our Revised Remuneration Policy from 2017 As we transform Genus, we need the ability to recognise better the key strategic milestones for the Company (‘Company Nigel Turner Senior Independent Director and Chairman of the Remuneration Committee Genus plcAnnual Report 2016Directors’ Remuneration ReportSection A: Annual Statement 63 Milestones’), particularly as their benefit may only be reflected some years later in traditional incentive plan measurements. We also need the flexibility to recognise and retain key individuals who exist as part of a global talent pool, now and in the future, so that we optimise the execution of these initiatives to maximise the Company’s long-term performance and shareholder value. Our core bonus opportunity for each Executive Director will remain at 125% of salary. This will continue to be measured using a combination of financial and non-financial metrics, and 25% of the award made under the core bonus element will continue to be made in shares and deferred for three years. We will introduce a new element to the annual bonus to recognise progress towards and achievement of Company Milestones. Such milestones are significant events in the Company’s development. At the start of the year the Committee will determine what needs to be achieved during the year to ultimately achieve the Company Milestone(s). Any awards under this element (up to 75% of salary for the Chief Executive and 50% of salary for the Group Finance Director) will be made fully in shares and deferred for three years. This allows us to recognise industry-changing events for Genus that build future long-term value for shareholders and retain individuals who will continue to make such events happen. We will retrospectively disclose the Company Milestones within our Remuneration Report so shareholders have full visibility of the significance we have placed on particular strategic events. As a result the total possible opportunity under the annual bonus will increase from 125% of salary to 200% for the Chief Executive and to 175% for the Group Finance Director. Financial targets will continue to govern at least half of any award under the annual bonus. If awards were made under all elements of the bonus, the total award in shares deferred for three years would increase from 25% of any award to over 50% of the annual award for the Chief Executive. This change is designed to recognise progress, drive alignment with the business and aid retention of executives through increased shareholding. We believe it is important for our Executive Directors to be fully aligned to Company performance through significant shareholding levels in the business. Alongside the change to annual bonus, we are doubling the Executive Directors’ minimum shareholding requirement to 200% of salary (currently 100%). In order to complement the above policy changes, you will see some amendments to the way we propose to implement the Remuneration Policy for 2017 in relation to the Genus plc 2014 Performance Share Plan (‘2014 PSP’). Having reviewed market conditions, changes to our business strategy and the level of awards coming through our existing plans, we will adjust the EPS range for performance such that the annual EPS growth range will be set at a threshold level of 5% for 20% vesting (currently 6%) through to 15% for full vesting (currently 20%). The previous range was set ahead of the decision to accelerate further investment in research and development as part of our strategy, which has potential to create significant value for shareholders. We believe that this amended range continues to reflect stretching performance against our agreed strategy, and that annual 15% EPS growth should warrant full awards under the 2014 PSP. This change will be made for awards granted from 2016. To support our transformation towards becoming an animal biotechnology business, we also propose that certain costs in connection with the development of gene editing are excluded from the calculation of awards. We want to encourage vigorous pursuit of the opportunities: because expenditure year on year will be variable, we want to ensure that considerations of the remuneration impact do not influence executive decision-making. By excluding gene editing, we drive the behaviours we seek from the executives and encourage management to invest for the long-term interests of shareholders. We will follow this approach in determining the vesting of long-term awards in 2017 and 2018. Shareholder Engagement The Committee consulted major shareholders in July and August 2016 on the proposed changes to the Remuneration Policy. We are grateful to our shareholders for their time and feedback, which was challenging but supportive: they were very understanding of the direction the business is taking and wish to retain, as we do, the current management team to deliver on the potential. Outcomes for 2016 Remuneration In reaching the 2016 outcomes, the Committee has excluded amounts charged to the Profit and Loss account and cash flows which were incurred in relation to our investment in gene editing. This investment opportunity was not foreseen when targets were set. Management reacted quickly to secure this value for shareholders and to build our IP position following the PRRSv resistant pig discovery. We have therefore excluded these costs from the calculation of awards under the annual bonus and performance share plan. The Committee is firmly of the view that this is the right approach and creates an appropriate alignment between underlying performance and reward. Adjusted profit before tax, after an adjustment of £0.9m of gene editing investment, grew 12% in constant currency. The performance of PIC, and specifically the business in China, resulted in good Group performance overall. The Committee therefore determined that 78.2% of maximum annual bonus should be awarded to the Chief Executive and 78.2% to the Group Finance Director. Under the long-term incentive, following adjustment for gene editing costs and share-based payments as explained further within this report, the 2013 award partially vested. The three- year EPS growth rate was 25.4% and RPI was 5.7%, resulting in an average annual EPS growth over the period of RPI+6.6%. 34.4% of the award will vest for Chief Executive and 31.4% for Group Finance Director. Shareholders’ Views The Committee was delighted that it received 99.55% approval of the Remuneration Report in 2015. We will continue to engage with shareholders, taking into account shareholder views and best practice. On behalf of the Board, I would like to thank shareholders for their continued support. The Committee hopes that the report is clear and succinct and, as always, would welcome feedback. If you wish to contact me, please email me at remunerationchair@genusplc.com. The Committee looks forward to your support for our Remuneration Report at the 2016 AGM. Nigel Turner Senior Independent Director and Chairman of the Remuneration Committee Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 64 Directors’ Remuneration Report continued Section A: Annual Statement continued This Remuneration Report has been prepared so it complies with the 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 Financial Conduct Authority’s Listing Rules. 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 its 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. Genus plcAnnual Report 2016 Section B: Directors’ Remuneration Policy Report The revised Remuneration Policy is set out in this section. It is being put to shareholders for approval at the AGM to be held on 17 November 2016. This is one year earlier than originally intended, as a result of the changes the Committee is proposing. The Remuneration Policy is intended to apply, subject to shareholder approval, for three years from the 2016 AGM. Where a material change to this policy is considered, the Company will consult with major shareholders prior to submitting the revised policy to all shareholders for approval. 65 • incentive structures should be simple, reward long-term sustained growth and key strategic milestones, rather than volatile performance; • the policy should be clearly aligned with shareholders’ interests, take due account of current best practice 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. Directors’ Remuneration Policy Report The key objectives of the Remuneration Policy are that: • pay should be competitive, so we can attract and retain the best people; • fixed pay (base salary, pension and benefits) should take account of appropriate external benchmarks (both in the UK where we are listed and globally) and pay for our other employees; • short and long-term incentive pay should provide the opportunity to earn upper quartile total remuneration, subject to delivering our above-market long-term growth aspirations; • we can recognise significant biotechnology and strategic Company Milestones; • 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; How we are Evolving Reward to Meet Identified Goals Goal Current Policy How we are Evolving Our Policy Greater flexibility to recognise the long term benefit of achieving key Company Milestones • Weighted towards short term financial metrics • Introduction of a new element within the annual bonus to recognise Company Milestones. • Whether this is included within the annual bonus determined annually in advance by the Committee. A strengthening in our ability to retain top talent • Market competitive base pay • Compulsory holding period for shares released • Amended EPS performance range for the 2016 award maintaining stretch. from PSP (awards made since 2014) • Increase in maximum possible award under the annual bonus. Greater alignment of the interests of the executive and shareholders • Compulsory deferral into shares within • Greater deferral within annual bonus structure, annual bonus • Long-term incentive plan awarded in shares • Minimum shareholding requirement where over half of the award may be deferred for three years. • Increase in minimum shareholding requirements to 200% of salary. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 66 Directors’ Remuneration Report continued Section B: Directors’ Remuneration Policy Report continued Future Policy Table Base Salary Benefits Pension To provide competitive fixed remuneration that will attract and retain key employees and reflect their experience and position in the Group. To provide competitive benefits and to attract and retain high-calibre employees. To provide a competitive Company contribution that enables effective retirement planning. Operation Operation 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. Reviewed annually as the norm, with increases from 2017 usually effective from 1 September. Benefits generally include a car allowance and insured benefits (e.g. life assurance and private medical insurance). 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. 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. Maximum Maximum Maximum Annual percentage increases are generally consistent with the range awarded across the Group and in line with the salary awards for the home country that the executive works in. 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. 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 76. Pension contribution or salary supplements in lieu of pension are provided to a maximum of 25% of basic salary. Performance Conditions Performance Conditions Performance Conditions A broad assessment of individual and Company performance is used as part of the salary review. The salaries payable to the Executive Directors from 1 July 2016 are disclosed on page 74. Changes Any salary award from 2017 onwards will be effective from September rather than July. This aligns pay awards with a review of the full year’s performance. None. None. Changes None. Changes None. Genus plcAnnual Report 2016 67 Annual Bonus The bonus is split into two parts: A Core Bonus element incentivises against a combination of financial targets and personal objectives. A Company Milestone element incentivises achievement of significant Company Milestones. This element is included at the discretion of the Committee. In combination, these elements support achievement of the Group’s goals. A dividend equivalent provision operates, enabling dividends to be paid (in cash or shares) on deferred shares that vest. Therefore the maximum under the annual bonus is 200% of salary for the Chief Executive, 175% for other Executive Directors. For financial performance targets under the Core Bonus element, bonus is earned on a graduated scale. The level of payment at threshold is set annually but will not exceed 25% of maximum. Maximum awards (100% payable) are for substantial outperformance against targets. A summary of the performance targets for 2017 is included on page 74. Operation 25% of the payments under the Core Bonus element are made in Company shares deferred for three years subject to continued service. The remaining award is payable in cash. Payments under the Company Milestone element are made fully in Company shares deferred for three years subject to continued service. Maximum Core Bonus opportunity: 125% of salary The Committee has the discretion to award an additional variable award (up to 75% of salary for the Chief Executive, up to 50% of salary for other Executive Directors) to reward achievement of company milestones under the Company Milestone element. Performance Conditions Core 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. The specific performance measures, targets and weightings are set every year to align with the Company’s strategy. Financial targets govern the majority of Core Bonus payments and are typically linked to the Group’s key performance indicators (e.g. profit and cash generation), Changes Additional element of bonus (Company Milestone element) worth a maximum of 75% of salary per annum for significant strategic achievements. Awards from this element in deferred shares further align executives with shareholders and supports Malus and clawback provisions may apply for a period of three years from the point of award, in the event of a material misstatement of the Group’s financial results. Share awards are made under the Deferred Share Bonus Plan (‘DSBP’). Awards (under either the Core Bonus element or Company Milestone element) will vest after three years, subject to continued service. The Committee has the discretion to determine in which year the award is earned, and can choose to recognise achievement in a subsequent year. The maximum award in any year will be up to 75% for the Chief Executive, 50% for other Executive Directors. with a minority earned based on performance against personal objectives. The Company Milestone element may be included by the Committee to incentivise and reward the achievement of pre-determined Company Milestones. The Committee has the discretion to adjust the bonus outcome in light of overall underlying performance. Any adjustment made will be disclosed within the following Annual Report on Remuneration. a long-term and significant personal shareholding requirement. In years when a Company Milestone element is included, the annual bonus maximum increases from 125% to 200% of salary for the Chief Executive, 175% for other Executive Directors. A diagram illustrating the structure of the annual bonus is shown on page 74. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 68 Directors’ Remuneration Report continued Section B: Directors’ Remuneration Policy Report continued Future Policy Table continued 2014 PSP The 2014 PSP incentivises executives to achieve superior returns to shareholders over a three-year period, to retain key individuals and align their interests with shareholders. Share Ownership Guidelines To align executives and shareholders. Operation Operation Eligibility to receive awards is at the Committee’s discretion each year. Awards vest three years from grant, subject to continued employment and satisfaction of challenging three-year performance targets. For awards granted from 2014, the after-tax number of vested shares must be held for at least a two-year period following vesting. Executives are expected to achieve a shareholding of 200% of salary, by retaining 50% of the net of tax number of vested shares under the Company’s DSBP and PSP. A dividend equivalent provision enables dividends to be paid (in cash or shares) on shares that vest. Malus and clawback provisions may apply for a period of three years, in the event of a material misstatement of the Group’s financial results. In addition, the Chief Executive Officer will retain the entire after tax number of Restricted Stock that was granted to him shortly after his appointment. Maximum Maximum annual award of 200% of salary (300% of salary in exceptional circumstances, such as recruitment). Performance Conditions 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 outperformance 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. Changes None. Maximum Not applicable. Performance Conditions A summary of the performance targets for 2017 is given on page 80. Not applicable. 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. Changes To align the executives with shareholder interests, minimum shareholding doubled from 100% of salary to 200% of salary. Genus plcAnnual Report 2016 69 NEDs To provide compensation that attracts high-calibre individuals and reflects their experience and knowledge. Operation 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. 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. Maximum 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. The periodic review may result in an increase beyond the fees currently payable. Non-Executive Directors also receive reimbursement of reasonable expenses incurred in connection with Company business and may settle any tax incurred in relation to these. The fees payable for 2017 are stated on page 82. Performance Conditions None. Changes Clarification of approach to expenses and that Genus may settle any tax liability due in relation to reasonable expenses incurred. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 70 Directors’ Remuneration Report continued Section B: Directors’ Remuneration Policy Report continued Approach to Recruitment Remuneration Area Overall Policy and operation When hiring a new Executive Director or making internal promotions to the Board, the Committee will apply the same policy as for existing Executive Directors, as detailed in the Remuneration Policy. The rationale for the package offered will be explained in the next Annual Report on Remuneration. For internal promotions, commitments made prior to appointment will typically be honoured, as the executive transitions to the new remuneration arrangements. Awards made in the transition year would be pro-rated to reflect the remaining period of the vesting period or financial year. Any award will take into consideration awards granted prior to promotion. Base salary Base salary would be set at an appropriate level, to recruit the best candidate based on their skills, experience and current remuneration. If the salary is initially set at a discount to those offered in companies of a similar size, geographical reach and complexity, the salary will be increased over a period of time to bring the salary to the desired level, subject to individual performance. Benefits Benefits provisions would be in line with the normal policy. In addition, reimbursement of legal fees in connection with recruitment may be reimbursed. Pension Annual bonus Where appropriate, the executive may also receive relocation benefits or other benefits reflecting normal market practice in the territory in which the Executive Director is employed. Pension provision would be in line with normal policy. Incentive awards would be made under the annual bonus, in line with the normal policy. The maximum award under the Policy is 200% of salary. Where an individual joins after the start of a scheme year, awards may be pro-rated for the portion of the financial year. Long-term incentives Awards under the Performance Share Plan would be granted in line with the policy outlined for the current Executive Directors. In the event of internal promotion, existing awards made under the Plan will continue over their original vesting period and remain subject to their terms at the date of grant. The Committee may choose to make an additional award (on the same basis as other Executive Directors), subject to the overall limit permitted under the Plan in any year. Where an individual joins after the start of the incentive grant, an award may be made to bring the executive onto the ‘in-flight’ cycle, subject to the limits set out in the policy. Awards may be pro-rated for the portion of vesting period served. Buy-out awards In addition to normal incentive awards, buy-out awards may be made to reflect value forfeited through an individual leaving their current employer. If required, the Committee would seek to reflect the nature, timing and value of awards forgone in any replacement awards. Awards may be made in cash, shares or any other method as deemed appropriate by the Committee. Where possible, share awards will be replaced with share awards. Where performance conditions apply to the forfeited awards, performance conditions will be applied to the replacement award or the reward size adjusted downwards. In establishing the appropriate value of any buy-out, the Committee would also take into account the value of the other elements of the new remuneration package. The Committee would aim to minimise the cost to the Company. However, buy-out awards are not subject to a formal maximum. Any awards would be no more valuable than those being replaced. Malus and Clawback Malus and clawback may operate in respect of the annual bonus and long-term incentives. These provisions enable the Company to reduce the payout and vesting levels or to recover the relevant value from cash bonus payout or vesting of shares. These provisions could take effect in the event of erroneous or misstated financial accounts or other performance indicators within two years of the reporting date. Discretions The Committee retains certain discretions, which are set out in full in the plan rules. These include but are not limited to: • • • any adjustments required as a result of a corporate event (such as a transaction, corporate restructuring, special dividend or the timing of any bonus payment; the impact of a change of control or restructuring; and rights issue). Genus plcAnnual Report 2016 71 In line with the 2004 and 2014 PSP plan rules, the Committee can amend the performance conditions and/or measures in respect of any award or payment, if one or more event(s) occur which would lead the Committee to consider that it would be appropriate to do so, provided that such an amendment would not be materially less difficult to satisfy than the unaltered performance condition would have been, but for the event in question. Should the Committee use any of the discretions set out above, they would, where relevant, be disclosed in the next Annual Report on Remuneration. The views of major shareholders would be sought. Discretion in relation to the Company’s Share Incentive Plan scheme would be exercised within the parameters of the HMRC approved plan status and the listing rules. 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: Colour the individual bits on top of each curve 3000 2500 2000 1500 1000 500 0 0 0 0 £ ’ £710 100% £1,806 30% 30% 39% £2,903 38% 38% 24% Fixed Target Maximum £1,741 37% 37% 25% £1,091 30% 30% 40% Target Maximum £441 100% Fixed Chief Executive – Karim Bitar Group Finance Director – Stephen Wilson Fixed Pay Short Term Incentives Long Term Incentives • Fixed Pay – salaries as at 1 July 2016 + benefits (using the value to 30 June 2016 as a proxy) + pension (25% of salary for Chief Executive and 15% of salary for Group Finance Director). • Below Threshold – fixed pay only. • Target – annual bonus pays at 50% of the maximum (core bonus and Company Milestone elements), PSP vests at 50% of the maximum award. • Maximum – annual bonus and PSP pay out in full. • Share price growth has been ignored. Remuneration Policy for Other Employees The remuneration structure for the Genus Executive Leadership Team (‘GELT’) follows the same approach as the Executive Directors but with a lower maximum opportunity. Eligibility for the Company Milestone element below the Executive Directors is based on the Chief Executive’s recommendations and subject to approval by the Committee. The Committee approves the annual objectives and targets for GELT together with salary awards, bonus targets and out-turns. For the tier of management below GELT, the remuneration structure consists of base salary, benefits, pension, bonus and long-term share awards. Performance measures are tailored to reflect the position of the individual and the part of the business in which they operate. Below the leadership group, the structure and amount of remuneration vary by work level. Generally, at less senior levels of the Group, total remuneration is less weighted towards performance-related pay, consisting of base salary, bonus and benefits relevant to the local jurisdiction and market practice. The maximum provision and incentive opportunity available are determined by the seniority and specialism of the role. The Group HR Director is invited to present to the Committee on the proposals for salary increases for the employee population generally and any other changes to the Remuneration Policy. The Committee approves the share award policy for all employees and the value of awards to all executives and potential new hires. The Company did not consult with employees when drafting the Directors’ Remuneration Report. How Shareholders’ Views are Taken into Account We consulted shareholders on the changes we are proposing for the new policy, specifically the short term bonus and EPS range for the long term award. During July and August, we spoke to four of our largest shareholders, sharing the business progress and remuneration proposals. We explained that, when the original policy was approved in 2014, the rate of return was expected to be higher. Investments that we have recently made – PRRSv resistant pigs, CRISPR-Cas9 technology, IVB Brasil – have brought forward costs, which in the short term, will impact EPS growth. We shared that we want to retain the very high calibre management team, and incentivise them to deliver on the opportunities. We are grateful to our shareholders for their time and feedback, which was challenging but supportive: they were very understanding of the direction the business is taking and wish to retain, as we do, the current management team to deliver on the potential. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 72 Directors’ Remuneration Report continued Section B: Directors’ Remuneration Policy Report continued The Committee remains committed to ongoing dialogue with the Company’s shareholders and will continue to consult with shareholders in the future. 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 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 or at the Company’s registered office. 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 share bonus awards is determined by the DSBP rules. In general, awards lapse when employment ceases. However, the deferred share 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 vesting of any awards granted under the 2014 PSP will depend on the business’s performance, based on the full performance period, subject to the Committee’s final judgement. Awards will be pro-rated based on the time that the individual was employed, although the Committee can decide not to pro-rate an award if it thinks it is inappropriate 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 the pro-rating described above. This treatment will 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. 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. 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. Stephen Wilson retired from this appointment on 5 May 2016. Genus plcAnnual Report 2016 Section C: At a Glance What Executive Directors Were Paid in 2016 Chief Executive Group Finance Director Explanation 73 £364,140 These were the salaries set on 1 July 2015. Base salary Benefits Pension £537,367 £23,000 £134,342 £14,000 £54,621 Annual bonus £525,545 £356,129 Performance Share Plan £385,283 £208,521 Total £1,605,537 £997,411 This comprises a car allowance and insured benefits for both executives and a medical screen. This is a cash allowance (25% of salary for the Chief Executive and 15% for the Group Finance Director) in lieu of participation in a pension plan. For the short-term bonus award, after adjustment for gene editing costs, the Group’s financial performance meant that awards for both the Chief Executive and Group Finance Director were 78.2% of maximum. This is made up of: • Adjusted profit before tax growth in constant currency of 12% (excluding gene editing costs) ➝ up to 60% of bonus – 67.9% achieved. • Cash generation of £18.6m (excluding gene editing investment) ➝ up to 15% of bonus – 100% achieved. • Non-financial strategic targets ➝ up to 25% of bonus – The Chief Executive and Group Finance Director both received 90% for this element (22.5%). We explain the link between pay and corporate performance on page 75 and provide detailed disclosure of the bonus targets and adjustment for gene editing costs on page 76. The adjusted EPS figure was 60.7p. The figure used for determining vesting of PSP awards includes the impact of the cost of share based payments. In addition, the Committee exercised discretion to exclude the impact of gene editing costs incurred, resulting in a revised EPS number of 57.1p. This EPS level exceeds the threshold for these awards and therefore the Tier 1 awards granted to the Chief Executive and to the Group Finance Director (on 26 September 2013) partially vest. This is calculated using the average share price for the final quarter of the financial year ending 30 June 2016, which was 1,532p. This should be viewed in the context of: • A total shareholder return over the 2015/6 financial year of £97.8m (+11.2%) • Adjusted EPS growth of +7% (10% in constant currency) Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 74 Directors’ Remuneration Report continued Section C: At a Glance continued What Executive Directors Can Earn in 2017 and How Base salary Benefits Pension Annual bonus Chief Executive Group Finance Director Explanation £548,114 £25,000 £137,029 £371,423 The Executive Directors have been awarded a salary increase of 2% as from 1 July 2016: this will be paid in September, backdated to July. £14,000 There is no change to benefits. £55,713 The Chief Executive continues to be paid a 25% cash allowance in lieu of participation in a pension plan; the Group Finance Director receives a 15% cash allowance. A core bonus element with target value of 62.5% of salary and a maximum bonus of 125% of salary A core bonus element with target value of 62.5% of salary and a maximum bonus of 125% of salary Core Bonus Element The measures for the core bonus element will remain: • Adjusted profit before tax growth ➝ 80% of salary. • Cash generation ➝ 20% of salary. • Personal objectives ➝ 25% of salary. A Company Milestone element with an award of up to 75% of salary for achievement of Company Milestone A Company Milestone element with an award of up to 50% of salary for achievement of Company Milestone Performance Share Plan – November 2014 awards Performance Share Plan – awards that will be granted in 2016 and may vest in 2019 Up to 86,271 shares Up to 51,153 shares An award over shares worth 200% of salary An award over shares worth 175% of salary For the adjusted profit before tax growth measure, target bonus requires 10% growth and maximum bonus requires 15% growth in constant currency. Gene editing costs will be excluded in the calculation of adjusted profit growth and cash generation for 2016/17. Company Milestone Element The Committee has determined eligibility for an award in respect of achieving an identified Company milestone during 2017. Due to commercial sensitivity, this will be disclosed retrospectively in the 2017 Annual Report. The opportunity is up to 75% of salary for the Chief Executive and up to 50% for the Group Finance Director. These levels have been set following consideration of reward opportunities available from both UK and international benchmarks. The vesting of these awards depends on the adjusted EPS achieved in 2017. Full details are given on page 80. This will be calculated excluding gene editing costs as described elsewhere in this report. The vesting of these awards will be subject to an adjusted EPS growth condition, with the 2019 EPS being compared to the 2016 adjusted EPS of 57.1p (excluding gene editing costs). 5% annual growth ➝ threshold 20% vesting. 15% annual growth ➝ 100% vesting. Vesting levels will be calculated on a straight line basis between the above values. This will be calculated excluding gene editing costs as described elsewhere in this report. Annual Bonus Structure for Chief Executive: 2017 2017 2018 2019 2020 2021 Core Bonus Element 25% of salary Personal 75% of any award: Paid in cash i d e n m r e t e D d r a w A i d e n m r e t e D d r a w A 80% of salary PBT 20% of salary Cash flow 75% of salary Remuneration Committee determine annually in advance if element included Up to 200% of salary Company Milestone Element Total Annual Bonus opportunity for Chief Executive 25% of any award: Compulsory Share Deferral 100% of any award: Compulsory Share Deferral Shares Released Shares Released Genus plcAnnual Report 2016 Section D: Remuneration and Performance Statement Genus’s Strategy and its Link to Performance-Related Pay Increase genetic control and product differentiation Success measured by R&D and business innovation Proprietary genetic improvement and dissemination positions 75 Link to Remuneration Policy Captured within the personal objectives element of the annual bonus and through the Company Milestone element Targeting key markets and segments Volume growth Operating profit Measured through the profit element of the annual bonus Over the longer term will flow into EPS, used to determine vesting under the PSP Plan Sharing in the value delivered Cash conversion Measured through the cash element of the annual bonus See pages 65 to 72 for our Remuneration Policy Performance Components and Their Impact on Remuneration 2015 2016 Movement % Impact on remuneration Adjusted Results Revenue £398.5m £388.3m (3) Input to annual bonus profit and EPS in Performance Share Plan. Adjusted profit before tax Cash generation £46.6m £22.6m £49.7m £15.7m Adjusted earnings per share Dividend per share 56.8p 19.5p 60.7p 21.4p 7 Annual bonus measure. (31) Annual bonus measure; performance reflects increased capital investment in 2015/16. 7 Performance Share Plan performance condition. 10 Executives rewarded via dividend equivalent feature of deferred bonuses and Performance Share Plan awards. Share price at year end 1,427p 1,565p 10 Determines the value of deferred bonuses and Performance Share Plan awards. Values in the table are in actual currency as shown in the Annual Report. A number of adjustments are made to these for the purposes of calculating awards under our incentive plans as described within this report. Executive Directors’ Alignment to Share Price Shares owned Maximum rights to shares Total share exposure Value at share price on 1 July 2015 (£)1 Value at share price on 30 June 2016 (£)2 Consequence of a +/- 50 pence share price change (£) Difference (£) Chief Executive 50,213 258,298 308,511 4,451,814 4,828,197 376,383 154,256 Group Finance Director 8,433 153,728 162,161 2,339,983 2,537,820 197,837 81,081 Conclusion Executives are aligned to share price 1 Value of share price on 1 July 2015 – £14.43. 2 Value of share price on 30 June 2016 – £15.65. Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 76 Directors’ Remuneration Report continued Section E: Annual Report on Remuneration Introduction There are extensive legal and best practice disclosure obligations with which we comply in this section of the Directors’ Remuneration Report. The Directors’ Remuneration Report is subject to an advisory vote at the AGM, with the new Directors’ Remuneration Policy in Section B being subject to a separate binding vote at this year’s AGM. Balancing this formality with a desire to have a clear and understandable report, we have split this section into the following chapters: 1. What the Executive Directors were paid in 2016. 2. What the Executive Directors can earn in 2017. 3. The process the Committee followed to arrive at these decisions. 4. How the Chief Executive’s pay compares to shareholder returns over the past six years and to employees’ pay. 5. The Chairman and Non-Executive Directors’ fees. 6. Details of the Directors’ shareholdings and rights to shares. 7. Details of the Directors’ contracts and Non-Executive Directors’ letters of appointment. 1. What the Executive Directors Were Paid in 2016 Executive Directors’ Single Total Remuneration Figure (Audited) The following table shows a single total figure of remuneration for the 2016 financial year for each of the Executive Directors and compares this figure to the prior year. Variable pay remains in line with last year, based on another year of good overall performance. Karim Bitar Stephen Wilson Year 2016 2015 2016 2015 Salary and fees £000 Benefits1 £000 Pension2 £000 537 527 364 357 23 24 14 14 135 132 54 53 Subtotal for fixed pay £000 695 683 432 424 Bonus3 £000 526 650 356 435 Long-term incentives4 £000 Subtotal for variable pay £000 385 2895 209 1445 911 939 565 579 Total £000 1,606 1,6225 997 1,0035 1 Benefits comprise a car allowance of £20,000 for Karim Bitar and £12,000 for Stephen Wilson, insured benefits include life assurance and private medical insurance and a medical screen. 2 Executive Directors receive a cash allowance in lieu of pension shown in the Pension column. 3 Bonus earned excludes gene editing costs incurred in 2016 (outlined in the following section) and includes the 25% which is deferred into Company shares for three years. 4 The value of long-term incentives is determined by the number of awards vesting in relation to performance ended 30 June 2016. Dividend equivalents are not added to awards made under the long-term incentives. The value shown for 2016 is based on the average share price for the final three months of the 2016 financial year (which was 1,532p). 5 The 2015 values shown in the previous Annual Report have been updated to reflect the actual value at vesting (share price was 1,496p (vesting 8 December 2015) for awards for the Chief Executive and 1,431p (vesting 29 February 2016) for awards for the Group Finance Director). How the Bonuses for 2016 Were Calculated The 2016 bonuses for Executive Directors were calculated by reference to performance against a challenging sliding scale of profit, cash flow and personal targets. As disclosed in the Remuneration Committee Chairman’s letter, the Committee exercised discretion to exclude costs relating to gene editing incurred in the year when calculating awards under the plans. These costs were unforeseen at the time of setting targets for these awards and the Committee believes that the targets remain as stretching as when the awards were originally made. This ensured management’s reward was not unfairly affected by decisions to make the right long-term investment decisions on behalf of the business. The following are the results achieved in each element of the annual bonus incentive in a year of solid performance. Bonus target Strategic objective Proportion of bonus Actual 2016 performance Threshold Target Stretch Adjusted PBT1 Cash flow Year-on-year profit growth2 Generate cash for reinvestment and dividend3 60% £52.1m £46.6m £51.2m £53.5m 15% £18.6m £11.0m £14.0m £17.0m Extent to which targets were met (%) 67.9% 100% Non-financial strategic objectives To build the foundation for future growth 25% See table below Chief Executive 90% Group Finance Director 90% 1 Adjusted PBT in constant currency (actual currency was £49.7m). 2 Adjusted PBT excludes gene editing costs of £0.9m, as agreed by the Remuneration Committee. Without this adjustment the award level would have been 49.6% of maximum for this part of the bonus. 3 Cash flow excludes gene editing costs of £0.9m and capital expenditure of £2.0m, as agreed by the Remuneration Committee. Without this adjustment the award would have been 78% of maximum. The financial elements of the bonus are payable on a straight-line basis between each threshold, target and stretch level. Overall extent to which the bonus targets were met: Chief Executive 78.2% Group Finance Director 78.2% Genus plcAnnual Report 2016 77 Performance against non-financial strategic objectives related to targets set in a number of areas that included customer, people, and product and service improvement. Retrospective disclosure of performance against these targets is: Executive Director Karim Bitar Key achievements in the year Customer Achieved porcine targeted profit, volume and royalty growth in key markets, most significantly in China. Payout against maximum of 25% of bonus 90% In the bovine business, global volumes of doses declined 6%, adjusted operating profit lower in tough market conditions. Improved capability and tools through GMS 2.0 launch, IVB laboratory facilities operational in US and at advanced construction in Mexico; Indian JV stud now fully operational. People Further strengthening of leadership and succession, specifically in research and development. Product and service improvement Stephen Wilson Results Customer/ stakeholders People Staff engagement scores in staff survey maintained their very high level (see page 40). Significant improvement in H&S execution. Continued acceleration of genetic improvement in PIC and reduced genetic lag to 3.3 years (like-for- like sites). This is described in more detail on page 16 (Key Performance Indicators). Significant progress on GSS: scaling up of technology to commercial launch readiness and pursuit of litigation. Significant progress on gene editing, with breeding of PRRSv resistant pigs and strategic collaboration with Caribou Biosciences on CRISPR-Cas9 gene editing technology. Strategic review completed, with foundations of beef business set for 2016/17. Strengthened the good relationships with the Company’s shareholders, evidenced by broker feedback following roadshows. Further strengthening of team, with high-quality recruits into Finance and IT. Product and service improvement Led the strategic review for the Board. Continued support for acquisitions, licensing and partnerships, including University of Missouri (PRRSv) and Caribou Biosciences (gene editing technology). Introduced IT tools supporting better sales force engagement with customers through mobile technology and for the business with improved forecasting and budgeting tools. Results Reviewed the capital structure and refreshed external borrowing facilities. Led negotiations with the Milk Pension Fund to adopt CPI (replacing RPI) for increases. Maintained tight internal cost management, risk management and controls. 90% As a result of this performance, the bonuses awarded to the Executive Directors were: Karim Bitar Stephen Wilson 1 This is the number that appears in the single total remuneration figure on page 76. 2 The number of shares will be calculated in September when bonuses are paid. Extent to which targets were met Maximum bonus Actual total bonus1 Bonus payable immediately Deferred bonus2 78.2% £671,709 £525,545 £394,159 £131,386 78.2% £455,175 £356,129 £267,097 £89,032 Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Genus plc Annual Report 2016 78 Directors’ Remuneration Report continued Section E: Annual Report on Remuneration continued How the Long-Term Incentive Figure Was Calculated in the Single Total Remuneration Table Karim Bitar’s and Stephen Wilson’s 2014 PSP awards granted on 26 September 2013 were both subject to an adjusted EPS performance condition, based on the growth in adjusted EPS from a base year of 2013 compared to the adjusted EPS in 2016. These awards were granted under our former policy. The performance targets were as follows in relation to the awards: Tier 1 The range of targets applicable to awards with a value of 125% of salary for the Chief Executive and 100% of salary to the Group Finance Director were as follows: Per annum growth in adjusted EPS*