Genus plc.
Annual Report 2017

Plain-text annual report

PIONEERING ANIMAL GENETIC IMPROVEMENT Genus plc | Annual Report 2017 A WORLD LEADER IN ANIMAL GENETIC IMPROVEMENT GENUS HELPS FARMERS TO PRODUCE HIGH-QUALITY MEAT AND MILK MORE EFFICIENTLY AND SUSTAINABLY, WHICH INCREASES THE AVAILABILITY OF SAFE, AFFORDABLE ANIMAL PROTEIN FOR CONSUMERS. STRATEGIC REPORT 02 2017 Highlights 04 Business Model 08 Market Overview 10 Strategic Framework 12 Principal Risks and Uncertainties 14 Chairman’s Statement 16 Chief Executive’s Review 18 Strategy in Action 24 Divisional Reviews 30 Financial Review 34 People and Culture 36 Responsible Business CORPORATE GOVERNANCE 40 Chairman’s Letter 42 Board of Directors and Company Secretary 44 Genus Executive Leadership Team 46 The Board’s Year in Review 50 Corporate Governance Statement 55 Nomination Committee Report 57 Audit Committee Report 60 Directors’ Remuneration Report 62 Annual Report on Remuneration 82 Other Statutory Disclosures 84 Directors’ Responsibilities Statement Independent Auditor’s Report FINANCIAL STATEMENTS 85 91 Group Income Statement Group Statement of 92 Comprehensive Income 93 Group Statement of Changes in Equity 94 Group Balance Sheet 95 Group Statement of Cash Flows 96 Notes to the Group Financial Statements 149 Parent Company Balance Sheet 150 Parent Company Statement of 151 Changes in Equity Notes to the Parent Company Financial Statements ADDITIONAL INFORMATION 159 Five Year Record – Consolidated Results 160 Glossary 162 Notice of Annual General Meeting 173 Advisers BUSINESS MODEL For more information See pages 4-7 STRATEGY IN ACTION For more information See pages 18-23 PEOPLE AND CULTURE For more information See pages 34-35 IN 2017, GENUS ACHIEVED AN IMPROVING FINANCIAL PERFORMANCE THROUGH THE YEAR AND MADE STRONG STRATEGIC PROGRESS KARIM BITAR, CEO Genus plc | Annual Report 2017 01 STRATEGIC REPORT2017 Highlights A YEAR OF SUCCESSFUL DEVELOPMENT WITH STRONG STRATEGIC PROGRESS AND SOLID FINANCIAL PERFORMANCE FINANCIAL HIGHLIGHTS1 £459.1m £56.4m £40.7m • Revenue of £459.1m increased 18% (6% in constant currency) with strong porcine revenues, up 20% (7% in constant currency), particularly in Asia and from royalties, and a return to growth in bovine revenues which increased 13% (2% in constant currency) • Adjusted profit before tax up 13% to £56.4m (down 1% in constant currency) with strong performance in Genus PIC, particularly China, offset by planned increased R&D investments and lower Genus ABS results • Statutory profit before tax down 33% to £40.7m, primarily due to lower pension related exceptional credits of £5.7m compared with a £44.2m credit in the prior year, partially offset by a smaller reduction in the value of biological assets of £1.1m (2016: £17.1m decrease) GROUP REVENUE (£M) ADJUSTED PROFIT BEFORE TAX (£M) STATUTORY PROFIT BEFORE TAX (£M) 2017 2016 2015 2014 2013 0 459.1 388.3 398.5 372.2 345.3 2017 2016 2015 2014 2013 459 0.0 9.4 18.8 28.2 56.4 49.7 46.6 2017 2016 2015 2014 2013 40.7 38.2 33.4 60.9 57.8 47.0 56.4 0.0 60.9 39.3 42.5 37.6 OPERATIONAL HIGHLIGHTS3 CONTINUED OPERATING PROFIT GROWTH OF 7% IN PIC ON VOLUMES UP 4%, WITH PARTICULAR STRENGTH IN ASIA IMPROVED SECOND HALF PERFORMANCE IN ABS AS A RESULT OF ACTIONS TAKEN TO STRENGTHEN EXECUTION AND IMPROVE EFFICIENCY • Secured three new Top 20 porcine customers in • Volume growth of 8% in H2 resulting in volume growth North America of 1% overall in the year (2016: 6% lower) • Signed three new royalty agreements with key Chinese porcine customers, raising our total number of Chinese royalty customers to eight4 • Acquired Hermitage’s porcine genetics and entered into a strategic distribution and production partnership in March 2017, with encouraging early results • Full year operating profit 13% lower (30% lower in H1) • Appointed new Chief Operating Officer (‘COO’) of Genus ABS Dairy in January 2017 • IVB continued to grow its presence with large accounts in the US and in its newly established Mexican business, which is already performing well • Acquired the remaining 49% stake in IVB for £11.4m in March 2017 to further accelerate integration and growth 1 For definitions of adjusted profit, free cash flow, cash conversion and return on invested capital, see Financial Review on pages 30 to 33. Results discussed throughout the Annual Report are on an adjusted basis unless otherwise stated. 2 For definition of adjusted earnings per share, see note 12 on page 108. 3 Based on adjusted results. 4 5 The PRRSv programme refers to our development-phase gene editing programme to confer resistance to pigs to Porcine Reproductive and Includes one new royalty agreement signed post period end in July 2017. Respiratory Syndrome virus. 02 Genus plc | Annual Report 2017 69.4p £25.4m 19.9% • Adjusted basic earnings per share2 up 14% to 69.4p (unchanged in constant currency) and statutory basic earnings per share down 34% to 53.8p, reflecting the lower exceptional pension credit • Strong free cash flow of £25.4m (2016: £15.7m), with solid cash conversion of 84% (2016: 88%) and good cash inflows from joint ventures (‘JVs’) of £8.3m (2016: £3.4m) • After tax return on invested capital improved to 19.9% (2016: 19.1%) • Recommended dividend increased by 10% to 23.6p, well covered by adjusted earnings at 2.9 times (2016: 2.8 times) • Net debt to EBITDA of 1.5x (2016: 1.4x) after acquisitions and investments of £30.0m (2016: £7.2m) ADJUSTED BASIC EARNINGS PER SHARE (PENCE) FREE CASH FLOW (£M) DIVIDEND PER SHARE (PENCE) 2017 2016 2015 2014 2013 69.4 60.7 56.8 46.5 49.1 2017 2016 2015 2014 2013 25.4 22.6 26.2 15.7 17.2 2017 2016 2015 2014 2013 23.6 21.4 19.5 17.7 16.1 0.00000011.56666723.13333334.70000046.26666757.83333369.400000 0.0 26.2 0.0 23.6 RESEARCH AND DEVELOPMENT INVESTMENT INCREASED AS PLANNED BY 27% (12% IN CONSTANT CURRENCY) AS KEY INITIATIVES IN GENOMIC SELECTION, GENDER SKEW AND GENE EDITING MADE SIGNIFICANT PROGRESS • Genus Sexed Semen (‘GSS’) technology successfully scaled up and manufacturing sexed semen in the US and India. Sexcel, the marketing brand of GSS, launched with customers globally on 1 September 2017 and sales have now commenced • Successfully obtained a permanent injunction against Sexing Technologies (‘ST’). ST commenced new patent infringement litigation in June 2017 which will be vigorously defended • Launched new dairy genetic improvement programme in September 2016, De Novo, in partnership with leading breeder De-Su with promising early results in scale and quality of genetics produced • PRRSv resistance development programme progressing as planned: launched a gene editing venture with new experimental facilities, optimised the molecular scissors for carrying out edits, obtained an Investigational New Animal Drug (‘INAD’) regulatory application from the US Food and Drug Administration (‘FDA’) and created the first gene edited pregnancies for the programme5 This Strategic Report was approved by the Board of Directors on 6 September 2017 and signed on its behalf by: Karim Bitar Chief Executive Stephen Wilson Group Finance Director 03 STRATEGIC REPORTGenus plc | Annual Report 2017 Business Model PRODUCING SUPERIOR BREEDING LIVESTOCK THROUGH GENETIC IMPROVEMENT WHAT WE DO Genus is a world-leading animal genetics company. We continuously develop better bovine and porcine breeding livestock with desirable characteristics, helping farmers to produce better quality meat and milk more efficiently and sustainably. Examples of desirable characteristics include feed efficiency, disease resistance, protein and fat content, and fertility. HOW WE DO IT We analyse animals’ DNA and look for markers that are linked to desirable characteristics. We then select animals with the strongest genetic profile and breed them to produce even stronger offspring, which we then sell to our customers in the form of live breeding animals, semen or embryos. £100M+ INVESTED IN 2017 04 We also own technology that enables us to screen and process semen for desirable traits, such as gender, and license technology to make precise, desirable gene edits to animals’ DNA, which we are employing on product development programmes. For more information See pages 6-7 £40.5M £101.7M £72.6M £66.2M £57.0M 2013 2014 2015 2016 2017 ● R&D1 ● Capex2 ● Acquisitions & Investments 1 2 Includes GSS capitalised development expenses. Includes biological asset increases due to purchases. Genus plc | Annual Report 2017OUR BUSINESS SERVING PORK, BEEF AND DAIRY FARMERS WITH SUPERIOR GENETICS PORK DAIRY AND BEEF Our porcine genetics business PIC sells genetically superior sows, boars and semen, to breed pigs with desirable characteristics for pork production. Our bovine genetics business ABS primarily sells bull semen and embryos, which are delivered through artificial insemination to breed dairy and beef cattle with desirable characteristics for milk and beef production. ABS’s subsidiary IVB offers comprehensive IVF services. SALES PRESENCE IN 35+COUNTRIES1 2,000+ CUSTOMERS GLOBALLY SALES PRESENCE IN 70+ COUNTRIES3 50K+CUSTOMERS 139M MPEs2 17M+ CATTLE INSEMINATIONS AND EMBRYO TRANSFERS REVENUE OPERATING PROFIT £250m £196m £21m £446M £116M £95m Note: Excludes Genus R&D revenues & costs. ● Porcine ● Bovine Including through franchises, distributors and joint ventures. 1 2 MPEs refers to market pig equivalents, a standardised measure of slaughter animals produced by our customers that contain our genetics. 3 Including through distributors. 05 STRATEGIC REPORTGenus plc | Annual Report 2017Business Model continued HOW WE DRIVE AND DELIVER GENETIC IMPROVEMENT 1 PRODUCE SUPERIOR GENETICS OUR STRENGTHS AND RESOURCES SHARED PROPRIETARY TECHNOLOGY PLATFORM GENOMIC SELECTION Breeding successive generations of animals by scientifically selecting superior parents through DNA analysis BIOSYSTEMS ENGINEERING GSS: processing bovine semen using laser technology to deliver offspring of a desired sex GENE EDITING Making precise, controllable changes directly to animals’ genes GENOME SCIENCE Researching DNA to understand the links between genetic code and the observable characteristics of animals, and how these can be influenced GLOBAL POSITION Genus is uniquely placed as a global player, with leading market positions and well-respected brands ELITE ANIMALS We own elite livestock with desirable traits for farmers PROPRIETARY TECHNOLOGY We own leading genomic and breeding technology, developed in-house and through strategic partnerships, or licensed from strategic partners CUSTOMER RELATIONSHIPS We serve over 50,000 customers globally, including world-leading meat and milk producers EXPERT PEOPLE We have over 100 PhD qualified employees and collaborative relationships with leading research institutions SUPPLY CHAIN AND DISTRIBUTION We have production facilities in key locations worldwide, coupled with sales forces and agents in over 70 countries FINANCIAL STRENGTH Genus is a cash generative company with a strong financial position, allowing us to invest for the future LINK TO STRATEGY 1 Increasing Genetic Control and Product Differentiation 2 Targeting Key Markets and Segments 3 Sharing in the Value Delivered 06 Genus plc | Annual Report 20172 3 DELIVER IMPROVED ANIMALS DELIVER VALUE AND PRICE ACCORDINGLY DELIVERING FOR OUR STAKEHOLDERS CUSTOMERS We help our customers to produce better meat and milk more efficiently, improving their profitability CONSUMERS We increase consumers’ access to safe, affordable and nutritious animal protein COMMUNITIES AND ENVIRONMENT We make farming more sustainable by reducing the consumption of feed, water and other resources PEOPLE Our employees can develop their careers and apply their scientific knowledge to benefit our customers and society INVESTORS By sharing in the value we deliver to customers, we deliver returns to our investors and generate funds to reinvest in our company CUSTOMER 139m MPEs produced CUSTOMER 6-7m dairy and beef calves born GENETICS PRIMARILY SOLD ON MULTI-YEAR ROYALTY AGREEMENTS BOARS IN STUD Over 30,000 boars in stud, producing semen Superior pigs with desirable traits for farmers EXPANSION HERDS Over 300,000 pure line breeding females managed every day GENETICS PRICED ON INDICES (SEMEN) OR THE INDEX RATING OF BOTH PARENTS (EMBRYOS) STUD Over 17m straws of semen sold Over 500superior dairy and beef bulls with desirable traits for farmers IVF LAB Over 240,000 embryos produced Note: MPEs refers to market pig equivalents, a standardised measure of slaughter animals that contain our genetics. 07 STRATEGIC REPORTGenus plc | Annual Report 2017Market Overview GROWING IMPACT OF ANIMAL GENETIC IMPROVEMENT LONG-TERM DRIVERS OF ANIMAL GENETIC IMPROVEMENT THE GLOBAL POPULATION IS GROWING AND MOVING TO CITIES. URBAN POPULATIONS TEND TO BECOME WEALTHIER, LEADING TO GREATER APPETITE FOR ANIMAL PROTEIN. 3.2 3.3 3.3 6.3 3.3 3.4 6.0 5.7 5.4 5.1 WORLD POPULATION GROWTH 1990-2050 BILLION 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 1995 2.3 1990 Urban 4.7 4.3 4.0 3.2 2.9 2.6 3.3 3.3 3.4 3.4 Rural 3.0 3.6 3.3 3.2 3.4 Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). 08 INCREASING COMPETITION FOR RESOURCES SUCH AS LAND AND WATER PUTS PRESSURE ON FARMERS TO USE SUPERIOR GENETICS AND NEW TECHNOLOGIES TO IMPROVE EFFICIENCY. GROWING CONSUMER AWARENESS IS DRIVING DEMAND FOR HIGH-QUALITY PRODUCTS, WHICH ARE PRODUCED WITH FEWER DRUGS. FARMS ARE CONSOLIDATING. LARGER PRODUCERS TYPICALLY MEASURE PERFORMANCE IN MORE DETAIL AND BETTER UNDERSTAND THE BENEFITS OF SUPERIOR GENETICS. CHANGES IN PIG POPULATION BY SIZE OF FARM IN CHINA 100 80 60 40 20 0 6% 37% 57% 12% 49% 39% 2006 2009 18% 54% 28% 2012 22% 58% 20% 2015 30% 60% 10% 2020F Commercial size farms (3,000+ heads/farm) Mid size farms (50-3,000 heads/farm) Small size farms (1-49 heads/farm) Source: Rabobank. Genus plc | Annual Report 2017 CONSOLIDATION AND ADOPTION OF TECHNOLOGY CONSOLIDATION OF HIGH-QUALITY BREEDING HERDS. THE NUMBER OF BREEDERS CONSISTENTLY PRODUCING HIGH RANKING DAIRY GENETICS HAS FALLEN IN RECENT YEARS, DUE TO THE CONSOLIDATION OF ELITE GENETIC HERDS. ELITE PORCINE BREEDING HERDS ARE ALSO CONSOLIDATING, WITH SOME BREEDERS ENTERING INTO STRATEGIC ALLIANCES TO PRODUCE AND DISTRIBUTE OTHERS’ GENETICS. CONSOLIDATION MEANS THAT THERE ARE FEWER SOURCES OF ELITE GENETICS, AND HENCE IT IS INCREASINGLY IMPORTANT FOR GENETICS COMPANIES TO OWN AND CONTROL THEIR OWN GENETICS. ADOPTION OF TECHNOLOGY. ADOPTION OF SEMEN SEXING TECHNOLOGY AND IVF IS GROWING FAST ACROSS DAIRY AND BEEF HERDS. THESE ARE LIKELY TO REMAIN AREAS OF STRONG MARKET GROWTH IN THE COMING YEARS. CONVENTIONAL SEMEN +1% GROWTH IN +10% GROWTH IN +20% GROWTH IN SEXED SEMEN EMBRYOS Note: Growth rates refer to actual volume growth rates for 2017 delivered by ABS. Conventional and sexed volumes relate to global dairy semen volumes. Embryos relate to total global embryo volumes. NO. OF BREEDERS 2016 2008 57 107 TOP 20 BREEDER SHARE OF TOP BULLS 2016 2008 78% 48% Source: Genus analysis; US Holstein breeders represented in the Top 200 NM$ rankings by birth year. BREAKTHROUGH TECHNOLOGY AND DATA. THE ANIMAL GENETICS INDUSTRY IS PURSUING ALTERNATIVE SOLUTIONS IN THE FIGHT AGAINST ANIMAL DISEASE AND SUFFERING. THESE INCLUDE USING DATA AND HEALTH- FOCUSED BREEDING INDICES, AND EXPLORING BREAKTHROUGH TECHNOLOGY, INCLUDING GENE EDITING. OUR POSITION IN THE ANIMAL GENETICS INDUSTRY GENUS IS A WORLD LEADER IN ANIMAL GENETIC IMPROVEMENT. OUR COMPETITORS ARE LARGELY PRIVATE COMPANIES AND FARMER-OWNED COOPERATIVES. ABS MARKET SHARE1 PIC MARKET SHARE2 Global porcine genetic supply: Technified/commercial production ~ 50% Less technified production ~ 50% Share of addressable market: ● 8% ABS ● 8% Competitor 1 ● 6% Competitor 2 ● 5% Competitor 3 ● 4% Competitor 4 ● 69% Other ● 23% PIC ● 14% Competitor 1 ● 10% Competitor 2 ● 4% Competitor 3 3% Competitor 4 12% Internal Customer Programmes ● ● ● 34% Other 1 Source: Governmental agencies, local bovine genetics and agriculture organisations, Genus estimates. Market shares represent the estimated share of combined dairy and beef volumes (semen and embryos) in ABS’s Top 30 target markets for dairy and Top 8 target markets for beef. 2 Source: Governmental agencies, local independent pork organisations, Genus estimates. Global porcine genetic supply represents production in top pig production markets, including small and non- industrial farming activity in those markets. Market shares in addressable market represent the estimated share of production in technified/commercial production in top pig production markets. 09 STRATEGIC REPORTGenus plc | Annual Report 2017 Strategic Framework CAPTURING OPPORTUNITIES SIGNIFICANT GROWTH INCREASING GENETIC CONTROL AND PRODUCT DIFFERENTIATION GENUS HELPS FARMERS TO PRODUCE HIGH QUALITY MEAT AND MILK MORE EFFICIENTLY AND SUSTAINABLY. WE DO THIS BY CONTINUOUSLY PRODUCING AND DELIVERING BETTER GENETICS TO THEM. TARGETING KEY MARKETS AND SEGMENTS SHARING IN THE VALUE DELIVERED To maintain and enhance our product leadership We do this by using the latest technology to improve continuously our own herds, investing in new technology to strengthen our capabilities, and protecting our unique position by choosing how to deploy our genes and technology. To deliver the right offering for the right customers We target leading global and regional meat and milk producers, and offer them our superior breeding animals, semen and embryos, together with technical services, tailored to their needs. To capture an appropriate share of the value we deliver to customers, aligning our interests with theirs We do this by demonstrating the value of our genetics through trials and data, and linking our pricing to genetic indices and our customers’ productivity. 10 Genus plc | Annual Report 2017 What does success look like? Creating better breeding animals for farmers, measured against proprietary and public indices weighted towards economic traits that help farmers operate more efficiently and sustainably. What does success look like? Growing volumes, particularly with large commercial dairies and integrated meat producers who focus heavily on the efficiency and sustainability of their production systems. What does success look like? Generating profit resulting from the superior quality and performance of our products in customers’ systems. How do we measure this success? PORCINE GENETIC IMPROVEMENT INDEX (US$) NET MERIT RANKINGS (DAUGHTER PROVEN AND GENOMIC BULLS) 4.12 3.68 2017 2016 2015 2014 2013 0.000 0.824 Measures the genetic gain we achieve in our porcine nucleus herds. 1.94 1.648 3.76 2.42 3.296 2.472 4.120 13 PROVEN 17 17 23 19 GENOMIC 18 2017 2016 2015 2014 2013 0 Monitors our success in developing bulls that are highly ranked, because of their genetic performance and economic merit. 30 31 42 11 11 Definition The index measures the marginal economic value improvement in customers’ US$ 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 a step change in genetic gain value improvement in recent years and has delivered a further improvement of US$3.68 per pig, per annum in 2017. Definition The number of our generally available Holstein bulls listed in the top 100 Net Merit US$ rankings for progeny tested and the top 100 Genomic Net Merit rankings for genomically tested sires. Performance Genus maintained a competitive industry line-up. We have continued to strengthen our position in the Holstein genomic bull category while also maintaining our position in proven bulls. How do we measure this success? DAIRY AND BEEF VOLUME GROWTH (%) PORCINE VOLUME GROWTH (%) 1 (6) 2017 2016 2015 2014 2013 -6 -5 -4 -3 -2 -1 0 1 Tracks our global unit sales growth in dairy and beef. 5 5 2 3 4 5 6 6 4 4 2017 2016 2015 2014 2013 Tracks the growth in the number of pigs with PIC genetics globally. 9 6 5 Definition The change in dairy, beef and sorted units of semen and embryos delivered or produced for customers in the year. Performance Bovine volumes returned to growth, improving by 1% to 17.7 million units in varying markets. Europe grew 6% as dairy markets improved and Asia grew 7% driven by India. However, the North America (-5%) and Latin America (-2%) markets remained challenging. 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. Performance Volumes grew 4% to 139 million MPEs, with very strong double-digit growth in Asia from our China and Vietnam businesses and continued royalty volume growth across all regions. Volumes of upfront animals, where MPEs are counted at the time of initial sale, declined as planned. How do we measure this success? OPERATING PROFIT PER MPE (£) OPERATING PROFIT PER DOSE (£) 0.61 0.51 2017 2016 2015 2014 2013 Monitors porcine profitability by unit. 0.38 0.43 0.41 0.00 0.61 0.57 0.60 2017 2016 2015 2014 2013 1.19 Monitors bovine profitability by unit. 0.88 1.03 0.48 0.96 0.24 0.72 0.00 1.20 Definition Net porcine adjusted operating profit globally, expressed per MPE. Results include our share of Agroceres PIC, our Brazilian Joint Venture. Performance Operating profit per MPE was £0.61, up £0.10, helped by strong growth in our China porcine business, beneficial exchange rates and higher royalty volumes across all sales regions. Definition Net dairy and beef adjusted operating profit globally, expressed per dose of semen or embryo delivered. Excludes India, as its characteristics are substantially different to the rest of our bovine business and the start up costs of our GSS manufacturing. Performance Operating profit per dose was £0.57, down £0.03. Challenging dairy markets, particularly in North America and Asia, held back operating profit growth in our sales regions. Initiatives to improve profitability include growing our presence with large Enterprise dairies, expanding IVF services and launching SexcelTM. 11 STRATEGIC REPORTGenus plc | Annual Report 2017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 research and developments (‘R&D’) portfolio. The table below outlines the principal risks and uncertainties facing 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. As part of this assessment, we considered the Group’s increased investment in leading- edge R&D, along with the technical and customer-facing skills needed to deliver our growth plans. In response to the latter issue, we identified and evaluated a new principal risk relating to our ability to hire and retain talented people, as detailed below. 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 our risk appetite and identify and manage risks, can be found in the Corporate Governance Statement on pages 52 and 53. LINK TO STRATEGY 1 Increasing Genetic Control and Product Differentiation 2 Targeting Key Markets and Segments 3 Sharing in the Value Delivered STRATEGY RISK CHANGE IN 2017 STRATEGIC RISKS RISK DESCRIPTION DEVELOPING PRODUCTS WITH COMPETITIVE ADVANTAGE HOW WE MANAGE RISK • Development programmes fail to produce best genetics for customers. Increased competition to secure elite genetics. • Dedicated teams align our product development to customer requirements. We use large-scale data and advanced genomic analysis to ensure our breeding goals are met. We frequently measure our performance against competitors in customers’ systems, to ensure the value added by our genetics remains competitive. COMMERCIALISING GSS TECHNOLOGY • Failure to manage the technical, production and financial risks associated with launching a new product technology. • The industry response to the introduction of competition into the sexed semen market. We have rigorously prepared for the successful commercial launch of our GSS technology, supported by dedicated internal resources and external expert advice. We initiated legal proceedings against ST in the US in 2014, to open the market to competition. 1 2 1 DEVELOPING AND COMMERCIALISING GENE EDITING TECHNOLOGIES 1 2 • Failure to develop successfully and commercialise gene editing technologies due to technical, intellectual property (‘IP’), market, regulatory or financial barriers. ‘Game-changing’ technology secured by competitors. • We maintain awareness of new technology opportunities through a wide network of academic and industry contacts. Our R&D Portfolio Management Team (‘R&D PMT’) oversees our own research, ensures we correctly prioritise our R&D investments and assesses the adequacy of resources and the relevant IP landscapes. We have formal collaboration agreements with key partners, to ensure responsible exploration and development of technologies and the protection of IP. The Board is updated regularly on key development projects. CAPTURING VALUE THROUGH ACQUISITIONS 1 2 3 • 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 material projects. We also have a structured post-acquisition integration planning and execution process. 12 No change in porcine but decreased in bovine, due to the acquisition of De Novo genetics, which has secured increased access to elite dairy genetics. Reduced. The granting of a permanent injunction against ST in the US legal proceedings removed certain research, marketing and non-compete restrictions. Technical progress on GSS continued as we scaled up for commercial launch in September 2017, with strong product trial results. In June 2017 new patent infringement proceedings were filed by ST in the US which the Group is defending vigorously (see note 7). Increased, due to our discovery and pursuit of new gene editing applications and consequent higher investment in 2018 and beyond. Key initiatives are progressing through the R&D life cycle. No change. The acquisition process continues to provide valuable and timely access to the right investment opportunities. Our experiences with post-acquisition integration provide a platform for integrating newly acquired businesses. Genus plc | Annual Report 2017RISK DESCRIPTION GROWING IN EMERGING MARKETS • Failure to appropriately develop our business in China and other emerging markets. OPERATIONAL RISKS PROTECTING IP HOW WE MANAGE RISK STRATEGY RISK CHANGE IN 2017 We have a robust organisation, blending local and expatriate executives, supported by the global species teams. This allows us to grow our business in key markets, while managing risks and ensuring we comply with our global standards. 2 3 No change. Business performance has continued to be strong in China. However, we remain exposed to the pig cycle in China, as the majority of our business there is not yet on a royalty model. • Failure to protect our IP could mean Genus-developed genetic material, methods, systems and technology become freely available to third parties. We have a global, cross-functional process to identify and protect our IP. Our customer contracts and our selection of multipliers and joint venture partners include appropriate measures to protect our IP. We conduct robust ‘Freedom To Operate’ searches to identify third-party rights to technology. No change. 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. • Lower demand for our products, due to industry-wide disease outbreaks. We have stringent biosecurity standards, with independent reviews throughout the year to ensure compliance. We regularly review the geographical diversity of our production facilities, to avoid over-reliance on single sites. 1 2 No change. HIRING AND RETAINING TALENTED PEOPLE 1 2 • Failure to attract, recruit, develop and retain the global talent needed to deliver our R&D programmes and growth plans in our chosen markets. We have a robust talent and succession planning process, including annual assessments of our global talent pool and active leadership development programmes. The Group’s reward and remuneration policies are reviewed regularly, to ensure their competitiveness. We work closely with a number of specialist recruitment agencies to identify candidates with the skills we need. 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. • 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. 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 (‘MPF’) and chair the group of participating employers. The fund is closed to future service and has an agreed deficit recovery plan, based on the 2015 actuarial valuation. In agreement with the employers, the trustees implemented an investment de-risking strategy and have started a liability management exercise. We also monitor the strengths of other employers in the fund and have retained external consultants to provide expert advice. 3 n/a New principal risk. Growth in new business areas (including IVB and GSS) and delivery of our R&D programmes depend on having people with appropriate skills. No change. Reduced. During the year the trustees and Genus consented to a Flexible Appointment Agreement (‘FAA’) resulting in the NMR Group leaving the scheme after making payments to the fund and to Genus. More details on this arrangement can be found in note 27. 13 STRATEGIC REPORTGenus plc | Annual Report 2017Chairman’s Statement A YEAR OF GOOD STRATEGIC PROGRESS THIS WAS ANOTHER GOOD YEAR FOR GENUS, AS WE GREW THE TOP LINE AND BALANCED OUR INCREASED INVESTMENT WITH THE DISCIPLINE OF PROVIDING AN ATTRACTIVE RETURN ON CAPITAL AND RISING DIVIDENDS FOR SHAREHOLDERS This was another good year for Genus, as we grew revenue and invested for the future. Genus PIC was a strong contributor to our financial performance, with increases in both revenue and adjusted operating profit. While Genus ABS had a challenging start to the year, our actions contributed to an improving performance in the second half. Our planned increase in R&D investment, particularly in gene editing, is already delivering encouraging results. We balance our investment in growth with the discipline of providing shareholders with an attractive return on capital and rising dividends. The Board is recommending a final dividend of 16.2 pence per share, giving a total dividend for the year of 23.6 pence per share. This represents an increase of 10% over last year’s total dividend of 21.4 pence. The final dividend will be paid on 1 December 2017, to shareholders on the register at the close of business on 17 November 2017. Overseeing Our Strategy One of the Board’s key roles is to approve the Group’s strategy and monitor our progress against it. Each year, we hold a strategic review with our Executive leadership team, which gives us the insight we need into the Group’s competitive landscape, the challenges it faces and management’s plans for addressing the compelling opportunities that they see. We also receive regular updates on specific aspects of the business throughout the year and visit our operations, to give us first-hand experience of key areas of the Group and its markets. This year, we spent a week visiting our operations and customers in the UK and Spain. 14 Genus plc | Annual Report 2017 This work positions the Board to provide effective scrutiny of the Group’s strategic development. This year we were pleased to approve our joint venture with De-Su, the acquisition of Hermitage’s porcine genetics and our ongoing strategic partnership, the early acquisition of the outstanding 49% of IVB, and our PRRSv programme. We also received regular updates on progress with our court case with Inguran LLC, which concluded successfully. This paved the way for the launch of our new sexed semen product, Sexcel in the US, India and other key markets around the world, from 1 September 2017. As anticipated, ST has launched new patent litigation, which we will vigorously defend. FINAL DIVIDEND PER SHARE 16.2P 23.6P 10% TOTAL DIVIDEND FOR THE YEAR (PER SHARE) TOTAL DIVIDEND INCREASE OUR VALUES CUSTOMER CENTRIC RESULTS DRIVEN PIONEERING 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. PEOPLE FOCUSED We are a business rooted in science but built around our people. We inspire, challenge and support everyone to perform, develop and grow. We treat others with respect and we invite views and feedback to help us improve. Board and People The Board recognises the importance of providing independent, strong and effective leadership to the Group. We were therefore pleased that the latest evaluation shows that the Board and its Committees continue to function well. Other than Mike Buzzacott’s previously announced retirement, the Board’s composition was unchanged during the year and we remained focused on succession planning and diversity. More information on the Board and its activities can be found on pages 44 to 46 of this report. The Board delegates responsibility for the Group’s day-to-day running to the Executive leadership team. As a result, we are keenly aware of the need to attract and retain the best people. During the year, we kept abreast of succession planning for the Genus Executive Leadership Team (‘GELT’) and the appointment of a talented new COO for the Genus ABS Dairy business. Our succession planning is demonstrated by the internal promotion to the role of Group Human Resources Director following the incumbent’s planned retirement. More generally, Genus’s people strategy is to support our growth plans by recruiting, developing, retaining and inspiring people who couple deep operational or technical expertise with genuine passion for our industry. The Group has nearly 2,700 employees around the world, who all play their part in helping our customers to improve their performance and productivity. On behalf of the Board, I thank them for their contribution to our success this year. The Board is responsible for setting and demonstrating the behaviours and ethical standards we want to see throughout Genus. The Group has a fair, open and respectful culture, underpinned by our values (see left). Summary We made good progress with our strategy in 2017, while delivering financial performance in line with our expectations. The strategic investments we have made will enable us to build on our strong position in our global markets and ensure we have a sustainable business model. We look forward with confidence, as we deliver benefits to our customers, shareholders and other stakeholders. RESPONSIBLE We are ethical to our core. We feel a deep sense of responsibility to our customers, colleagues, animals, communities and shareholders. We are honest, reliable and trustworthy. We mean what we say and do what we say. Bob Lawson Chairman 6 September 2017 15 STRATEGIC REPORTGenus plc | Annual Report 2017Chief Executive’s Review PIONEERING ANIMAL GENETIC IMPROVEMENT Our R&D programme had a planned increased investment in gene editing, as well as other areas of research and product development. We achieved further strong results in porcine product development, with rates of genetic improvement exceeding our target. We also incurred pre-launch costs for our GSS technology, which we brought to market as planned after the end of the financial year. Strategic Progress In addition to our increased investment in R&D, we concluded a number of important strategic developments in 2017, which continued to build Genus’s leading position in pioneering animal genetic improvement. Our efforts to improve Genus PIC’s European business in recent years were rewarded with robust growth in 2017. To strengthen further this revitalised operation, we formed a strategic partnership with Hermitage and acquired its porcine genetics. This will help us to accelerate genetic improvement for the customers of both organisations, whilst we benefit from the substantial footprint of Hermitage’s European supply chain. Early results of the partnership are encouraging. In bovine, IVB’s strong performance led us to acquire the outstanding 49% a year early in March 2017. The business continues to expand in the US and, with the successful launch of its operations in the important Mexican market. In 2017, Genus achieved an improving financial performance through the year and made strong strategic progress. We grew our investment in our leading-edge proprietary technology platform and positioned Genus to seize the significant growth opportunities ahead of us. Group Performance The Group performed in line with our expectations for the year. In constant currency terms, revenue increased by 6% while adjusted profit before tax including joint ventures was 1% lower, after our planned increase in R&D investment. In actual currency, revenue and adjusted profit before tax rose by 18% and 13% respectively. Genus PIC continued to perform well, with adjusted operating profit including joint ventures up by 7% in constant currency. Growth in Asia was strong, particularly in China. Genus PIC continued to extend its royalty base, grew its presence with key integrated producers in China and won business with new large customers in North America. We were disappointed with Genus ABS’s performance in the first half of the year and took action to address the issues, including appointing a new COO for ABS Dairy to sharpen our commercial execution and drive our strategic initiatives. ABS Dairy performance improved in the second half, resulting in adjusted operating profits including non- controlling interest for the full year declining by 13% in constant currency compared with a 30% decline in the first half. We continue to be pleased with the performance of IVB. 16 WE EXPECT TO MAKE FURTHER STRATEGIC PROGRESS AS WE CONTINUE TO INVEST IN R&D We also formed De Novo Genetics, a majority owned joint venture with De-Su, the leading independent Holstein breeder. De Novo has a world- leading dairy genetic improvement programme and significantly expands and strengthens our capability in dairy product development. While the biological results will take time to come through, De Novo has already produced industry leading bulls. We launched Sexcel, our proprietary semen sexing product, on 1 September 2017. This followed the granting in our favour of a permanent injunction against ST, which was ruled to have wilfully maintained monopoly power in the US market for processing sexed Genus plc | Annual Report 2017 REVENUE IN ACTUAL CURRENCY 18% 13% ADJUSTED PROFIT BEFORE TAX IN ACTUAL CURRENCY I also extend my thanks to all my colleagues around the world. Their hard work and dedication to delivering for our customers enables Genus to succeed. Outlook The fundamental drivers of our markets remain favourable, with demand for superior genetics continuing to grow. We expect to make further strategic progress, as we continue to invest in R&D and the benefits of this year’s initiatives come through in both PIC and ABS. We anticipate making further positive financial progress in 2018 and to perform in line with our expectations. Karim Bitar Chief Executive 6 September 2017 bovine semen. We are excited by the prospects for Sexcel, which is the first competing technology in this space for over a decade. Sexcel is now available in the US, India and key markets around the world. ST has launched new patent litigation, which we had anticipated and will vigorously defend. Our longer-term PRRSv-resistance programme made good progress, in conjunction with our partner Caribou Biosciences. We have edited elite pig embryos and implanted them, achieving pregnancies. We co-founded RenOVAte Biosciences, a biotech company focused on creating gene edited livestock, which is supporting this programme. We also secured an INAD from the US FDA and continued to develop constructive relationships with regulatory authorities. People Dr Nate Zwald joined us in January 2017 as COO of ABS Dairy. We are very pleased with the leadership, customer- centricity and people focus he has already brought to the business. Catherine Glickman stepped down as Group HR Director and will retire from Genus at the end of 2017. I want to thank Catherine for her outstanding contribution to our progress during her six years at Genus. Angelle Rosata was promoted to the role from July 2017 and we welcome her to the GELT. 17 STRATEGIC REPORTGenus plc | Annual Report 2017Strategy in Action INCREASING GENETIC CONTROL AND PRODUCT DIFFERENTIATION 18 Genus plc | Annual Report 2017STRATEGIC REPORT 75% EXPECTED TOTAL NEW US HOLSTEIN BULLS SOURCED IN LESS THAN FIVE YEARS CASE STUDY In September 2016 we joined forces with De-Su Holsteins, North America’s leading independent breeder of Holstein bulls, to create De Novo Genetics. The majority- owned venture combines the best genetics from both partners in a joint breeding programme, focused on creating elite and differentiated Holstein genetics. This follows years of effective collaboration between the two organisations. Owning and producing your own genetics is becoming increasingly important in a consolidating genetics marketplace. De Novo will accelerate our ability to produce our own bulls, growing from 20% of total new US Holstein bulls sourced in 2016 to around 75% in less than five years. Strategically, the partnership also gives us greater control of genetics that we provide to our customers. It strengthens our ability to enhance their profitability, by providing more efficient and sustainable genetics tailored to their needs. De Novo is consistently producing high ranking bulls with desirable traits for farmers. GENUS AND DE-SU SHARE THE SAME PHILOSOPHY, AS WE USE BREEDING TO BUILD ON THE TRAITS THAT ARE ECONOMICALLY IMPORTANT TO OUR CUSTOMERS KATIE OLSON – GLOBAL DIRECTOR, DAIRY PRODUCT DEVELOPMENT 19 Genus plc | Annual Report 2017 Strategy in Action continued TARGETING KEY MARKETS AND SEGMENTS 20 Genus plc | Annual Report 2017KEY MARKETS AND SEGMENTS STRATEGIC REPORT THIS IS AN IMPORTANT STEP FOR US AND HERMITAGE IS AN EXCELLENT PARTNER, WITH A TREMENDOUS REPUTATION AND AN IMPRESSIVE FOOTPRINT IN EUROPE DR BILL CHRISTIANSON, COO, GENUS PIC 21 CASE STUDY Over recent years, we have transformed Genus PIC’s European business and returned it to strong growth. In February 2017, we entered into a strategic partnership with Hermitage and acquired its genetics, further reinforcing PIC’s position in Europe. Hermitage is one of Europe’s oldest pig breeding and genetics companies. Acquiring its genetic rights and IP will help PIC to accelerate genetic improvement for European customers of both businesses. At the same time, we have taken on some of Hermitage’s customer and multiplication contracts, including those in a number of European countries. Hermitage has also become a strategic supply chain and distribution partner for PIC. Its strong supply chain and customer service focused team will further improve our ability to serve European pig producers efficiently and reliably. The partnership is an excellent strategic fit for PIC. The combination of PIC’s genetics expertise and quality, and Hermitage’s supply chain and operational excellence, will benefit both businesses and their customers. Genus plc | Annual Report 2017Strategy in Action continued SHARING IN THE VALUE DELIVERED CASE STUDY During this financial year, IVB’s new laboratory in Torreón, Mexico, began serving large dairy enterprise customers. Torreón is home to Mexico’s largest dairy farms, and the area with the biggest concentration of dairy cows in Latin America. On-farm IVF services and ready-to- implant embryos are typically priced at a significant premium to semen. This is because an embryo allows for the selection of superior female as well as male parent donors to create genetically superior offspring with desirable characteristics for farmers. With the commercial launch of the IVB lab in Mexico, the IVB and ABS teams visited numerous farms and dairies, and were able to demonstrate the genetic improvement benefits, and ultimately, the economic returns, of investing in IVF technology. As a result, IVB secured over 15 new accounts by the end of the financial year, including two large accounts. In light of this success, IVB Mexico has taken on new staff to meet the growing demand for its services. 22 Genus plc | Annual Report 2017 STRATEGIC REPORT 15NEW IVB CUSTOMERS SECURED IN MEXICO IVB’S ABILITY TO DEMONSTRATE THE VALUE OF INVESTING IN IVF TECHNOLOGY IS GENERATING SIGNIFICANT DEMAND AMONGST DAIRY FARMERS IN MEXICO DR NATE ZWALD, COO, GENUS ABS DAIRY 23 Genus plc | Annual Report 2017Divisional Reviews – Genus PIC ACCELERATING GENETIC PROGRESS STRATEGIC PROGRESS 24 Dr Bill Christianson, Chief Operating Officer, Genus PIC A YEAR OF STRONG STRATEGIC PROGRESS, IN AN INCREASINGLY GLOBAL MARKETPLACE £94.8M ADJUSTED OPERATING PROFIT INCLUDING JOINT VENTURES Genus plc | Annual Report 2017During the year, progress against our strategic objectives included:INCREASING GENETIC CONTROL AND PRODUCT DIFFERENTIATION• Continuing to develop our range of industry-leading genetics and beginning to assimilate genes acquired from Hermitage Genetics• Collaborating with R&D colleagues and external partners on long-term development programmes, including our investigational gene-editing project to produce animals resistant to PRRSvTARGETING KEY MARKETS AND SEGMENTS• Increasing our share of business with large producers around the world, so we now work with over 70% of the largest global accounts• Maintaining our progress in Europe (achieving growth of 26%) and continuing to see the benefits of our tailored strategy for China (with growth of 82%)• Strengthening our supply chain to support markets around the world by upgrading several sites and incorporating Hermitage Genetics facilitiesSHARING IN THE VALUE DELIVERED• Conducting 26 product trials across seven countries, involving more than 63,000 pigs, demonstrating the difference our products and services deliver for customers• Expanding use of the royalty pricing model, particularly in Europe and Asia (including further contracts in China), so that 77% of our volumes are now conducted on a royalty basisPRIORITIES FOR 2018• Continuing to implement our global strategy, tailored to local markets where needed• Expanding use of the royalty model where possible, particularly accelerating the transition in China• Making further investments in our supply chain to underpin growth• Continuing to collaborate with colleagues and partners on new technologies and on plans to commercialise and achieve regulatory acceptance for gene-edited animals OPERATING REVIEW Revenue Adjusted operating profit excl. JVs Adjusted operating profit incl. JVs Adjusted operating margin excl. JVs Pork – Key Markets £ per kg Corn – Key Markets £ per tonne Actual currency Constant currency 2016 £m Movement % Movement % 207.5 71.7 78.0 20 22 22 7 8 7 34.6% 0.6pts 0.3pts 2017 £m 249.5 87.7 94.8 35.2% 3.0 2.5 2.0 1.5 1.0 300 250 200 150 100 50 0.5 Aug 14 Aug 15 Aug 16 Aug 17 0 Aug 14 Aug 15 Aug 16 Aug 17 US Brazil EU China Russia US Brazil EU China Market Market conditions for most of Genus PIC’s customers improved during the year, primarily due to increased global trade with Asia. Other factors included tighter supply in Europe and continued favourable crop prices in North America and other key markets. Global pork prices increased 13% over the 12 months, and the outlook is generally moderately favourable. In China, supply constraints, following reductions in the sow herd in prior years, continued to support elevated pig prices and stimulated record pork imports. However, prices have more recently returned to more normal levels as large producers have expanded supply and imports have also slowed. Production also expanded in Russia and in other core Asian markets such as the Philippines. Increasing demand prompted expansion in the US breeding herd during 2017, which will lead to further production growth. While processors recorded significant profits, US producers realised more modest returns. With new production and packing capacity coming online in 2018, continued strong domestic and export demand is required for future producer profitability. The European porcine industry enjoyed a steady recovery in pig prices and producer profitability after a prolonged period of losses. The main drivers were a 1.6% decline in the European sow herd and increased exports to China. Brazilian producers experienced volatile input prices and pig prices, following political and market turbulence involving the meat industry. During the past five months, producers have returned to slightly positive margins per pig, after 12 months of losses. In Mexico, the second largest producer in Latin America, pig producers have been expanding. However, the industry is still suffering significant impacts from disease. The porcine genetics market saw further consolidation in 2017. Genus PIC took a leading role, partnering with and acquiring the genetic rights of Hermitage. Other North American and European competitors have also entered into partnerships and distribution agreements, to expand their reach. Performance Genus PIC achieved a good performance, with operating profits including joint ventures of £94.8m, up 7% in constant currency. Volumes grew by 4% and revenue was 7% higher, primarily due to royalty growth and higher breeding stock sales. Asia’s results were particularly strong, with a 45% increase in royalty volumes and 60% increase in operating profit. China profits grew over 80% in constant currency, with strong demand from large scale producers for PIC genetics. PIC China has signed up a further three royalty customers. Strong double-digit growth in Russia, Philippines and franchises further underpinned performance across Asia. In North America, volumes were stable and revenue grew 2%, but stockings of new customer systems contributed to 12% growth in breeding stock shipments, positioning the business for future royalty growth. To support this future growth, PIC invested in expanding the supply chain, upgrading Company- owned facilities, and increasing the quality and number of staff, leading to a 3% reduction in profit in the year. Latin American profits improved by 2% in constant currency, on stable volumes. Mexico performed strongly and operating profit increased by 11%. This growth was offset by the Andean region, where profit declined by 15% due to ongoing economic instability in Venezuela. In Brazil, profit increased by 5% in constant currency, despite market volatility. Europe once again achieved strong growth, with revenue and volumes up 8% and 6% respectively and profits increased by 26% in constant currency, driven primarily by higher royalty fees and lower costs. Transforming Europe to focus on royalty business with producers that value genetics has been under way for several years and is delivering sustained benefits, which will be further enhanced by the Hermitage Genetics acquisition and partnership. Overall, Genus PIC performed well, despite varying global market conditions and continued investment to enhance product supply and differentiation. These investments will continue to enable Genus PIC to better serve customers, mitigate market risks and support future growth. 25 STRATEGIC REPORTGenus plc | Annual Report 2017 Divisional Reviews – Genus ABS ENHANCING OUR CUSTOMER FOCUS STRATEGIC PROGRESS 26 Jerry Thompson Chief Operating Officer, Genus ABS Beef Dr Nate Zwald Chief Operating Officer, Genus ABS Dairy PRODUCING OUR OWN GENETICS AND APPLYING OUR PROPRIETARY SEXING AND IVF TECHNOLOGIES TO IMPROVE OUR CUSTOMERS’ HERDS 17.7MUNITS OF SEMEN AND EMBRYOS SOLD Genus plc | Annual Report 2017During the year, progress against our strategic objectives included:INCREASING GENETIC CONTROL AND PRODUCT DIFFERENTIATION• Creating De Novo Genetics, our partnership with De-Su Holsteins, to accelerate in-house development of differentiated dairy genetics • Bringing through the first bulls from our beef nucleus herd into production• Launching NuEra Genetics™, the new global brand of our proprietary beef genetics, including the beef genetic nucleus and proprietary indices• Taking full ownership of IVB to further accelerate its integration and growth • Significantly enhancing our Genetic Management System (GMS 2.0) to help customers plan and achieve the genetic blueprint they are seeking for their herdTARGETING KEY MARKETS AND SEGMENTS • Enhancing our focus on large dairy accounts, particularly in the US, tailoring provision of products and services to their needs • Continuing to expand IVB’s reach in the US and grow its business in Mexico, harnessing the new laboratories established in 2016• Helping customers in Latin America maintain the benefits of cross-breeding across generations, by providing hybrid genetics in embryo form • Working with beef supply chain partners in the UK, US and Brazil on proprietary indices to identify genetics that increase supply chain efficiency, profitability and sustainability SHARING IN THE VALUE DELIVERED • Combining elite sire and maternal genetics in embryo form for customers in Latin America, providing a premium product that accelerates genetic progress • Introducing a new beef index in the UK to rank sires on profit potential in customer herds, enabling us to price to valuePRIORITIES FOR 2018• Successfully launching our proprietary sexed genetics offer, Sexcel, in target markets around the world (which we introduced on 1 September 2017)• Building customised genetic blueprints for target dairy customers and tailoring our offer to their needs• Launching further proprietary products and developing new indices for different beef markets and segments• Continuing to extend IVB’s reach to target customers and markets worldwide OPERATING REVIEW Revenue Adjusted operating profit Adjusted operating profit less non-controlling interest Adjusted operating margin Dairy – Key Markets Pence per litre Beef – Key Markets Live cattle £ per kg Actual currency Constant currency 2017 £m 195.9 22.3 21.3 11.4% 2016 £m Movement % Movement % 172.8 23.3 22.0 13 (4) (3) 2 (15) (13) 13.5% (2.1)pts (2.1)pts 50 45 40 35 30 25 20 15 10 Aug 14 Aug 15 Aug 16 Aug 17 2.5 2.0 1.5 1.0 0.5 0 Aug 14 US Brazil Aug 15 Aug 16 Aug 17 US Brazil EU China Russia India Market Global dairy producers started to recover in 2017 from their unprecedentedly low profitability in 2016. In Europe, the legacy of the low prices resulted in milk supply contracting, with France, Germany, the Netherlands and the UK producing 3% less milk in the first four months of 2017 compared with 2016. Combined with modest increases in demand, this has resulted in Europe experiencing firmer farm gate milk prices. Global milk output in the first four months of 2017 was at the same level as 2016 due to increases in production in Argentina, the US, Australia and New Zealand. The US increased production 2%, with 0.6% of this contributed by increasing cow numbers. Consistently low milk prices in China continue to challenge smaller farms, leading to consolidation to fewer, larger dairy farms, and to reduced imports during the year, although recent signs suggest an improved outlook. Following two years of strong beef cattle prices in the US, producers faced a sudden and unexpected decline in prices in the first half of the year, due to increased cattle numbers and reduced packer capacity. This resulted in a rapid drop in the rate of herd expansion and reduced artificial insemination usage in this key beef market. Beef prices and producer profitability in Brazil were adversely impacted by the tainted meat scandal in the second half of the year. Challenging conditions for customers over the last two years have constrained demand for quality bovine genetics as customers conserved cash. This has affected the bovine genetics market, driving consolidation and a focus on distribution chain efficiencies, exemplified by the takeover of the Accelerated Genetics cooperative in the US by Select Sires, a major US cooperative. and dairy volumes increased by 5%. Beef volumes also increased by 9%, as dairy customers continued to produce beef cross-bred offspring for slaughter. A continued focus on cost reduction and improving service margins also yielded benefits throughout the year. Performance Adjusted operating profits for Genus ABS fell by 13% in constant currency with the decline all in the first half of the year. Volumes in the second half grew significantly, up 8% year to year, resulting in a positive second half performance. For the year as a whole, volumes increased 1% and revenues 2%. North America and Asia were key contributors to the lower results for the year but performance improved in Europe and Latin America, and IVB continued to grow. Results in the second half were also impacted by provisions for ST-produced sorted inventory as we prepared for the launch of Sexcel. In North America, profits decreased by 12% in constant currency, driven by an 8% dairy volume decrease, partially offset by a 25% increase in sexed semen volumes and strong cost management. A strengthened focus on strategic key account management led to the addition of a Top 5 US enterprise dairy as an IVB customer. Beef volumes were down 13% against the record prior year, due to low market steer prices and competition with natural service. In Europe, profits increased by 8% in constant currency. The severe dairy market weakness experienced in 2016 improved in 2017, with many customers returning to profitability In Latin America, profits grew 41% in constant currency, despite volumes declining 2% due to tough beef markets. Genus ABS continued to take the lead in increasing selling prices in key markets, and by June, ABS prices were on average 9% higher. Beef volumes were down 6% from last year, hampered by political turmoil as well as misconduct allegations in the downstream supply chain in Brazil. Results in Asia were 32% lower, driven primarily by adverse trading conditions in China, where many producers have been loss-making. Australian producers also struggled with reduced milk prices and trading in India was impacted by the demonetisation process. Despite these challenges, Asia performance improved in the second half of the year. IVB continued to deliver strongly with revenues and operating profit less non-controlling interest both up over 30% in constant currency (over 60% in actual currency), on embryo volume growth of 20%. Commercial integration between ABS and IVB enabled over 15 new accounts to be won in Mexico, including two large enterprise accounts, leveraging a new world class IVF facility in Torreon. In North America, IVB secured a new key account with a herd of over 60,000 animals, with a new laboratory to serve it starting in early FY18. 27 STRATEGIC REPORTGenus plc | Annual Report 2017Divisional Reviews – R&D PIONEERING TECHNOLOGIES STRATEGIC PROGRESS Dr Jonathan Lightner Chief R&D and Scientific Officer A YEAR OF FURTHER PROGRESS ON LONG-TERM PROJECTS USING PIONEERING TECHNOLOGIES  12%IN R&D INVESTMENT IN CONSTANT CURRENCY 28 Genus plc | Annual Report 2017During the year, progress against our strategic objectives included:DIFFERENTIATED PRODUCTS FROM GENOMIC SELECTION• Formation of De Novo Genetics, integrating our elite dairy female programme with animals from De-Su Holsteins, to create world leading, proprietary Holstein genetics• Developing proprietary indices for beef, enabling us to select appropriate genetics for the drivers of profitability in target markets and segments • Implementing our proprietary technological platform for genomic evaluation of beef genetics, based on analysing data collected from commercial herds in our target market segments• Implementing genomic evaluations for dairy, focused on TransitionRight™ traits that produce daughters more resistant to health problems which commonly occur after giving birth • Continuing our Nextgen Breeding project with the Roslin Institute, which is exploring the sequencing of porcine DNA to identify and harness several billion data points for animal selectionGENE EDITING• Working with our partners in Caribou Bioscience to select and optimise the gene editing reagents for use in our PRRSv resistance programme• Beginning the process of creating edits in elite PIC genetics, to remove the CD163 gene product, which is required for PRRSv to infect pigs• Securing an INAD application with the US FDA for the PRRSv programme GENDER SKEW• Scaling our proprietary GSS technology in anticipation of our launch on 1 September 2017, to deliver our sexed bovine genetics offer at the highest calibre on a global scale PRIORITIES FOR 2018• Driving our dairy genetic progress through the De Novo joint venture• Launching full genomic selection for beef, harnessing our proprietary technology • Introducing further proprietary bovine indices, such as targeted beef indices, for Brazil and the US • Successfully launching Sexcel, our proprietary sexed genetics offering • Continuing to enhance our gene editing trait development capability • Working with regulators and stakeholders to facilitate the future approval, and acceptance, of gene edited animal proteinsOPERATING REVIEW Gene editing Other research Porcine product development Bovine product development Net expenditure in R&D less non-controlling interest Performance As planned, R&D investment increased by 12% in constant currency, while capital spending remained flat. This reflected increased investments in gene editing capabilities, genome science, advancing GSS and furthering our computational capabilities in bovine product development. Our investment in gene editing increased by £2.6m, as we built platform capabilities, co-founded a gene editing company, RenOVAte Biosciences, to perform the edits, selected and optimised the gene editing reagents, created the first pregnancies of gene edited pigs for testing, and carried expenses for our collaboration with Caribou Biosciences from which we license market leading and proprietary CRISPR-Cas9 gene editing technology. We secured an INAD with the US FDA for the PRRSv programme. As planned, we expect gene editing expense to grow to around £6.0m in 2018. As in previous years, our research focused on genomic evaluation, gender skew and animal health and well-being. Research expenditure increased by 2% this year. We also continued to invest in core informatics capabilities and expanded research efforts in a number of promising areas. Additionally, we continued to build our internal capabilities in IP development, regulatory affairs and research strategy. Bovine product development expenditure increased by 6% in constant currency, as we incurred pre-launch costs of GSS partially offset by strategically increasing the efficiency of our product development programme, including reducing the size of our bull herd and the expenses associated with progeny testing. In GSS, we continued to refine and scale up our manufacturing processes in preparation for commercial launch incurring costs in the year in excess of £2m. We added resources in quality and operational controls and invested in technology improvements to the current GSS system, which enhanced the technology’s performance and promise further advances in fertility. De Novo achieved promising genetic results, while running to plan financially. We also brought into production 23% (2016: 20%) of our bulls from our ABS internal herd with the impact of De Novo expected to grow significantly in future years. We continued to Actual currency Constant currency 2016 £m Movement % Movement % 0.9 7.1 13.5 12.9 34.4 289 18 23 19 27 251 2 7 6 12 2017 £m 3.5 8.4 16.6 15.3 43.8 invest in genetic services resources, to develop proprietary breeding indices and predictive genomic mating, to deliver higher genetic control and differentiation. We leveraged this work through our beef nucleus breeding programme to launch our proprietary NuEra Genetics beef genetics in the market after the end of the year. Within porcine product development, the single-step genomic evaluation of all pure line populations, retail products and traits of economic importance is continuing to exceed the aim of a 35% increase in the rate of genetic gain compared with the period before its implementation. Porcine product development costs increased 7% in constant currency, driven by increased animal volumes and the related operating expenses in our nucleus herds, and lower market prices for by-product pigs. These cost increases were partially offset by lower genetic testing fees, due to project phasing, and reduced global genetic dissemination costs. 29 STRATEGIC REPORTGenus plc | Annual Report 2017 Financial Review DELIVERING A SOLID FINANCIAL PERFORMANCE GENUS ACHIEVED A SOLID FINANCIAL PERFORMANCE IN THE YEAR ENDED 30 JUNE 2017 30 Genus achieved a solid financial performance in line with expectations in the year ended 30 June 2017, with revenue growth of 18% (6% in constant currency) and adjusted profit before tax up 13% (1% lower in constant currency) after increased investment in R&D. Adjusted earnings per share were also up 14% (flat in constant currency). On a statutory basis, profit before tax was 33% lower, primarily due to the significant pensions-related exceptional gain in the prior year. 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. The effect of exchange rate movements on the translation of our overseas profits was to increase the Group’s adjusted profit before tax for the year by £7.0m or 14% compared with 2016 caused by the sharp devaluation of Sterling at the end of the prior period following the UK referendum on Brexit. Revenue Revenue increased by 18% in actual currency and 6% in constant currency to £459.1m (2016: £388.3m) during the year. In Genus PIC, growth of 7% in constant currency was across all regions but was particularly strong in Asia where revenues grew 24%. All regions also grew royalty revenue, with particularly notable growth in Europe of 22% and Asia of 28%. In Genus ABS, revenues grew 2% in constant currency (13% in actual currency), with mixed performances across regions. Growth was strongest in Latin America and IVB. Adjusted Operating Profit including JVs (£m) 2017 2016 2015 2014 2013 48.2 44.8 54.3 60.1 51.2 0.00000017.83333335.66666753.50000071.33333389.166667107.000000 Adjusted operating profit including joint ventures was £60.1m (2016: £54.3m), up 11% in actual currency and 2% lower in constant currency. Within this, Genus’s share of adjusted joint venture operating profits was higher at £7.1m (2016: £6.4m). Genus plc | Annual Report 2017Adjusted results1 Revenue Operating profit Operating profit incl. 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) Actual currency Constant currency2 2016 £m Movement % Movement % 6 (1) (2) (1) – 388.3 49.3 54.3 49.7 60.7 18 12 11 13 14 2016 £m Movement % 388.3 58.6 60.9 81.1 21.4 18 (35) (33) (34) 10 2017 £m 459.1 55.1 60.1 56.4 69.4 2017 £m 459.1 38.2 40.7 53.8 23.6 1 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. 2 Constant currency percentage movements are calculated by restating 2017 results at the average exchange rates applied in 2016. Exchange rates US Dollar/£ Euro/£ Brazilian Real/£ Mexican Peso/£ Adjusted profit before tax3 Genus PIC Genus ABS R&D Central costs Adjusted operating profit incl. JVs Net finance costs Adjusted profit before tax Average Closing 2017 2016 2017 2016 1.27 1.16 4.11 24.61 1.47 1.33 5.47 25.38 1.30 1.14 4.30 23.51 Actual currency 1.34 1.20 4.28 24.66 Constant currency 2017 £m 94.8 21.3 (43.8) (12.2) 60.1 (3.7) 56.4 2016 £m Movement % Movement % 78.0 22.0 (34.4) (11.3) 54.3 (4.6) 49.7 22 (3) (27) (8) 11 20 13 7 (13) (12) 5 (2) 18 (1) 3 Includes share of adjusted pre-tax profits of joint ventures and removes share of profits of non-controlling interests. Genus PIC had another robust year, with profits including joint ventures up 7%. Volume growth of 4% included royalty volume growth of 6%, helped by 45% growth in royalty volumes in Asia, which was particularly encouraging. Upfront sales reduced as planned. Genus ABS had a challenging year, however performance improved in the second half as a result of actions taken. For the year, volumes grew 1%, while profit was 13% lower (3% lower in actual currency), driven by weaker performance in North America and China and an increase in ST-produced inventory provisions as we prepared to launch Sexcel. Performance improved in Europe and Latin America, and IVB continued to grow. R&D costs increased by 12%, as planned, as we created our first gene edited pregnancies, ramped up GSS manufacturing processes, and incurred increased costs in our porcine nucleus herds. Net Finance Costs Net finance costs reduced to £3.7m (2016: £4.6m) principally due to lower IAS 19 pension interest of £1.2m (2016: £2.2m), following the prior year’s agreement to change the inflation index used to pay pensions in the MPF. Average borrowings and debt interest in the year were higher, following the depreciation of Sterling after the Brexit referendum, the Hermitage acquisition, and the purchase of the remaining 49% of IVB for £11.4m. Offsetting this, the Group earned higher interest income through the year on Brazilian Real cash deposits hedging the anticipated 49% IVB acquisition. Exceptional Items There was a £2.5m net exceptional expense in 2017 (2016: £36.3m credit). The prior year included a large exceptional gain of £44.2m related to the MPF’s adoption of CPI in place of RPI to determine pension increases. In comparison, the current year included an exceptional credit of £5.7m in respect of the arrangements for National Milk Records plc (‘NMR’) exiting the MPF in June 2017. There was also £5.3m for legal fees in Genus ABS’s case against ST, £0.6m for acquisition and integration related expenses, primarily De Novo and Hermitage, net of a gain on the cancellation of the IVB put option, and other items of £2.3m including restructuring costs. 31 STRATEGIC REPORTGenus plc | Annual Report 2017Financial Review continued 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 JVs and associates Tax on JVs 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 2017 £m 56.4 2.1 0.5 (1.4) (1.1) (8.7) (4.6) (2.5) 40.7 2016 £m 49.7 1.4 1.9 (1.4) (17.1) (6.1) (3.8) 36.3 60.9 Our statutory profit before tax was £40.7m (2016: £60.9m), with the prior year benefiting from a large exceptional credit relating to the MPF mentioned on page 31. Statutory profit before tax also included a net IAS 41 valuation biological asset movement decline of £1.1m (2016: £17.1m), amortisation of acquired intangibles of £8.7m (2016: £6.1m) and share-based payment expense of £4.6m (2016: £3.8m). These items tend to be non-cash, can be volatile and do not correlate to the underlying trading performance in the period. Taxation The effective rate of tax for the year, based on adjusted profit before tax, was 25.0% (2016: 25.8%) reflecting a higher mix of profits in lower tax jurisdictions compared with the prior year. The effective rate remains higher than the UK corporate tax rate 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. These effects are partly mitigated by the availability of manufacturing relief, R&D credits and agricultural reliefs in certain jurisdictions. The tax rate on statutory profits was 18.5% (2016: 19.3%) and is lower than the effective rate on adjusted profits primarily due to a reduction in the applicable deferred tax rate on the balance sheet carrying value of biological assets based on the anticipated mix of future sales by territory. 32 Earnings Per Share Adjusted basic earnings per share increased by 14% to 69.4 pence (2016: 60.7 pence) and was unchanged in constant currency. Basic earnings per share on a statutory basis were 53.8 pence (2016: 81.1 pence), a decline of 34%, with the prior year benefiting from changing the index used for pension and deferred pension increases in the MPF from RPI to CPI. 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 2017, the carrying value of biological assets was £375.3m (2016: £354.4m), as set out in the table below: Biological assets Non-current assets Current assets Inventory Represented by: Porcine Dairy and beef 2017 £m 279.2 73.9 22.2 375.3 215.6 159.7 375.3 2016 £m 264.6 66.4 23.4 354.4 184.7 169.7 354.4 The movement in the overall carrying value of biological assets, excluding the effect of exchange rate translation increases of £10.9m, includes: • a £24.9m 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 £14.8m decrease in the carrying value of dairy and beef biological assets, arising from the increasing sales mix of genomic bulls which tend to have shorter productive lives than proven bulls, offset partially by the assets acquired through the completion of De Novo Genetics. The historical cost of these assets, less depreciation, was £51.5m at 30 June 2017 (2016: £42.5m), which is the basis used for the adjusted results. The historical cost depreciation of these assets included in adjusted results was £7.0m (2016: £5.5m). Retirement Benefit Obligations The Group’s retirement benefit obligations at 30 June 2017, calculated in accordance with IAS 19 and IFRIC 14, were £40.9m (2016: £44.5m) before tax and £32.4m (2016: £34.9m) net of related deferred tax. The largest element of this liability relates to the multi-employer MPF, where we account for this scheme on the basis of Genus being responsible for 85% of the scheme since the exit of NMR (2016: 75%). During the year, contributions payable in respect of the Group’s defined benefit schemes amounted to £7.2m (2016: £6.7m). Genus plc | Annual Report 2017Cash Flow Free cash flow was strong at £25.4m (2016: £15.7m), driven by solid cash generated by operations of £46.3m (2016: £43.3m), representing conversion of adjusted operating profit of £55.1m (2016: £49.3m) into cash of 84% (2016: 88%), and strong cash inflows from joint ventures of £8.3m (2016: £3.4m) following good trading performance in our PIC joint ventures in China and Brazil. Capital expenditure of £18.9m (2016: £18.6m) included continued investment in GSS capacity and technology, research and continued investments in the Group’s facilities. The cash outflow from investments was £30.0m, primarily relating to the acquisition of De Novo Genetics, Hermitage Genetics and the purchase of the remaining 49% of IVB. This compares with £7.2m, net of cash acquired, from the acquisition of St Jacobs and an investment in Caribou Biosciences in 2016. The total cash outflow for the year after these investments and dividends was £18.1m (2016: outflow £3.7m). Cash flow (before debt repayments) Cash generated by operations Interest and tax paid Capital expenditure Cash received from JVs Other Free cash flow Acquisitions and investments Dividends 2017 £m 46.3 (11.7) (18.9) 8.3 1.4 25.4 (30.0) (13.5) (18.1) 2016 £m 43.3 (13.3) (18.6) 3.4 0.9 15.7 (7.2) (12.2) (3.7) Net Debt Net debt increased from £89.7m to £111.6m at 30 June 2017, primarily due to the £30.0m investments in De Novo Genetics, Hermitage Genetics and the remaining 49% of IVB. During the year, we exercised a portion of an accordion in our credit facilities to increase them by £29.2m and extended the facilities by one year to February 2022. At the end of June 2017 there was substantial headroom of £73.6m under the extended facilities of £202.0m. The Group’s financial position and borrowing ratios remain strong with interest cover remaining at 37 times (2016: 35 times). EBITDA as calculated under our financing facilities includes cash received from joint ventures and historical cost depreciation of biological assets. The ratio of net debt to EBITDA on this basis moderately increased to 1.5 times (2016: 1.4 times) primarily due to acquisitions and investments in the year, partially offset by increased EBITDA. Return on Invested Capital We measure our return on invested capital on the basis of adjusted operating profit including joint ventures after tax, divided by the operating net assets of the business, stated on the basis of historical cost, excluding net debt and pension liability. This removes the impact of IAS 41 fair value accounting, the related deferred tax and goodwill. The return on invested capital increased to 19.9% after tax (2016: 19.1%), reflecting the increase in adjusted profit and lower tax rate in the year. Dividend Reflecting the Board’s continuing confidence in the Group’s prospects, it is recommending to shareholders a final dividend of 16.2 pence per ordinary share, resulting in a total dividend for the year of 23.6 pence per ordinary share, an increase of 10% for the year. Dividend cover by adjusted earnings remains consistently strong, at 2.9 times (2016: 2.8 times). Stephen Wilson Group Finance Director 6 September 2017 33 STRATEGIC REPORTGenus plc | Annual Report 2017People and Culture THROUGH PEOPLE Our people strategy centres on recruiting, developing and inspiring employees with deep genetic and operational expertise. Our global team ranges from geneticists to livestock technicians, veterinarians to accountants: all playing their part in helping customers improve performance and productivity. Our overall headcount remained broadly level during the year, as we invested in areas of growth, whilst adjusting staffing in other areas. Skill Recruitment In June 2017, our staff numbered 2,677, up 8 from 2,669 last year. We controlled headcount tightly, resourcing areas of growth, for example, our IVB embryo business and GSS production in the US, whilst restructuring other areas, such as parts of ABS and PIC Supply Chain, for efficiency. We recruited 16 staff with PhDs this year, bringing our total of PhD qualified staff to 101. Our talent pool is global, with staff originating from 30 different countries: during the year we recruited or assigned staff into 22 of the 25 countries in which we employ staff. Female Representation for 2017 31% of our staff are women, 27% in management roles: we are committed to identifying women with potential and developing them into senior roles. Investing in Our People We continued to run bespoke management development programmes, together with our PIC and ABS Sales Academies. We mounted our largest-ever training programme, equipping employees for the launch of Sexcel, and we developed a global training programme for PIC production managers to introduce best-in-class recruitment and on-boarding practices. 34 2,677 2,669 2016 32COUNTRIES NUMBER OF EMPLOYEES 2017 2016 EMPLOYEE COU NTR Y OF ORIGIN 1 2017 30COUNTRIES FEMAL E REPRESENTAT ION 1 1 BOARD DIRECTORS 14% FEMALE GELT 13% FEMALE2 821 OTHER EMPLOYEES 31% FEMALE 1 , 8 4 3 6 6 7 Male Female 1 Those employees who chose to record their country of origin. 2 Of the direct reports to GELT, 34% are female (22% excluding administrative supportive staff). Visit: www.genusplc.com/work-for-us to learn about Genus as an employer. Genus plc | Annual Report 2017RESULTSWe applied rigorous individual performance conditions before making the award to those we see as key to our future success. We saw a positive impact on morale and are monitoring to ensure it has the desired retention effect. Enhancing Health and Safety (‘H&S’) We made significant progress this year, with incidents down by 10%, and animal related incidents – a specific target – falling by 12%. Across the business we increased ‘near miss’ reporting by 61%, 266% in owned production sites, learning lessons to avoid future incidents. To support colleagues working alone on farms, we introduced a lone working device to 243 UK colleagues (see case study). More details are on our website www.genusplc.com/responsibility. Human Rights and Anti-Slavery We remain fully compliant with our policies and operate to the highest standards for our people and those who work with us directly through our supply chains. Looking Ahead To support the Company’s growth plans, we will be increasing recruitment in a number of areas. These include our embryo business, PIC supply chain capacity and support for the launch of Sexcel. We will continue to invest in our people, and will run our third global employee survey, seeking feedback to help us continue improving our organisation and the way we work. TO REALISE ANIMAL GENETIC IMPROVEMENT TAKES A GENERATION: OUR TEAMS BRING A UNIQUE BLEND OF EXPERTISE AND EXPERIENCE TO DELIVER RESULTS IN CUSTOMER HERDS Aligning Incentives with Business Goals We introduced new incentive programmes for ABS and PIC production staff, rewarding them for improving productivity, quality and safety. We overhauled our corporate incentive programmes. For our annual scheme, open to all salaried staff, we simplified targets and strengthened links with business goals. For our long-term scheme awarded to selected senior leaders below GELT, we moved from performance shares to restricted stock, aligned to North American reward practice where the majority of our leaders are based. CASE STUDIES TRAINING INTERVE NTIONS 2017 32,708 24,127 2016 ENHANCING H&S INCIDENTS ALL INCIDENTS 10% 20% RECORDABLE INCIDENTS ANIMAL-RELATED INCIDENTS 12% NEAR MISS REPORTING TOTAL COMPANY 61% PROTECTING LONE WORKERS We have introduced portable devices to enhance protection for dairy technicians working alone on customer farms. If the device detects that the technician is not moving, it relays the location and an alarm to a 24/7 monitoring station, activating emergency protocols. Initially rolled out in the UK, we plan to introduce these devices in other geographies. PIC GENETIC SERVICES PIC’s multi-national Genetic Services team is made up of world class geneticists and data scientists: one third with PhDs. They use Relationship Based Genomic Selection and PicTraq®, our 55 year database, to identify, improve and multiply traits of commercial value to producers, shaping product indices, mating strategies and research programmes. GLOBAL TRAINING ON SEXCEL We invested in our largest-ever training programme to support the launch of Sexcel. This was developed through collaboration between global colleagues and helps participants learn about the value of sexed genetics and what is different about our proprietary technology. It is enabling colleagues to help customers understand and make the most of the benefits Sexcel offers them. 35 STRATEGIC REPORTGenus plc | Annual Report 2017Responsible Business SUSTAINABILITY AT OUR CORE WE SUPPORT THE MEAT AND DAIRY INDUSTRIES THROUGH ETHICAL ANIMAL GENETIC IMPROVEMENT, INCREASING THE SUSTAINABLE SUPPLY OF ANIMAL PROTEIN TO HELP NOURISH PEOPLE AROUND THE WORLD The world’s population is growing, demand for protein is rising, but our natural resources are increasingly stressed. We work with the core building block – animal genetics – to improve the quality and output of responsibly produced meat and milk. Our scientific teams harness leading- edge research and technologies. By identifying desired genetic traits, replicating these through our breeding programmes, disseminating them rapidly with on farm support to deliver at scale, we help our customers increase the supply of affordable and high quality protein around the world. CASE STUDY CASE STUDY CASE STUDY Importing live bulls to India In 2016, we became the first company ever to import live bulls to India, following a landmark agreement with the Indian government. These 13 animals are now the country’s leading sires, enhancing the availability of high-quality genetics in the world’s largest dairy market. They reside at our Brahma joint venture bull stud, a state-of-the art facility built using best practice for animal well-being and H&S. Enhancing feed efficiency Our genetic improvement programmes select animals with desirable traits, for example, converting feed into growth more efficiently. This both enhances the productivity of customer operations and reduces environmental impact: efficient growth means animals produce less manure and methane, farmers can use less water and we reduce the land required for crop production. Recruiting for our farms In 2017, we recruited 93 new employees into our bovine and porcine production facilities from neighbouring communities. We train every employee on our animal well-being principles including our zero tolerance policy on animal cruelty. Our training is tailored to the different species and is of a world class standard. To see the full scope of our framework, and read more about our work in each area, please visit: www.genusplc.com/responsibility 36 Genus plc | Annual Report 2017 FOOD QUALITY AND SECURITY ‘Food Quality and Security’ is at the very core of what we do as a business. The diagram below describes how our corporate responsibility approach works with our business cycle (see our People and Culture section on page 35 for progress on improving H&S). OUR SCIENTISTS ACCESS LEADING-EDGE RESEARCH AND ANALYSIS TO DRIVE GENETIC IMPROVEMENT (cid:31) WE EVALUATE AND VALIDATE OUR GENETICS IN CUSTOMER OPERATIONS, SEEKING HOW TO DELIVER THE NEXT GENERATION OF GENETIC IMPROVEMENT (cid:31) FOOD QUALITY AND SECURITY Providing expertise and products that increase the production of high quality protein (cid:31) WE REPLICATE DESIRABLE TRAITS THROUGH OUR BREEDING PROGRAMMES, DELIVERING BENEFITS FOR ANIMAL WELL-BEING, CUSTOMER PRODUCTIVITY AND SUSTAINABLE PROTEIN PRODUCTION (cid:31) WE DELIVER GENETIC IMPROVEMENT TO BENEFIT CUSTOMERS BY DISSEMINATING THE GENES RAPIDLY WE ARE ROOTED IN THE COMMUNITIES WE WORK IN, OPERATING TO GLOBAL H&S STANDARDS FOR OUR STAFF, AND GLOBAL ANIMAL WELL-BEING STANDARDS (cid:31) ANIMAL WELL-BEING Continually improving animal well-being through proven science based initiatives ENVIRONMENT Reducing the impact of protein production OPERATE SAFELY Ensuring a safe working environment for colleagues COMMUNITY Being a responsible corporate citizen within our communities 37 STRATEGIC REPORTGenus plc | Annual Report 2017Responsible Business continued LEADING FROM THE FRONT The leaders on our Corporate Social Responsibility (‘CSR’) Committee were chosen because each has a role in delivering our corporate responsibility agenda. Now in its fourth year of operation, the Committee reports to the Board, meeting quarterly, setting strategy, annual objectives and tracking progress. Achievements of particular note during 2017 included improvements in H&S performance, see page 35, and continued investment in animal well-being. The key performance indicators for monitoring and reporting our performance are summarised below and can be read in full, together with more information on our Committee, at www.genusplc.com/responsibility. OBJECTIVES UPDATE WHAT WE DO FOOD QUALITY AND SECURITY Providing expertise and products that increase the supply of high quality protein HIGHLIGHTS WHAT WE PLAN TO DO NEXT • Using genomic selection, the value of PIC genetics improved by US$3.68, providing highly productive, high health pigs • Maintained current genetic lag levels by market • Deployed IVF technology, genetic audits and mating tools to deliver tailored genetic solutions to ABS customers • Elite bull export to India, improving genetic merit • Maximise porcine genetic improvement and rapidly disseminate the genes • Continue development of PRRSv resistant pigs to improve animal well-being and producer output India: using elite male genetics and sexing technology, increase probability of female offspring • • Launch Sexcel, a sexed product subjected to less stress during production ANIMAL WELL-BEING Continually improving animal welfare through proven science-based initiatives • Pork Quality Assurance (‘PQA’) based training completed in all owned production sites and global standards briefed to every staff member • Deliver PIC Care programme • Conduct the second PIC Supply Chain survey and action plan based on findings • Continue investment in PIC and ABS • PIC facilities in US and Canada upgraded animal housing facilities to plan • ABS studs audited and action plans delivered ENVIRONMENT Reducing the environmental impact of protein production • External audits of Genus PIC’s waste • Maintain scope and measures of PIC management systems, completed on 80% of animals on owned sites. Waste from the genetic nuclei used as commercial fertiliser • Met the targeted improvement in feed audits on owned production, including 80% of owned sites Improve feed efficiency by 0.02kg of feed per kg of pork • efficiency of 0.02kg of feed per kg of pork • Develop beef genetics that improve feed efficiency, measured through the in-house Genetic Nucleus (GN) selection index OPERATE SAFELY Ensuring a safe working environment for our colleagues • Vehicle incidents increased in the year; • Reduce occupational road risk year reduction in UK offset by increase in the US linked to improved reporting • Near miss reporting on our production sites increased by 266%, and by 61% across the Company • Total Company recordable incidents reduced by 20% on year • Near miss reporting – reduce risk by increasing reports across the business • Continue to reduce incidents, specifically involving animals, and on customer premises COMMUNITY Being a responsible corporate citizen, within our communities • Supported the Send a Cow charity: • Continue to respond to local crises, 74 cows donated • Recruited 93 staff into our PIC and ABS production sites recruit into local farms and encourage support for charities close to the local businesses 38 Genus plc | Annual Report 2017CASE STUDIES DEVISING NEW BULL DIETS SUPPORTING SAFE ANIMAL HANDLING We have devised high forage, high fibre diets for our bulls that meet nutritional needs and help them relax. The diet encourages cud chewing, which is natural behaviour for cattle and keeps them calm. We tailor diets to animal needs and strive to feed them 1.5% of their body weight daily. We have developed bespoke training to help employees understand and respond to the instinctive behaviours of the animals they work with. We have different courses on working with pigs, bulls and cattle. These have been translated into multiple languages and all employees undertake ‘refresher’ training regularly. INCREASING GENETIC IMPROVEMENT We harness genomic selection technology to help our customers accelerate genetic improvement in their herds and produce more animal protein, using fewer natural resources. This helps us increase customer profitability; for example, our Porcine Genetic Improvement Index shows an improvement of US$3.68 per commercial pig per year. GREENHOUSE GAS (‘GHG’) REPORTING Our GHG emissions are primarily methane produced by our animals and carbon dioxide from consuming fuel and other materials, and from 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 affected mainly by the number and age of animals but also by emissions from our fuel combustion. Animal weight has reduced by 1%, driven by exiting porcine farms in Asia and Europe, partially offset by an increase in the number of bovine animals being produced internally. However, an increase in fuel combustion, mainly to control the temperature in our Chinese porcine farms, has resulted in an overall increase in the primary ratio. Our secondary intensity ratio has reduced, mainly due to an increase in turnover while maintaining the absolute level of total emissions. 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. 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 joint ventures 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 and livestock emissions Scope 2 – purchased electricity, steam, heat and cooling Total Scope 1 and 2 Scope 3 – material usage and waste, third party distribution and business travel Total emissions Primary intensity measure – animal weight (tonne) Secondary intensity measure – turnover (£m) Primary intensity ratio – Scope 1 and 2 (tCO2e/tonne animal weight) Secondary intensity ratio – Scope 1,2 and 3 (tCO2e/£m turnover) GHG EMISSIONS FOR 2017 (%) ● 67% From livestock ● 14% From third party distribution and business travel ● 19% From other activities 2017 2016 Tonnes of CO2e Tonnes of CO2e 77,895 8,065 85,960 24,055 72,596 8,857 81,453 28,433 110,015 109,886 10,146 459.1 8.47 240 10,249 388.3 7.95 283 Annual emissions figures have been calculated based on actual ten-month data for July to April, extrapolated for a 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’. 39 STRATEGIC REPORTGenus plc | Annual Report 2017 Chairman’s Letter STRONG CORPORATE GOVERNANCE THE BOARD CONTINUES TO PROVIDE HIGH- QUALITY LEADERSHIP TO THE GROUP 40 Genus plc | Annual Report 2017Dear ShareholderThe contribution of strong corporate governance to business success is widely recognised, and it remains an area of keen focus for investors, the government, standard setters and society more broadly. At Genus, we are highly aware of the critical role the Board plays. We were therefore pleased that the latest evaluation of the Board’s performance showed that it continues to provide high-quality leadership to the Group.During the year, we have devoted considerable time to analysing the Board’s range of skills and planning succession for the Directors. This will remain a priority for us in the coming year. We have also reviewed the Group’s diversity policy, recognising that diversity contributes to better business decisions.We continue to look at how we report on corporate governance, so we provide real insight into the Board’s work and how it leads the Group. This year we have given more emphasis to our activities and offered opportunities for some of our Non-Executive Directors (‘NEDs’) to share their impressions of Genus and the Board.Set out opposite are some of this year’s governance highlights. More information on each area can be found on pages 42 to 83.Bob LawsonChairman6 September 2017CORPORATE GOVERNANCE HIGHLIGHTS PROVIDING EFFECTIVE LEADERSHIP MAINTAINING AN INDEPENDENT BOARD ENSURING STRATEGIC OVERSIGHT ENHANCING THE BOARD’S KNOWLEDGE OF THE BUSINESS ENGAGING OUR SHAREHOLDERS CONTINUING TO COMPLY An independent external follow up review of the Board’s performance showed particular strengths in the composition and culture of the Board, along with the leadership of the Board and the organisation. The Board has a majority of independent Directors, with five Non-Executives (including the Chairman) and two Executive Directors. The Board held its annual strategy review in January and received regular updates on strategy and business development and the competitive landscape during the year. To give the Board first-hand experience of our business and customers, the Directors spent a week visiting our UK and Spanish operations in May. The Executive Directors met institutional investors owning almost 60% of our share capital, including 20 of our 25 largest shareholders, as well as many potential investors. Genus complied in full with the 2016 edition of the UK Corporate Governance Code (the ‘Code’), which was the standard applicable for this financial year. A copy of the Code is available from the Financial Reporting Council’s (‘FRC’) website. CORPORATE GOVERNANCE OUR APPROACH TO REPORTING ON CORPORATE GOVERNANCE See page 47 See page 50 See pages 46 and 48 See pages 46-49 See pages 50-52 See pages 47 and 55-56 See page 49 See pages 52-53 and 57-59 See page 54 See page 54 See pages 60-81 41 Genus plc | Annual Report 2017CORPORATE GOVERNANCEThis year, we have aimed to provide even greater insight into the Board’s key activities during the year, to demonstrate how the Board works and its effectiveness. The remainder of the Corporate Governance Report explains how we comply with the Code, using the key Code principles as a framework. The content of each section is outlined below:THE BOARD’S YEAR IN REVIEWIncludes the Board’s key activities in the year and details of the annual Board evaluation.LEADERSHIPIncludes the composition of the Board and its Committees, and the Directors’ roles and responsibilities. EFFECTIVENESSIncludes the Nomination Committee’s activities in the year. ACCOUNTABILITYIncludes an explanation of our risk management and internal controls, and the Audit Committee’s activities during the year. RELATIONS WITH SHAREHOLDERSIncludes our investor relations calendar, data on the shareholders we met during the year, and the key themes discussed at investor meetings. REMUNERATIONIncludes an explanation of our approach to remuneration and a report on the Directors’ remuneration for the year. Board of Directors and Company Secretary Karim Bitar1 Chief Executive Board Appointment – September 2011 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. 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. On 1 July 2017, Karim was appointed a Non-Executive Director on the board of Spectris plc. He is also a member of the University of Michigan Ross School of Business Advisory Board. Bob Lawson1, 2 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 is currently Non-Executive Chairman of Eurocell plc and was formerly Chairman of the Federation of Groundwork Trusts and Non-Executive Chairman of Barratt Developments plc. Stephen Wilson Group Finance Director Board appointment – January 2013 Skills and Experience Before joining Genus, Stephen worked in France and the US and gained 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 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. Key to Committees 1 Member of the Nomination Committee. 2 Member of the Remuneration Committee. 3 Member of the Audit Committee. 42 Genus plc | Annual Report 2017Nigel Turner1, 2, 3 Senior Independent 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 Senior Independent Director of Croda International plc. Lysanne Gray1, 2, 3 Non-Executive Director Audit Committee Chair 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. Professor Duncan Maskell1, 2, 3 Non-Executive Director Lykele van der Broek1, 2, 3 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. 43 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Genus Executive Leadership Team (‘GELT’) During 2017, we strengthened the leadership team and ensured it was aligned to our business priorities. The appointments we made have deepened GELT’s industry expertise and commercial acumen, further improving its capability to deliver the Group’s strategy. Jerry Thompson was appointed to lead our Genus ABS Beef business from July 2016 and his strategic review is now being implemented (see pages 26 and 27). Saskia Korink, who was COO of Genus ABS Dairy, left the business in November 2016 and was replaced by Dr Nate Zwald, who joined us in January 2017. Catherine Glickman, Group HR Director, stepped down from GELT on 1 July 2017 and Angelle Rosata was promoted to the role with effect from July 2017. Karim Bitar Chief Executive Stephen Wilson Group Finance Director See pages 42 and 43 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 career at the intersection of agriculture and biotechnology, giving him a unique blend of deep industry knowledge and extensive commercial and global experience. He holds doctorates (DVM and PhD) in Veterinary Medicine from the University of Minnesota. Career Bill joined in 1993 as Manager of Veterinary R&D, based in the US. He subsequently worked in operational roles spanning Europe, South America and the US, before becoming General Manager of PIC North America in 2007. He led the combined ABS and PIC business across the Americas from 2010, before becoming COO of Genus PIC in 2012. 44 Genus plc | Annual Report 2017Jerry Thompson Chief Operating Officer, Genus ABS Beef 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 Genus establish and grow its business in new markets. 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 Siberia and Romania before leading PIC in Central and Eastern Europe. He then led PIC Europe before becoming Regional Director for PIC and ABS in Russia and Asia Pacific and subsequently COO for Genus Asia. He was appointed to his current role in July 2016. Dr Jonathan Lightner Chief R&D and Scientific Officer 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. Angelle Rosata Group HR Director (from 1 July 2017) Skills and Experience Angelle combines commercial acumen with her broad expertise in resourcing, talent and succession, leadership development, and H&S. Her strategic planning skills and pragmatism help to align the Group’s people agenda with its business needs. Angelle holds a Masters in Human Resource Development from Vanderbilt University. Career Angelle joined Genus PIC in September 2013 as HR Director, following more than 20 years in the healthcare sector. She developed and delivered PIC’s people strategy, before being appointed HR Director for Genus ABS. Angelle was appointed Group HR Director and a member of GELT on 1 July 2017. 45 Dr Nate Zwald Chief Operating Officer, Genus ABS Dairy Skills and Experience Nate brings deep dairy genetics expertise, a strong commercial focus and a passion for people development. He grew up on the Bomaz dairy farm in the US, which has produced high- ranking industry and ABS sires, before studying at the University of Wisconsin. Here, he obtained a degree in Dairy Science, an MBA and a PhD (focused on the genetic evaluation of health traits in dairy cattle). Career Nate joined Genus in January 2017 after 15 years at Alta Genetics. This included being Alta’s Advantage Program Manager, in which he redesigned progeny testing in partner herds. For his final ten years with the company, Nate led Alta’s successful US business as General Manager. Nate has a strong dairy industry network and sits on the board of the Council on Dairy Cattle Breeding and is Vice President of the National Association of Animal Breeders. CORPORATE GOVERNANCE Genus plc | Annual Report 2017The Board’s Year in Review OUR MAIN ACTIVITIES IN 2017 UPDATES RECEIVED AT ALL BOARD MEETINGS RESEARCH AND DEVELOPMENT FINANCE • Received regular updates on R&D • Approved the annual and interim results and dividends • Approved the 2018 budget • Received tax and treasury updates • Received pension updates • Approved the terms of the exit of National Milk Records plc from the MPF EXECUTIVE/GELT UPDATES • Received monthly financial and operational performance updates • Received regular presentations from each business unit H&S • Reviewed 2017 targets for H&S and reviewed progress throughout the year • Received monthly and quarterly updates from Head of H&S including progress against the H&S KPIs RISK MANAGEMENT • Monitored the Group risk register • Updated on whistleblowing hotline reports and investigations • Reviewed and approved a project to implement a new Enterprise System across Genus • Strategic business and competitive landscape developments from CEO pipeline developments, new initiatives and potential collaborations • Financial performance of businesses and forecasts from Group FD • Corporate governance and legal issues from Group General Counsel and Company Secretary, and external advisers LEADERSHIP AND EFFECTIVENESS • Carried out Board effectiveness review • Update on the appointment of COO ABS Dairy and GELT succession planning BUSINESS DEVELOPMENT AND STRATEGY • Received regular updates on the progress of the PRRSv development programme • Received updates from Directors attending the R&D Portfolio Management Team • 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 the integration of the new ABS Dairy COO and the plans to accelerate ABS growth • Monitored the Group’s performance against its goals • Held strategic meeting with GELT (see page 48) • Approved: EMPLOYEES – the dairy genetic improvement • Updated on key vacancies and hires, joint venture, De Novo, in partnership with one of the leading Holstein breeders De-Su – the acquisition of Hermitage porcine genetics and strategic distribution channels – the acquisition of the remaining 49% stake in IVB – the PRRSv programme • Received updates on: – IVB integration, including the launch in Mexico to serve large dairy operations – GSS development progress and US litigation (see note 14) – the De Novo joint venture progress – business development opportunities, including summaries of due diligence reviews – the competitor landscape in particular in sales and R&D • Met key talent and business leads on Board site visits • Updated on resourcing for growth and other initiatives, in particular the: – recruitment and training of GSS teams in the US and India – resourcing of IVB expansion and building of capability SHAREHOLDERS • Updated on meetings with shareholders, potential investors and analysts • Received regular briefings from Executive teams 46 Genus plc | Annual Report 2017EFFECTIVENESS Assessing Our Effectiveness To ensure the Board provides effective leadership, we have a three-year evaluation cycle, using a mixture of internal and external evaluations. YEAR 1 External Board effectiveness review produces an action plan for areas of focus YEAR 3 Internal questionnaires and interviews with the Chairman YEAR 2 Follow-up questionnaire by some external evaluation consultant, to monitor progress with the focus areas THE BOARD PROVIDES AN APPROPRIATE BALANCE OF CHALLENGE AND SUPPORT Our Progress Against Last Year’s Areas of Focus The table below shows progress against the three focus areas in 2017: Focus area Our progress this year Strategy, including our competitor landscape and our shareholders’ expectations. Developing the risk agenda, in line with our strategic objectives. Succession planning, including diversity and the mix of skills on the Board, to identify any current and future skills gaps. Competitors’ activities are monitored through our business development team. The Board is updated on competitor activity at each Board meeting, and in dedicated ‘deep dives’ twice a year. In addition to the formalised process in place to monitor Group risks and the ‘deep dive’ sessions to appraise risk management plans, the Board performed a comprehensive Group-wide risk review in May 2017, to validate existing risks and identify and evaluate new or emerging ones. A Board skills matrix and updated Board role specifications have been developed. This was the second year of the three-year cycle. The evaluation was externally 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 involved: • effectiveness questionnaires with each Board member, following which the Board discussed the strengths and challenges identified by the process; • a workshop with the Board, to examine and discuss a case study, based on strengths and challenges similar to Genus’s; and • discussion of how the Board could enhance the effectiveness of its contribution to the Company. The Evaluation’s Conclusions The review showed that the Board had particular strengths in the following areas: • Board culture and leadership, with the Board functioning well as a team and having an appropriate balance of challenge and support, with open, forthright and relevant dialogue on critical issues; • realism about the challenges and opportunities facing Genus, and the ability to take long-term decisions because they are right for the Company; • the benefit of high-quality Board papers, produced in a timely manner and presented by the Executives, enabling the Board to discharge its duties; • a focus on risk assessment, including H&S; and • possession of all the required disciplines, with the Board being well prepared for meetings and generating productive solutions. 47 CORPORATE GOVERNANCE Genus plc | Annual Report 2017What We Will Focus On in 2018The evaluation identified that the priorities for the Board were to continue to focus on the areas identified in the full external effectiveness review performed in the previous year. These were:• continuing to focus on strategic clarity in a changing competitive landscape;• continued risk analysis to better understand the Company’s risks, controls and risk appetite; and• succession planning, including for the Chairman and CEO, and focusing on structured communications with shareholders. The Board’s Year in Review continued REVIEWING AND MONITORING OUR PERFORMANCE REVIEWING THE STRATEGY One of the Board’s key responsibilities is to approve the Company’s strategy and monitor our performance against it. To understand how well our strategy is working and to ensure it remains appropriate, the Board holds an annual strategy review each January. Members of GELT present to the Board on their business unit or function. Senior Independent Non-Executive Director Nigel Turner said: “The annual strategy reviews are extremely important for both the Board and GELT. The Board gains greater understanding of the competitive landscape and the challenges the businesses face, as well as the anticipated five-year financial plans. This gives us a benchmark against which we can review, challenge, approve and monitor each business unit’s strategic goals and initiatives. For GELT, it is an opportunity to take stock, consolidate its plan and receive independent advice that draws on the Board’s wealth of experience and expertise. In summary, the strategy reviews provide an excellent forum for constructive debate about the future, with high-quality contributions from senior management, GELT and Board members.” OVERSEEING R&D The R&D PMT has a number of responsibilities. These are periodically to: • review and prioritise our investment in R&D and technology; • assess the quality and competitiveness of our R&D pipeline, including considering its risk profile; • oversee and encourage the ideation management process; and • approve our patent and other IP strategies for new technologies, based on business and technical opportunities. The R&D PMT typically meets twice a year. This year it held one meeting in Chicago, with a second meeting in Basingstoke shortly after the year end. Professor Duncan Maskell is a Non-Executive Director and our adviser to the R&D PMT, providing a direct link between the R&D PMT and the Board. He said: “R&D is Genus’s lifeblood and it is vital that we oversee it effectively. The R&D PMT is therefore a key forum for the Group. In addition to our standing agenda items, this year we reviewed two focus areas. We conducted a ‘deep dive’ review of the PRRSv resistance development plan and our technical progress. We also reviewed the strategy for the Biosystems Engineering function, and its plans to continue to drive innovation in sexing technology, after the launch of GSS. Both these areas are strategically important to the Company and its customers.” Nigel Turner Senior Independent Non-Executive Director Professor Duncan Maskell Non-Executive Director 48 Genus plc | Annual Report 2017THE STRATEGY REVIEWS PROVIDE AN EXCELLENT FORUM FOR CONSTRUCTIVE DEBATE ABOUT THE FUTURE, WITH HIGH-QUALITY CONTRIBUTIONS FROM SENIOR MANAGEMENT, GELT AND BOARD MEMBERS GAINING INSIGHT INTO THE BUSINESS We want to ensure that the Board has first-hand experience of key areas of our business and markets, so we include at least one annual site visit in the Board calendar. In May 2017, the Board spent a week visiting our operations and facilities in the UK and Spain. This included meeting our ABS and PIC European leadership and key members of their teams, as well as receiving business update presentations. Commenting on the site visit, Non-Executive Director Lykele van der Broek said: “The Board visit was designed to give us a deeper understanding of our European businesses, our operations on the ground, our markets and the needs of our key customers. We met some of our largest customers in the UK and Spain, which gave us an insight into their perspectives of Genus, what drives their purchasing decisions, how they see the markets and how they expect their future product and service requirements will develop. The visit also gave our local management teams the chance to have a mutually stimulating interaction with the Board, face-to-face.” REFLECTIONS ON MY FIRST YEAR Lysanne Gray joined the Board in April 2016. Reflecting on her first year as a Non-Executive Director, she said: “Since joining Genus, I have met with GELT, senior managers and key personnel, through both Board presentations and site visits. What is overwhelmingly apparent is that everyone is genuinely passionate about delivering the best genetics and services for our customers while maintaining consistently high levels of animal well-being. Our people have a wealth of expertise and knowledge and the skill set required to deliver on the Company’s strategy. “Genus clearly demonstrates its values through the decisions our people take each day, from Board level through to AI Technicians out on customer farms. This is a pioneering business and there have been some in-depth discussions and complex decisions to take, as Genus pushes forwards into new areas. Following my appointment as Audit Committee Chair in November 2016, I have been impressed by the quality of debate around business and financial risks and our internal control procedures. “I want to take this opportunity to thank my fellow Board members and the management team, for welcoming me into the business and ensuring I had an excellent induction.” 49 Lykele van der Broek Non-Executive Director Lysanne Gray Non-Executive Director CORPORATE GOVERNANCE Genus plc | Annual Report 2017Corporate Governance Statement LEADERSHIP AN INDEPENDENT BOARD 2 1 4 Executive Directors Independent Non-Executive Chairman Independent Non-Executive Directors The Board’s Role The Board, under the Chairman’s leadership, is responsible for ensuring our 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 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; ensuring we have the right funding; approving material contracts, acquisitions and investments; and reporting to shareholders. The Board’s Composition Following Mike Buzzacott’s retirement at the 2016 AGM, the Board now comprises five independent NEDs, including the Chairman, and two Executive Directors – the Chief Executive and the Group Finance Director. This gives us a majority of independent Directors on the Board. 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. NON-EXECUTIVE TENURE ON THE BOARD MORE THAN 9 YEARS 6 TO 9 YEARS 3 TO 6 YEARS 1 TO 3 YEARS 1 1 1 2 00.0 A BROAD BASE OF RELEVANT EXPERIENCE INTERNATIONAL BUSINESS FINANCE SCIENTIFIC / BIOTECH FOOD INDUSTRY 1 3 3 6 00.0 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 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 Responsibilities Chairman Bob Lawson Chief Executive Karim Bitar Group Finance Director Stephen Wilson Senior Independent NED Nigel Turner 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 NEDs without the Executives present. Bob is also responsible for the Board’s communications with shareholders. Karim is responsible for devising and implementing our strategy and managing our 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 NEDs, without the Chairman present, to appraise the Chairman’s performance, and consults with shareholders in the absence of the Chairman and Chief Executive. Lysanne Gray, Duncan Maskell, Lykele van der Broek The NEDs constructively challenge and provide oversight and assistance in the progression of our execution of strategy, management of the Company and management of our governance structures, within the risk and control framework set by the Board. NEDs 50 Genus plc | Annual Report 2017 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. Several of our Directors, including the Chair of the Audit Committee, have significant financial experience, while others 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. More information about our approach to Board composition and recruitment can be found in the Nomination Committee report on pages 55 to 56. 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 47, the Board also confirms that all the Directors continue to be effective and to demonstrate commitment to their roles. As required by the Code, all the Directors will offer themselves for election at the next Annual General Meeting (‘AGM’). 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 tenth anniversary of his original appointment as a NED in January 2018. Following review, the Board is satisfied that Nigel remains independent and that he has no connection with the Company’s operational activities. Board and Committee Structure The diagram below shows the Board and the Committees that report to it. Executive Committees Information about the GELT and the R&D PMT can be found on pages 44 to 45 and page 48 respectively. 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 34 to 39, and at www.genusplc.com. R&D PMT Gives us a comprehensive view of our R&D programme and involves our business units in prioritising our R&D initiatives. GELT Leads our strategic delivery and ensures organisational alignment, engagement and efficient execution. AUDIT COMMITTEE Ensures the integrity of our financial reporting, evaluates our risk management and internal control system, and oversees the internal and external auditor. GENUS PLC BOARD CSR COMMITTEE Ensures that the Group continues to engage in business in a socially responsible and ethical manner. REMUNERATION COMMITTEE Determines remuneration for our Executive Directors and senior management, to support our growth strategy and deliver value for stakeholders. NOMINATION COMMITTEE Reviews the Board’s structure, size and composition and proposes candidates for appointment to the Board. Board Committees The table below shows Board Committee membership: Director Bob Lawson Karim Bitar Nigel Turner Lysanne Gray Duncan Maskell Lykele van der Broek M = Committee member C = Committee Chair Committee Audit Nomination Remuneration – – M C M M C M M M M M M – C M M M The Committee Chairs oversee and lead the Committees’ activities, within their terms of reference, and are responsible for their effective operation. More information about the roles and work of the Board Committees can be found in their statements on pages 55 to 81, and in their terms of reference on our website at www.genusplc.com. 51 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Corporate Governance Statement continued LEADERSHIP CONTINUED Attendance at Board and Committee Meetings The table below shows how many Board and Committee meetings each Director attended during the year. Director Board Nomination Audit Remuneration Non-Executive Chairman Bob Lawson Executive Directors Karim Bitar Stephen Wilson Non-Executive Directors 8 (8) 3 (3) 8 (8) 8 (8) 3 (3) 31 51 51 51 6 (6) 61 61 Nigel Turner 8 (8) 3 (3) 5 (5) 6 (6) Mike Buzzacott (retired on 17 November 2016) Lysanne Gray2 Duncan Maskell3 Lykele van der Broek 3 (3) 7 (8) 8 (8) 8 (8) 1 (1) 3 (3) 2 (3) 3 (3) 3 (3) 5 (5) 4 (5) 5 (5) 3 (3) 5 (6) 6 (6) 6 (6) Note: Figures in brackets are the maximum number of Board or Committee meetings the Director could have attended. 1 Attendance by invitation. 2 Due to prior commitments pre-appointment, Lysanne Gray was unable to attend the November 2016 Board and July 2016 Remuneration Committee meetings. However, Lysanne was provided with all Board and Committee materials and submitted feedback via the Board and Committee Chairs prior to the meeting. 3 Due to prior commitments pre-appointment, Duncan Maskell was unable to attend the November 2016 Audit and Nomination Committee meetings. However, Duncan was provided with all Committee materials and submitted feedback via the Committee Chairs prior to the meetings. risks 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 12 and 13. The Board performed its annual risk review in May 2017. This involved reviewing 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 ascertain 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 the: • litigation relevant to the GSS project and preparation for market launch of its products and services; • in-licensing of IP rights, particularly those relating to gene editing assets; • IT resilience and cyber security; and acquisition; 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. MEETINGS 8BOARD 3NOMINATION COMMITTEE MEETINGS COMMITTEE MEETINGS 5AUDIT 6REMUNERATION COMMITTEE MEETINGS 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 our risk appetite, which defines the types and levels of risks that the Board is prepared to seek and accept as the Group executes its strategy. The Board then monitors our risk exposure against the appetite for our principal risks and ensures appropriate executive ownership for all risks. This on-going process for identifying, evaluating and managing the Group’s significant 52 Genus plc | Annual Report 2017The review considered our internal control self-assessment process, which is 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. 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 our risk exposure against risk appetite, for our principal risks. • Provides direction on the importance of risk management and the 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. 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 is informed of 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 its work programme, performs independent reviews of these assessments to identify any deficiencies in our controls and how we should address them. The external auditor also provides observations on the control environment as part of its audit work. The results are communicated to senior management and the Audit Committee. 53 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Corporate Governance Statement continued RELATIONS WITH SHAREHOLDERS Investor Relations Calendar Date Type of communication September 2016 September 2016 November 2016 November 2016 February 2017 Preliminary results announcement and presentation Preliminary results investor roadshow London, Edinburgh Investor Conference AGM and trading update Interim results announcement and presentation London London London Location London February and March 2017 Interim results investor roadshow Calls Investor calls London, Edinburgh London, New York, Paris INSTITUTIONS AND POTENTIAL INVESTORS MET 30NON-HOLDING 59%PROPORTION OF 20NUMBER OF TOP SHARES HELD BY INSTITUTIONS MET DURING YEAR 25 SHAREHOLDERS MET (8 OF TOP 10) 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. These meetings usually take place after we release our interim and preliminary results. During the year, our investor relations programme included meetings in the locations 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. 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 16 November 2017. 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 and our initiatives to address them; • strategic progress across the Group; • R&D progress and our increased spending to accelerate the programme; • progress in ABS through the De Novo and IVB acquisitions; • capturing a share of the value we deliver to customers; • the Hermitage acquisition; • the opportunity for PRRSv resistant pigs; and • updates on the GSS litigation. Note: Shareholdings as at 30 June 2017. 54 Genus plc | Annual Report 2017Nomination Committee Report EFFECTIVENESS A WELL-BALANCED BOARD Introduction The Nomination Committee reviews the Board’s structure, size and composition and manages appointments to the Board. This year, the Committee continued to focus on succession planning for the Board, by reviewing the Directors’ skills and experience and identifying areas to consider for future appointments. This Committee’s approach recognises its critical role in ensuring the Company has an effective and well-balanced Board. Bob Lawson Chair of the Nomination Committee 6 September 2017 THE COMMITTEE CONTINUED TO FOCUS ITS EFFORTS ON SUCCESSION PLANNING FOR THE BOARD Committee Composition and Governance Focus areas 2017 Chair Members Bob Lawson Nigel Turner Duncan Maskell Lykele van der Broek Lysanne Gray Karim Bitar 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 Non-Executive and Executive Directors and other senior executives; and • identifying and recommending suitable candidates to become Directors, based on merit. The Committee met three times in the year, primarily to discuss the Board’s current skills and experience, and succession planning. • Continued succession planning • Ongoing review of diversity and mix of skills to identify any current skills gap 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. The Committee’s biographies, along with information on Genus’s other Board members, can be found on pages 42 to 43. 55 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Nomination Committee Report continued EFFECTIVENESS CONTINUED The Committee’s Main Activities During the Year Succession Planning Process In 2016, the Committee formalised and committed to a three-phase succession planning process: ASSESSMENT APPROACH EXECUTION Board Skills Matrix and Experience Engagement Rules Appointments • As part of the Approach phase: • Desired skills for any new Non-Executives have been identified, for use in filling any future vacancies on the Board. • Potential internal candidates for promotion to Executive Director. – Engagement rules were developed for use in succession planning, including: > succession planning in line with the Committee’s terms of reference; > considering the skills of any departing NED for replacement; and > filling any skills deemed to be missing or required for the Company’s future strategic direction. – Job specifications for the Non- Executives and Executives have been updated. 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. Service Contracts and Letters of Appointment Copies of service contracts and letters of appointment between the Directors and the Company will be available for inspection at the Company’s registered office during normal business hours until the conclusion of the AGM on 16 November 2017, and at the AGM from at least 15 minutes prior to the meeting until its conclusion. • As part of the Assessment phase, which was formalised last year following an in-depth review and discussion, the Committee has mapped out the Board’s current skills and experiences across a range of relevant areas. • This resulted in a skills matrix, which identified good skills coverage from all Board members. • Potential skills gaps were identified, so they can be incorporated into future succession planning at Board and Executive level. • Areas for ongoing Board upskilling were identified and discussed. 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. Genus will continue to make all Board appointments based on individual merit. The Committee reviewed the Board diversity policy during the year and concluded that it remained appropriate for Genus. More information about diversity across Genus can be found in the Strategic Report on page 34. 56 Genus plc | Annual Report 2017Audit Committee Report ACCOUNTABILITY 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 Committee Composition and Governance Chair Members Lysanne Gray Nigel Turner Duncan Maskell Lykele van der Broek Focus areas 2017 • Biological assets valuation • Goodwill and intangible assets • Pensions • Presentation and disclosure of exceptional and adjusting items 57 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Dear ShareholderThis is my first report as Chair of the Audit Committee. I joined the Board and the Committee in April 2016 and became Chair of the Committee in November 2016. During my first year, I underwent a thorough induction programme, which involved meetings with the global management team and visits to both Group and customer sites, to better understand the business operations and industry sector. I also had meetings with the Group’s external auditor and invested time to learn about the Group’s system of risk management and internal control.The Audit Committee acts on behalf of the Board and shareholders, to ensure the integrity of the Group’s financial reporting, evaluate its system of risk management and internal control, and oversee the performance of the internal and external auditors. We have an annual work programme that is designed to deliver these commitments.I am happy to report that the Committee’s 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 Board members, are in the Corporate Governance Statement of this Annual Report.During the financial year, we focused on risk management, internal control and the Group’s financial reporting processes. We have supported the Board in monitoring the risk management process 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, 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.Lysanne GrayChair of the Audit Committee6 September 2017 Audit Committee Report continued ACCOUNTABILITY CONTINUED The Committee’s members are NEDs with a wide range of financial, commercial and scientific research expertise, appropriate for fulfilling the Committee’s duties. In 2017, the Committee met the UK Corporate Governance Code’s requirement that at least one Committee member should have recent and relevant financial experience, with Lysanne Gray 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. The Committee agreed to enhance its effectiveness by further emphasis on broadening the Committee’s knowledge on financial matters. 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 Annual Report to ensure it is fair, balanced and understandable; • 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 Group maintains suitable confidential arrangements for employees to raise concerns; and • reviews the Group’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 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 In compliance with IAS 41, Genus records its biological assets at fair value in the Group balance sheet (£375.3m), 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 £27.4m in the value of porcine biological assets and the reduction of £28.5m in the value of bovine biological assets. Genus has £104.7m of goodwill and £88.3m 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 £20.9m of capitalised development expenses in respect of GSS, as well as £9.3m in associated fixed assets. The Committee discussed management’s goodwill and intangible asset impairment reviews, as well as 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 recognition of £5.7m as an exceptional credit, as a consequence of NMR withdrawing from the MPF. The Committee also continued to review the status of the other parties who are jointly and severally liable for the MPF deficit and concurred with management’s assumptions for reporting Genus’s share of the fund. Genus had £16.9m of adjusting items including £2.5m of exceptional items in the Group income statement. The Committee gave consideration to the presentation of these items in the financial statements this financial year due to the nature of these items and the recent guidelines on the use of alternative performance measures issued by the European Securities and Markets Authority. The Committee received detailed reports from management outlining the judgements applied in relation to the disclosure of adjusting items which include net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. For adjusting items the Committee took into consideration their volatility and lack of correlation to the underlying progress and performance of the business. Specifically for exceptional items, the Committee took into consideration the materiality, frequency, and nature of the items. Following this detailed review and active discussion with management, the Committee has concluded that the presentation of the financial statements is appropriate. Biological assets valuation Goodwill and intangible assets Pensions Presentation and disclosure of exceptional and adjusting items 58 Genus plc | Annual Report 2017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 Group’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 45% of audit fees, and reviewed compliance with the Group’s Non-Audit Services by Auditor Policy (see note 8 to the financial statements for further details). The Committee was satisfied that using Deloitte for such services did not impair its independence as the Group’s external auditor. The Committee assessed the external auditor’s performance in conducting the audit for the June 2016 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. 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 and product trials, as well as the legal proceedings relating to the anti- trust and patent issues connected with this key initiative. • Gene-editing technology: this is the risk that we fail to successfully develop and commercialise gene editing technologies due to technical, IP, market, regulatory or financial barriers. The Board was updated regularly on the development of our gene editing capabilities. • Pensions: the Board was updated on the status of discussions with the Milk Pension Fund in relation to the outcome of the triennial valuation and the NMR Flexible Appointment Agreement (FAA). • Enterprise systems: the Board reviewed plans to replace the ageing existing multiple enterprise systems across the Group with a single integrated best in class cloud-based solution to improve effectiveness and efficiency. • IT resilience and cyber security: the Committee received updates from the global Chief Information Officer on the Group’s IT recovery and continuity plans, as well as the effort to strengthen infrastructure and systems security and the implementation of Group wide cyber security measures. • H&S: the Board received updates on the controls and mitigation activities in place and/or being implemented to manage this risk, both on Group and third-party premises. The Committee also received an update on supply chain risks. Internal Control System Our risk management process and system of internal controls are described in detail on pages 52 and 59. 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 every six months. The Committee further reviewed internal audit’s findings at each scheduled meeting, and the Group’s whistleblowing 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 implements control improvement opportunities and the Committee discussed with management various opportunities to further strengthen the Group system of internal control. 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 FRC’s Audit Quality Review Team (‘AQRT’) selected to review the audit of the Company’s financial statements as part of its 2016 annual inspection of audit firms. The Chair of the Committee received a full copy of the findings of the AQRT and discuss ed these with Deloitte. There were no significant areas for improvement identified within the report. We are satisfied that there is nothing within the report which might have a bearing on the audit appointment. 59 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Director’s Remuneration Report Section A: Annual Statement STRONGPROGRESSMADEDELIVERING AGAINSTOURSTRATEGY Letter from the Chairman Dear Shareholder On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for 2017. Our Remuneration Policy Shareholders will be aware that we proposed a new remuneration policy (‘Remuneration Policy’) for approval at our 2016 AGM. This was a year ahead of the next scheduled binding vote. We concluded that changes were necessary to ensure we maintain momentum as the business transitions to being an agricultural biotechnology pioneer. The amendments to the Remuneration Policy improve our ability to recognise the strategic progress we make as the organisation evolves, and promote stable leadership through an important period for the business. We were pleased to receive such high levels of support from shareholders for these changes, with over 96% of shareholders who voted backing the new policy. We were encouraged also by shareholders’ desire to understand in more detail our strategy and plans for the years ahead and these are covered elsewhere in the Annual Report. Transparency with Shareholders We are committed to reporting transparently to shareholders on remuneration. During the year our previous remuneration disclosure was ’Highly Commended’ at the 2016 Building Public Trust in Corporate Reporting Awards. We are committed to helping shareholders to understand the factors we consider in developing and implementing our Remuneration Policy. This extends to helping people see the rationale behind decisions and the way this supports the business strategy, so we focus on why we have made certain decisions as well as the outcome of the decision itself. Business Performance and Reward Outcomes for 2017 We have made strong progress this year on delivering against our three part strategy. We made significant steps in increasing genetic control and product differentiation. As we flagged last year, this was a year of additional investment in R&D, and we have seen real progress on our work in gene editing, with the PRRSv resistant pig project hitting its key milestones. In PIC, genetic improvement exceeded its targets and met the dissemination targets. With the establishment of the De Novo joint venture with De-Su, we have created a world leading dairy genetic improvement programme. IVB continued its growth. In ABS we gained a permanent injunction, enabling us to go to market with our proprietary sexing technology, and achieved scaling up of production to deliver cost effectively at volume. In targeting key markets and segments, we saw volume and royalty growth in PIC, with a strong performance in Asia, particularly China, and robust growth in Europe. PIC met its targeted operating profit Annual bonus – Core Element • Adjusted profit before tax growth of 3.6% in constant currency • Strong cash generation • Good progress against personal targets Annual bonus – Company Milestones • Ability to launch sexed semen technology 18.1% 0% 0% • Total award of 45.6% of maximum. One quarter of this award is made in shares deferred for three years TARGET 50% 45.6% 50% 100% 90% 100% 50% 100% • Total award of 80% of maximum available, all deferred into shares for three years Long-term – Performance Share Plan (‘PSP’) • Three-year average adjusted earnings per share growth of 16.4% • Strong share price growth over the performance period ANNUAL EARNINGS PER SHARE 6% AWARDS VESTING 20% 20% ACTUAL 16.4% ANNUAL EARNINGS PER SHARE 20% ACTUAL 79.4% AWARDS VESTING 100% 100% • 79.4% of the PSP award vested for both Executives 60 Genus plc | Annual Report 2017PROFIT BEFORE TAXPERSONAL OBJECTIVESCASH GENERATIONOVERALL% OF MAXIMUM AWARD% OF MAXIMUM AWARDCOMPANY MILESTONE80%% OF AWARD VESTINGBUSINESS ACHIEVEMENTREMUNERATION TARGETSOUTCOMES FOR EXECUTIVES growth. ABS’s performance for the year as a whole was disappointing, not meeting its volume growth or operating profit targets. However, actions were taken in H1 to address this, and we have seen improving performance in H2. The final part of the strategy – sharing in the value we are creating – saw good cash generation across the business. Tight control of cash, close management of working capital and actions to return cash from joint ventures resulted in a full award in this element of the annual bonus. The way that business and individual performance has fed through to reward outcomes is highlighted below and covered in detail within the wider Remuneration Report. As a Committee we recognise the natural tension between growing the business year on year and investing for the future. The Long Term Incentive Plan, in which the sole measure is adjusted earnings per share, requires the Executives to manage both elements. Over the three year period, we were pleased to see strong adjusted earnings per share growth, and continue to believe adjusted earnings per share is a key metric to measure long term business performance. Annual Bonus (Core Bonus Elements) Profit before tax: In constant currency our adjusted profit before tax grew by 3.6% excluding gene editing costs. This resulted in an award of 18.1% of maximum under this section of the Core Bonus. Cash Generation: The strong free cash flow performance in the year significantly exceeded the stretch target, resulting in full awards under this part of the Core Bonus. Personal Objectives: We have assessed the performance of both Executive Directors against the personal targets that were set for them. Awards of 90% of maximum were made to the Chief Executive and Group Finance Director. Overall, the combination of Company and individual performance meant that 45.6% of this Core Bonus opportunity will be payable. Of this, one quarter will be awarded in shares in Genus plc under the Deferred Share Bonus Plan (‘DSBP’) which will be deferred for three years. Annual Bonus (Company Milestones) The revised Remuneration Policy provides flexibility to recognise key strategic events, and to reward and retain key individuals who were instrumental in making them happen. We agreed that the ability to launch our sexed semen technology would represent such a milestone. This technology has been in development for a number of years and represents a significant opportunity to generate future value for shareholders. Getting to a position where we can launch has required us to overcome significant barriers, covering areas such as legal freedom to trade, development of production processes to deliver successfully at scale, and creating the internal capability to sell across a diverse customer base. Many of these aspects are described elsewhere in the Annual Report. In summary, we have made strong progress in creating freedom to operate and have successfully demonstrated the ability to produce at scale cost effectively. We have now launched in 2018 and the Committee therefore judged that 80% of the award under the Company Milestones should be made to each Executive Director. As previously communicated, these will be awarded in shares deferred for three years. Overall, the structure of the bonus awards and use of deferred shares means that a significant proportion of the annual bonus award will be in shares deferred for three years. When considering the combined position of the Core Bonus and Company Milestone elements, 63.5% of the total annual bonus award will be deferred into shares for three years for the Chief Executive, and 55.9% for the Group Finance Director. Long Term Awards Awards under our 2014 Performance Share Plan (‘2014 PSP’) granted in November 2014 will partially vest on the third anniversary of grant. Vesting was linked to adjusted earnings per share performance and the calculation was performed after adjustment for costs relating to our gene editing programme as explained in the Annual Report last year and elsewhere within this document. The average adjusted earnings per share growth rate over the period was 16.4% resulting in 79.4% of the share award vesting. During the period we have seen significant growth in the share price of Genus plc which rose 49.2% between award and the end of the performance period: this is reflected in the number in the single figure table within the Report. Under the terms of the scheme, Executive Directors will be required to hold onto the post-tax number of vested shares for a minimum of a further two years. Employee engagement and reward Following regular engagement with employees around the world on their performance during the year, senior management reviews annually their salaries and benefit provision, which is benchmarked to the local markets in which people work. There is a clear linkage between performance and reward which is recognised through annual bonuses, commission or non-financial recognition. Each year we make share awards to a number of senior leaders in the business, designed to recognise the contribution people are making, align them to our success and support retention of key talent. We are aware of the developing regulatory environment on pay in the UK, Europe and the US, and we will continue to monitor this over the coming year. Looking forward to 2018 We will operate under the agreed Remuneration Policy in 2017/18. We have decided to include the Company Milestones within the structure of the annual bonus for the coming year. This is in line with the agreed Remuneration Policy and awards will be made if specific identified strategic milestones are achieved during 2018. Due to commercial sensitivity we will disclose these in the next Directors’ Remuneration Report, along with the level of any award as determined by the Committee. There are no changes to the way we propose to implement the Remuneration Policy in 2018. As always I would like to thank shareholders for their support. We try to make our disclosures as easy to read as possible, while fulfilling our disclosure obligations. If you have any feedback I can be contacted at remunerationchair@genusplc.com. I look forward to your support at our forthcoming AGM. Nigel Turner Senior Independent Non-Executive Director and Chair of the Remuneration Committee 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 ‘auditable parts’ of the Directors’ Remuneration Report state whether, in his 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. 61 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Annual Report on Remuneration Section B: At a Glance (For more detail please see pages 65 to 76) WHAT EXECUTIVE DIRECTORS WERE PAID IN 2017: 1 2 Base salary and benefits • Salaries were effective 1 July 2016 • Benefits include a car allowance and a pension allowance of 25% of base for Chief Executive and 15% for Group Finance Director Annual bonus – Core Element • Maximum opportunity 125% of salary comprising 80% adjusted profit before tax, 20% Cash Generation and 25% personal objectives • Overall award 45.6% of maximum • 25% of total award under this element made in shares deferred for three years 3 Annual bonus – Company Milestones • Maximum opportunity of 75% of salary for Chief Executive and 50% of salary for Group Finance Director • Company Milestones linked to sexed semen technology. 80% of maximum award made to Chief Executive and Group Finance Director (60% and 40% of salary respectively) • All awards to be made in shares deferred for three years 4 PSP • Awards vested at 79.4% of maximum based on average annual adjusted earnings per share growth achieved of 16.4% Chief Executive Karim Bitar Group Finance Director Stephen Wilson BASE SALARY £548,114 BENEFITS £159,769 BASE SALARY £371,423 BENEFITS £68,945 Company performance Target 50% PBT CASH GENERATION PERSONAL OBJECTIVES OVERALL 0% Executive outcome 45.6% 90% CORE ELEMENT £312,315 MAX. OPPORTUNITY £685,142 CORE ELEMENT £211,637 MAX. OPPORTUNITY £464,278 Company performance COMPANY MILESTONES Executive outcome 80% 100% 100% 100% COMPANY MILESTONE £328,868 MAX. OPPORTUNITY £411,085 COMPANY MILESTONE £148,569 MAX. OPPORTUNITY £185,712 Company performance 6% 20% ACTUAL 16.4% ACTUAL 79.4% 20% 100% Total shares released 68,499 Total shares released 40,615 Executive outcome INDICATIVE VALUE £1,248,0211 INDICATIVE VALUE £739,9941 1 Calculated based on the average share price for the final quarter of financial year ended 30 June 2017 (1,821.95p) 5 Total remuneration breakdown Chief Executive Karim Bitar Group Finance Director Stephen Wilson TOTAL £2,597,087 £1,540,568 PERFORMANCE SHARES COMPANY MILESTONES CORE ELEMENT BASE SALARY AND BENEFITS £1,248,021 £328,868 £312,315 £707,883 £739,994 £148,569 £211,637 £440,369 62 Genus plc | Annual Report 201718.1%% OF MAXIMUM AWARDANNUAL ADJUSTED EPS% OF AWARD VESTING WHAT EXECUTIVE DIRECTORS CAN EARN IN 2018 AND HOW: 1 2 3 4 Base salary • Salaries were increased by 1.5% from 1 September 2017, with new values of £556,336 and £376,994. The previous pay review date was July and there was no backdating of awards • No changes to benefits items provided Annual bonus – Core Element The measures for the Core Bonus element will remain unchanged • Adjusted profit before tax growth g 80% of salary • Cash generation g 20% of salary • Personal objectives g 25% of salary For the adjusted profit before tax growth, target bonus requires 10% growth and maximum requires 15% growth in constant currency Annual bonus – Company Milestones • The Remuneration Committee has determined that this element will be included in the reward structure for 2018 • Due to commercial sensitivity, this will be disclosed retrospectively in the 2018 Annual Report • All awards to be made in shares deferred for three years PSP (September 2015 awards) • The vesting of these awards depends on the adjusted earnings per share (excluding gene editing costs) achieved in the three financial years ending 30 June 2018 PSP (September 2017 awards) • The vesting of these awards will be subject to an adjusted earnings per share growth, with the 2020 earnings per share being compared to the 2017 adjusted earnings per share (excluding gene editing costs) • 5% annual growth g threshold 20% vesting • 15% annual growth g 100% vesting • Vesting levels will be calculated on a straight line basis between the above values Chief Executive Karim Bitar Group Finance Director Stephen Wilson BASE SALARY £554,965 BENEFITS £161,241 BASE SALARY £376,066 BENEFITS £69,410 Maximum of 125% of salary, Target award of 62.5% of salary ADJUSTED PROFIT BEFORE TAX GROWTH g 80% OF SALARY CASH GENERATION g 20% OF SALARY PERSONAL OBJECTIVES g 25% OF SALARY Maximum award of 75% of salary for Chief Executive Maximum award of 50% of salary for Group Finance Director SHARES WORTH UP TO 75% OF SALARY 0% Max SHARES WORTH UP TO 50% OF SALARY 75% 0% Max 50% Chief Executive – award (shares) Group Finance Director – award (shares) UP TO 78,850 SHARES UP TO 46,753 SHARES Award to Chief Executive of 200% of salary Award to Group Finance Director of 175% of salary 5% 20% 15% 100% 63 CORPORATE GOVERNANCE Genus plc | Annual Report 2017ANNUAL ADJUSTED EPS% OF AWARD VESTINGAnnual Report on Remuneration continued Section C: Remuneration and Performance Statement Genus’s Strategy and its Link to Performance-Related Pay See pages 77 to 81 for a summary of our Remuneration Policy agreed by shareholders in 2016. Our strategy and the way this is linked to variable reward is shown below. INCREASE GENETIC CONTROL AND PRODUCT DIFFERENTIATION SUCCESS MEASURED BY R&D AND BUSINESS INNOVATION LINK TO REMUNERATION POLICY TARGETING KEY MARKETS AND SEGMENTS SHARING IN THE VALUE DELIVERED PROPRIETARY GENETIC IMPROVEMENT AND DISSEMINATION POSITIONS VOLUME GROWTH OPERATING PROFIT CASH CONVERSION Specific events are captured through the Company Milestone element of the annual bonus (where awarded). Personal objectives within the Core Element of the annual bonus recognise wider progress than financial measures alone Measured through the profit element of the annual bonus Over the longer term will flow into EPS, used to determine vesting under the PSP Measured through the cash element of the annual bonus Performance Components and Their Impact on Remuneration 2016 2017 Movement % Impact on remuneration Adjusted results Revenue £388.3m £459.1m 18 Input to annual bonus profit and earnings per share in PSP. Adjusted profit before tax Generation of free cash flow £49.7m £15.7m £56.4m £25.4m Adjusted earnings per share Dividend per share 60.7p 21.4p 69.4p 23.6p 13 Annual bonus measure. 62 Annual bonus measure; performance reflects increased cash from operations, lower taxes paid and higher receipts from joint ventures. 14 PSP performance condition. 10 Executives rewarded via dividend equivalent feature of deferred bonuses and PSP awards. Share price at year end 1,565p 1,780p 14 Determines the value of deferred bonuses and PSP 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 and in line with our Remuneration Policy. Executive Directors’ Alignment to Share Price The table below shows the value of shares held by the individual, or awarded under the Deferred Share Bonus Plan (‘DSBP’), but not yet released (on a post-tax basis). It does not include awards under the PSP scheduled to vest in the future subject to Company performance (earnings per share), which has potential to significantly increase the alignment of the Executives, subject to the resulting level of vesting of awards. Shares awarded under the DSBP (post-tax) Shares owned Total share exposure Indicative value on 1 July 2016 (£)1 Indicative value on 30 June 2017 (£)2 Difference (£) Consequence of a +/- £2 share price change (£) Chief Executive 65,353 12,480 77,833 1,192,402 1,418,078 225,676 155,666 Group Finance Director 16,214 8,560 24,774 379,538 451,370 71,832 49,548 1 Value calculated using the average share price for the final quarter of the financial year ended 30 June 2016 (1,532p). 2 Value calculated using the average share price for the final quarter of the financial year ended 30 June 2017 (1,821.95p). Conclusion Executives remain aligned to share price 64 Genus plc | Annual Report 2017 Section D: Annual Report on Remuneration Introduction We comply with extensive legal and best practice disclosure obligations in this section of the Directors’ Remuneration Report, which is subject to an advisory vote at the 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 2017. 2. What the Executive Directors Can Earn in 2018. 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 Eight 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 Executive Directors’ Contracts and Non-Executive Directors’ Letters of Appointment. 1. What the Executive Directors Were Paid in 2017 Executive Directors’ Single Total Remuneration Figure (Audited) The following table shows a single total figure of remuneration for the 2017 financial year for each of the Executive Directors and compares this figure to the prior year. Salary and fees £000s 548 537 371 364 Year 2017 2016 2017 2016 Benefits1 £000s Pension2 £000s Subtotal for fixed pay £000s Annual bonus3 (Core Element) £000s Annual bonus (Company Milestone)4 £000s 23 23 13 14 137 134 56 55 708 694 440 433 312 526 212 356 329 149 Subtotal for variable pay £000s 1,889 1,010 1,101 618 PSP5 £000s 1,248 4846 740 2626 Total £000s 2,597 1,704 1,541 1,050 Karim Bitar Stephen Wilson 1 Benefits include a car allowance of £20,000 for Karim Bitar and £12,000 for Stephen Wilson. Insured benefits include life assurance, private medical insurance and a medical screen. 2 Executive Directors receive a cash allowance in lieu of pension, which is shown in the Pension column. 3 Bonus earned includes the 25% of the Core Bonus element which is deferred into Company shares. 4 All awards under the Company Milestone element are made in shares deferred for three years. 5 The value of the PSP is determined by the number of awards vesting in relation to performance in the period ended 30 June 2017. Dividend equivalents are not added to awards made under the PSP. The value shown for 2017 is based on the average share price for the final three months of the 2017 financial year (which was 1,821.95p). 6 The 2016 values shown as estimated in the previous Annual Report have been restated to reflect the actual value at vesting. The share price was 1,926p on 27 September 2016 when awards vested for the Chief Executive and Group Finance Director. How the Bonuses for 2017 Were Calculated Annual Bonus: Core Element The 2017 bonuses for Executive Directors were calculated by reference to performance against a challenging sliding scale of profit, cash flow and personal targets. As in 2016 and as previously communicated to shareholders, 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. Bonus target1 Strategic objective Adjusted profit before tax2 Generation of free cash flow Personal objectives Year-on-year profit growth Generate cash for reinvestment and dividend To build the foundation for future growth Proportion of salary (maximum) Actual 2017 performance Threshold Target Stretch Extent to which targets were met (%) 80% £52.4m £50.6m £55.6m £58.2m 20% £25.4m £12.4m £15.4m £18.4m 18.1% 100% 25% See page 66 Chief Executive 90% Group Finance Director 90% 1 The financial elements of the bonus are payable on a straight-line basis between each threshold, target and stretch level. 2 Adjusted profit before tax in constant currency was £49.0m (actual currency was £56.4m). For purposes of measuring growth for the annual bonus the agreed policy is to exclude gene editing costs which were £3.4m (2016: £0.9m), giving a 2017 performance of £52.4m. Without this adjustment the award level would have been below threshold for this part of the bonus. Overall extent to which targets for the Core Element of the annual bonus were met: Chief Executive 45.6% Group Finance Director 45.6% 65 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued Personal Objectives Performance against personal objectives related to targets set in a number of areas that included customers, people, and product and service improvement. Retrospective disclosure of performance against these targets is as follows: Payout against maximum of 25% of salary 90% Executive Director Key achievements in the year Karim Bitar Customer People Product and service improvement Achieved PIC targets on profit and new stockings, with strong performance in Asia, specifically China, and robust growth in the EU. Extended the royalty model in China, with key integrated producers and penetrated large customers in North America. ABS: disappointing H1 was followed by stronger H2 after interventions. Global volumes grew 1% and adjusted operating profit declined by 13%. IVB met targets, successful launch of Mexican and US operations. Beef opportunities analysed, and strategy approved: execution of H2 plan. Aligned people to strategy, with appointment of COO Beef; integration of Asia into species business units completed with no loss of performance; appointed ABS Dairy COO to drive performance improvement; invested in R&D, GSS and IVB to drive future revenue streams. PIC genetic improvement exceeded its target and met its regional dissemination targets. PIC supply chain strengthened by strategic partnership with Hermitage, taking advantage of its strong European footprint; acquisition of Hermitage porcine genetics. Targeted investment in gene editing with PRRSv project meeting 2017 milestones. Formed the De Novo joint venture with De-Su to produce world class Holstein genetics. Results Acquired remaining 49% of IVB, now fully integrated Genus business. Stephen Wilson Customer/ stakeholders Sustained good relationships with the Company’s shareholders. 90% People Further strengthening of team, specifically IT, with appointment of new Group CIO and further strengthening of the finance leadership. Product and service improvement Critical to successful year of business development with acquisitions, licensing and partnerships, including De Novo joint venture with De-Su, full acquisition of IVB through the buyout, Hermitage acquisition and NMR. Continued to improve internal finance controls. Improved financial planning processes through TM1 system. Supported the ABS sales force with mobile technology to support herd mating schedules. Results Maintained tight internal cost management disciplines and cash flow management, risk management and controls. 66 Genus plc | Annual Report 2017Annual Bonus: Company Milestones The Committee included this element of the annual bonus for 2017 as disclosed in our 2016 Directors’ Remuneration Report. We set a target related to securing the ability to deploy our sexed semen technology, producing our first product (Sexcel) delivered to customers through our ABS business. This would represent the culmination of multiple years of development and be the first case of Genus developing its own proprietary technology to offer to customers. The Committee believed that this was fully in line with the intended purpose of the Company Milestone element: an example of a significant strategic achievement that will change our industry and build long-term value for shareholders. The maximum opportunity under the Company Milestone was an award of shares deferred for three years worth up to 75% of salary for the Chief Executive and 50% of salary for the Group Finance Director. The performance criteria and resulting awards as determined by the Committee are as follows: Performance criteria Outcome/progress made Resulting award Remove threats and barriers so the business can launch the Genus sexed semen technology in targeted markets • Gained a permanent injunction enabling freedom to launch new technology to market • Demonstrated that a competitor had wilfully maintained a monopoly position within a market Deliver the production plan to launch Sexcel • Production facilities developed and tested • Successfully ramped up production • Targeted cost efficiency achieved The Committee concluded that 80% of the possible award should be made for each of the Executive Directors. This corresponds to awards of deferred shares worth 40% of salary for the Group Finance Director and 60% of salary for the Chief Executive. As a result of this performance, the total annual bonus (both the Core Element and Company Milestone) awarded to the Executive Directors was: Annual bonus: Core Element Annual bonus: Company Milestone Total bonus Extent to which targets were met Cash bonus Deferred shares Extent to which targets were met Deferred shares Total cash Deferred shares 1 Total Karim Bitar Stephen Wilson 45.6% £234,236 £78,079 80% £328,868 £234,236 £406,947 £641,183 45.6% £158,728 £52,909 80% £148,569 £158,728 £201,478 £360,206 1 The number of shares will be calculated in September when bonuses are paid. How the Performance Share Plan Figure was Calculated in the Single Total Remuneration Table Karim Bitar’s and Stephen Wilson’s PSP awards granted on 20 November 2014 were subject to a performance condition, based on the growth in adjusted earnings per share from 2014 to 2017. The range of targets applicable to the awards, which had a value of 200% of salary for the Chief Executive and 175% of salary to the Group Finance Director, was as follows: Average annual growth in adjusted earnings per share1 Less than 6% p.a. 6% p.a. 20% p.a. 1 Straight line vesting between the points in the above table. % of award vesting Nil 20% 100% As with the short-term award, the Committee exercised discretion to calculate the long-term award after excluding gene editing costs incurred during the performance period, to avoid an unintended impact on the Executives’ remuneration. The adjusted 2017 earnings per share after the cost of share based payments and adjusting for costs relating to gene editing was 68.1p. This represents an average annual growth in adjusted earnings per share of 16.4% compared to the comparable 2014 adjusted earnings per share figure (after the cost of share based payments). The resulting level of vesting is therefore 79.4% of maximum for both the Chief Executive and Group Finance Director1. Karim Bitar’s award was over a maximum of 86,271 shares, so the actual level of vesting is 68,499 shares and these will vest on 20 November 2017. Stephen Wilson’s award was over a maximum of 51,153 shares, so the actual level of vesting is 40,615 shares and these will vest on the same date. The Company’s average share price for the period from 1 April 2017 to 30 June 2017 was 1,821.95p, meaning that the values shown for these awards within the single figure table are £1,248,021 for Karim Bitar and £739,994 for Stephen Wilson. 1 The average annual earnings per share growth including the gene editing costs would be 13.7% and the associated vesting level would be 64% of maximum. 67 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued Breakdown of Vesting for Chief Executive: 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 £217,053 £1,053,654 £836,601 £411,420 +49.2% £1,248,021 VALUE AT AWARD VALUE OF SHARES LAPSED VALUE OF SHARES RETAINED SHARE PRICE GROWTH VALUE AT 30 JUNE 2017 2014 PSP Award: Key points: • Based on average annual earnings per share-growth of 16.4%, 79.4% of the original grant of shares will vest • Strong share price growth was seen over the three year period, from 1,221p at award to 1,821.95p at release (based on average price over last three months of the year) • This increased the value of the long term award on vesting by 49.2% Material Contracts There were no other contracts or arrangements during the financial year in which a Director of the Company was materially interested and/or which were significant in relation to the Group’s business. Payments for Loss of Office and Payments to Former Directors (Audited) There were no payments for loss of office in the year or to any former Directors of the business. Executive Directors’ External Appointments Executive Directors are permitted to accept an external non-executive position, with the Board’s approval. Any fees received in respect of these appointments may be retained by the Executive. Neither the Chief Executive nor Group Finance Director held any Non-Executive Directorships in the period from 1 July 2016 to 30 June 2017. As previously communicated, the Chief Executive (Karim Bitar) has been appointed as a Non-Executive Director of Spectris Plc with effect from 1 July 2017. Any fees or payments made in connection with this appointment will be disclosed in future remuneration reports. 2. What the Executive Directors Can Earn in 2018 A summary of this chapter is given on page 63. Base Salary The Committee reviews the Executive Directors’ base salaries, taking into account factors such as individual and corporate performance, an assessment of market conditions and, most importantly, the salary increases applicable to the Group’s other UK employees. In line with other UK employees, the date of salary review has been moved to 1 September 2017. The Executive Directors’ current salary levels (with effect from 1 September 2017 and with no backdating of awards) are as follows: • Karim Bitar: £556,336 (1.5% increase); and • Stephen Wilson: £376,994 (1.5% increase). The Committee determined that salaries would be increased by 1.5%, reflecting the core award across the UK employee population. It did not refer to other market benchmarking data this year when making this decision. Benefits The Executive Directors will receive benefits including a car allowance, private fuel (for Chief Executive), life assurance, an annual medical screen and private medical insurance. Pension In lieu of Company pension contributions, the Company pays the Chief Executive and Group Finance Director a taxable pension allowance of 25% and 15% of basic salary per annum respectively. 68 Genus plc | Annual Report 2017Performance-Related Annual Bonus Consistent with the Remuneration Policy agreed by shareholders in 2016, the Company bonus scheme for 2018 for the Executive Directors is: Annual Bonus: Core Element Value of bonus A Core Element of 125% of salary based on profit, cash and personal objectives. Bonus Performance measures Chief Executive/Group Finance Director On-target value of bonus 62.5% (Core Bonus element) Adjusted profit before tax Cash generation Personal objectives – 80% of salary weighting. – 20% of salary weighting. – 25% of salary weighting. Calibration of profit target No bonus is payable unless the prior year’s result is exceeded. Thereafter, the Core Bonus award is determined on the following basis: Growth on prior year adjusted profit before tax1 0% 10% p.a. delivers 15% p.a. Payout (profit element) Percentage of salary awarded 0% 50% 100% 0% 40% 80% Straight-line payout between performance points. 1 In constant currency and excluding gene editing costs. The cash target is the budgeted figure, with a specific range of £3m below the target and £3m above. Specific numbers were set (rather than a percentage range) to ensure Executives are focused on actual cash generation. Personal objectives are linked to successful implementation of objectives for the Executive Directors. It would be commercially sensitive to disclose them in advance. We will disclose retrospectively performance against these targets. Of the 125% Core Bonus element, one quarter of the total award will be deferred by way of shares for three years and will vest subject to continued employment, other than in certain good leaver circumstances. The Committee can apply malus to deferred bonuses and claw back any element of paid bonuses that should not have been awarded or paid, in the event of a material misstatement of the Group’s annual results. Calibration of cash generation target Calibration of personal objectives Bonus deferral Malus and clawback Annual Bonus: Company Milestone Element Value of bonus A Company Milestone element of up to 75% and 50% of salary for the Chief Executive and the Group Finance Director respectively. Performance measures Company Milestones represent pivotal and significant events in the Company’s development, which reposition the Company as an agricultural biotechnology pioneer. Such events would be significant strategic achievements and long-term value creating. Bonus deferral The Committee has determined that this element of the annual bonus will be included for 2018 for the Chief Executive and Group Finance Director. Due to commercial sensitivity the target and achievement against it including any resulting award will be disclosed retrospectively. For achievement of the Company Milestone element, any award will be deferred into shares for three years and will vest subject to continued employment, other than in certain good leaver circumstances. 69 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued 2. What the Executive Directors Can Earn in 2018 continued Long-Term Incentives Awards to be granted in 2018 will be granted in line with the Remuneration Policy approved by shareholders and under the 2014 PSP. The Chief Executive will be granted an award over shares worth 200% of salary and the Group Finance Director will be granted an award over shares worth 175% of salary. These awards are in line with those awarded in 2015, due to vest in 2018. The performance targets for the awards to be granted in 2018 will primarily relate to average annual growth in adjusted earnings per share, measured over three years and excluding gene editing costs. The same approach will govern awards due to vest in 2018. The range of targets for the 2018 awards is as follows: Average annual growth in adjusted earnings per share1 Less than 5% p.a. 5% p.a. 15% p.a. Vesting (% award) 0% 20% 100% Straight-line vesting between performance points. 1 Growth in adjusted earnings per share over the three-year performance period will be calculated on a simple average annual growth rate after the cost of share based payments and gene editing. The Committee remains convinced that using adjusted earnings per share is the correct approach and is consistent with awards made in 2016. The Committee believes the above targets are appropriately challenging, that they incentivise Executives to deliver the Company’s growth strategy and are therefore aligned with shareholders’ interests. They also adhere to the principles of transparency and simplicity, to maximise the incentive provided to participants by the 2014 PSP. As with awards currently granted under the 2014 PSP, the Committee will retain the ability to scale back vesting based on earnings per share performance if it does not consider the vesting result to be consistent with the progress achieved against the Company’s strategy during the performance period. This is considered appropriate to broaden the Executive team’s focus beyond financial performance. 2014 PSP awards granted in 2018 will continue to require the Executives to retain the after-tax number of shares vesting in 2020 for two years. Clawback and malus provisions may be applied at the Committee’s discretion, if the Company’s results are found to have been materially misstated within three years of vesting. 3. The Process the Committee Followed to Arrive at These Decisions The Committee complies with the UK Corporate Governance Code. It makes recommendations to the Board, within agreed terms of reference, on remuneration for the Executive Directors and other members of GELT. The Committee’s full terms of reference are available on the Company’s website at www.genusplc.com. During 2017, the Committee comprised: Director Nigel Turner (Chairman) Mike Buzzacott1 Duncan Maskell Lykele van der Broek Lysanne Gray2 Bob Lawson Independent status Attendance at meetings Yes Yes Yes Yes Yes Yes 6/6 3/3 6/6 6/6 5/6 6/6 1 Mike Buzzacott retired on 17 November 2016. 2 Due to prior commitments pre-appointment, Lysanne Gray was unable to attend the July 2016 Remuneration Committee meeting following her appointment. However, Lysanne was provided with all Committee materials and submitted feedback via the Chairman prior to the meeting. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Chief Executive and the Group Finance Director attend meetings at the invitation of the Committee, but are not present when their own remuneration is being discussed. The Committee is supported by the Group HR Director, Group Reward Director, Finance and Company Secretariat functions. During the year, the Committee continued to use PricewaterhouseCoopers (‘PwC’) for advice it considers is of value, objective and independent. PwC’s fees were £35k for its remuneration advice to the Committee. PwC is a member of the Remuneration Consultants Group and complies with its Code of Conduct. Separate teams within PwC provide unrelated advisory service, including taxation, international assignments and acquisition related services to the Group. 70 Genus plc | Annual Report 2017During the year to 30 June 2017, the Committee met six times and considered the following matters: JULY 2016 SEPTEMBER 2016 NOVEMBER 2016 • Pay review for GELT members. • Approval of the Directors’ • Review of shareholder voting JULY 2016 • Review of Directors’ Remuneration Report. Remuneration Report for 2016. • Determination of Annual Bonus awards in respect of 2016. • Testing of the performance conditions and approval of the vesting levels of long-term share incentive awards granted in 2013. on the Remuneration Policy and Annual Remuneration Report. • Review of remuneration reporting for 2016. APRIL 2017 • Approve long-term share incentive awards under the Company’s 2014 PSP and the associated performance targets. • Discussion of Company Milestone element within annual bonus. • Review shareholder perspectives and discussion of AGM season. • Review of shareholdings by Executive Directors and GELT. • Approval of PSP for senior leadership. MAY 2017 • Proposal for Company Milestone for 2018. • Committee effectiveness review. How Shareholders’ Views are Taken into Account We consulted with shareholders ahead of proposing a revised Remuneration Policy to shareholders at our 2016 AGM. We were pleased with the constructive dialogue with shareholders and for their time and feedback on the proposed policy changes. The results of the most recent vote were as follows: For Against Total number of shares in respect of which votes were validly made Votes withheld Vote on Directors’ Remuneration Report (advisory) Vote on Directors’ Remuneration Policy Total number of votes % of votes cast Total number of votes % of votes cast 41,184,785 96.94 40,093,114 1,301,514 3.06 1,619,093 96.12 3.88 42,486,299 100 41,712,207 100 513,260 1,287,352 How Employees’ Pay is Taken into Account While the Company does not consult employees on matters of Directors’ remuneration, the Committee does take account of the policy for employees across the workforce when determining the Remuneration Policy for Directors. The Group HR Director facilitates this process, presenting to the Committee on the pay structures across the organisation and how they fit the Group’s Remuneration Policy. The process includes a staff engagement survey that includes questions on pay, as well as consulting employees informally on their views of the current overall Remuneration Policy. This forms part of the feedback provided to the Committee and is used by the Group HR Director to assess the Remuneration Policy’s ongoing effectiveness and the changes that should be made. When setting the Executive Directors’ base salaries, the Committee compares the salary increases proposed for each Executive Director within those proposed for employees in their geographical location, as well as considering the typical increase proposed across the Group as a whole. 71 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued 4. How the Chief Executive’s Pay Compares to Shareholder Returns Over the Past Eight Years and to Employees’ Pay Total Shareholder Return The following graph shows the Company’s performance measured by total shareholder return (‘TSR’), compared with the TSR performance of the FTSE 250 Index. The FTSE 250 Index was selected as it represents a broad equity market of which the Company is a member. Total remuneration (£000s) £2,034 £2,383 Richard Wood 2010 20111 Year ending 30 June 2012 £231 R 20122 £1,776 2013 £868 Karim Bitar 2014 2015 2016 2017 £877 £1,622 £1,704 £2,597 Annual bonus (% of max) Total PSP vesting (% of max) 64% 94% 88% 77% 31% 32% 99% 78% 58.5%3 100% 88% – – – – 26% 34% 79.4% 1 PSP vesting relates to all awards that were tested early on cessation of employment. 2 Includes payment (as previously disclosed) for loss of annual bonus (£163,000) and the value of restricted stock (£755,000) granted to compensate him for loss of value forfeit on joining Genus. Includes the award under the Company Milestone element of the annual bonus. 3 Eight years of Total Shareholder Return ) £ ( ) d e s a b e r ( R S T 400 350 300 250 200 150 100 50 0 June 10 June 11 June 12 June 13 June 14 June 15 June 16 June 17 Genus FTSE 250 This graph shows the value, by 30 June 2017, of £100 invested in Genus plc on 30 June 2009 compared with the value of £100 invested in the FTSE 250 Index. Source: Thomson Datastream. Chief Executive Pay Compared to Genus Employees Remuneration Received (% Change from 2016 to 2017) Chief Executive UK comparators2 Salary % Benefits % 2 2.1 (1) 0 Annual bonus % 221 (35) Includes the award made under the Company Milestone element of the annual bonus. 1 2 A subset of the UK workforce comprising circa 25 employees with a bonus structure based on Group performance. This is considered the most relevant comparator group for these purposes. Distribution Statement Employee costs (£m) Distributions to shareholders1 1 Includes dividends and share buy-backs. 72 2016 2017 % change £118.4m £137.6m £12.2m £13.5m 16% 11% Genus plc | Annual Report 2017 5. The Chairman and Non-Executive Directors’ Fees Fees payable to the Non-Executive Directors per annum are as follows: Position Chairman Audit and Remuneration Committee Chairs Adviser to R&D PMT Base Non-Executive Director fee 2016 fees 2017 fees 2018 fees £160,000 £160,000 £160,000 £60,000 £60,000 £60,000 n/a n/a £65,000 £55,000 £55,000 £55,000 Fees were increased in 2016 (as explained in the Directors’ Remuneration Report set out in the 2015 Annual Report and approved at the 2015 AGM). The Chairman’s fee, which had not been reviewed since 2010, was increased to £160,000 and Non-Executive Director fees, which were last reviewed in 2012, increased to £55,000 which includes, for each of them, their fees for membership of the Board’s Committees. The responsibilities of chairing the Audit and Remuneration Committees were also recognised with an additional fee of £5,000, giving the Chairs of these Committees a total fee of £60,000. Fees will continue at this level for 2018. The additional responsibilities as advisors of the R&D PMT are to be recognised for 2018 as shown in the above table. Total Single Figure of Remuneration (Audited) for 2016 and 2017 are as follows: Non-Executive Directors Bob Lawson Nigel Turner Mike Buzzacott1 Duncan Maskell Lykele van der Broek Lysanne Gray Total Fees £000s 160 160 60 60 25 60 55 55 55 55 58 14 413 404 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Taxable expenses £000s Benefits £000s Total £000s 2 3 1 2 1 2 2 2 1 – 1 – 8 9 – – – – 4 – – – 11 6 – – 15 6 162 163 61 62 30 62 57 57 67 61 59 14 436 419 1 Mike Buzzacott retired on 17 November 2016 The Non-Executive Directors’ taxable expenses are travel expenses related to their role and have been grossed up for tax where applicable, in line with HMRC rules. Spotlight: Increased Alignment of Executives to Genus through shareholding In introducing the new Remuneration Policy, we increased the shareholding guideline for Executives from 100% of salary to 200% of salary. As will be seen within the Directors’ Remuneration Report, a significant part of the Annual Bonus for 2017 will be made in shares. In addition, Executives will be required to retain the post-tax shares from the 2014 PSP award for a further two years from November 2017. We have seen significant progress by both Executives in developing their shareholding in the business as highlighted in the adjacent table. This shows the value of shares held by the individual and the post-tax value of any shares awarded under the DSBP not yet released. We have also provided a forecast of the position as at November 2017, when awards under the DSBP for the 2017 annual bonus will have been made, and the vesting of the 2014 PSP awards will have taken place (which the Executives are required to retain for a further two years). Shareholding as percentage of salary KARIM BITAR STEPHEN WILSON 173% 258% 256% 121% 63% 419% NOV 2017 JUN 2017 JUN 2016 TARGET 0 50 100 150 200 250 300 350 400 450 SHAREHOLDING REQUIREMENT TO 2016 = 100% OF SALARY SHAREHOLDING REQUIREMENT FROM 2017 = 200% OF SALARY 73 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued 6. Details of the Directors’ Shareholdings and Rights to Shares Directors’ Shareholdings (Audited) The Directors had the following interests in the Company’s shares: Bob Lawson Karim Bitar Stephen Wilson Nigel Turner Mike Buzzacott Duncan Maskell Lykele van der Broek Lysanne Gray Total At 30 June 2017 Number % of salary held1 % of shareholding guideline2 8,557 65,353 16,214 15,000 4,0003 0 3,750 0 112,874 n/a 258% 121% n/a n/a n/a n/a n/a n/a 200% 200% n/a n/a n/a n/a n/a Unvested DSBP awards at 30 June 2017 Number Unvested PSP awards held at 30 June 2017 Number n/a 23,548 16,150 n/a 223,307 132,406 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a At 30 June 2016 Number 7,201 50,213 8,433 15,000 4,000 – 3,750 – 39,698 355,713 88,597 1 Based on the combined number of beneficially held shares and the net of tax DSBP awards held and the average closing share price over the three months to 30 June 2017 of 1,821.95p. 2 Executive Directors are expected to work towards achieve a shareholding of 200% of salary as set out in the Remuneration Policy agreed by shareholders in 2016. This was increased from 100% in 2016. 3 This represents the shareholding at the point Mike Buzzacott retired from the Board (17 November 2016) There were no changes in the Directors’ interests between 30 June 2017 and the date of this report. Company Share Price The market price of the Company’s shares on 30 June 2017 was 1,780p and the lowest and highest share prices during the financial year were 1,642p and 2,042p respectively. Performance Share Awards Granted in 2017 (Audited) The awards granted under the 2014 PSP were as follows: Executive Karim Bitar Stephen Wilson Number of shares comprising award Face/maximum value of awards at grant date (% salary)1 % of award vesting at threshold 58,186 £1,096,224 (200%) 34,500 £649,980 (175%) 20 20 Performance period 01.07.16–30.06.19 01.07.16–30.06.19 1 The closing average share price over the three days prior to the award being granted has been used to determine the maximum face value of the awards. This was 1,884p for Karim Bitar and Stephen Wilson (award granted on 14 September 2016). The awards were granted as nil-cost share options and vesting will be subject to achieving a challenging sliding scale of adjusted earnings per share growth target and a strategic underpin, consistent with our Remuneration Policy. The adjusted earnings per share growth performance target for the above awards is: Average annual growth in adjusted earnings per share 1 Less than 5% p.a. 5% p.a. 20% p.a. Straight-line vesting between performance points Vesting (% award) 0% 20% 100% 1 Growth in adjusted earnings per share over the three-year performance period will be calculated on a simple average annual growth rate after the cost of share based payments and adjusted for gene editing costs. Deferred Bonus Awards Granted in 2017 (Audited) The basis of the awards’ calculation is described in more detail on page 65, which resulted in the following DSBP awards being granted in relation to the 2016 annual bonus: 74 Genus plc | Annual Report 2017Executive Karim Bitar Stephen Wilson Number of shares comprising award Face value of awards at grant date1 6,973 4,725 £131,371 £89,019 These awards are not subject to any further performance conditions and will normally vest in full on 14 September 2019, subject to continued service. 1 The closing average share price over the three days prior to the award being granted has been used to determine the maximum face value of the awards. This was 1,884p for Karim Bitar and Stephen Wilson (award granted on 14 September 2016). Summary of Scheme Interests (Audited) At 30 June 2017, the Executive Directors had the following beneficial interests in share awards and share options: Karim Bitar Grant date Award Vesting period Share price at grant At 30 June 2016 Number Granted in year Number Lapsed in year Number Exercised in year Number At 30 June 2017 Number 26 September 2013 30 December 2013 PSP 26 September 2013 to 27 September 2016 DSBP 30 December 2013 to 27 September 2016 1,413p 73,107 1,413p 3,495 21 October 2014 DSBP 21 October 2014 to 21 October 2017 1,111p 4,648 20 November 2014 14 September 2015 14 September 2015 14 September 2016 14 September 2016 Total Stephen Wilson PSP 20 November 2014 to 20 November 2017 DSBP 14 September 2015 to 14 September 2018 PSP 14 September 2015 to 14 September 2018 PSP 14 September 2016 to 14 September 2019 DSBP 14 September 2016 to 14 September 2019 1,221p 86,271 1,363p 11,927 1,363p 78,850 1,884p 1,884p – – 58,186 6,973 (47,958) (25,149) – – – – – – – (3,495) – – – – – – 0 0 4,648 86,271 11,927 78,850 58,186 6,973 258,298 65,159 (47,958) (28,644) 246,855 Grant date Award Vesting period Share price at grant At 30 June 2016 Number Granted in year Number Lapsed in year Number Exercised in year Number At 30 June 2017 Number 26 September 2013 30 December 2013 PSP 26 September 2013 to 27 September 2016 DSBP 30 December 2013 to 27 September 2016 1,413p 43,347 1,413p 1,050 21 October 2014 DSBP 21 October 2014 to 21 October 2017 1,111p 3,445 20 November 2014 14 September 2015 14 September 2015 14 September 2016 14 September 2016 Total PSP 20 November 2014 to 20 November 2017 DSBP 14 September 2015 to 14 September 2018 PSP 14 September 2015 to 14 September 2018 PSP 14 September 2016 to 14 September 2019 DSBP 14 September 2016 to 14 September 2019 1,221p 51,153 1,363p 7,980 1,363p 46,753 1,884p 1,884p – – 34,500 4,725 (29,736) (13,611) – – – – – – – (1,050) – – – – – – 0 0 3,445 51,153 7,980 46,753 34,500 4,725 – – – – – – – – – – - - 153,728 39,225 (29,736) (14,661) 148,556 75 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Annual Report on Remuneration continued Section D: Annual Report on Remuneration continued 6. Details of the Directors’ Shareholdings and Rights to Shares continued Summary of Scheme Interests (Audited) continued In relation to the share awards granted on 14 September 2016, the closing average share price over the three days prior to 14 September 2016 (the grant date for the PSP awards) was used (1,884p) to determine the number of shares comprising individual awards. The performance targets applying to the 14 September 2016 awards are as described above. An earnings per share range also applied to awards made in 2015 and 2014. No further performance conditions apply to the DSBP awards. Dilution The aggregate dilution of all relevant share incentives is 4.98% at 30 June 2017, which is less than the permissible 10% in ten years dilution limit. 7. Details of the Executive Directors’ Contracts and Non-Executive Directors’ Letters of Appointment Appointment date Current contract date Expiry date Notice period (Months) 24 May 2011 24 May 2011 Stephen Wilson 12 December 2012 12 December 2012 n/a n/a 12 (from Company) 6 (from Executive) 12 (from Company) 6 (from Executive) 11 November 2010 11 November 2016 11 November 2019 17 January 2008 17 January 2017 16 January 2020 1 April 2014 1 July 2014 1 April 2016 7 May 2009 1 April 2017 1 July 2017 1 April 2016 1 April 2020 1 July 2020 1 April 2019 7 May 2015 17 November 20161 n/a 1 1 1 1 1 Director Executives Karim Bitar Non-Executives Bob Lawson Nigel Turner Duncan Maskell Lykele van der Broek Lysanne Gray Mike Buzzacott 1 Mike Buzzacott retired on 17 November 2016. 76 Genus plc | Annual Report 2017Section E: Summary of Directors’ Remuneration Policy Our existing Directors’ Remuneration Policy was approved by shareholders on 17 November 2016. We were pleased to receive over 96% support for the changes which you will see referred to elsewhere within this Report. There are no proposed changes to the Policy this year and therefore there will be no resolution seeking shareholder approval at the forthcoming AGM. We will continue to have the annual resolution seeking shareholder approval on how we have implemented the Remuneration Policy. The table summarising the Remuneration Policy is shown below for information. The full details of the revised Remuneration Policy can be found within our 2016 Annual Report (which can be viewed through our website at www.genusplc.com). 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; • 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 GELT, with appropriate tiering through the wider workforce. 77 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Annual Report on Remuneration continued Summary of Current Remuneration Policy continued 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. Periodically benchmarked against relevant market comparators, reflecting the size and nature of the role, individual performance and experience, increases awarded to other employees, Group performance and broader economic conditions. Benefits generally include a car allowance and insured benefits (e.g. life assurance and private medical insurance). Where Executive Directors are recruited from overseas, or required to relocate on an international assignment, benefits more tailored to their geographical location may be provided and may include relocation costs and/or tax equalisation arrangements as necessary. Where revised benefits are offered in a geographic location or across the Group, Executive Directors are likely to be eligible to receive those benefits on similar terms. If the Company introduces an all- employee share plan, Executive Directors will be eligible to participate on the same terms as other employees. 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 in which the Executive works. 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 65. 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. None. The salaries payable to the Executive Directors from 1 September 2017 are disclosed on page 68. None. 78 Genus plc | Annual Report 2017Annual Bonus The bonus is split into two parts: A Core Bonus element incentivises against a combination of financial targets and personal objectives. Operation 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. 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. 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. A dividend equivalent provision operates, enabling dividends to be paid (in cash or shares) on deferred shares that vest. Payments under the Company Milestone element are made fully in Company shares deferred for three years subject to continued service. Share awards made under the DSBP (under either the Core Bonus element or Company Milestone element) will vest after 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), with a minority earned based on performance against personal objectives. 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. Therefore the maximum under the annual bonus is 200% of salary for the Chief Executive, 175% for other Executive Directors. The Committee may include the Company Milestone element 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. 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 2018 is included on page 69. 79 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Annual Report on Remuneration continued Summary of Current Remuneration Policy continued 2014 PSP The 2014 PSP incentivises Executives to achieve superior returns to shareholders over a three-year period, to retain key 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. individuals and align their interests with shareholders. To align Executives and shareholders. Share Ownership Guidelines For awards granted from 2014, the post-tax number of vested shares must be held for at least a two-year period following vesting. 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. Operation Executives are expected to achieve a shareholding of 200% of salary, by retaining 50% of the net of post-tax number of vested shares under the Company’s DSBP and PSP. In addition, the Chief Executive will retain the entire post-tax number of Restricted Stock that was granted to him shortly after his appointment. Maximum n/a A summary of the performance targets for 2018 is given on page 70. n/a Performance Conditions The Committee will review performance conditions annually, specifically the range of earnings per share 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. 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 earnings per share 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. 80 Genus plc | Annual Report 2017 Approved by the Board and signed on its behalf by: Nigel Turner Chair of the Remuneration Committee 6 September 2017 Non-Executive Directors 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 73. Performance Conditions None. 81 CORPORATE GOVERNANCE Genus plc | Annual Report 2017 Other Statutory Disclosures The Company has one class of ordinary share, with the rights set out in the Articles of Association. All issued shares are fully paid and each share has the right to one vote at the Company’s general meetings. There are no specific restrictions either on the size of a holding or on the transfer of shares, which are both governed by our Articles of Association and prevailing legislation. No person has any special rights of control over the Company’s share capital. Details of the Company’s employee share schemes are set out in note 51. In connection with these schemes, the Genus plc Employee Benefit Trust holds shares in the Company from time to time and abstains from voting in respect of any such shares. For additional information on capital risk management including financial instruments, see note 24. Authority to Acquire the Company’s Own Shares The Directors may only buy back shares to the extent authorised by the shareholders in general meeting. The current power to buy back shares was granted by shareholder resolution at the 2016 AGM and a new authority is being sought at the 2017 AGM within the limits set out in the notice of meeting, that is up to a nominal value of £611,745 (representing 10% of the Company’s current issued share capital). No shares were bought back by the Company, under the authority granted at the 2016 AGM, from the date of that AGM up to the date of this report. Directors The Directors and the dates of their respective appointments are listed on pages 42 and 43. Equal Opportunities/Employees with Disabilities Genus values diversity and aims to make best use of everyone’s skills and abilities. We are therefore committed to equal opportunities at every stage of our employees’ careers. Our policy on employees with disabilities is to fully and fairly consider people with disabilities for all vacancies. We interview and recruit people with disabilities and endeavour to retain employees if they become disabled while they work for us. Where possible, we will retrain employees who become disabled and adjust their working environment, so they can maximise their potential. Political Contributions The Group does not make political contributions. Dividend The Board is recommending to shareholders a final dividend of 16.2 pence per ordinary share, resulting in a total dividend for the year of 23.6 pence per ordinary share, an increase of 10% for the year. It is proposed that the final dividend will be paid on 1 December 2017 to shareholders on the register at the close of business on 17 November 2017. Share Capital Note 29 gives details of the Company’s issued share capital and any movements in the issued share capital during the year. The Directors may only issue shares to the extent authorised by the shareholders in general meeting. The current power to allot shares was granted by shareholder resolution at the 2016 AGM and a new authority is being sought at the 2017 AGM within the limits set out in the notice of meeting, that is up to a nominal value of £4,078,303.72 (representing two-thirds of the Company’s current issued share capital). 82 Genus plc | Annual Report 2017Going Concern and Long-Term Viability StatementAfter making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future and for a period of at least 12 months from the date of this report. Accordingly, the Directors continue to adopt and consider appropriate the going concern basis in preparing the Annual Report.During the year Genus exercised an extension option to extend the maturity of the facility for a further year to February 2022, on the same terms and pricing, and in March 2017 exercised the first tranche of the Accordion feature of the facility, increasing our GBP facility by £10m to £75m and increasing our US$ facility by $25m to $165m. At 30 June 2017 the Group had net debt of £111.6m (2016: £89.7m) and had substantial headroom of £73.6m (2016: £49.8m) under the renewed facilities of £202m. The Group’s financial position remains strong. In accordance with provision C.2.2 of the 2014 revision of the Code, the Directors have assessed the viability of the Group over a three-year period to June 2020. This period is deemed appropriate given the visibility the Company has to its product development pipeline, for example, as a result of the genetic lag of approximately three years between the porcine nucleus herds and customers’ production systems. In addition, the nature of the principal risks and uncertainties affecting Genus, including the agricultural markets in which it operates, were taken into account in determining the three-year period. The Directors have considered Genus’s current financial position, its planned capital expenditure, as well as the financing facilities available to the Group. They also assessed the potential impact, in severe but plausible scenarios, of the principal risks and uncertainties, set out on pages 12 to 13, and in particular the impacts of biosecurity, market down-turn, continuity of supply and increased competition including new product launches. The assessment took into account the likely degree of effectiveness of current and available mitigating actions.Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to June 2020.Substantial Shareholdings As at 1 September 2017, we were aware of the following material interests in the Company’s ordinary shares: Fund Manager Lansdowne Partners Baillie Gifford & Co Columbia Threadneedle Investments NFU Mutual Investment Mgrs Allianz Global Investors Legal & General Investment Mgt M&G Investment Mgt Shareholding 6,088,888 4,080,940 3,748,354 2,507,442 2,183,133 2,117,859 1,892,622 % 9.95 6.67 6.13 4.10 3.57 3.46 3.09 There have been no material changes in shareholding since 30 June 2017. No other person has notified an interest in the Company’s ordinary shares, which is required to be disclosed to us. Provision of Information to the Company’s Auditor Each of the Directors at the date of approval of this Annual Report confirms that: • so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and • the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 Companies Act 2006. Appointment of Auditor Deloitte LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint it will be proposed at the forthcoming AGM. Directors’ Indemnities The Company has made qualifying third party indemnity provisions for the benefit of its Directors which were made during the year and remain in force at the date of this report. Requirements of the Listing Rules Details of the Company’s long-term incentive schemes can be found in the Directors’ Remuneration Report on pages 60 to 81. Approved by the Board and signed on its behalf by: Dan Hartley Group General Counsel and Company Secretary 6 September 2017 83 CORPORATE GOVERNANCE Genus plc | Annual Report 2017Director’s Responsibilities The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and Article 4 of the IAS Regulation and have chosen to prepare the Parent Company Financial Statements in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Parent Company Financial Statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ has been followed, subject to any material departures disclosed and explained in the Financial Statements; and • prepare the Financial Statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business. In preparing the Group Financial Statements, International Accounting Standard 1 requires that Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. Directors’ Responsibility Statement We confirm that to the best of our knowledge: • the Financial Statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; • the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and • the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. Approved by the Board and signed on its behalf by: Karim Bitar Chief Executive 6 September 2017 Stephen Wilson Group Finance Director 6 September 2017 84 Genus plc | Annual Report 2017Independent Auditor’s Report To the Members of Genus plc REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 June 2017 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of Genus plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) which comprise: • the Group Income Statement; • the Group Statement of Comprehensive Income; • the Group and Parent Company Statements of Changes in Equity; • the Group and Parent Company Balance Sheets; • the Group Statement of Cash Flows; and • the related notes 1 to 55. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the EU. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 ‘Reduced Disclosure Framework’ (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • Fair value of biological assets under IAS 41 ‘Agriculture’ • Orphan pension scheme liabilities related to the Milk Pension Fund • Impairment of the ABS cash generating unit Materiality Scoping We determined materiality for the Group to be £2.2m (2016: £2.2m), which is 5.0% (2016: 5.3%) of pre-tax profit before exceptional items and changes in fair value of biological assets. Our audit scope covered 17 components (2016: 22). Of these, eight were subject to a full audit (2016: 11), whilst the remaining nine (2016: 11) were subject to specified audit procedures. The coverage of key account balances was 82% of revenue, 80% of profit before tax and 92% of net assets. Significant changes in our approach Last year we included a key audit matter relating to the impairment of capitalised development costs, this was not included this year following the related court rulings in the year which have removed any restriction that prevents commercial launch. Our impairment risk in the current period has been focused specifically on the assets associated with the ABS business, due to the more limited headroom associated with this cash generating unit. 85 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Independent Auditor’s Report continued To the Members of Genus plc Conclusions relating to principal risks, going concern and viability statement We have reviewed the Directors’ statement regarding the appropriateness of the going concern basis of accounting contained within note 2 to the financial statements and the Directors’ statement on the longer-term viability of the Group contained within the Directors’ Report on page 82. We are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 12 - 13 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation on page 84 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; • the Directors’ statement on page 84 about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group and the Parent Company’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements; • the Directors’ explanation on page 82 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions; and • whether the Directors’ statements relating to going concern and the prospects of the Company required in accordance with Listing Rule 9.8.6R(3) are materially inconsistent with our knowledge obtained in the audit. We confirm that we have nothing material to add or draw attention to in respect of these matters. We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Fair value of biological assets under IAS 41 ‘Agriculture’ Key audit matter description The Group calculates the fair value of biological assets through the use of discounted cash flow models and recent transaction prices. As at 30 June 2017 the total fair value of biological assets is £353m. Our risk is focused specifically on the following key assumptions for each species, being the most sensitive assumptions applied in the valuation models. Certain assumptions contain high levels of management judgement and therefore represent potential areas where management could fraudulently manipulate the financial statements. For bovine asset valuations: the future growth rates of proven and genomic semen sales; the biological asset value discount factor; and; the discount rates applied. For porcine asset valuations: the expected useful breeding life of pigs; the number of offspring generations valued in the nucleus herd, and; the discount rate applied. Details of the biological assets are disclosed in note 15 to the accounts. The Audit Committee has included their assessment of this risk on page 58 and it is included in the key accounting estimates and judgements in note 4. 86 Genus plc | Annual Report 2017How the scope of our audit responded to the key audit matter Our response to this risk considers the separate elements of the fair value calculations: the basis for management’s estimates and judgements applied in the key assumptions; the validity of transactional data used for other inputs; and the mechanical integrity of the models themselves. For the bovine asset valuations, our audit work included obtaining an understanding of management’s processes surrounding the compilation of the future demand, marketable life and production volume forecasts. We considered the appropriateness of projected prices, volume growth rates against historical trends, current performance and third party market data, and analysed management’s historical forecasting accuracy. For the porcine asset valuations our audit work included consideration of the appropriateness of management’s assessment of the number of future generations from which output is attributable to the current herd and expected useful lives. We tested the expected percentages of animals to be sold, retained and slaughtered as well as recent selling prices by reference to historical transactional data. For all other assumptions in each model we challenged the significant estimates with reference to third party or historical transactional data as appropriate. For both species’ valuation models, we used internal valuation experts in our testing of the discount rates applied to the cash flows. We also tested the mechanical integrity of the spreadsheets used to calculate the fair values using analytical tools and performed sensitivity analyses on the key assumptions. Key observations From the work performed, we are satisfied that the key assumptions applied in respect of the valuation of biological assets are appropriate. Orphan pension scheme liabilities related to the Milk Pension Fund (MPF) Key audit matter description Genus is party to the MPF, a joint and several liable multi-employer pension scheme, and is exposed to the risk of additional liabilities from the default of other scheme members beyond its current share of 85% of the liabilities. Our risk is focused on the financial position and stability of the other employers within the MPF. Our risk is also focused on the accounting treatment of National Milk Record plc’s (“NMR”) withdrawal from the scheme. Details of the defined benefit pension scheme are disclosed in note 27 to the accounts. The Audit Committee has included their assessment of this risk on page 58 and it is included in the key accounting estimates and judgements in note 4. How the scope of our audit responded to the key audit matter In response to the risk of additional liabilities for the multi-employer scheme arising from other employers, we have considered the financial strength and stability of remaining employers in the scheme and their ability to contribute to the deficit through a review of the most recent publicly available financial information, including the latest financial statement and media reports We have reviewed the accounting and disclosure for NMR withdrawal from the MPF, as set out in note 27 to the financial statements. Key observations From our work performed, we are satisfied that the accounting and disclosure is appropriate for the orphan liabilities and NMR’s withdrawal from the scheme. Impairment of the ABS CGU Key audit matter description The Group has £32.4m of goodwill on its balance sheet and total assets of £132.8m in relation to the ABS CGU. On an annual basis, management is required to perform an impairment assessment for goodwill, and to assess for indicators of impairment in respect of other intangible and tangible assets. Assessment of the carrying value of CGU’s assets is a key risk due to the quantum of the balance and the judgements involved in setting the key assumptions and assertions used by management to support their assessment of the carrying value. In testing the carrying value for impairment, management has made a number of key assumptions including short-term and long-term growth rates and discount rates. Our risk in the current period has been focused specifically on the assets associated with the ABS business due to the more limited headroom associated with this CGU. The associated disclosure is included in note 14. The Audit Committee has included their assessment of this risk on page 58 and it is included in the key accounting estimates and judgements in note 4. 87 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Independent Auditor’s Report continued To the Members of Genus plc Impairment of the ABS CGU (continued) How the scope of our audit responded to the key audit matter We challenged the assumptions used by management in their annual impairment assessment by comparing the projected growth rates and forecast cash flows against historical trends achieved in the business in the wake of what has been challenging market conditions. We analysed historical budgeting accuracy to assess the reliability of management’s forecasts. We reviewed third-party market data sources used by management in their forecast models. We evaluated management’s assessment of the sensitivity of the Group’s impairment assumptions to reasonably possible changes and considered the associated disclosures provided by the Group in relation to its impairment review within note 14. We used valuation specialists within the audit team to challenge the discount rates applied to these cash flows by reference to market data, including the risk premium applied to each CGU. Key observations From our work performed, we are satisfied that the carrying value of the goodwill and other assets attributable to the ABS segment is appropriate. Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality £2.2m (2016: £2.2m) Basis for determining materiality 5.0% (2016: 5.3%) of pre-tax profit before exceptional items and changes in fair value of biological assets. Rationale for the benchmark applied We have used a profit based measure given the Group is listed and therefore shareholders focus on profitability. The profit is adjusted for the exceptional items and changes in fair value of biological assets to avoid distortion that could otherwise arise due to non-recurring items and fair value movements. Adjusted PBT: £44.3m Group materiality £2.2m Component materiality range £1.1m to £1.76m ● PBT ● Group materiality Audit Committee reporting threshold £0.1m We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.1m (2016: £0.1m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit work at 17 components (2016: 22). Of these, eight were subject to a full audit (2016: 11), whilst the remaining nine (2016: 11) were subject to specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations at those locations. The change in number of components within scope reflects the impact of acquisitions and certain entities which are no longer significant to the Group following internal restructuring. 88 Genus plc | Annual Report 2017These 17 components represent the principal business units and account for 82% (2016: 88%) of the Group’s revenue and 80% (2016: 92%) of the Group’s profit before tax and 92% (2016: 99%) of the Group’s net assets. REVENUE PROFIT BEFORE TAX NET ASSETS ● 62% Full audit scope ● 20% Specified audit procedures ● 18% Out of scope ● 17% Full audit scope ● 63% Specified audit procedures ● 20% Out of scope ● 65% Full audit scope ● 27% Specified audit procedures ● 8% Review at group level At the Parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. The Group audit team continued to follow a programme of planned visits. The lead audit partner visited the United States, Mexico and Brazil components during the current and previous year. In years when we do not visit a significant component we include the component audit team in our team briefing, discuss their risk assessment, and review documentation of the findings from their work. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. We have nothing to report in respect of these matters. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: • Fair, balanced and understandable – the statement given by the directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or • Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. 89 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Independent Auditor’s Report continued To the Members of Genus plc Responsibilities of Directors As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or Directors’ Report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Other matters Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the Board on 8 June 2006 to audit the financial statements for the year ending 30 June 2006 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 12, covering the years ending 30 June 2006 to 30 June 2017. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). Andrew Bond, FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Reading, United Kingdom 6 September 2017 90 Genus plc | Annual Report 2017Group Income Statement For the year ended 30 June 2017 Revenue Adjusted operating profit Adjusting items: – Net IAS 41 valuation movement on biological assets – Amortisation of acquired intangible assets – Share-based payment expense – Exceptional items:   – Pension-related   – Litigation   – Acquisition and integration   – Other (including restructuring) Total exceptional items Total adjusting items Operating profit Share of post-tax profit of joint ventures and associates retained Finance costs Finance income Profit before tax Taxation Profit for the year from continuing operations Attributable to: Owners of the Company Non-controlling interest Earnings per share from continuing operations Basic earnings per share Diluted earnings per share Alternative measure of performance Adjusted operating profit from continuing operations Adjusted operating profit attributable to non-controlling interest Pre-tax share of profits from joint ventures and associates excluding net IAS 41 valuation movement Adjusted operating profit including joint ventures and associates Net finance costs Adjusted profit before tax from continuing operations Adjusted earnings per share from continuing operations Basic adjusted earnings per share Diluted adjusted earnings per share Note 5, 6 5 15 14 28 7 8 17 10 10 11 12 10 12 2017 £m 459.1 2016 £m 388.3 55.1 49.3 (1.1) (8.7) (4.6) (14.4) 5.7 (5.3) (0.6) (2.3) (2.5) (16.9) 38.2 6.2 (4.5) 0.8 40.7 (6.4) 34.3 32.8 1.5 34.3 (17.1) (6.1) (3.8) (27.0) 44.2 (6.9) (0.2) (0.8) 36.3 9.3 58.6 6.9 (4.7) 0.1 60.9 (10.6) 50.3 49.3 1.0 50.3 53.8p 53.0p 81.1p 80.3p 55.1 (2.1) 7.1 60.1 (3.7) 56.4 49.3 (1.4) 6.4 54.3 (4.6) 49.7 69.4p 68.4p 60.7p 60.1p 91 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Group Statement of Comprehensive Income For the year ended 30 June 2017 Profit for the year Items that may be reclassified subsequently to profit or loss Foreign exchange translation differences Fair value movement on net investment hedges Fair value movement on cash flow hedges Tax relating to components of other comprehensive income Items that may not be reclassified subsequently to profit or loss Actuarial gain/(loss) on retirement benefit obligations Movement on pension asset recognition restriction Recognition of additional pension liability Tax relating to components of other comprehensive income Note 2017 £m 7.7 (2.7) 2.1 (4.6) 1.2 0.3 (4.3) 0.4 11 27 27 27 11 Other comprehensive income for the year Total comprehensive income for the year Attributable to: Owners of the Company Non-controlling interest 2016 £m 76.6 (13.3) (0.7) (16.8) (12.8) (0.6) (14.9) 4.5 2017 £m 34.3 2.5 (2.4) 0.1 34.4 33.8 0.6 34.4 2016 £m 50.3 45.8 (23.8) 22.0 72.3 72.1 0.2 72.3 92 Genus plc | Annual Report 2017Group Statement of Changes in Equity For the year ended 30 June 2017 Called up share capital £m Share premium account £m Note Own shares £m Translation reserve £m Hedging reserve £m Retained earnings £m Non- controlling interest £m Total £m Total equity £m 6.1 112.2 (0.1) (10.1) 202.7 310.8 (5.7) 305.1 Balance at 30 June 2015 Foreign exchange translation differences, net of tax Fair value movement on net investment hedges, net of tax Fair value movement on cash flow hedges, net of tax Actuarial loss on retirement benefit obligations, net of tax Movement on pension asset recognition restriction, net of tax Recognition of additional pension liability, net of tax Other comprehensive (expense)/income for the year Profit for the year Total comprehensive income for the year Recognition of share-based payments, net of tax Adjustment arising from change in non-controlling interest and written put option Dividends Issue of ordinary shares Balance at 30 June 2016 Foreign exchange translation differences, net of tax Fair value movement on net investment hedges, net of tax Fair value movement on cash flow hedges, net of tax Actuarial gain on retirement benefit obligations, net of tax Movement on pension asset recognition restriction, net of tax Recognition of additional pension liability, net of tax Other comprehensive (expense)/income for the year Profit for the year Total comprehensive income for the year Recognition of share-based payments, net of tax Adjustment arising from change in non-controlling interest Dividends Issue of ordinary shares 13 13 – – – – – – – – – – – – – – – – – – – – – – – – – 0.1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0.5 – – – – – – – – – – – – – 58.2 (1.2) 57.0 – – – (0.6) – – – (10.6) (0.6) – (11.0) (11.0) – – (0.6) (0.6) (12.2) (12.2) 58.2 (10.6) – – – – – – – – – (10.6) (0.6) (11.0) (0.6) (12.2) 47.6 – (0.6) – (23.8) 49.3 23.2 49.3 (1.2) 1.0 22.0 50.3 47.6 (0.6) 25.5 72.5 (0.2) 72.3 – – – – – – – – 3.3 3.3 – 3.3 – (12.2) – – (12.2) 0.1 (0.5) – – (0.5) (12.2) 0.1 3.9 (0.9) 3.0 3.9 (2.2) – – – – – – 1.7 – – – – – – (2.2) 1.7 1.0 1.0 0.3 0.3 (3.7) (3.7) – – – – – (2.2) 1.7 1.0 0.3 (3.7) 1.7 – 1.7 – (2.4) 32.8 1.0 32.8 (0.9) 1.5 0.1 34.3 1.7 1.7 30.4 33.8 0.6 34.4 – – – – – – – – 4.0 4.0 – 4.0 – (13.5) – – (13.5) 0.5 8.6 – – 8.6 (13.5) 0.5 6.1 112.3 (0.1) 37.5 (0.6) 219.3 374.5 (6.4) 368.1 Balance at 30 June 2017 6.1 112.8 (0.1) 39.2 1.1 240.2 399.3 2.8 402.1 93 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Group Balance Sheet As at 30 June 2017 Assets Goodwill Other intangible assets Biological assets Property, plant and equipment Interests in joint ventures and associates Other investments Derivative financial asset Deferred tax assets Total non-current assets Inventories Biological assets Trade and other receivables Cash and cash equivalents Income tax receivable Derivative financial asset Asset held for sale Total current assets Total assets Liabilities Trade and other payables Interest-bearing loans and borrowings Provisions Obligations under finance leases Current tax liabilities Derivative financial liabilities Total current liabilities Interest-bearing loans and borrowings Retirement benefit obligations Provisions Deferred tax liabilities Derivative financial liabilities Obligations under finance leases Total non-current liabilities Total liabilities Net assets Equity Called up share capital Share premium account Own shares Translation reserve Hedging reserve Retained earnings Equity attributable to owners of the Company Non-controlling interest Put option over non-controlling interest Total non-controlling interest Total equity Note 14 14 15 16 17 18 24 11 19 15 20 21 24 22 25 23 26 24 25 27 23 11 24 26 29 29 29 29 24 2017 £m 104.7 88.3 279.2 67.5 22.7 5.5 0.1 3.8 571.8 33.1 73.9 88.8 26.5 1.9 1.3 0.3 225.8 797.6 (76.4) (7.7) (2.7) (1.4) (5.2) (0.6) (94.0) (127.2) (40.9) (3.7) (124.2) (3.7) (1.8) (301.5) (395.5) 402.1 6.1 112.8 (0.1) 40.0 1.1 239.4 399.3 6.1 (3.3) 2.8 402.1 2016 £m 86.0 78.0 264.6 61.8 24.3 3.6 – 4.7 523.0 35.7 66.4 78.1 34.0 1.0 0.6 0.3 216.1 739.1 (65.1) (4.6) (1.2) (1.1) (4.9) (0.5) (77.4) (115.3) (44.5) – (118.5) (12.6) (2.7) (293.6) (371.0) 368.1 6.1 112.3 (0.1) 37.5 (0.6) 219.3 374.5 5.0 (11.4) (6.4) 368.1 The financial statements were approved and authorised for issue by the Board of Directors on 6 September 2017. Signed on behalf of the Board of Directors Karim Bitar Chief Executive 94 Stephen Wilson Group Finance Director Genus plc | Annual Report 2017 Group Statement of Cash Flows For the year ended 30 June 2017 Net cash flow from operating activities Cash flows from investing activities Dividends received from joint ventures and associates Joint venture loan repayment Acquisition of subsidiaries, net of cash acquired Increase in investment in subsidiaries Acquisition of investment Acquisition of investment in joint venture Disposal of subsidiary, net of cash disposed Disposal of joint venture Purchase of property, plant and equipment Purchase of intangible assets Proceeds from sale of property, plant and equipment Proceeds from sale of assets held for sale Net cash outflow from investing activities Cash flows from financing activities Drawdown of borrowings Repayment of borrowings Payment of finance lease liabilities Equity dividends paid Dividend to non-controlling interest Issue of ordinary shares Debt issue costs Note 30 36 36 18 17 14 Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at start of the year Net (decrease)/increase in cash and cash equivalents Effect of exchange rate fluctuations on cash and cash equivalents Total cash and cash equivalents at 30 June 21 2017 £m 34.6 3.8 3.0 (17.5) (12.0) (0.3) (0.2) – 1.5 (13.4) (5.5) 1.4 – (39.2) 68.1 (55.7) (2.0) (13.5) (0.1) 0.5 (0.4) (3.1) 2016 £m 30.0 2.4 1.0 (3.5) – (3.5) (0.2) 0.1 – (11.8) (6.8) 1.8 0.7 (19.8) 53.6 (37.3) (1.9) (12.2) (0.4) 0.1 (1.4) 0.5 (7.7) 10.7 34.0 (7.7) 0.2 26.5 21.3 10.7 2.0 34.0 95 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements For the year ended 30 June 2017 1. Reporting entity Genus plc (the ‘Company’) is a public company limited by shares incorporated in the United Kingdom under the Companies Act 2006. Its registered office is Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ. The Group financial statements for the year ended 30 June 2017 comprise the Company and its subsidiaries (together referred to as the ‘Group’). We have used the equity method to account for the Group’s interests in joint ventures and associates. Our business model on pages 4 and 7 explains the Group’s operations and principal activities. 2. Basis of preparation We have prepared the Group financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and therefore comply with Article 4 of the IAS Regulation. Unless otherwise stated, we have consistently applied the significant accounting policies set out below to all periods presented in these Group financial statements. The going concern statement has been included in the Directors’ Report on page 82 and forms part of these statements. In note 5 we have reclassified the comparative period to reflect the change in operating segments and amendments in non-current assets between geographical regions, in note 9 we have restated the comparative employee costs to conform with the current period definition and in note 15 we reclassified a prior year misclassification between the two bovine categories ‘changes in fair value of biological assets’ and ‘inventory transferred to cost of sales at fair value’, also impacting the comparative in note 8 – cost of inventories recognised as an expense. Functional and presentation currency We present the Group financial statements in Sterling, which is the Company’s functional and presentational currency. All financial information presented in Sterling has been rounded to the nearest £0.1m. Use of estimates Preparing financial statements requires management to make judgements, estimates and assumptions that affect our application of accounting policies and our reported assets, liabilities, income and expenses. Our actual results may differ from these estimates. We review our estimates and underlying assumptions on an ongoing basis, and recognise revisions to accounting estimates in the period in which we revise the estimate and in any future periods affected. Note 4 provides information about significant areas of estimation uncertainty and the critical judgements we made in applying accounting policies that have the most effect on the amounts we recognised in the financial statements. Alternative performance measures (‘APMs’) In reporting financial information, the Group presents APMs, which are not defined or specified under the requirements of IFRS. The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board and the Executive Leadership Committee. Some of these measures are also used for the purpose of setting remuneration targets. The key APMs that the Group uses include: adjusted operating profit, adjusted profit before tax from continuing operations, adjusted earnings per share, adjusted EBITDA and net debt. The Group reports some financial measures, on both a reported and constant currency basis. The constant currency basis, which is an APM, retranslates the previous year results at the average actual periodic exchange rates used in the current financial year. This measure is presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results. The Group makes certain adjustments to the statutory profit measures in order to derive many of these APMs. The Group’s policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group. On this basis, the following were included within adjusted items for the year ended 30 June 2017: • net IAS 41 valuation movements on biological assets–movements can be materially volatile and do not directly correlate to the underlying trading performance in the period. Furthermore, the movement is non-cash related and many assumptions used in the valuation model are based on future projections rather than current trading; • amortisation of acquired intangible assets–by excluding it helps the comparability between acquired operations and organically grown operations, as the latter are not able to recognise internally generated intangible assets. Adjusting for amortisation provides a more consistent basis for comparison between the two; • share-based payments – this expense is considered to be relatively volatile and is not fully reflective of the current period trading as the performance criteria are based on earnings per share performance over a three-year period and include estimates of future period performance; and • exceptional items – are items which either due to their size or their nature are excluded to improve the understanding of the Company’s underlying performance, see note 7 for further details. The reconciliation between operating profit from continuing operations and adjusted operating profit from continuing operations is shown on the face of the Group Income Statement. All other reconciliations are included within the Financial Review section. 96 Genus plc | Annual Report 20173. Significant accounting policies applied in the current reporting period that relate to the financial statements as a whole This section sets out our significant accounting policies that relate to the financial statements as a whole. Where an accounting policy is generally applicable to a specific note to the financial statement, the policy has been described in that note. We have also detailed below the new accounting pronouncements that we will adopt in future years and our current view of the impact they will have on our financial reporting. Accounting convention We prepare the Group financial statements under the historical cost convention, except for our biological assets, share- based payment expense, pension liabilities and derivative financial instruments. In accordance with IFRS, we measure: biological assets at fair value less point-of-sale costs, which represent the costs of distribution and selling expenses; share-based payment expense; pension liabilities; and certain financial instruments at fair value. Basis of consolidation Subsidiaries are entities the Group controls. We have control of an entity when we are exposed, or have the rights, to variable returns from the entity and have the ability to affect the returns through power over the entity. In assessing control, we take into account potential voting rights that we can currently exercise or convert. We fully consolidate the results of subsidiaries we acquire from the date that control transfers to the Group. We cease consolidating the results of subsidiaries we cease to control from the date that control passes. In preparing the Group financial statements, we eliminate intra-Group balances and any unrealised income and expenses arising from intra-Group transactions. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment, to the extent of our interest in the investee. We eliminate unrealised losses in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Foreign currencies We record foreign currency transactions in the relevant Group entity’s functional currency, at the exchange rate on the transaction date. At each balance sheet date, we retranslate monetary assets and liabilities denominated in foreign currencies at the exchange rate on the balance sheet date. We recognise the foreign exchange differences arising on retranslation in the Group Income Statement. When non-monetary assets and liabilities are measured at historical cost in a foreign currency, we translate them at the exchange rate at the transaction date. When non-monetary assets and liabilities are stated at fair value in a foreign currency, we translate them at the prevailing exchange rate on the date we determined the fair value. The assets and liabilities of foreign operations, including goodwill arising on consolidation, are translated into Sterling at the prevailing exchange rates at the balance sheet date. We translate these operations’ revenues and expenses using an average rate for the period. When exchange differences arise from translating foreign operations into Sterling, or from the fair value movement of related effective hedges, we take them to the foreign currency translation reserve. When we dispose of a foreign operation, we release these differences to the Income Statement. Exchange movements on inter-Company loans designated as long-term funding are taken to the foreign currency translation reserve, together with any related taxation. The principal exchange rates were as follows: US Dollar/£ Euro/£ Brazilian Real/£ Mexican Peso/£ 2017 1.27 1.16 4.11 24.61 Average 2016 1.47 1.33 5.47 25.38 2015 1.57 1.32 4.26 22.68 2017 1.30 1.14 4.30 23.51 Closing 2016 1.34 1.20 4.28 24.66 2015 1.57 1.41 4.89 24.68 Revenue Revenue is the value of sales and royalties receivable from customers, net of trade discounts and value added tax. The principal components of the Group’s revenue and their respective accounting treatments are: • Revenue from the sale of bovine and porcine semen, porcine breeding animals, embryos and ancillary products, which we recognise when risks and rewards transfer to the customer or distributor. This is either when we ship to customers or on delivery, depending on the terms of sale. • Royalties, which we recognise when receivable. We receive royalty payments from certain porcine customers based on key performance variables, such as the number of pigs born per litter, the number of litters born per sow and the average slaughter weight of the animals born. This amount is confirmed directly to Genus by the customer. • Revenue from consulting, which represent the amounts we charged for services we provided during the year, including recoverable expenses but excluding value added tax. We recognise services provided but not yet billed as revenue, based on a fair value assessment of the work we have delivered and our contractual right to receive payment. Where unbilled revenue is contingent on a future event, we do not recognise any revenue until the event occurs. • Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. The stage of completion of the contract is determined based on the fair value of services provided to date. • Revenue from the slaughter of porcine animals, which we recognised when the risks and rewards transfer to the slaughterhouse. 97 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 3. Significant accounting policies applied in the current reporting period that relate to the financial statements as a whole continued Research and development We undertake research with the aim of gaining new scientific or technical knowledge, and recognise this expenditure in the income statement as we incur it. The Group constantly monitors its research activities. When research projects achieve technical feasibility and are commercially viable, our policy is to capitalise further development costs within intangible assets, in accordance with IAS 38. Our development activities include developing and maintaining our porcine genetic nucleus herd and our bovine pre-stud herds. We do not capitalise development expenditure separately for these herds, as their fair value is included in the fair value of the Group’s biological assets, in accordance with IAS 41. We disclose the costs of research and herd development activities, as required by IAS 38. New standards and interpretations The following new standards and interpretations have been adopted in the current period: • Amendments to IFRS 11 ‘Accounting for Acquisitions of Interests in Joint ventures’, IAS 27 ‘Equity Method in Separate Financial Statements’, IAS 1 ‘Disclosure Initiatives’; • Amendments to IFRS 10, IFRS 12 and IAS 28 ‘Investment entities: Applying the Consolidation Exception’; • Amendments to IAS 16 and IAS 38 ‘Clarification of Acceptable Method of Depreciation and Amortisation’; and • ‘Annual Improvements to IFRS 2012 – 2014 Cycle’. There has been no significant impact on the results or disclosures for the current period from the adoption of these new standards and interpretations. New standards and interpretations not yet adopted At the date of authorisation of these Group financial statements, the following standards and interpretations were in issue but not yet effective (and in some cases had not yet been adopted by the EU). These standards and interpretations have not been applied in preparing these Group financial statements: • ‘Annual improvement 2014-2016 cycle’; • IFRIC 22 ‘Foreign Currency Transaction and Advance Consideration’; • IAS 7 (amendments) ‘Disclosure Initiative’; • IAS 12 ‘Recognition of Deferred Tax Assets for Unrealised Losses’; • IFRS 2 (amendments) ‘Classification and Measurement of Share-based Payment Transactions’; • IFRS 9 ‘Financial Instruments’; • IFRS 10 and IAS 28 (amendments) ‘Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture’; • IFRS 15 ‘Revenue from Contracts with Customers’; and • IFRS 16 ‘Leases’. The Group is currently assessing the impact of the new pronouncements on its results, financial position and cash flows. It is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed. 4. Critical accounting judgements and key sources of estimation uncertainty In applying the Group’s accounting policies, which are described in note 3 or in the specific note the policy relates to, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Critical judgements Defined benefit pension schemes (note 27) Amounts recorded in the financial statements in respect of defined benefit pension schemes are also based on significant estimates. Judgements required included the extent to which we should provide for any amounts that might become payable under our joint and several liability in respect of the Milk Pension Fund (‘MPF’), and the extent of additional liability required under IFRIC 14. Estimates and key sources of estimation uncertainty Determination of the fair value of biological assets (note 15) Determining the fair values of our bovine and porcine biological assets requires significant estimates and assumptions. Following is a list of these significant estimates and assumptions, showing whether we consider them to be observable or unobservable inputs to the fair value determination. In addition we identify those inputs that are ‘readily obtainable transactional data’ or ‘open market prices’. 98 Genus plc | Annual Report 20174. Critical accounting judgements and key sources of estimation uncertainty continued Significant estimates and assumptions Observable/unobservable Bovine Long-term dairy volume growth rate Expected unit prices Animals' useful lifespan Discount rate Porcine (general) Animals' useful lifespan The proportion of animals that go to slaughter The mix of boars and gilts Unobservable Unobservable Observable Unobservable Observable Observable Observable Porcine (pure line herds) Number of future generations attributable to the current herds Observable Fair value prices achieved on sales Animals' expected useful lifespan and productivity Observable Discount rate Observable Unobservable n/a n/a readily obtainable n/a readily obtainable readily obtainable readily obtainable readily obtainable open market prices readily obtainable n/a Impairment of goodwill and intangible assets (note 14) Determining whether goodwill and intangible assets are impaired requires us to consider any specific impairment indicators and to estimate the value in use of the CGUs to which we have allocated goodwill and intangible tangible assets. The value in use calculation requires us to estimate the future cash flows arising from the CGU, the appropriate discount rate and the long-term growth rates, in order to calculate present value. 5. Segmental information IFRS 8 ‘Operating Segments’ requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Group Chief Executive and the Board to allocate resources to the segments and to assess their performance.  For management purposes effective from 1 July 2016, the Group’s operating and reporting structure comprises three operating segments: Genus PIC, Genus ABS and Research and Development. These segments are the basis on which the Group reports its segmental information. The principal activities of each segment are as follows: Genus PIC – our global porcine sales business; Genus ABS – our global bovine sales business; and Research and Development – our global spend on research and development. A segment analysis of revenue, operating profit, depreciation, amortisation and non-current asset additions and segment assets and liabilities are detailed below. We do not include our adjusting items in the segments, as we believe these do not reflect the underlying progress of the segments. The accounting policies of the reportable segments are the same as the Group’s accounting policies, as described in the financial statements. Revenue Genus PIC Genus ABS Research and Development Research Porcine Product Development Bovine Product Development 2017 £m 249.5 195.9 – 10.7 3.0 13.7 2016 £m 207.5 172.8 – 8.0 – 8.0 459.1 388.3 Operating profit by segment is set out below and reconciled to the Group’s adjusted operating profit. A reconciliation of adjusted operating profit to profit for the year is shown on the Group Income Statement. 99 FINANCIAL STATEMENTS Genus plc | Annual Report 2017 Notes to the Group Financial Statements continued For the year ended 30 June 2017 5. Segmental information continued Adjusted operating profit Genus PIC Genus ABS Research and Development Research Porcine Product Development Bovine Product Development Adjusted segment operating profit Central Adjusted operating profit 2017 £m 87.7 22.3 (11.9) (16.6) (14.2) (42.7) 67.3 (12.2) 55.1 2016 £m 71.7 23.3 (8.0) (13.5) (12.9) (34.4) 60.6 (11.3) 49.3 Our business is not highly seasonal and our customer base is diversified, with no individual customer generating more than 2% of revenue. Other segment information Genus PIC Genus ABS Research and Development Research Porcine Product Development Bovine Product Development Segment total Central Total Genus PIC Genus ABS Research and Development Research Porcine Product Development Bovine Product Development Segment total Central Total Depreciation Amortisation Additions to non-current assets 2017 £m 0.8 2.1 0.3 1.9 1.4 3.6 6.5 2.3 8.8 2016 £m 0.8 1.7 – 1.8 1.4 3.2 5.7 2.2 7.9 2017 £m 6.0 2.1 0.9 – 2.2 3.1 11.2 – 11.2 2016 £m 5.9 1.1 – – – – 7.0 – 7.0 2017 £m 1.1 3.4 2.5 2.6 5.6 10.7 15.2 5.0 20.2 2016 £m 1.4 2.6 3.6 1.7 7.3 12.6 16.6 4.3 20.9 Segment assets Segment liabilities 2017 £m 258.3 132.8 5.9 182.4 202.7 391.0 782.1 15.5 797.6 2016 £m 233.5 144.4 3.7 146.7 203.1 353.5 731.4 7.7 739.1 2017 £m (60.1) (41.1) (1.4) (72.0) (52.6) (126.0) (227.2) (168.3) (395.5) 2016 £m (50.3) (47.7) (0.4) (59.6) (51.2) (111.2) (209.2) (161.8) (371.0) Exceptional items of £2.5m expense (2016: £36.3m credit), relate to Genus ABS (£6.9m expense), Genus PIC (£2.1m expense) and our central segment (£6.5m credit). Note 7 provides details of these exceptional items. We consider share-based payment expenses on a Group-wide basis and do not allocate them to reportable segments. 100 Genus plc | Annual Report 20175. Segmental information continued Geographical information The analysis of revenue by geographical area is stated on the basis of where the legal entity is incorporated and therefore in the country the revenue will be reported.  The Group’s revenue by geographical segment is analysed below: Revenue North America Latin America Rest of Europe, Middle East and Africa UK Asia Non-current assets (excluding deferred taxation and financial instruments) North America Latin America Rest of Europe, Middle East and Africa UK Asia 6.Revenue Sale of animals, semen, embryos and associated products and services Royalties – animal and semen Consulting services Interest income (see note 10) 2017 £m 214.5 71.4 48.5 70.0 54.7 459.1 2017 £m 407.9 47.2 37.1 60.9 14.8 567.9 2017 £m 335.7 116.1 7.3 459.1 0.8 459.9 2016 £m 178.7 58.6 40.7 65.2 45.1 388.3 2016 £m 376.0 43.2 22.0 59.6 17.5 518.3 2016 £m 283.5 97.8 7.0 388.3 0.1 388.4 7. Exceptional items Accounting policy The Group presents exceptional items separately, as we believe it helps to improve the understanding of the Company’s underlying performance. In determining whether an item should be presented as exceptional, we consider items which are material either because of their size or their nature, and those which are non-recurring. For an item to be considered as exceptional, it must initially meet at least one of the following criteria: • it is a one-off material item; • it is has been directly incurred as the result of either an acquisition and/or integration or other major restructuring programme; • it has been previously classified as an exceptional item, and as such consistent accounting treatment is being applied; or • it is unusual in nature e.g. outside the normal course of business. If an item meets at least one of the criteria, we then exercise judgement as to whether the item should be classified as exceptional. The tax impact of the exceptional items is disclosed in note 11. Operating (expense)/income: Pension-related Litigation Acquisition and integration Other (including restructuring) 2017 £m 5.7 (5.3) (0.6) (2.3) (2.5) 2016 £m 44.2 (6.9) (0.2) (0.8) 36.3 101 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 7. Exceptional items continued Pension-related On 23 June 2017, National Milk Records plc ('NMR') withdrew from the MPF under a Flexible Apportionment Arrangement between NMR, Genus and the Trustees of the MPF. In return for the right to withdraw from the MPF, NMR made a one-off, lump sum cash payment of £10.1m to the MPF, equivalent to the undiscounted value of all NMR's future payments under the existing MPF recovery plan which extends to March 2026; and NMR also made a payment to Genus of £4.7m, with £1.4m being satisfied by the issue NMR shares. As a result of the NMR withdrawal, Genus has recognised £5.7m as an exceptional credit, with £4.5m (£4.7m payment net of fees) being received directly from NMR, and £1.2m from the MPF pension scheme reflecting the impact of NMR paying undiscounted amounts into the scheme. See note 27 for further details. During the prior year, a gain of £43.9m arose as a result of changing the index used for pensions and deferred pension increases in the MPF from RPI to CPI, and a £0.3m settlement gain arose from members leaving the same scheme. Litigation Litigation includes legal fees of £5.3m (2016: £5.4m) related to the action by ABS Global, Inc. (‘ABS’) against Inguran, LLC (aka Sexing Technologies (‘ST’)) and £nil (2016: £1.5m (US$2m)) for up-front damages related to patent infringement and confidential information. On 14 July 2014, ABS launched a legal action against ST in the US District Court for the Western District of Wisconsin alleging, among other matters, that ST: (i) has a monopoly in the processing of sexed bovine semen in the US; and (ii) unlawfully maintains this monopoly through anticompetitive conduct.  The legal action aimed to remove these barriers and allow free and fair competition in the sexed bovine semen processing market (‘ABS Action’). In parallel with the ABS Action, ABS also filed Inter-Partes Review applications (‘IPR’) before the US Patent Office challenging the validity of several of ST’s group patents, including US Patent No. 7,195,920 (the ‘’920 patent’), US Patent No. 7,820,425 (the ‘’425 patent’), US Patent No. 8,206,987 (the ‘’987 patent’) and US Patent No. 8,198,092 (the ‘’092 patent’). ST and its subsidiary XY Inc. filed an Answer and Counterclaim to the ABS Action, denying any anticompetitive activities, and alleging, among other matters, that the Company and ABS infringed the ’920, ’425, ’987 and ’092 patents. On 29 April 2015, the Patent Trial and Appeal Board (‘PTAB’) ruled that ABS had not demonstrated a reasonable likelihood of prevailing on its assertion that relevant claims of the ’987 patent were invalid and declined to order the institution of a trial. However, trials were instituted for the other three patents. On 11 January and 15 April 2016, the PTAB ruled that the ’920 and ’425 patents were unpatentable. ST has appealed these decisions. The parties await a decision from the PTAB on whether the ’092 patent is unpatentable. On 1 August 2016, the trial of the ABS Action commenced and lasted for approximately two weeks. Following the jury verdicts, both sides filed post-trial motions. On 31 March 2017, the Court entered a judgment which confirmed: (i) the Company and ABS had proved that ST had wilfully maintained a monopoly in the market for sexed bovine semen processing in the US since July 2012, and awarded a permanent injunction against ST which, among other matters, relieved ABS of certain research, marketing and other non-compete restrictions contained in the 2012 semen sorting agreement between the parties; (ii) ST's ’987 and ’092 patents were valid and infringed; and (iii) that ABS had materially breached the confidentiality obligations under the 2012 semen sorting agreement. The Court also confirmed that: (i) the Company and ABS should pay ST an upfront amount of US$750,000 and an ongoing royalty of US$1.25 per straw on commercialisation of the Genus Sexed Semen technology for the use of ST's ’987 patent in the US; (ii) the Company and ABS should pay ST an up front payment of US$500,000 and an ongoing royalty of US$0.50 per straw for the use of ST’s ’092 patent in the US; and (iii) ABS should pay ST damages of US$750,000 for having breached the confidentiality obligations under the 2012 semen sorting agreement. Both parties have appealed the Court’s decision. On 7 June 2017, ST, XY LLC and Cytonome/ST, LLC filed proceedings against ABS Global, Inc., the Company and Premium Genetics (UK) Limited (‘PG’) in the United States District Court for the Western District of Wisconsin (‘New Litigation’).  The New Litigation alleges that ABS and the Company infringe seven patents and asserts trade secret and breach of contract claims. ABS, the Company and PG have filed a Motion to dismiss the trade secret and breach of contract claims. The Company and ABS intend to vigorously defend the patent infringement claims. Acquisitions and integration During the period, £0.6m of expenses were incurred, with £1.6m of expenses in relation to acquisitions and integration, principally of De Novo Genetics and Hermitage Genetics, being partially offset by a gain on cancellation of the IVB put option. Other (including restructuring) Included within ‘other’ of £2.3m is £1.8m restructuring costs primarily relating to ABS operating business, especially supply chain. 102 Genus plc | Annual Report 20178. Operating profit Operating costs comprise: Cost of sales excluding net IAS 41 valuation movement on biological assets and amortisation of multiplier contract intangible assets Net IAS 41 valuation movement on biological assets Amortisation of multiplier contract intangible assets Cost of goods sold Other cost of sales Amortisation of customer relationship intangible assets Other cost of sales Research and Development expenditure Amortisation of technology and licences and patents Research and Development costs Administrative expenses Share-based payment expense Amortisation of software, licences and patents Exceptional items within administrative expenses Total administrative expenses Total operating costs Profit for the year is stated after charging/(crediting): Net foreign exchange losses Depreciation of owned fixed assets Depreciation of assets held under finance leases and hire purchase contracts Loss/(profit) on disposal of fixed assets Profit on sale of asset held for sale Operating lease rentals – plant and machinery – other Employee costs (see note 9) Cost of inventories recognised as an expense Auditor’s remuneration is as follows: Fees payable to the Company’s auditor and their associates for the audit of the Company’s Annual Report and financial statements Fees payable to the Company’s auditor and their associates for other services to the Group – The audit of the Company’s undertakings Total audit fees Tax compliance services Other services Total non-audit fees Total fees to the Group’s auditor Fees payable to other auditors of Group companies 2017 £m 2016 £m (199.7) (1.1) (0.2) (201.0) (88.2) (5.8) (94.0) (41.5) (3.9) (45.4) (72.1) (4.6) (1.3) (2.5) (80.5) (157.6) (17.1) (0.2) (174.9) (81.0) (3.6) (84.6) (34.4) (2.3) (36.7) (65.1) (3.8) (0.9) 36.3 (33.5) (420.9) (329.7) 2017 £m 0.1 7.1 1.7 0.2 – 4.0 4.5 137.6 98.5 2017 £m 0.3 0.5 0.8 0.1 0.2 0.3 1.1 – 2016 £m 0.5 6.4 1.5 (0.2) (0.2) 4.0 3.4 118.4 81.9 2016 £m 0.1 0.5 0.6 0.2 – 0.2 0.8 – Non-audit tax services principally comprise tax compliance support services. Other services include financial due diligence provided in relation to the acquisition of Hermitage Genetics. These services fall within the non-audit services policy approved by the Company’s Audit Committee. 103 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 9. Employee costs This note shows the total employment costs and the average number of people employed by segment during the year. Employee costs, including Directors’ remuneration, amounted to: Wages and salaries (including bonuses and sales commission) Social security costs Contributions to defined contribution pension plans Share-based payment expense (excluding National Insurance) The number of full time equivalent employees, including Executive Directors, was as follows: 2017 £m 118.4 12.1 3.5 3.6 137.6 2016 £m 102.0 10.0 3.0 3.4 118.4 Genus PIC Genus ABS Research and Development Central Included in the totals above: UK Year end Average monthly 2017 Number 669 1,613 172 81 2,535 2016 Number 705 1,598 136 62 2,501 2017 Number 686 1,603 163 69 2,521 2016 Number 722 1,601 137 58 2,518 702 705 704 729 The Directors’ Remuneration Report sets out details of the Directors’ remuneration, pensions and share options. 10. Net finance costs Net finance costs mainly arise from interest due on bank loans, pension scheme liabilities, amortisation of debt issue costs and the results of hedging transactions used to manage foreign exchange and interest rate movements. Accounting policy We recognise interest income and interest payable in the Income Statement, as they accrue. Interest payable on bank loans and overdrafts Amortisation of debt issue costs Other interest payable Net interest cost in respect of pension scheme liabilities Net interest cost on derivative financial instruments Total interest expense Interest income on bank deposits Total interest income Net finance costs 2017 £m (2.7) (0.4) (0.1) (1.2) (0.1) (4.5) 0.8 0.8 (3.7) 2016 £m (1.7) (0.5) (0.1) (2.2) (0.2) (4.7) 0.1 0.1 (4.6) 11. Taxation and deferred taxation This note explains how our Group tax charge arises. The deferred tax section of the note also provides information on our expected future tax charges and sets out the tax assets and liabilities held across the Group together with our view on whether or not we expect to be able to make use of them in the future. Accounting policies Tax on the profit or loss for the year comprises current and deferred tax. We recognise tax in the income statement, unless: • it relates to items we have recognised directly in equity, in which case we recognise it in equity; or • it arises as a fair value adjustment in a business combination. We provide for current tax, including UK corporation tax and foreign tax, at the amounts we expect to pay (or recover), using the tax rates and the laws enacted or substantively enacted at the balance sheet date, together with any adjustments to tax payable in respect of previous years. Deferred tax is tax we expect to pay or recover due to differences between the carrying amounts of our assets and liabilities in our financial statements and the corresponding tax bases used in calculating our taxable profit. We account for deferred tax using the balance sheet liability method. 104 Genus plc | Annual Report 201711. Taxation and deferred taxation continued We generally recognise deferred tax liabilities for all taxable temporary differences, and deferred tax assets to the extent that we will probably have taxable profits to utilise deductible temporary differences against. We do not recognise these assets and liabilities if the temporary difference arises from: • our initial recognition of goodwill; or • our initial recognition of other assets and liabilities in a transaction (other than a business combination) that affects neither our taxable profit nor our accounting profit. We recognise deferred tax liabilities for taxable temporary differences arising on our investments in subsidiaries, and interests in joint ventures and associates, except where we can control the reversal of the temporary difference, and it is probable that it will not reverse in the foreseeable future. We calculate deferred tax at the tax rates we expect to apply in the period when we settle the liability or realise the asset. We charge or credit deferred tax in the Income Statement, except when it relates to items we have charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Income tax expense Current tax expense Current period Adjustment for prior periods Total current tax expense in the Group Income Statement Deferred tax expense Origination and reversal of temporary differences Adjustment for prior periods Total deferred tax expense in the Group Income Statement Total income tax expense excluding share of income tax of equity accounted investees Share of income tax of equity accounted investees (see note 17) Total income tax expense in the Group Income Statement Reconciliation of effective tax rate Profit before tax Add back share of income tax of equity-accounted investees Profit before tax excluding share of income tax of equity-accounted investees Income tax at UK corporation tax of 19.75% (2016: 20.00%) Effect of tax rates in foreign jurisdictions Non-deductible expenses Tax exempt income and incentives Change in tax rate Movements in recognition of tax losses Change in unrecognised temporary differences Tax overprovided in prior periods Tax on undistributed reserves Total income tax expense in the Group Income Statement 2017 % 19.75 7.83 0.70 (5.00) (2.85) 0.70 (0.70) (0.95) (0.95) 18.53 2017 £m 40.7 1.4 42.1 8.3 3.3 0.3 (2.1) (1.2) 0.3 (0.3) (0.4) (0.4) 7.8 2017 £m 9.9 0.4 10.3 (2.6) (1.3) (3.9) 6.4 1.4 7.8 2016 % 20.00 1.35 0.48 (4.00) 1.28 1.12 (0.32) (0.49) (0.16) 19.26 2016 £m 10.4 (1.4) 9.0 0.7 0.9 1.6 10.6 1.4 12.0 2016 £m 60.9 1.4 62.3 12.5 0.8 0.3 (2.5) 0.8 0.7 (0.2) (0.3) (0.1) 12.0 The tax rate for the year depends on our mix of profits by country and our ability to recognise deferred tax assets in respect of losses in some of our smaller territories. Tax is calculated using prevailing tax legislation, reliefs, and existing interpretations and practice. The Group’s future tax charge and effective tax rate could be affected by factors such as countries reforming their tax legislation to implement the OECD’s BEPS recommendations and by European Commission initiatives including state aid investigations. The tax credit attributable to exceptional items is £1.5m (2016: charge of £5.4m). 105 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 11. Taxation and deferred taxation continued Income tax recognised directly in the Statement of Comprehensive Income and Statement of Changes in Equity Income tax recognised directly to the Statement of Comprehensive Income Financial instruments Foreign exchange differences on long-term intra-Group currency loans and balances Actuarial movement on retirement benefit obligations Translation of biological assets, intangible assets and finance leases Income tax recognised directly to the Statement of Changes in Equity Share-based payment expense 2017 £m 0.4 0.4 (0.4) 3.8 4.2 2016 £m (0.1) (0.1) (4.5) 17.0 12.3 (0.4) (0.1) Unrecognised deferred tax assets and liabilities At the balance sheet date, the Group had unused tax losses which were available for offset against future profits, with a potential tax benefit of £15.6m (2016: £15.2m). We have recognised a deferred tax asset in respect of £2.4m (2016: £2.5m) of these benefits as we expect these losses to be offset against future profits of the relevant jurisdictions in the near term. We have not recognised a deferred tax asset in respect of the remaining £13.2m (2016: £12.7m), due to uncertainty about the availability of future taxable profits in the relevant jurisdictions. At 30 June 2017, the expiry dates of deferred tax assets in respect of losses available for the carry forward were as follows: Losses for which a deferred tax asset is recognised Losses for which no deferred tax asset is recognised Expiring within 1 and 10 years £m 11 and 20 years £m – – – 0.2 – 0.2 Unlimited £m 2.2 13.2 15.4 At 30 June 2016, the expiry dates of deferred tax assets in respect of losses available for the carry forward were as follows: Losses for which a deferred tax asset is recognised Losses for which no deferred tax asset is recognised Expiring within 1 and 10 years £m 11 and 20 years £m – – – 0.3 – 0.3 Unlimited £m 2.2 12.7 14.9 Total £m 2.4 13.2 15.6 Total £m 2.5 12.7 15.2 The gross value of losses for which deferred tax assets are recognised is £12.9m (2016: £12.5m). The gross value of losses for which deferred tax assets are not recognised is £44.9m (2016: £41.5m). We have not recognised deferred tax liabilities totalling £4.5m (2016: £4.5m) for the withholding tax and other taxes that would be payable on the unremitted earnings of certain overseas subsidiaries. This is because we can control the timing and reversal of these differences and it is probable that the differences will not reverse in the foreseeable future. Recognised deferred tax assets and liabilities We have offset deferred tax assets and liabilities above, to the extent that they arise in the same tax jurisdiction. The following is the analysis of the deferred tax balances: Deferred tax assets Deferred tax liabilities 2017 £m (3.8) 124.2 120.4 2016 £m (4.7) 118.5 113.8 UK deferred tax assets and liabilities are stated at 17%, which is the UK headline rate of tax effective from 1 April 2020. The tax effect of timing differences reversing in the UK between the reporting date and 1 April 2020 at current rates over 17% is immaterial. 106 Genus plc | Annual Report 201711. Taxation and deferred taxation continued Movement in net deferred tax liabilities during the year Property, plant and equipment Intangible assets Biological assets Retirement benefit obligations Share-based payment expense Short-term timing differences Tax loss carry-forwards Property, plant and equipment Intangible assets Biological assets Retirement benefit obligations Share-based payment expense Short-term timing differences Tax loss carry-forwards Balance brought forward 1 July 2016 £m Recognised in Income Statement £m Changes in tax rate recognised in Income Statement £m Prior year adjustments recognised in Income Statement £m Recognised in equity £m Acquisitions £m Foreign exchange difference £m Balance carried forward 30 June 2017 £m 7.0 18.7 109.7 (9.6) (2.2) (7.3) (2.5) 113.8 1.2 (2.2) (0.1) 1.3 (0.6) (0.8) – (1.2) 0.3 (0.4) (1.6) 0.2 – (0.2) 0.1 (1.6) (0.1) – – 0.1 0.2 (1.2) – (1.0) – – 3.7 (0.4) – 1.2 – 4.5 – 4.4 – – – 0.8 – 5.2 0.2 0.3 – (0.1) – 0.3 – 0.7 8.6 20.8 111.7 (8.5) (2.6) (7.2) (2.4) 120.4 Balance brought forward 1 July 2015 £m Recognised in Income Statement £m Changes in tax rate recognised in Income Statement £m Prior year adjustments recognised in Income Statement £m Recognised in equity £m Acquisitions £m Foreign exchange difference £m Balance carried forward 30 June 2016 £m 4.4 18.5 97.5 (13.2) (1.9) (6.4) (1.5) 97.4 0.7 (1.7) (5.5) 7.9 (0.5) (1.3) (1.1) (1.5) 0.2 (0.4) 1.0 0.7 0.3 0.2 0.2 2.2 0.6 (0.2) – – – 0.5 – 0.9 – 0.8 16.0 (4.5) (0.1) 0.2 – 12.4 – 0.3 0.7 – – – – 1.0 1.1 1.4 – (0.5) – (0.5) (0.1) 1.4 7.0 18.7 109.7 (9.6) (2.2) (7.3) (2.5) 113.8 12. Earnings per share Basic earnings per share is the profit generated for the financial year attributable to equity shareholders divided by the weighted average number of shares in issue during the year. Basic earnings per share from continuing operations Basic earnings per share 2017 (pence) 53.8 2016 (pence) 81.1 The calculation of basic earnings per share from continuing operations for the year ended 30 June 2017 is based on the net profit attributable to owners of the Company from continuing operations of £32.8m (2016: £49.3m) and a weighted average number of ordinary shares outstanding of 60,944,000 (2016: 60,814,000), which is calculated as follows: Weighted average number of ordinary shares (basic) Issued ordinary shares at the start of the year Effect of own shares held Shares issued on exercise of stock options Shares issued in relation to Employee Benefit Trust Weighted average number of ordinary shares in year 2017 000s 61,013 (163) 47 47 60,944 2016 000s 60,968 (177) 23 – 60,814 107 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 12. Earnings per share continued Diluted earnings per share from continuing operations Diluted earnings per share 2017 (pence) 53.0 2016 (pence) 80.3 The calculation of diluted earnings per share from continuing operations for the year ended 30 June 2017 is based on the net profit attributable to owners of the Company from continuing operations of £32.8m (2016: £49.3m) and a weighted average number of ordinary shares outstanding, after adjusting for the effects of all potential dilutive ordinary shares, of 61,833,000 (2016: 61,387,000), which is calculated as follows: Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares (basic) Dilutive effect of share options 2017 000s 60,944 889 Weighted average number of ordinary shares for the purposes of diluted earnings per share 61,833 Adjusted earnings per share from continuing operations 2016 000s 60,814 573 61,387 Adjusted earnings per share Diluted adjusted earnings per share 2017 (pence) 69.4 68.4 2016 (pence) 60.7 60.1 Adjusted earnings per share is calculated on profit before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items, after charging taxation associated with those profits, of £42.3m (2016: £36.9m), which is calculated as follows: Profit before tax from continuing operations Add/(deduct): Net IAS 41 valuation movement on biological assets Amortisation of acquired intangible assets Share-based payment expense Exceptional items (see note 7) Net IAS 41 valuation movement on biological assets in joint ventures Tax on joint ventures and associates Attributable to non-controlling interest Adjusted profit before tax Adjusted tax charge Adjusted profit after tax Effective tax rate on adjusted profit Reconciliation of effective tax rate Total income tax expense in the Group Income Statement Net IAS 41 valuation movement on biological assets Amortisation of acquired intangible assets Share-based payment expense Exceptional items (see note 7) Net IAS 41 valuation movement on biological assets in joint ventures Attributable to non-controlling interest Adjusted profit before tax 108 2017 £m 40.7 1.1 8.7 4.6 2.5 (0.5) 1.4 (2.1) 56.4 (14.1) 42.3 25.0% 2017 Tax £m 7.8 1.7 3.1 0.5 1.5 (0.2) (0.3) 14.1 2016 £m 60.9 17.1 6.1 3.8 (36.3) (1.9) 1.4 (1.4) 49.7 (12.8) 36.9 25.8% 2017 % 18.5 154.5 35.6 10.9 60.0 40.0 14.3 25.0 2017 Profit £m 42.1 1.1 8.7 4.6 2.5 (0.5) (2.1) 56.4 Genus plc | Annual Report 201712. Earnings per share continued Total income tax expense in the Group Income Statement Net IAS 41 valuation movement on biological assets Amortisation of acquired intangible assets Share-based payment expense Exceptional items (see note 7) Net IAS 41 valuation movement on biological assets in joint ventures Attributable to non-controlling interest Adjusted profit before tax 2016 Profit £m 62.3 17.1 6.1 3.8 (36.3) (1.9) (1.4) 49.7 2016 Tax £m 12.0 4.5 2.3 0.4 (5.4) (0.6) (0.4) 12.8 13. Dividends Dividends are one type of shareholder return, historically paid to our shareholders in December and March. Amounts recognised as distributions to equity holders in the year Final dividend Final dividend for the year ended 30 June 2016 of 14.7 pence per share Final dividend for the year ended 30 June 2015 of 13.4 pence per share Interim dividend Interim dividend for the year ended 30 June 2017 of 7.4 pence per share Interim dividend for the year ended 30 June 2016 of 6.7 pence per share 2017 £m 9.0 – 4.5 – 13.5 2016 % 19.3 26.3 37.7 10.5 14.9 31.6 28.6 25.8 2016 £m – 8.1 – 4.1 12.2 The Directors have proposed a final dividend of 16.2 pence per share for 2017. This is subject to shareholders’ approval at the Annual General Meeting and we have therefore not included it as a liability in these financial statements. 14. Intangible assets Our Group Balance Sheet contains significant intangible assets, mainly in relation to goodwill, acquired technology, customer relationships and our Genus Sexed Semen (‘GSS’) development project. We recognise that accounting for intangible assets is an area which includes critical accounting judgements and key sources of estimation uncertainty. See note 4. Accounting policies Identifiable intangible assets are recognised when the Group controls the asset, it is probable that future economic benefits attributed to the asset will flow to the Group and the cost of the asset can be reliably measured. Goodwill When we acquire a subsidiary, associate or joint venture, the goodwill arising is the excess of the acquisition cost, excluding transaction costs, over our interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Identifiable assets include intangible assets which could be sold separately or which arise from legal rights, regardless of whether those rights are separable. We state goodwill at cost less any accumulated impairment losses. We allocate goodwill to CGUs, which are the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. We do not amortise goodwill but we do test it annually for impairment. IAS 21 requires us to treat the following as assets and liabilities of the acquired entity, rather than of the acquiring entity: • goodwill arising on acquisition of a foreign operation; and • any fair value adjustments we make on acquisition to the carrying amounts of the acquiree’s assets and liabilities. We therefore express them in the foreign operation’s functional currency and retranslate them at the balance sheet date. 109 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 14. Intangible assets continued Intangible assets Intangible assets that we have acquired in a business combination since 1 April 2005 are identified and recognised separately from goodwill, where they meet the definition of an intangible asset and we can reliably measure their fair values. Their cost is their fair value at the acquisition date. After their initial recognition, we report these intangible assets at cost less accumulated amortisation and accumulated impairment losses. This is the same basis as for intangible assets acquired separately. The estimated useful lives for intangible assets are as follows: Porcine and bovine genetics technology 20 years 15 years Multiplier contracts 10 to 17 years Customer relationships 10 years Genus sexed semen term of agreement (4 years) Patents and licences 2 to 10 years Software Intangible assets acquired separately We carry intangible assets acquired other than through a business combination at cost less accumulated amortisation and any impairment loss. We charge amortisation on a straight-line basis over their estimated useful lives, and review the useful life and amortisation method at the end of each financial year, accounting for the effect of any changes in estimate on a prospective basis. Impairment We review the carrying amounts of our tangible and intangible assets at each balance sheet date, to determine whether there is any indication of impairment. If any indication exists, we estimate the asset’s recoverable amount. For goodwill, and tangible and intangible assets that are not yet available for use, we estimate the recoverable amount at each balance sheet date. The recoverable amount is the greater of their net selling price and value in use. In assessing value in use, we discount the estimated future cash flows to their present value, using a pre-tax discount rate of 10.7% (2016: 10.8%), which is derived from the Group’s weighted average cost of capital. For some countries we add a premium to this rate, to reflect the risk attributable to that country. If the asset does not generate largely independent cash inflows, we determine the recoverable amount for the CGU that the asset belongs to. We recognise an impairment loss in the income statement whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. When we recognise an impairment loss in respect of a CGU, we first allocate it to reduce the carrying amount of any goodwill allocated to CGUs, and then apply any remaining loss to reduce the carrying amount of the unit’s other assets on a pro rata basis. Reversals of impairment We reverse an impairment loss in respect of assets other than goodwill when the impairment loss may no longer exist and we have changed the estimates we used to determine the recoverable amount. We only reverse an impairment loss to the extent that the asset’s carrying amount does not exceed the carrying amount it would have had, net of depreciation or amortisation, if we had not recognised the impairment loss. 110 Genus plc | Annual Report 2017 14. Intangible assets continued Brand, multiplier contracts and customer relationships £m Separately identified acquired intangible assets £m Technology £m Software £m Genus Sexed Semen £m Patents, licence and other £m Cost Balance at 1 July 2015 Additions Acquisition Effect of movements in exchange rates Balance at 30 June 2016 Additions Acquisition (see note 36) Reclassified from tangible fixed assets Effect of movements in exchange rates Balance at 30 June 2017 Amortisation and impairment losses Balance at 1 July 2015 Amortisation for the year Effect of movements in exchange rates Balance at 30 June 2016 Reclassified from tangible fixed assets Amortisation for the year Effect of movements in exchange rates Balance at 30 June 2017 46.1 – – 0.5 46.6 – 6.7 – 61.5 – 0.7 10.5 107.6 – 0.7 11.0 72.7 119.3 – 7.4 – – 14.1 – 2.3 0.1 2.2 53.4 82.3 135.7 19.8 31.5 51.3 2.3 – 3.8 5.6 6.1 5.6 22.1 40.9 63.0 – 2.7 – – 6.0 1.0 – 8.7 1.0 24.8 47.9 72.7 Carrying amounts At 30 June 2017 28.6 34.4 63.0 At 30 June 2016 24.5 31.8 56.3 At 30 June 2015 26.3 30.0 56.3 6.6 – – 0.3 6.9 0.9 – 1.0 – 8.8 4.5 0.7 0.2 5.4 0.7 1.3 0.1 7.5 1.3 1.5 2.1 11.1 4.6 – 2.1 17.8 3.1 – – 0.4 21.3 – – – – – 0.4 – 0.4 20.9 17.8 11.1 Total £m Goodwill £m 125.6 6.8 0.7 73.9 – 1.9 13.5 10.2 146.6 5.5 14.1 1.0 2.7 86.0 – 16.2 – 2.5 0.3 2.2 – 0.1 2.6 1.5 – – – 4.1 169.9 104.7 – 0.2 – 0.2 – 0.8 – 1.0 3.1 2.4 0.3 55.8 7.0 5.8 68.6 0.7 11.2 1.1 81.6 – – – – – – – – 88.3 104.7 78.0 86.0 69.8 73.9 Additions in the year to intangible assets of £3.1m relates to costs capitalised in respect of the GSS development project. Included above is £20.9m of capitalised development expenses in respect of GSS, and a further £9.3m is included within fixed assets relating to GSS. Additions to patents and licences of £1.5m relate to a stage payment for the worldwide licence to use Caribou Biosciences, Inc.’s leading CRISPR-Cas9 gene editing technology platform. 111 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 14. Intangible assets continued Impairment testing for CGUs containing goodwill To test impairment, we allocate goodwill to our CGUs which are in line with our operating segments. These are the lowest level within the Group at which we monitor goodwill for internal management purposes. The aggregate carrying amounts of goodwill allocated to each operating segment are as follows: Genus PIC Genus ABS 2017 £m 72.3 32.4 104.7 2016 £m 59.3 26.7 86.0 We test goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. We determine the recoverable amount of our CGUs by using value in use calculations. The key assumptions for these calculations relate to discount rates, growth rates, expected changes to selling prices, direct costs and the cost saving derived from the GSS project. We have estimated the pre-tax discount rate using the Group’s weighted average cost of capital (‘WACC’). We risk adjusted the discount rate for risks specific to each market, adding between nil and 14% to the WACC as appropriate. The post-tax WACC of 8.0% (2016: 8.0%) we applied to our cash flow projections equates to a pre-tax rate of approximately 10.7% (2016: 10.8%). Our estimates of changes in selling prices and direct costs are based on past experience and our expectations of future changes in the market. The annual impairment test is performed immediately before year end. It is based on cash flows derived from our most recent financial and strategic plans approved by management, cash flows beyond this period extrapolated using estimated growth rates. Short-term profitability and growth rates are based on past experience, current trading conditions and our expectations of future changes in the market. We have applied annual growth rates to cash flows in the five-year financial and strategic planning period. A growth rate of 2.5% (2016: 2.5%) has been used to extrapolate cash flows beyond this period. The Genus PIC and Genus ABS CGUs are deemed to be significant. The individual country assumptions used to determine value in use for these CGUs are: Genus PIC Genus ABS Genus PIC Genus ABS Risk adjusted discount rate Short-term growth rates (CAGR) Long-term growth rates 2017 8–22% 8–22% 2016 8–23% 8–19% 2017 6–24% 1–26% 2016 6–12% 1–15% 2017 2.5% 2.5% 2016 2.5% 2.5% Weighted average risk adjusted discount rate Weighted average short-term growth rates (CAGR) 2017 9% 9% 2016 9% 9% 2017 11% 8% 2016 9% 7% The rates towards the higher end of the range above represent those which are applied to our smaller entities and those in emerging markets and hence appear high relative to others. Sensitivity to changes in assumptions Having completed our impairment review we have concluded that a reasonably possible change in any one key assumption does not result in an impairment in either PIC or ABS. A combination of a 4% reduction in ABS’s weighted average short-term growth rates combined with global macro-economic changes which caused both a 1% increase in post-tax WACC and a 1% reduction in long-term growth rates could result in goodwill impairment in the ABS CGU. No reasonably possible combination of changes in key assumptions would result in impairment in the PIC CGU. 112 Genus plc | Annual Report 201715. Biological assets The Group applies quantitative genetics and biotechnology to animal breeding. We use these techniques to identify and select animals with the genes responsible for superior milk and meat, high health and performance traits. We sell breeding animals and semen to customers, who use them to produce offspring which yield greater production efficiency, milk and meat quality, for the global dairy and meat supply chain. We recognise that accounting for biological assets is an area which includes critical accounting judgements and key sources of estimation uncertainty. See note 4. Accounting policies Biological assets and inventories In bovine, we use research and development to identify genetically superior bulls in a number of breeds, primarily the Holstein dairy breed. Each selected bull has its performance measured against its peers, by using genomic evaluations and progeny testing of its daughters’ performance. We collect and freeze semen from the best bulls, to satisfy our customers’ demand. Farmers use semen from dairy breeds to breed replacement milking stock. They use the semen we sell from beef breeds in either specialist beef breeding herds, for multiplying breeding bulls for use in natural service, or on dairy cows to produce animals to be reared for meat. Our research and development also enables us to produce and select our own genetically superior females from which we will breed future bulls. We hold our bovine biological assets for long-term internal use and classify them as non-current assets. We transfer bull semen to inventory at its fair value at the point of harvest, which becomes its deemed cost under IAS 2. We state our inventories at the lower of this deemed cost and net realisable value. Sorting semen is a production process rather than a biological process. As a result, we transfer semen inventory into sexed semen production at its fair value at the point of harvest, less the cost to sell, and it becomes a component of the production process. We carry sexed semen in finished goods at production cost. In porcine, we maintain and develop a central breeding stock (the ‘nucleus herd’), to provide genetically superior animals. These genetics help make farmers and food processors more profitable, by increasing their output of consistently high-quality products, which yield higher value. So we can capitalise on our intellectual property, we outsource the vast majority of our pig production to our global multiplier network. We also sell the offspring or semen we obtain from animals in the nucleus herd to customers for use in commercial farming. Pig sales generally occur in one of two ways: ‘upfront’ and ‘royalty’. Under upfront sales, we receive the full fair value of the animal at the point we transfer it to the customer. Under royalty sales, the pig is regarded as comprising two separately identifiable components: its carcass and its genetic potential. We receive the initial consideration, which is approximately the animal’s carcass value, at the point we transfer the pig to the customer. We retain our interest in the pig’s genetic potential and receive royalties for the customer’s use of this genetic potential. The breeding animal biological assets we own, and our retained interest in the biological assets we have sold under royalty contracts, are recognised and measured at fair value at each balance sheet date. We recognise changes in fair value in the income statement, within operating profit for the period. We classify the porcine biological assets we are using as breeding animals, as non-current assets and carry them at fair value. The porcine biological assets we are holding for resale, which are the offspring of the breeding herd, are carried at fair value and classified as current assets. We split our retained interest in the genetics from royalty sales between current and non-current assets, based on the expected remaining life of the animals. Determination of fair values – biological assets IAS 41 ‘Agriculture’ requires us to show the carrying value of biological assets in the Group Balance Sheet. We determine this carrying value according to IAS 41’s provisions and show the net valuation movement in the income statement. There are important differences in how we value our bovine and porcine assets, as explained below. Bovine – we base the fair value of proven bulls, bulls with a genomic evaluation and bulls on test, on the net cash flows we expect to receive from selling their semen, discounted at a current market-determined pre-tax rate. Proven bulls are those we have evaluated through daughter proofs and whose semen we actively market. Genomic bulls are those we market on their estimated genetic value. We adjust the fair value of the bovine herd and semen inventory we manage where a third party has a share in semen sales from a particular bull. The significant assumptions determining the fair values are the expected future demand for semen, estimated production value, each bull’s expected marketable life and, for bulls on test, the percentage whose production we expect to actively market. In assessing the sales price, we use independent statistical data for the bulls. This data is produced three times a year in all our major markets. In addition, we estimate which markets we will sell the semen in, as well as domestic and export prices. Females are valued by reference to market prices and published independent genetic evaluations. Porcine – the fair value of porcine biological assets includes the animals we own entirely and our retained interest in the genetics of animals we have sold under royalty arrangements. The fair value of animals we own is calculated using the animals’ average live weights, plus a premium where we believe that their genetics make them saleable. We base the live weight value and the genetic premium on recent transaction prices we have achieved. The significant assumptions in determining fair values are the breeding animals’ expected life, the percentage of production animals that are saleable as breeding animals, and the expected sales prices. For our retained interest in the genetics of animals sold under royalty contracts, we base the initial fair value on the fair values we achieved in recent direct sales of similar animals, less the amount we received upfront for the carcass element. We then remeasure the fair value of our retained interest at each reporting date. The significant assumption in determining the fair value of the retained interest is the animals’ expected life. 113 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 15. Biological assets continued We value the pigs in our pure line herds, which are the repository of our proprietary genetics, as a single unit of account. We do this using a discounted cash flow model, applied to the herds’ future outputs at current prices. The significant assumptions we make are the number of future generations attributable to the current herds, the fair value prices we achieve on sales, the animals’ expected useful lifespan and productivity, and the discount rate. Non-recognition of porcine multiplier contracts where no contractual interest is retained by the Group To manage commercial risk, a very large part of our porcine business model involves selling pigs to farmers (‘multipliers’) who produce piglets on farms we neither manage nor control. We have the option, but not the obligation, to buy the offspring at slaughter market value plus a premium. Because the offspring have superior genetics, we can then sell them to other farmers at a premium. We do not recognise the right to purchase offspring on the balance sheet, as we enter into the contracts and continue to hold them for the purpose of receiving non-financial items (the offspring), in accordance with our expected purchase requirements. This means the option is outside the scope of IAS 39. We do not recognise the offspring as biological assets under IAS 41, as we do not own or control them. Fair value of biological assets Non-current biological assets Current biological assets Balance at 30 June 2015 Increases due to purchases Decreases attributable to sales Decrease due to harvest Changes in fair value less estimated sale costs Acquisition Effect of movements in exchange rates Balance at 30 June 2016 Non-current biological assets Current biological assets Balance at 30 June 2016 Increases due to purchases Decreases attributable to sales Decrease due to harvest Changes in fair value less estimated sale costs Acquisition Effect of movements in exchange rates Balance at 30 June 2017 Non-current biological assets Current biological assets Balance at 30 June 2017 Bovine £m 144.8 – 144.8 7.7 – (31.6) 2.1 1.9 21.4 146.3 146.3 – 146.3 11.9 – (40.7) 10.3 5.4 4.3 Porcine £m 97.9 50.2 148.1 112.9 (152.0) (18.0) 67.7 – 26.0 184.7 118.3 66.4 184.7 176.0 (197.8) (19.3) 66.0 – 6.0 Total £m 242.7 50.2 292.9 120.6 (152.0) (49.6) 69.8 1.9 47.4 331.0 264.6 66.4 331.0 187.9 (197.8) (60.0) 76.3 5.4 10.3 137.5 215.6 353.1 137.5 – 137.5 141.7 73.9 215.6 279.2 73.9 353.1 Bovine biological assets include £6.9m (2016: £7.8m) representing the fair value of bulls owned by third parties but managed by the Group, net of expected future payments to such third parties and are therefore treated as assets held under finance leases. There are no movements in the carrying value of the bovine biological assets in respect of sales or other changes during the year. The current market-determined post-tax rate used to discount expected future net cash flows from the sale of bull semen is the Group’s weighted average cost of capital. This has been assessed as 8.0% (2016: 8.0%). Decreases due to harvest represent the semen extracted from the biological assets. Inventories of such semen are shown as biological asset harvest in note 19. Included in increases due to purchases is £87.0m arising on the initial recognition of biological assets acquired through multiplier purchases, other than parent gilts (2016: £49.4m). Decreases attributable to sales during the period of £197.8m (2016: £152.0m) include £66.6m (2016: £49.6m) in respect of the reduction in fair value of the retained interest in the genetics of animals, other than parent gilts, transferred under royalty contracts. 114 Genus plc | Annual Report 201715. Biological assets continued Porcine biological assets include £111.0m (2016: £69.3m) relating to the fair value of the retained interest in the genetics animals, other than parent gilts, transferred to customers under royalty contracts. Total revenue in the period, including parent gilts, includes £159.5m (2016: £127.2m) in respect of these contracts, comprising £54.0m (2016: £38.1m) on the initial transfer of animals to customers and £105.5m (2016: £89.1m) in respect of royalties received. For pure line porcine herds, the net cash flows from the herds’ expected output are discounted at the Group’s required rate of return, adjusted for the greater risk implicit in including output from future generations. This adjusted rate has been assessed as 11.0% (2016: 11.0%). The number of future generations taken into account is seven (2016: seven) and their estimated useful lifespan is 1.4 years (2016: 1.3 years). Year ended 30 June 2017 Net IAS 41 valuation movement on biological assets1 Changes in fair value of biological assets2 Inventory transferred to cost of sales at fair value Biological assets transferred to cost of sales at fair value Fair value movement in related financial derivative Year ended 30 June 2016 Net IAS 41 valuation movement on biological assets2 Changes in fair value of biological assets Inventory transferred to cost of sales at fair value Biological assets transferred to cost of sales at fair value Fair value movement in related financial derivative Bovine £m Porcine £m Total £m 10.3 (38.8) – (28.5) – (28.5) 66.0 (19.3) (18.8) 27.9 (0.5) 27.4 76.3 (58.1) (18.8) (0.6) (0.5) (1.1) Bovine £m Porcine £m Total £m 2.1 (28.6) – (26.5) – (26.5) 67.7 (18.0) (39.7) 10.0 (0.6) 9.4 69.8 (46.6) (39.7) (16.5) (0.6) (17.1) 1 This represents the difference between operating profit prepared under IAS 41 and operating profit prepared under historical cost accounting, which forms part of the reconciliation to adjusted operating profit. Includes £2.1m write down in bovine assets. 2 Fair value measurement All of the biological assets fall under Level 3 of the hierarchy defined in IFRS 13. Unobservable inputs Bovine Long-term dairy volume growth rate Discount rate Value at point of production – United States Value at point of production – Rest of world Porcine Discount rate – upfront prices Discount rate – pure line herd 2017 2016 Sensitivity 2.0% 8.0% 17% 25% 8% 11% 2.6% 1% decrease in the growth rate would result in approximately a £4.0m reduction in value. 8.0% 1% increase in the discount rate would result in approximately a £3.6m reduction in value. 16% 1% decrease in the rate would result in approximately a £2.9m reduction in value. 26% 1% decrease in the rate would result in approximately a £2.6m reduction in value. 8% 1% increase in the discount rate would result in approximately a £0.3m reduction in value. 11% 1% increase in the discount rate would result in approximately a £2.8m reduction in value. Significant increases/(decreases) in any of these inputs in isolation would result in a significantly lower or higher fair value measurement. 115 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 15. Biological assets continued Additional information Bovine Quantities at period end Number of proven bulls Number of genomic bulls Total number of marketable artificial insemination bulls Number of doses of semen valued in inventory Total number of bulls in development, excluding marketable bulls Amounts during the year Fair value of agricultural produce – semen harvested during the period Porcine Quantities at period end Number of pigs (own farms) 2017 2016 256 266 522 258 280 538 7.2m 7.2m 854 1,071 £40.7m £31.6m 108,549 120,051 Number of pigs, excluding parent gilts, despatched on a royalty basis and valued at fair value 110,632 74,602 Amounts during the year Fair value of agricultural produce – semen harvested during the period £19.3m £18.0m 16. Property, plant and equipment We make significant investments in our property, plant and equipment. All assets are depreciated over their useful economic lives. Accounting policies We state property, plant and equipment at cost, together with any directly attributable acquisition expenses, or at their latest valuation, less depreciation and any impairment losses. Where parts of an item of property, plant and equipment have different useful lives, we account for them separately. We charge depreciation to the income statement on a straight-line basis, over the estimated useful lives of each part of an asset. The estimated useful lives are as follows: • Freehold buildings • Leasehold buildings • Plant and equipment • Motor vehicles 10 to 40 years over the term of the lease 3 to 20 years 3 to 5 years We do not depreciate land or assets under construction. 116 Genus plc | Annual Report 2017 16. Property, plant and equipment continued Cost or deemed cost Balance at 1 July 2015 Additions Transfer Disposals Effect of movements in exchange rates Balance at 30 June 2016 Additions Reclassification to intangible assets Transfer Disposals Effect of movements in exchange rates Balance at 30 June 2017 Depreciation and impairment losses Balance at 1 July 2015 Depreciation for the year Disposals Effect of movements in exchange rates Balance at 30 June 2016 Depreciation for the year Reclassification to intangible assets Disposals Effect of movements in exchange rates Balance at 30 June 2017 Carrying amounts At 30 June 2017 At 30 June 2016 At 30 June 2015 Land and buildings £m Plant, motor vehicles and equipment £m Assets under construction £m 37.3 2.0 2.0 (0.9) 6.9 47.3 1.2 – 2.2 (0.6) 1.6 51.7 13.2 2.0 (0.7) 2.7 17.2 2.4 – (0.5) 0.6 19.7 32.0 30.1 45.2 4.1 4.7 (3.2) 7.9 58.7 3.8 (1.0) 6.9 (3.7) 1.7 66.4 24.1 5.9 (2.4) 6.0 33.6 6.4 (0.7) (2.7) 1.2 37.8 28.6 25.1 24.1 21.1 5.1 8.0 (6.7) (0.7) 0.9 6.6 9.7 – (9.1) (0.5) 0.2 6.9 – – – – – – – – – – 6.9 6.6 5.1 Total £m 87.6 14.1 – (4.8) 15.7 112.6 14.7 (1.0) – (4.8) 3.5 125.0 37.3 7.9 (3.1) 8.7 50.8 8.8 (0.7) (3.2) 1.8 57.5 67.5 61.8 50.3 Leased plant and machinery At 30 June 2017, plant, motor vehicles and equipment included assets held under finance leases with a carrying value of £7.3m (2016: £7.8m, 2015: £6.8m). The associated depreciation charge for the year was £1.7m (2016: £1.5m, 2015: £1.2m). 17. Equity-accounted investees We hold interests in several joint ventures and associates where we have significant influence. Accounting policies Joint ventures are entities over whose activities we have joint control, under a contractual agreement. The Group financial statements include the Group’s share of profit or loss arising from joint ventures. Associates are entities in which the Group has significant influence, but not control, over the financial and operating policies. The Group financial statements include the Group’s share of the total recognised income and expense of associates on an equity-accounted basis, from the date that significant influence commences until the date it ceases. When our share of losses exceeds our interest in an associate, we reduce the carrying amount to nil and stop recognising further losses, except to the extent that the Group has incurred legal or constructive obligations or made payments on an associate’s behalf. Under the equity method, investments in joint ventures or associates are initially recognised in the Group Balance Sheet at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the joint ventures and associates. Related party transactions with the Group’s joint ventures and associates primarily comprise product and services. As each arrangement is a separate legal entity and control rights are substantially equal with the other parties, there are no significant judgements required to be made. The Group’s share of profit after tax in its equity-accounted investees for the year was £6.2m (2016: £6.9m). 117 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 17. Equity-accounted investees continued The carrying value of the investment is reconciled as follows: Balance at 1 July Share of post-tax profits of joint ventures and associates retained Dividends received from Agroceres – PIC Genética de Suínos Ltda (Brazil) Shareholder loan repayment Addition Disposal of Humei Pig Improvement Company (China) Effect of other movements including exchange rates Balance at 30 June 2017 £m 24.3 6.2 (3.8) (3.0) 0.2 (1.5) 0.3 22.7 2016 £m 19.6 6.9 (2.4) (1.0) 0.2 – 1.0 24.3 During the year, the Group injected further capital of £0.2m into Chitale Genus ABS (India) Pvt. Ltd, which is its investment under a joint venture agreement with B.G. Chitale Dairies Pvt. Ltd in India. There are no significant restrictions on the ability of the joint ventures and associates to transfer funds to the Parent, other than those imposed by the Companies Act 2006 or equivalent government rules within the joint venture jurisdiction. Related party transactions with joint ventures and associates Purchase of goods and services to joint ventures and associates Transaction value Balance outstanding 2017 £m 3.7 2016 £m 2.0 2017 £m (0.3) 2016 £m (0.7) All outstanding balances with joint ventures and associates are priced on an arm’s-length basis and are to be settled in cash within six months of the reporting date. None of the balances are secured. Summary financial information for equity-accounted investees, adjusted for the percentage ownership held by the Group, is shown below: Joint ventures and associates – year ended 30 June 2017 Net assets Ownership Current assets £m Non-current assets £m Biological assets £m Total assets £m Current liabilities £m Total liabilities £m Net assets £m 49% 5.0 10.4 4.4 19.8 (3.1) (3.1) 16.7 50% 0.3 49% 6.9 – – – 10.4 – 0.3 (0.2) (0.2) 0.1 0.2 – 4.6 7.1 (2.3) (2.3) 4.8 1.3 28.5 (0.2) (5.8) (0.2) (5.8) 1.1 22.7 Agroceres – PIC Genética de Suínos Ltda (Brazil) HY-CO Hybridschweine- Cooperations GmbH (Germany) Xianyang Yongxiang Agriculture Technology Co., Ltd. (China1) Chitale Genus ABS (India) Private Limited (India) 50% 1.3 13.5 1 Classified as an associate. 118 Genus plc | Annual Report 201717. Equity-accounted investees continued Income statement Agroceres – PIC Genética de Suínos Ltda (Brazil) HY-CO Hybridschweine- Cooperations GmbH (Germany) Humei Pig Improvement Company (China) Xianyang Yongxiang Agriculture Technology Co., Ltd. (China1) Chitale Genus ABS (India) Private Limited (India) Ownership Revenue £m Net IAS 41 valuation movement on biological assets £m Expenses £m Operating profit £m Taxation £m Profit after tax £m 49% 21.1 0.7 (15.2) 6.6 (1.4) 5.2 50% 50% 1.7 1.6 – – (1.5) 0.2 (1.6) – 49% 3.8 (0.2) (2.8) 0.8 50% 0.2 28.4 – 0.5 (0.2) (21.3) – 7.6 – – – – (1.4) 0.2 – 0.8 – 6.2 Joint ventures and associates have a December year end, except Chitale Genus ABS (India) Private Limited, which has a March year end. Joint ventures and associates – year ended 30 June 2016 Net assets Ownership Current assets £m Non-current assets £m Biological assets £m Total assets £m Current liabilities £m Total liabilities £m Net assets £m Agroceres – PIC Genética de Suínos Ltda (Brazil) HY-CO Hybridschweine- Cooperations GmbH (Germany) Humei Pig Improvement Company (China) Xianyang Yongxiang Agriculture Technology Co., Ltd. (China1) Chitale Genus ABS (India) Private Limited (India) 1 Classified as an associate. 49% 6.8 6.2 3.9 16.9 (1.8) (1.8) 15.1 50% 50% 49% 50% 0.1 1.3 – 1.2 7.0 4.5 0.1 15.3 0.9 12.8 – – 0.4 – 4.3 0.1 2.5 – – (1.1) (1.1) 0.1 1.4 11.9 (5.1) (5.1) 6.8 1.0 32.4 (0.1) (8.1) (0.1) (8.1) 0.9 24.3 119 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 17. Equity-accounted investees continued Ownership Revenue £m Net IAS 41 valuation movement on biological assets £m Expenses £m Operating profit £m 49% 50% 50% 49% 50% 14.7 1.7 (10.2) 1.2 3.7 4.0 0.1 23.7 – – 0.2 – 1.9 (1.1) (3.5) (2.4) (0.1) (17.3) 6.2 0.1 0.2 1.8 – 8.3 Taxation £m (1.4) – – – – (1.4) Profit after tax £m 4.8 0.1 0.2 1.8 – 6.9 Income statement Agroceres – PIC Genética de Suínos Ltda (Brazil) HY-CO Hybridschweine- Cooperations GmbH Germany Humei Pig Improvement Company (China) Xianyang Yongxiang Agriculture Technology Co., Ltd. (China1) Chitale Genus ABS (India) Private Limited (India) 1 Classified as an associate. 18. Other investments We hold a number of unlisted and listed investments, mainly comprising our strategic investment in Caribou Biosciences, Inc. and shares in listed entity National Milk Records plc (‘NMR’). Accounting policy Available for sale (‘AFS’) financial assets are non-derivatives that are either designated as AFS or are not classified as: (a) loans and receivables; (b) held-to-maturity; or (c) financial assets at fair value through the profit and loss. AFS listed equity investments are stated at fair value. AFS unlisted equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. AFS investments carried at fair value Unlisted equity shares – Caribou Biosciences Unlisted equity shares – RenOVate Biosciences, Inc. Listed equity shares – NMR 2017 £m 3.6 0.3 1.6 5.5 2016 £m 3.6 – – 3.6 On 21 June 2017, as part of the NMR pension agreement, we acquired 2,120,000 ordinary shares in NMR. During the prior year, we invested $5.0m to acquire a strategic non-controlling interest of 5% in Caribou Biosciences, Inc. These shares are not held for trading and accordingly are classified as AFS. 19. Inventories Our inventory primarily consists of bovine semen, raw materials and ancillary products. Accounting policies Inventory (excluding biological assets) is stated at the lower of cost and net realisable value. Cost is determined on the basis of weighted average costs and comprises direct materials and, where appropriate, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. For biological assets accounting policies, see note 15. Biological assets’ harvest classed as inventories Raw materials and consumables Goods held for resale 2017 £m 22.2 0.7 10.2 33.1 2016 £m 23.4 0.9 11.4 35.7 120 Genus plc | Annual Report 201720. Trade and other receivables Our trade and other receivables mainly consist of amounts owed to us by customers and amounts we pay to our suppliers in advance. Accounting policies We state trade and other receivables at their amortised cost less any impairment losses. Trade receivables Other debtors Prepayments and accrued income Other taxes and social security 2017 £m 73.7 5.4 7.8 1.9 88.8 2016 £m 65.0 5.5 5.3 2.3 78.1 Trade receivables The average credit period our customers take on the sales of goods is 59 days (2016: 61 days). We do not charge interest on receivables for the first 30 days from the date of the invoice. We provide for all receivables based upon knowledge of the customer and historical experience, and estimate irrecoverable amounts by reference to past default experience. No customer represents more than 5% of the total balance of trade receivables (2016: nil). At 30 June 2017, £56.4m (2016: £50.3m) of trade receivables were not yet due for payment. Included in the Group’s trade receivables balance, net of provision, are debtors with a carrying amount of £17.3m (2016: £14.7m) which are past due at the reporting date but which we have not provided for, as there has been no significant change in credit quality and we consider the amounts are recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 48 days (2016: 48 days). Ageing of trade receivables that are past due and presented net of provisions that have been established: Days past due 0–30 days 31–90 days 91–180 days Over 180 days 2017 £m 9.2 5.8 1.5 0.8 17.3 At 30 June 2017, trade receivables of £21.7m (2016: £19.0m) were past due but not impaired. The ageing of these receivables is as follows: Days past due 0–30 days 31–90 days 91–180 days Over 180 days 2017 £m 9.2 5.9 2.0 4.6 21.7 The Directors consider that the carrying amount of trade and other receivables approximates their fair value. At 30 June 2017, trade receivables are shown net of an allowance for doubtful debts of £4.4m (2016: £4.3m). 2016 £m 7.7 5.1 1.3 0.6 14.7 2016 £m 7.7 5.2 2.5 3.6 19.0 121 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 20. Trade and other receivables continued Movement in the allowance for doubtful debts Balance at the start of the year Impairment losses recognised Amounts written off as uncollectible Impairment losses reversed Disposed of on dissolution Effect of movements in exchange rates Balance at the end of the year 2017 £m 4.3 1.6 (0.4) (1.5) – 0.4 4.4 2016 £m 3.1 2.6 (0.5) (1.3) (0.1) 0.5 4.3 In determining the recoverability of a trade receivable, we consider any change in the receivable’s credit quality from the date we initially granted credit up to the reporting date. The concentration of credit risk is limited, as our customer base is large and unrelated. Receivables denominated in currencies other than Sterling comprise £32.1m denominated in US Dollars (2016: £29.5m), £11.0m denominated in Euros (2016: £11.3m) and £27.9m denominated in other currencies (2016: £22.1m). 21. Cash and cash equivalents We hold cash and bank deposits which have a maturity of three months or less, to enable us to meet our short-term liquidity requirements. Accounting policies Cash and cash equivalents comprise cash balances. Bank overdrafts that are repayable on demand form an integral part of our cash management and are included in interest-bearing loans and borrowings less than one year. We only include them in cash and cash equivalents in the statement of cash flows. Bank balances The carrying amount of these assets approximates their fair value. 2017 £m 26.5 2016 £m 34.0 Included within bank balances above is £9.7m (2016: £5.8m) which is subject to certain local restrictions, principally in China. 22. Trade and other payables Our trade and other payables mainly consist of amounts we owe to our suppliers that have been invoiced or are accrued. They also include taxes and social security amounts due in relation to our role as an employer. Accounting policies Trade payables are not interest bearing and are stated at their nominal value. Trade payables Other payables, accrued expenses and deferred income Other taxes and social security 2017 £m 20.7 49.0 6.7 76.4 2016 £m 20.7 40.0 4.4 65.1 Payables denominated in currencies other than Sterling comprise £32.3m denominated in US Dollars (2016: £25.2m), £9.8m denominated in Euros (2016: £9.0m) and £17.9m denominated in other currencies (2016: £15.4m). The carrying values of these liabilities are a reasonable approximation of their fair values. 122 Genus plc | Annual Report 201723. Provisions A provision is a liability recorded in the balance sheet, where there is uncertainty over the timing or amount that will be paid, and is therefore estimated. The main provisions we hold are in relation to contingent deferred consideration. Accounting policies We recognise a provision in the balance sheet when an event results in the Group having a current legal or constructive obligation, and it is probable that we will have to settle the obligation through an outflow of economic benefits. If the effect is material, we discount provisions to their present value. Balance at 1 July 2015 Additional provision in the year Utilisation of provision Release of provision Balance at 30 June 2016 Additional provision in the year Acquisition Utilisation of provision Release of provision Balance at 30 June 2017 Current Non-current Contingent deferred consideration £m Property lease provision £m Other provisions £m – – – – – – 5.1 – – 5.1 0.1 – – – 0.1 – – – – 0.1 2.3 0.8 (1.7) (0.3) 1.1 1.1 – (0.5) (0.5) 1.2 2017 £m 2.7 3.7 6.4 Total £m 2.4 0.8 (1.7) (0.3) 1.2 1.1 5.1 (0.5) (0.5) 6.4 2016 £m 1.2 – 1.2 Contingent deferred consideration of £5.1m relates to the acquisitions of Hermitage Genetics and De Novo Genetics, and are subject to certain conditions being met by the seller. Other provisions mainly relate to legal (£1.0m) and restructuring (£0.2m) provisions. The timing and cash flows associated with the restructuring costs and a majority of legal claims are expected to be less than one year. However, for some legal claims the timing of cash flows may be long-term in nature. The property provision mainly represents the discounted future costs of dilapidations. 24. Financial instruments This note details our treasury management and financial risk management objectives and policies, as well as the Group’s exposure and sensitivity to credit, liquidity, interest and foreign exchange rate risk, and the policies in place to monitor and manage these risks. Financial risk management objectives The Group’s Corporate Treasury function provides services to the business, coordinates our access to domestic and international financial markets, and monitors and manages the financial risks relating to the Group’s operations, through internal risk reports that analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. We seek to minimise the effects of these risks by hedging them using derivative financial instruments. Our use of financial derivatives is governed by policies approved by the Board of Directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. The Board of Directors regularly reviews our compliance with policies and exposure limits. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Key financial risks and exposures are monitored through a monthly report to the Board of Directors, together with an annual Board review of corporate treasury matters. Financial risk The principal financial risks our activities expose us to are the risks of changes in foreign currency exchange rates, interest rates and commodity prices. We use derivative financial instruments to manage our exposure to interest rate, foreign currency and commodity price risks, including: • forward foreign exchange contracts, to hedge the exchange rate risk arising on the sale of goods and purchase of supplies in foreign currencies; • interest rate swaps, to mitigate the risk of rising interest rates; and • forward commodity contracts, to hedge commodity price risk. 123 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 24. Financial instruments continued Accounting policies Financial instruments Financial assets and liabilities, in respect of financial instruments, are recognised on the Group’s balance sheet when the Group becomes a party to the instrument’s contractual provisions. Financial liabilities and equity instruments Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that provides a residual interest in the assets of the Group after deducting all of its liabilities and includes no obligation to deliver cash or other financial assets. The accounting policies adopted for specific financial liabilities and equity instruments are set out below. Put option arrangements over non-controlling interest The potential cash payments related to put options issued by the Group over the equity of subsidiary companies are accounted for as financial liabilities, when such options may only be settled by exchange of a fixed amount of cash or another financial asset for a fixed number of shares in the subsidiary. The amount that may become payable under the option on exercise is initially recognised at present value within borrowings, with a corresponding charge directly to equity. The charge to equity is recognised separately as written put options over non-controlling interest, adjacent to non-controlling interest in the net assets of consolidated subsidiaries. Such options are subsequently measured at amortised cost, using the effective interest rate method, in order to accrete the liability up to the amount payable under the option at the date at which it first becomes exercisable. The charge arising is recorded as a financing cost. If the option expires unexercised, the liability is derecognised with a corresponding adjustment to equity. Derivative financial instruments and hedging activities The fair value of interest rate swaps is the estimated amount that we would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the creditworthiness of the swap counterparties. The fair values of forward exchange contracts and forward commodity contracts are their quoted market price at the balance sheet date, which is the present value of the quoted forward price. Cash flow hedges Where a derivative financial instrument is designated as hedging the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, we recognise the effective part of any gain or loss on the instrument directly in the Group Statement of Comprehensive Income. We recognise any ineffective portion of the hedge immediately in the Group Income Statement. If we hedge a forecast transaction that subsequently results in our recognising a financial asset or liability, we recycle in the Group Income Statement the associated gains and losses that we had recognised in equity. We do this in the same period or periods that the asset or liability affects the Group Income Statement, which are the periods when we recognise the interest income or expense. If we expect a hedged forecast transaction to occur but the hedging instrument has expired, been sold, terminated or exercised, or we have revoked the designation of the hedge relationship, then the cumulative gain or loss at that point remains in equity and we recognise it in accordance with the above policy when the transaction occurs. If we no longer expect the hedged transaction to take place, we immediately recognise in the Group Income Statement the cumulative unrealised gain or loss recognised in equity. Net investment hedges Where we have designated a derivative financial instrument as hedging the variability of the net assets of an overseas subsidiary, which arises from the spot or forward exchange rate translation risk associated with the subsidiary’s functional currency, we recognise the effective part of any gain or loss on the instrument directly in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the Group Income Statement. When a hedging instrument expires or is sold, terminated or exercised, or we revoke designation of the hedge relationship, the cumulative gain or loss at that point remains in equity until we dispose of the investment it relates to. We only apply net investment hedge accounting in the Group financial statements. Capital risk management The Group manages its capital to ensure that Group entities can continue as a going concern, while maximising the return to shareholders by optimising our debt and equity balance. The Group’s capital structure consists of debt, which includes the borrowings disclosed in note 25, cash and cash equivalents, and equity attributable to equity holders of the Parent, comprising issued capital, reserves and retained earnings as disclosed in note 29. 124 Genus plc | Annual Report 201724. Financial instruments continued Gearing ratio The Group keeps its capital structure under review and monitors it monthly to ensure the gearing ratio remains below 60%. The Group is not subject to externally imposed capital requirements. The gearing ratio at the year end was as follows: Debt (see note 25) Cash and cash equivalents (see note 21) Net debt (see note 30) Equity Net debt to equity ratio 2017 £m 138.1 (26.5) 111.6 402.1 28% 2016 £m 123.7 (34.0) 89.7 368.1 24% Debt is defined as long and short-term borrowings, as detailed in note 25. Equity includes all capital and reserves of the Group attributable to equity holders of the Parent. Categories of financial instruments We have categorised financial instruments held at valuation into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique in accordance with IFRS 13. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, we base the category level on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety. We have estimated the fair values of the Group’s outstanding interest rate swaps by calculating the present value of future cash flows, using appropriate market discount rates, representing Level 2 fair value measurements as defined by IFRS 13. We have not categorised any financial instruments as Level 1 or Level 3. Financial assets Other investments Trade receivables and other debtors, excluding prepayments (see note 20) Cash and cash equivalents Derivative instruments in non-designated hedge accounting relationships Assets held for sale Derivative instruments in designated hedge accounting relationships Financial liabilities Trade and other payables, excluding other taxes and social security (see note 22) Derivative instruments in designated hedge accounting relationships Loans and overdrafts (see note 25) Leasing obligations (see note 26) Derivative instruments in non-designated hedge accounting relationships Put option over non-controlling interest There is no material difference between the carrying value and fair value. Foreign currency risk management We undertake transactions denominated in foreign currencies. 2017 Carrying value £m 2016 Carrying value £m 5.5 81.0 26.5 1.3 0.3 0.1 3.6 72.8 34.0 0.6 0.3 – (69.7) (0.4) (134.9) (3.2) (0.6) (3.3) (60.7) (1.2) (119.9) (3.8) (0.5) (11.4) The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date were as follows: US Dollar (including leases) Euro Brazilian Real Chinese Yuan Renminbi Liabilities Assets 2017 £m (106.2) (12.1) – (1.9) 2016 £m (89.1) (9.4) – (5.3) 2017 £m 8.7 1.9 0.1 1.9 2016 £m 1.0 2.2 0.1 5.3 125 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 24. Financial instruments continued Foreign currency income statement sensitivity analysis The Group is mainly exposed to movements in the US Dollar, Euro, Brazilian Real, Mexican Peso and Chinese Yuan Renminbi exchange rates. The following table details the Group’s sensitivity to a 10% increase and decrease in Sterling against these currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management and represents our assessment of a significant change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. It includes external loans, as well as loans to foreign operations within the Group where the loan is denominated in a currency other than the lender or borrower’s currency. A positive number below indicates an increase in profit when Sterling weakens against the relevant currency. A strengthening of Sterling against the relevant currency would produce an equal but opposite reduction in profit, and the balances below would be negative. 10% currency movement Profit or loss 10% currency movement Profit or loss 10% currency movement Profit or loss Euro currency impact US Dollar currency impact 2017 £m 1.0 2016 £m 0.6 2017 £m 2.0 2016 £m 3.1 Brazilian Real currency impact Mexican Peso currency impact 2017 £m 0.9 2016 £m 0.7 2017 £m 1.2 2016 £m 1.0 Chinese Yuan Renminbi currency impact 2017 £m 0.9 2016 £m 0.3 Forward foreign exchange contracts The Group’s policy is to enter into forward foreign exchange contracts, to cover specific foreign currency payments and receipts. The following table details the forward foreign currency contracts outstanding as at the year end: Average exchange rate Foreign currency Contract value Fair value 2017 2016 2017 2017 £m 2016 £m 8.64 1.75 23.29 – 76.75 1.14 4.79 16.73 1.06 2,930 3.37 37.4 659 16.16 6.81 49.98 1.32 18.27 1.14 – – 13.04 – 1.93 26.10 9.07 – – 5.61 – 1.10 3,017 – – 689 – – 46.86 1.30 – 1.11 14.25 19.04 – CNY AUD MXN CNY RUB EUR PLN ZAR CHF COP BRL PHP CLP ARS CNY PHP CAD MXN EUR ARS MXN ZAR 1.0 1.8 – 0.2 0.6 0.3 – 0.3 0.2 0.5 0.2 0.1 0.4 0.3 4.6 0.4 0.2 0.6 – – 0.1 – 1.7 0.8 0.1 – – 0.4 – 0.3 0.2 – – 0.1 – – 1.2 0.6 – 0.7 0.1 0.7 – 2017 £m – (0.1) – – – – – – – – – – – – – 0.1 – – – – – – – 2016 £m – (0.1) – – – – – – – – – – – – – – – – – – – – (0.1) Outstanding contracts Buy CNY Buy AUD Buy MXN Sell CNY Sell RUB Sell EUR Sell PLN Sell ZAR Buy EUR/Sell CHF Buy USD/Sell COP Buy BRL/Sell USD Buy PHP/Sell AUD Buy USD/Sell CLP Buy USD/Sell ARS Buy USD/Sell CNY Buy PHP/Sell USD Buy CAD/Sell USD Buy USD/Sell MXN Buy USD/Sell EUR Buy ARS/Sell USD Buy MXN/Sell USD Buy USD/Sell ZAR 126 Genus plc | Annual Report 201724. Financial instruments continued Interest rate risk management The Group is exposed to interest rate risk, as Group entities borrow funds at both fixed and floating interest rates. We manage this risk centrally, by maintaining an appropriate mix between fixed and floating rate borrowings, using interest rate swaps. We regularly review our hedging activities, to align with our interest rate views and defined risk appetite, thereby ensuring we apply optimal hedging strategies to minimise the adverse impact of fluctuations in interest expense through different interest rate cycles. The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. Interest rate sensitivity analysis We have determined the sensitivity analyses below, based on the Group’s exposure to interest rates for both derivatives and non-derivative instruments, at the balance sheet date. For floating rate liabilities, we prepared the analysis assuming the liability outstanding at the balance sheet date was outstanding for the whole year. A 1.0% increase or decrease is used when reporting interest rate risk internally to key management and is our assessment of a significant change in interest rates. If interest rates had been 1.0% higher or lower and all other variables were held constant, the Group’s profit for the year ended 30 June 2017 would have decreased or increased by £0.5m (2016: decrease/increase by £0.5m). This impact is smaller than would otherwise be the case, due to our fixed rate hedging. Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts, calculated on agreed notional principal amounts. These contracts enable us to mitigate the risk of changing interest rates on the cash flow exposures on the variable rate debt we hold. We determine the fair value of interest rate swaps at the reporting date by discounting the future cash flows, using the yield curves at the reporting date and the credit risk inherent in the contract. This fair value is disclosed below. The average interest rate is based on the outstanding balances at the end of the financial year. Cash flow hedges The following table details the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date: Outstanding receive floating pay fixed contracts USD interest rate swaps Within one year Two to five years GBP interest rate swaps Two to five years Average contract fixed interest rate Notional principal amount Fair value 2017 % – 1.10 0.51 2016 % 0.68 1.10 – 2017 £m – 84.7 20.0 2016 £m 15.0 82.3 – 2017 £m – 1.2 0.1 2016 £m (0.3) (0.4) – The interest rate swaps settle on a quarterly basis. The corresponding floating rate on the interest rate swaps is three- month LIBOR. We settle the difference between the fixed and floating interest rate on a net basis. Interest rate swap contracts that exchange floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges, to reduce our cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and we recognise the amount deferred in equity in profit or loss, over the period that the floating rate interest payments on debt affect profit or loss. Commodity hedges The Group hedges both feed and slaughter exposures by using the Chicago Mercantile Exchange lean hog, corn and soybean meal commodity futures. Commodity hedge Open contracts from July 2017 to June 2018 Lean hog futures Corn Soybean meal Open contracts from July 2016 to June 2017 Lean hog futures Corn Soybean meal Winter wheat Average price Notional principal amount Fair value 2017 US$ 2016 US$ 0.68 3.95 314 0.76 3.98 310 – n/a n/a n/a 0.71 3.99 307 5.07 2017 £m 10.7 (2.2) (2.3) (1.1) (0.3) (0.2) – 4.6 2016 £m n/a n/a n/a 9.0 (2.8) (1.8) (0.2) 4.2 2017 £m (0.1) (0.2) (0.2) (0.1) – – – (0.6) 2016 £m n/a n/a n/a (0.2) (0.1) 0.4 – 0.1 127 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 24. Financial instruments continued Credit risk management Credit risk is the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the Group. We have a policy of only dealing with creditworthy counterparties. We regularly monitor our exposure and the credit ratings of our counterparties, and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure on financial instruments is controlled by counterparty limits that the Board reviews and approves annually. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. We carry out ongoing credit evaluation of the financial condition of accounts receivable. Liquidity risk management The Board of Directors has ultimate responsibility for managing liquidity risk. We manage this risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Liquidity and interest risk tables For non-derivative financial liabilities, see notes 25 and 26. The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities, excluding trade payables and other creditors. We have drawn up the table based on the undiscounted cash flows of financial liabilities, using the earliest date on which we can be required to pay. The table includes both interest and principal cash flows. Weighted average effective interest rate % Less than 1 month £m 1–3 months £m 3 months to 1 year £m 1–5 years £m 5+ years £m 2017 Variable interest rate instruments 2016 Variable interest rate instruments 2.3 1.7 7.8 5.2 0.5 0.3 4.7 2.3 144.4 125.7 – – Total £m 157.5 133.5 The following table details the Group’s expected maturity for other non-derivative financial assets, excluding trade receivables and other debtors. We have drawn up this table based on the undiscounted contractual maturities of the assets, including interest we will earn on them, except where we expect the cash flow to occur in a different period. Weighted average effective interest rate % Less than 1 month £m 1–3 months £m 3 months to 1 year £m 1–5 years £m 5+ years £m 2017 Variable interest rate instruments 2016 Variable interest rate instruments 0.63 26.5 0.38 34.0 – – – – – – – – Total £m 26.5 34.0 The Group has financing facilities with a total unused amount of £73.6m (2016: £49.8m) at the balance sheet date. We expect to meet our other obligations from operating cash flows and the proceeds of maturing financial assets. We expect to reduce the debt to equity ratio, as borrowings decrease through repayment from operating cash flows. The following table details the Group’s liquidity analysis for its derivative financial instruments. We have drawn up the table based on the undiscounted net cash outflows on derivative instruments that settle on a net basis and the undiscounted gross outflows on derivatives that require gross settlement. When the amount payable or receivable is not fixed, we have determined the amount disclosed by reference to the projected interest and foreign currency rates, as illustrated by the yield curves at the reporting date. Less than 1 month £m 1–3 months £m 3 months to 1 year £m 1–5 years £m 5+ years £m – – – – 0.1 0.9 (0.5) (0.7) – – Total £m 1.0 (1.2) 2017 Interest rate swaps 2016 Interest rate swaps 128 Genus plc | Annual Report 201725. Loans and borrowings The Group’s borrowing for funding and liquidity purposes comes from a range of committed bank facilities. Interest-bearing loans and borrowings We initially recognise interest-bearing loans and borrowings at their fair value, less attributable transaction costs. After this initial recognition, we state them at amortised cost and recognise any difference between the cost and redemption value in the income statement over the borrowings’ expected life, on an effective interest rate basis. Non-current liabilities Unsecured bank loans Obligations under finance leases (see note 26) Current liabilities Unsecured bank loans and overdrafts Obligations under finance leases (see note 26) 2017 £m 127.2 1.8 129.0 7.7 1.4 9.1 2016 £m 115.3 2.7 118.0 4.6 1.1 5.7 Total interest-bearing liabilities 138.1 123.7 Terms and debt repayment schedule Terms and conditions of outstanding loans and overdrafts were as follows: Revolving credit facility and overdraft Revolving credit facility, term loan and overdraft Revolving credit facility and overdraft Finance lease liabilities Other unsecured bank borrowings Total interest-bearing liabilities Currency Interest rate GBP USD EUR USD Other 1.5% 2.4% 0.7% 5.0% 0.7% 2017 £m 22.6 106.2 – 3.2 6.1 138.1 2016 £m 26.2 86.0 6.2 3.8 1.5 123.7 The above revolving credit facilities are unsecured. Information about the Group’s exposure to interest rate and foreign currency risks is shown in note 24. Loans and borrowings (excluding finance leases) comprise amounts falling due: In one year or less or on demand In more than one year but not more than two years In more than two years but not more than five years Less: unamortised issue costs Current liabilities Non-current liabilities 2017 £m 2016 £m 8.1 – 128.2 136.3 (1.4) 134.9 (7.7) 127.2 5.1 – 116.1 121.2 (1.3) 119.9 (4.6) 115.3 During the year, we exercised an Accordion request, which increased our available credit facilities by £10m and US$25m. We also extended the Group’s credit facilities by one year, which now expire in February 2022. At the balance sheet date, the Group’s credit facilities comprised a £75m multi-currency revolving credit facility and a US$165m revolving credit facility. As part of its interest rate strategy, the Company has entered into interest rate swaps to hedge floating LIBOR rates. As a result, bank loan and overdrafts include borrowings of US$110m (£84.7m) fixed at 1.10% and GBP £20m fixed at 0.51%, excluding applicable bank margin. 129 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 26. Finance lease liabilities A finance lease is a commitment to make a payment in the future, primarily in relation to plant and machinery and motor vehicles. Accounting policies We classify leases as finance leases whenever the lease terms transfer substantially all the risks and rewards of ownership to us. All other leases are operating leases. We recognise the assets we hold under finance leases at their fair value or, if lower, at the present value of the minimum lease payments, each of which we determine at the start of the lease. We include our corresponding liability in the balance sheet, as a finance lease obligation. We apportion lease payments between finance charges and a reduction in our lease obligation, so we achieve a constant rate of interest on the remaining liability. We recognise finance charges directly in the income statement, unless they are directly attributable to qualifying assets, in which case we capitalise them in accordance with our general policy on borrowing costs. Finance lease liabilities are payable as follows: Less than one year Between one and five years Minimum lease payments 2017 £m 1.4 1.8 3.2 Interest 2017 £m Principal 2017 £m 0.1 0.1 0.2 1.5 1.9 3.4 Minimum lease payments 2016 £m 1.1 2.7 3.8 Interest 2016 £m Principal 2016 £m – 0.2 0.2 1.1 2.9 4.0 Finance lease liabilities are secured on the assets to which they relate. There are no other restrictions imposed by the lessor. The fair value of the leases is approximately equal to the carrying amount. 27. Retirement benefit obligations The Group operates a number of defined contribution and defined benefit pension schemes covering many of its employees. The principal funds are the Milk Pension Fund (‘MPF’) and the Dalgety Pension Fund (‘DPF’) in the UK, which are defined benefit schemes. The assets of these funds are held separately from the Group’s assets and are administered by Trustees and managed professionally. We recognise that accounting for retirement benefit obligations is an area which includes critical accounting judgements and key sources of estimation uncertainty. See note 4. Accounting policies Defined contribution pension schemes A number of our employees are members of defined contribution pension schemes. We charge contributions to the income statement as they become payable under the scheme rules. We show differences between the contributions payable and the amount we have paid as either accruals or prepayments in the balance sheet. The schemes’ assets are held separately from those of the Group. Defined benefit pension schemes The Group operates defined benefit pension schemes for some of its employees. These schemes are closed to new members and to further accrual. We calculate our net obligation separately for each scheme, by estimating the amount of future benefit that employees have earned, in return for their service to date. We discount that benefit to determine its present value, and deduct the fair value of the plan’s assets (at bid price). The liability discount rate we use is the market yield at the balance sheet date on high-quality corporate bonds, with terms to maturity approximating our pension liabilities. Qualified actuaries perform the calculations, using the projected unit method. We recognise actuarial gains and losses in equity in the period in which they occur, through the Group Statement of Comprehensive Income. Actuarial gains and losses include the difference between the expected and actual return on scheme assets and experience gains and losses on scheme liabilities. Genus and the other participating employers are jointly and severally liable for the MPF defined benefit scheme’s obligations. We account for our section of the scheme and our share of any orphan assets and liabilities, and provide for any amounts we believe we will have to pay under our joint and several liability. The joint and several liability also means we have a contingent liability for the scheme’s obligations that we have not accounted for. Under the joint and several liability, we initially recognise any changes in our share of orphan assets and liabilities in the income statement. After this initial recognition, any actuarial gains and losses on the orphan assets and liabilities are recognised directly in equity through the Group Statement of Changes in Equity, in the period in which they occur. 130 Genus plc | Annual Report 201727. Retirement benefit obligations continued Retirement benefit obligations The financial positions of the defined benefit schemes as recorded in accordance with IAS 19 and IFRIC 14, are aggregated for disclosure purposes. The liability split by principal scheme is set out below. The MPF – Genus’s share The Dalgety Pension Fund Other retirement benefit obligations and other unfunded schemes Overall net pension liability 2017 £m 30.4 – 10.5 40.9 2016 £m 34.3 – 10.2 44.5 Overall, we expect to pay £7.3m (2017: £7.1m) in contributions to defined benefit plans in the 2018 financial year. The defined benefit plans are administered by Trustee boards that are legally separated from the Group. The Trustee board of each pension fund consists of representatives who are employees, former employees or are independent from the Company. The boards of the pension funds are required by law to act in the best interest of the plan participants and are responsible for setting certain policies, such as investment and contribution policies, and for the governance of the fund. The defined benefit pension schemes exposes the Group to actuarial risks such as greater than expected longevity of members, lower than expected return on investments and higher than expected inflation, which may increase the plans’ liabilities or reduce the value of their assets. UK pensions are regulated by The Pensions Regulator, a non-departmental public body established under the Pensions Act 2004 and sponsored by the Department for Work and Pensions, operating within a legal regulatory framework set by the UK Parliament. The Pensions Regulator has statutory objectives set out in legislation, which include promoting and improving understanding of the good administration of work-based pensions, protecting member benefits and regulating occupational defined benefit and contribution schemes. The Pensions Regulator’s statutory objectives and regulatory powers are described on its website at thepensionsregulator.gov.uk. All defined benefit schemes are registered as an occupational pension plan with HMRC and are subject to UK legislation and oversight from The Pensions Regulator. UK legislation requires that pension schemes are funded prudently and valued at least every three years. Separate valuations are required for each scheme. Within 15 months of each valuation date, the plan trustees and the Group must agree any contributions required to ensure that the plan is fully funded over time on a suitably prudent measure. Funding plans are individually agreed with the respective trustees for each of the Group’s defined benefits pension schemes, taking into account local regulatory requirements. The MPF The MPF was previously operated by the Milk Marketing Board and was also open to staff working for Milk Marque Ltd (the principal employer, now known as Community Foods Group Limited), NMR, First Milk Ltd, hauliers associated to First Milk Ltd, Dairy Farmers of Britain Ltd (which went into receivership in June 2009) and Milk Link Ltd. We have accounted for our section of the scheme and our share of any orphan assets and liabilities, which together represent approximately 85% of the MPF (2016: 75%). Although the MPF is managed on a sectionalised basis, it is a ‘last man standing scheme’, which means that all participating employers are jointly and severally liable for all of the fund’s liabilities. With effect from 30 June 2013, Genus’s remaining active members ceased accruing benefits in the fund and became deferred pensioners. On 11 January 2016, the Trustees of the MPF agreed with a request from the employers to change the index used for pension and deferred pension increases from RPI to CPI. The members of the scheme were informed of this change on 17 February 2016, which is effective for increases starting in 2016. As a result of the change, Genus recorded a gain of £43.9m. The most recent actuarial triennial valuation of the MPF was at 31 March 2015 and was carried out by qualified actuaries. The valuation has been agreed by the Trustees. The principal actuarial assumptions adopted in the 2015 valuation were that: • investment returns on existing assets would exceed fixed interest gilt yields by 1.1% p.a.; • CPI price inflation is expected to be 0.9% p.a. lower than RPI price inflation; and • pensions in payment and pensions in deferment would increase in future in line with CPI price inflation, subject to various minimum and maximum increases. At 31 March 2015, the market value of the fund’s assets was £403m. This represented approximately 87% of the value of the uninsured liabilities, which were £465m at that date. 131 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 27. Retirement benefit obligations continued The deficit in the fund as a whole, by reference to the 31 March 2015 valuation, was £62m (of which Genus’s notional share was £47m). This shortfall is being addressed by additional contributions from the participating employers. Under the Trustee prepared schedule of contributions, Genus will be required to make deficit repair contributions of £5.6m p.a. commencing 31 March 2016, and rising thereafter by 3.4% p.a. until 31 August 2022, in addition to funding the scheme’s operating expenses. Genus has assessed its additional pension liability under IFRIC 14 by reference to this schedule of contributions, resulting in an amount of £19.6m (2016: £14.9m) being recognised in the Group Statement of Comprehensive Income. On 23 June 2017, NMR withdrew from the MPF under a Flexible Apportionment Arrangement between NMR, Genus and the Trustees of the MPF. In return for the right to withdraw from the MPF, NMR made a one-off, lump sum cash payment of £10.1m to the MPF, equivalent to the undiscounted value of all NMR’s future payments under the existing MPF recovery plan which extends to March 2026; and NMR also made a payment to Genus of £4.7m, with £1.4m being satisfied by the issue NMR shares. As a result of the NMR withdrawal, Genus has recognised £5.7m as an exceptional credit, with £4.5m (£4.7m payment net of fees) being received directly from NMR, and £1.2m from MPF pension scheme reflecting the impact of NMR paying undiscounted amounts into the scheme. The DPF The most recent actuarial valuation of the DPF was at 31 March 2015 and carried out by qualified actuaries. The principal actuarial assumptions adopted in the 2015 valuation were that investment returns on existing assets would be 4.1% p.a. before retirement and 2.2% p.a. after retirement and that the annual increase in pensions in payment would be 3.3% p.a. The market value of the available assets at 31 March 2015 was £31.6m. The value of those assets represented approximately 101% of the value of the uninsured liabilities, which were £31.3m at 31 March 2015. Under the funding agreement, the Company will not have to make deficit repair contributions. The disclosures required under IAS 19 have been calculated by an independent actuary based on accurate calculations carried out as at 31 March 2015 and updated to 30 June 2016. As at 30 June 2017 the DPF was in an overall net pension asset position of £6.5m. However, the Company does not have the unilateral right to this surplus and therefore in line with IFRIC 14 the recognition of this asset is restricted. The Trustees of the DPF hold an £18.7m reserve against future unknown liabilities materialising. As the economic benefit to Genus of this amount is not certain, it is treated as a contingent asset. In addition to the aggregate assets and liabilities disclosed, a bulk annuity policy was secured with an insurance company in July 1999, which matched the benefit entitlement of the almost all of the fund’s current and deferred pension liabilities at that time. The value of these policies and related liabilities at 30 June 2017 was £708m (2016: £703m). Other defined benefit scheme in deficit The Group operates a closed defined benefit scheme for a small number of former employees of the National Pig Development Company Limited. The total market value of scheme assets and liabilities at 30 June 2017, under the provisions of IAS 19, were £5.2m (2016:£5.2m) and £6.7m (2016:£6.5m), respectively. Other unfunded schemes When the Group acquired Sygen International plc, it also acquired three unfunded defined benefit schemes and an unfunded retirement health benefit plan, which it now operates for the benefit of the previous Group’s senior employees and executives. The scheme liabilities for the three unfunded defined benefit schemes amounted to £8.1m (2016: £8.0m), based on IAS 19’s methods and assumptions. This amount is included within pension liabilities in the Group Balance Sheet. Interest on pension scheme liabilities amounted to £0.2m (2016: £0.2m). The principal assumptions used to calculate the scheme liabilities were that the discount rate would be 2.65% (2016: 2.8%) and that inflation and pension payment increases would be 3.1% per annum (2016: 2.7%). The scheme liabilities for the unfunded retirement health benefit plan amounted to £0.9m (2016: £0.9m), based on IAS 19’s methods and assumptions. This amount is included within retirement benefit obligations in the Group Balance Sheet. Interest on plan liabilities amounted to £nil (2016: £0.1m). The principal assumptions used to calculate the plan liabilities were that the discount rate would be 2.65% (2016: 2.8%) and that the long-term rate of medical expense inflation would be 7.1% (2016: 6.7%). 132 Genus plc | Annual Report 201727. Retirement benefit obligations continued Aggregated position of defined benefit schemes Present value of funded obligations (includes Genus’s 85% share of MPF (2016: 75%)) Present value of unfunded obligations Total present value of obligations Fair value of plan assets (includes Genus’s 85% share of MPF (2016: 75%)) Restrict recognition of asset (DPF) Recognition of additional liability (MPF) Recognised liability for defined benefit obligations Plan assets consist of the following: Equities Diversified growth funds Liability driven investments Gilts and corporate bonds Cash Other 2017 £m 424.2 9.0 433.2 (418.4) 6.5 19.6 40.9 2016 £m 347.9 8.9 356.8 (334.0) 6.8 14.9 44.5 2017 £m 90.4 93.7 93.5 59.5 8.9 72.4 2016 £m 99.3 57.6 32.7 95.7 1.7 47.0 418.4 334.0 Each of the defined benefits schemes manages risks through a variety of methods and strategies including equity protection, to limit downside risk of falls in equity markets, as well as inflation and interest rate hedging. Movement in the liability for defined benefit obligations Liability for defined benefit obligations at the start of the year Benefits paid by the plans Current service costs and interest Actuarial gains recognised on fund liabilities arising from changes in demographic assumptions Actuarial losses recognised on fund liabilities arising from changes in financial assumptions Actuarial losses/(gains) recognised on fund liabilities arising from experience (other) Gains on curtailments and settlements Change from RPI to CPI for benefit increases in the MPF Recognition of additional liabilities due to increasing Genus’s share of MPF Exchange rate adjustment Liability for defined benefit obligations at the end of year Movement in plan assets Fair value of plan assets at the start of the year Administration expenses Gains on curtailments and settlements Recognition of additional assets due to increasing Genus’s share of MPF Contributions paid into the plans Benefits paid by the plans Interest income on plan assets Actuarial gains recognised in equity Fair value of plan assets at the end of the year 2017 £m 356.8 (15.3) 9.8 – 28.0 2.2 – – 51.5 0.2 433.2 2017 £m 334.0 (0.6) – 52.7 7.2 (15.3) 9.0 31.4 418.4 2016 £m 386.1 (18.3) 14.3 (10.9) 41.6 (11.8) (1.4) (43.9) – 1.1 356.8 2016 £m 329.2 (0.7) (1.1) – 6.7 (18.3) 12.1 6.1 334.0 133 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 27. Retirement benefit obligations continued Summary of movements in Group deficit during the year Deficit in schemes at the start of the year Administration expenses Gains on curtailments and settlements Exceptional gain on NMR withdrawal from MPF Change from RPI to CPI for benefit increases in the MPF Contributions paid into the plans Net pension finance cost Actuarial loss recognised during the year Movement in restriction of assets Recognition of additional liability Exchange rate adjustment Deficit in schemes at the end of the year Amounts recognised in the Group Income Statement Administrative expenses Interest obligation Interest income on plan assets Interest on additional liability Gains on curtailments and settlements Exceptional gain on NMR withdrawal from MPF Change from RPI to CPI for benefit increases in the MPF The expense/(income) is recognised in the following line items in the Income Statement Administrative expenses Settlement gain in exceptional items Exceptional gain on NMR withdrawal from MPF Change from RPI to CPI for benefit increases in the MPF in exceptional items Net finance charge Actuarial gains and losses recognised in the Group Statement of Comprehensive Income Cumulative loss at the start of the year Actuarial (gain)/loss recognised during the year Movement in restriction of assets Recognition of additional liability Exchange rate adjustment Cumulative loss at the end of the year 2017 £m (44.5) (0.6) – 1.2 – 7.2 (1.2) 1.2 0.3 (4.3) (0.2) (40.9) 2017 £m 0.6 9.8 (9.0) 0.4 – (1.2) – 0.6 2017 £m 0.6 – (1.2) – 1.2 0.6 2017 £m 79.4 (1.2) (0.3) 4.3 0.2 82.4 2016 £m (63.1) (0.7) 0.3 – 43.9 6.7 (2.2) (12.8) (0.6) (14.9) (1.1) (44.5) 2016 £m 0.7 14.3 (12.1) – (0.3) – (43.9) (41.3) 2016 £m 0.7 (0.3) – (43.9) 2.2 (41.3) 2016 £m 50.0 12.8 0.6 14.9 1.1 79.4 134 Genus plc | Annual Report 201727. Retirement benefit obligations continued Actuarial assumptions and sensitivity analysis Principal actuarial assumptions at the reporting date (expressed as weighted averages): Discount rate Consumer Price Index (CPI) Retail Price Index (RPI) 2017 2.65% 2.05% 3.15% 2016 2.8% 1.6% 2.7% The mortality assumptions used are consistent with those recommended by the schemes’ actuaries and reflect the latest available tables, adjusted for the experience of the scheme where appropriate. For 2017, the mortality tables used are 97% of the SN2A tables, with birth year and 2014 CMI projections, subject to a long-term rate of improvement of 1.25% for males and females (2016: the mortality tables used are 97% of the SN2A tables, with birth year and 2014 CMI projections, subject to a long-term rate of improvement of 1.25% for males and females). The following table shows the assumptions used for all schemes and illustrates the life expectancy of an average member retiring at age 65 at the balance sheet date and a member reaching age 65 in 20 years’ time. Retiring at balance sheet date at age 65 Retiring at age 65 in 20 years’ time Male Female Male Female 2017 Years 23.0 25.2 24.7 27.0 2016 Years 22.9 25.1 24.6 26.9 Duration of benefit obligations The weighted average duration of the defined benefit obligations at 30 June 2017 was 17.4 years (2016: 17.5 years). Sensitivity analysis Measurement of the Group’s defined benefit obligation is sensitive to changes in certain key assumptions. The sensitivity analysis below shows how a reasonably possible increase or decrease in a particular assumption would, in isolation, result in an increase or decrease in the present value of the defined benefit obligation as at 30 June 2017. Discount rate Rate of inflation Life expectancy Decrease by 0.25% £m Increase by 0.25% £m Decrease by 0.25% £m Increase by 0.25% £m Decrease by 1 year £m Increase by 1 year £m Increase/(decrease) in present value of defined obligation 16.9 (16.2) (11.9) 12.1 (16.9) 16.9 The sensitivity analysis may not be representative of an actual change in the defined benefit obligation, as it is unlikely that changes in assumptions would occur in isolation from one another. The sensitivities assume the fund’s assets remain unchanged. However, in practice changes in interest rates and inflation will also affect the value of the fund’s assets. The fund’s investment strategy aims to hold matching assets which should move broadly in line with the liabilities of the funds, to protect partially against changes in interest rates and inflation. This sensitivity analysis has been prepared using the same method adopted when adjusting results of the latest funding valuation to the balance sheet date. This is the same approach adopted in previous periods. The history of experience adjustment is as follows: Present value of the defined benefit obligation Fair value of plan assets Restrict recognition of asset and recognition of additional liability Deficit in the plans Experience adjustments arising on plan liabilities (%) Experience adjustments arising on plan assets (%) 2017 £m 433.2 (418.4) 26.1 40.9 7.1 7.6 2016 £m 2015 £m 2014 £m 2013 £m 356.8 (334.0) 386.1 (329.2) 367.8 (314.6) 355.2 (294.1) 21.7 44.5 5.3 4.1 6.2 63.1 4.9 3.7 5.0 58.2 2.9 4.9 3.9 65.0 5.1 2.5 135 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 28. Share-based payments We have a number of share plans used to award shares to Directors and senior management as part of their remuneration. To record the cost of these, a charge is recognised over the vesting period in the consolidated income statement, based on the fair value of the award on the date of grant. Accounting policies We recognise the fair value of share awards and options granted as an employee expense, with a corresponding increase in equity. We measure the fair value at the grant date and spread it over the vesting period of each option. We use a binomial valuation model to measure the fair value of options and a Black-Scholes valuation model to measure the fair value of share awards. We adjust the amount we recognise as an expense, to reflect the estimated performance against non-market related conditions and the number of share awards and options that actually vest at the end of the vesting period. The Group recognised a total share-based payment expense of £4.6m (2016: £3.8m), including National Insurance contributions of £1.0m (2016: £0.4m). Share awards There were 1,089,391 conditional share awards outstanding at 30 June 2017. These conditional shares were awarded to Executive Directors and senior management under the 2004 Performance Share Plan on 7 December 2012, 26 September 2013 and 14 March 2014, and under the 2014 Performance Share Plan on 20 November 2014, 14 September 2015 and 14 September 2016. In accordance with the plans’ terms, participants have received a conditional annual award of shares or nil cost option awards which will normally vest after three years, with the proportion of the award vesting depending on growth in the Group’s adjusted earnings per share. Further details of the plan’s performance conditions are given in the Directors’ Remuneration Report. In the year ended 30 June 2017, awards were granted on 14 September 2016, with an aggregate fair value of £5,725,000. The fair value of services received in return for share awards granted is based on the fair value of share awards granted, measured using a Black-Scholes valuation model. At the date of grant, the fair value of a share awarded was £18.78, based on an expected dividend yield of 1.21%. Outstanding at the start of year Exercised during the year Forfeited during the year Granted during the year Outstanding at 30 June Exercisable at 30 June Number of awards 2017 Number of awards 2016 1,122,448 (94,882) (243,030) 304,855 1,034,287 (61,550) (254,818) 404,529 1,089,391 31,026 1,122,448 17,289 Bonus and restricted stock share awards In addition to the outstanding share awards above, there were 102,731 bonus and restricted stock share awards outstanding at 30 June 2017. The bonus shares were awarded to Executive Directors and senior management as part of the compulsory deferred bonus, and restricted stock share awards were granted to senior management in connection with recruitment. In accordance with the awards’ terms, participants have received a conditional annual bonus award of shares or nil cost option awards, which will normally vest between one and three years, after award, providing the participant is employed by the Group at that time. In the year ended 30 June 2017, 25,576 bonus share awards were granted on 14 September 2016, with an aggregate fair value of £482,000, and 22,138 restricted stock share awards were granted in total on 21 December 2016, with an aggregate fair value of £182,000. Number of awards 2017 68,870 (12,153) (1,700) 47,714 102,731 – Number of awards 2016 43,547 (19,370) (433) 45,126 68,870 – Outstanding at the start of year Exercised during the year Forfeited during the year Granted during the year Outstanding at 30 June Exercisable at 30 June 136 Genus plc | Annual Report 201728. Share-based payments continued Share options On 12 August 2004, the Group established a share option programme that entitles key management and other senior employees to purchase shares in the Company. Further grants on similar terms were offered to these employee groups as set out below. The terms and conditions of the grants are as set out below. All options are to be settled by physical delivery of shares and meet the criteria for being treated as equity settled. Employees entitled 2004 Company share plan 2004 Company share plan 2004 Company share plan 2004 Company share plan 2004 Company share plan 2004 Company share plan 2004 Company share plan Total share options Grant date Number of instruments Vesting conditions Option exercise price (pence) Contractual life of options 21 September 2007 19 September 2008 15 September 2009 10 September 2010 9 September 2011 7 September 2012 26 September 2013 4,048 7,923 17,911 31,993 41,729 47,711 72,050 223,365 Exercisable Exercisable Exercisable Exercisable Exercisable Exercisable Exercisable 582.00 775.67 654.50 729.83 977.83 1,334.00 1,413.00 10 years 10 years 10 years 10 years 10 years 10 years 10 years The number and weighted average exercise prices of share options are as follows: Outstanding at the start of year Forfeited during the year SAR effected during the year Exercised during the year Outstanding at 30 June Exercisable at 30 June Weighted average exercise price 2017 (pence) 1,132 1,351 1,215 1,092 1,118 1,118 Weighted average exercise price 2016 (pence) 1,119 1,171 1,038 932 1,132 986 Number of options 2017 396,971 (17,470) (87,296) (68,840) 223,365 223,365 Number of options 2016 612,821 (76,793) (94,801) (44,256) 396,971 261,608 The options at 30 June 2017 had a weighted average remaining contractual life of 4.4 years (2016: 5.4 years). No share options were granted during the year (2016: nil). The weighted average share price at the date of exercise during the year was £19.45p (2016: £14.83p). 29. Capital and reserves Called up share capital is the number of shares in issue at their par value. A number of shares were issued in the year in relation to employee share schemes. Accounting policies Equity instruments issued by the Group are recorded at the amounts of the proceeds received, net of direct issuance costs. Own shares We include the transactions, assets and liabilities of the Group-sponsored Qualifying Employee Share Ownership Trust (‘QUEST’) in the Group financial statements. In particular, the trust’s purchases of the Company’s shares are deducted from shareholders’ funds until they vest unconditionally with employees. Share capital Issued and fully paid Ordinary shares of 10 pence 2017 Number 2016 Number 61,161,622 61,012,703 The holders of ordinary shares are entitled to receive dividends, as declared from time to time. The movement in share capital for the period was as follows: Issued under the Executive Share Option Plan Issued to Employee Benefits Trust 2017 Number 68,840 80,079 148,919 2016 Number 44,256 – 44,256 2017 £m 6.1 2017 £m – – – 2016 £m 6.1 2016 £m – – – 137 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 29. Capital and reserves continued Shares issued under share option plans were issued at option prices as follows: Executive Share Option Plan 2017 Number Price (pence) 2016 Number Price (pence) – 1,984 2,847 2,434 8,065 24,139 9,206 20,165 68,840 440.00 582.00 776.00 654.50 729.83 977.83 1334.00 1413.00 4,992 527 – 629 4,860 26,799 6,449 – 44,256 440.00 582.00 776.00 654.50 729.83 977.83 1334.00 1413.00 Reserve for own shares The Company’s shares are held by a QUEST, which is an employee benefit trust established to facilitate the operation of our long-term incentive scheme for senior management. The reserve amount represents the deduction in arriving at shareholders’ funds for the consideration the trust paid for the Company’s shares, which had not vested unconditionally at the balance sheet date. The number and market value of the ordinary shares held by the employee benefit trust and the QUEST were: Shares allocated but not vested Unallocated shares 2017 Number 70,272 92,334 2016 Number 85,075 92,334 162,606 177,409 2017 £m 1.3 1.6 2.9 2016 £m 1.3 1.5 2.8 The shares have a nominal value of £16,261 (2016: £17,741). Translation reserve The translation reserve comprises all foreign currency differences arising from translating the financial statements of our foreign operations. The Group uses foreign currency denominated borrowings as a hedge against the translation exposure on the Group’s net investment in overseas companies. Where the hedge is fully effective at hedging the variability in the net assets of such companies caused by changes in exchange rates, the changes in value of the borrowings are recognised in the Consolidated Statement of Comprehensive Income and accumulated in the hedging and translation reserve. The ineffective part of any change in value caused by changes in exchange rates is recognised in the Consolidated Income Statement. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments, net of taxation. Hedging and translation reserves Balance at 30 June 2015 Exchange differences on translation of overseas operations Loss recognised on net investment hedges Loss recognised on cash flow hedges – interest swaps Income tax related to net gains recognised in other comprehensive income Balance at 30 June 2016 Exchange differences on translation of overseas operations Loss recognised on net investment hedges Gain recognised on cash flow hedges – interest swaps Income tax related to net gains recognised in other comprehensive income Balance at 30 June 2017 Hedging reserve £m Translation reserve £m – – – (0.7) 0.1 (0.6) – – 2.1 (0.4) 1.1 (10.1) 77.8 (13.3) – (16.9) 37.5 8.6 (2.7) – (4.2) 39.2 138 Genus plc | Annual Report 20172017 £m 34.3 1.1 8.7 4.6 (6.2) 3.7 6.4 2.5 55.1 8.8 0.2 – 2.5 66.6 (5.4) (5.7) 0.1 (6.6) (0.9) 48.1 1.4 (9.0) 5.8 46.3 0.8 (3.1) 0.6 (10.0) 34.6 2016 £m 50.3 17.1 6.1 3.8 (6.9) 4.6 10.6 (36.3) 49.3 7.9 (0.2) (0.2) 0.9 57.7 (4.7) (3.8) (1.2) (6.1) 0.3 42.2 (0.7) 2.6 (0.8) 43.3 0.1 (1.6) 0.1 (11.9) 30.0 30. Notes to the cash flow statement Profit for the year Adjustment for: Net IAS 41 valuation movement on biological assets Amortisation of acquired intangible assets Share-based payment expense Share of profit of joint ventures and associates Finance costs (net) Income tax expense Exceptional items Adjusted operating profit from continuing operations Depreciation of property, plant and equipment Loss/(profit) on disposal of plant and equipment Gain on asset held for sale Amortisation of intangible assets Adjusted earnings before interest, tax, depreciation and amortisation Exceptional item cash Other movements in biological assets and harvested produce Increase/(decrease) in provisions Additional pension contributions in excess of pension charge Other Operating cash flows before movement in working capital Decrease/(increase) in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Cash generated by operations Interest received Interest and other finance costs paid Cash flow from derivative financial instruments Income taxes paid Net cash from operating activities Analysis of net debt Cash and cash equivalents Interest-bearing loans – current Obligation under finance leases – current Interest-bearing loans – non-current Obligation under finance lease – non-current Net debt At 1 July 2016 £m Net cash flows £m Foreign exchange £m Non-cash movements £m At 30 June 2017 £m 34.0 (4.6) (1.1) (5.7) (115.3) (2.7) (118.0) (89.7) (7.7) (3.0) 2.0 (1.0) (9.4) – (9.4) (18.1) 0.2 (0.1) – (0.1) (2.5) (0.1) (2.6) (2.5) – – (2.3) (2.3) – 1.0 1.0 26.5 (7.7) (1.4) (9.1) (127.2) (1.8) (129.0) (1.3) (111.6) Included within non-cash movements is £1.3m in relation to new finance leases. 139 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 31. Operating leases The Group has entered into non-cancellable commercial arrangements on certain properties, plant, motor vehicles and equipment. Accounting policies For operating leases, we charge the rentals payable, and any incentives we receive to enter into an operating lease, to the income statement on a straight-line basis over the lease term. Total of future minimum lease payments under non-cancellable operating leases which expire within: Less than one year Between one and five years More than five years 2017 £m 2.7 10.7 5.8 19.2 2016 £m 1.3 10.7 9.2 21.2 The leases have various terms and renewal rights. There are no other restrictions imposed by these lease agreements. 32. Capital and other commitments At 30 June 2017, outstanding contracted capital expenditure amounted to £4.9m and all relate to the purchase of property, plant and equipment. (2016: £0.7m). A software agreement was signed on 23 June 2017, with a minimum five-year term, with an annual cost of £0.7m. 33. Contingencies and bank guarantees Contingent liabilities are potential future cash outflows, where the likelihood of payments is considered more than remote but is not considered probable or cannot be measured reliably. The retirement benefit obligations referred to in note 27 include obligations relating to the MPF defined benefit scheme. Genus, together with other participating employers, is joint and severally liable for the scheme’s obligations. Genus has accounted for its section and its share of any orphan assets and liabilities, collectively representing approximately 85% (2016: 75%) of the MPF. As a result of the joint and several liability, Genus has a contingent liability for the scheme’s obligations that it has not accounted for. The total deficit of the MPF scheme from the most recent triennial valuation can be found in note 27. During the year, as part of a commercial agreement in favour of a third party, we entered into a bank guarantee for £4.1m which will expire within two years. 34. Directors and key management compensation This note details the total amounts earned by the Company’s Directors and members of the Executive Committee. Key management compensation (including Directors) Salaries and short-term employee benefits Post-employment benefits Share-based payment expense Directors Details of Directors’ compensation are included in the Directors’ Remuneration Report. Other transactions with key management personnel Other than remuneration, there were no transactions with key management personnel. 2017 £m 6.1 0.3 2.6 9.0 2016 £m 5.8 0.3 2.1 8.2 140 Genus plc | Annual Report 201735. Group entities In accordance with section 409 of the Companies Act 2006, a list of subsidiaries and joint ventures and associates as at 30 June 2017 is set out below. All subsidiary undertakings are subsidiary undertakings of their immediate Parent undertaking(s), unless otherwise indicated. Nature of business Bovine Name of undertaking Registered address ABS Argentina S.A. ABS Chile Limitada ABS Genetics South Africa (Pty) Ltd ABS Global (Canada) Inc. ABS Global, Inc. ABS Italia S.r.l. ABS México, S.A. de C.V. ABS Progen Ireland Limited Bovec SASU – changed name Chitale Genus ABS (India) Private Limited De Novo Genetics LLC A.Castellanos 1169, (3080) Esperanza, Sante Fe, Argentina Avenida del Parque #4161 office #601, Huechuraba, Santiago, Chile Prestige Park Block B, Unit No 5B, Pastorale Street, Durbanville Industrial Park, Durbanville, 7550, South Africa 1525 Floradale Road, Elmira ON N3B 2Z1, Canada 1525 River Road, De Forest WI 53532, United States Via Bastida nr. 6, loc. Cavatigozzi, 26020, Cremona, Italy Kansas No. 2028, Quintas Campestre, 31214, Chihuahua, Chih., Mexico Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland 69 Chemin des Molieres, 69210, Lentilly, France Amar Neptune, Office No.406, off Baner Road, S. No.6/1/1, Village Baner, Tal. Haveli, Pune, Pune, Maharashtra, India 1286 Oriole Drive, New Albin IA 52160, Untied States Genus ABS Colombia SAS Avenida Carrera 70 , No. 105 – 51, Genus Australia Pty Ltd Genus (Beijing) International Trade Co., Ltd. Genus Breeding India Private Limited Genus Breeding Limited ‘Genus Ukraine’ LLC GIFCO (Ireland) Designated Activity Company Inimex Genetics Limited In Vitro Brasil México, S.A. de C.V. In Vitro Brasil S.A. Bogota, Colombia 2 Fleet Street, Somerton VIC 3062, Australia B1608, Lucky Tower, East5 3rd Ring Road, Chaoyang District, Beijing, 100027, China Amar Neptune, Office No.406, off Baner Road, S. No.6/1/1, Village Baner, Tal. Haveli, Pune, Pune, Maharashtra, India Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Pidlisna str., 1, KYIV 03164, Ukraine Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Plaza Comercial Punto Colorines, Boulevard Independencia #746, Lote. 27010, Sala 6 e 7., Cidade Torreon – Estado, Coahuila, Mexico São Francisco Farm, Km 165 of Righway Campinas-Mogi Mirim, City of Mogi Mirim, São Paulo, 13.800-970, Brazil Country of incorporation Direct/ indirect Group interest % of share capital/voting rights held by Group companies Share class Argentina Direct ARS1 ordinary 100% Chile South Africa Direct CLP1 common stock Indirect ZAR1 ordinary 100% 100% Canada Indirect CAD1 ordinary 100% United States Indirect Italy Indirect USD0.01 common €1 Quota Mexico Direct MXN10 Class 1 MXN10 Class 2 100% 100% 100% Ireland Indirect €1.25 ordinary 100% France Indirect €10 ordinary 100% India Indirect INR100 ordinary United States Colombia Indirect Indirect Australia Indirect China Indirect No par value LLC units COP10,000 ordinary No par value ordinary No par value common stock 50%1 51% 100% 100% 100% India Indirect INR10 ordinary 100% United Kingdom Direct £1 ordinary 100% Ukraine Indirect No par value common stock Ireland Indirect US$1 ordinary 100% 100% United Kingdom Indirect £1 ordinary 100% Mexico Indirect MXN1 ordinary 99% Brazil Indirect No par value common 100% 141 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 35. Group entities continued Name of undertaking Registered address Carrera 72A N° 49A – 39, Barrio Normandia Segundo Sector – Bogotá D.C, Colombia 188671, Distrito De Leningrado Região De Vsevolojskiy, Vilarejo De Lepsar, Russian Federation 1525 River Road, De Forest WI 53532, United States Rod. BR 050 Km 196 + 150metros, Zona Rural, Delta, MG – 38108-000, Brazil 1525 River Road, De Forest WI 53532, United States 400553858, Av. Mao Tse Tung, Maputo, Mozambique Country of incorporation Direct/ indirect Group interest % of share capital/voting rights held by Group companies Share class Colombia Indirect COP1 common 51% Russia Indirect RUB1 ordinary 50% United States Brazil Indirect US$0.001 common Indirect BRL1 ordinary United States No par value common Mozambique Indirect MZN1 ordinary Indirect 100% 100% 100% 80% 100% Maximo Tajes 7189, Uruguay Uruguay Indirect UYU0.54 provisional certified registered UYU1.00 registered In Vitro Colombia S.A.S. In Vitro Russia LLC IVB USA, Inc. Pecplan ABS Imp. e Exp. Ltda. St Jacobs Animal Breeding Corp. ZAP In Vitro Mozambique, Limitada Zitery S.A Porcine Name of undertaking Registered address Agricola PIC Andina LimitadaAutopista Los Libertadores Km39.5, Agroceres PIC Genética de Suínos Ltda Chacabuco, Colina, Santiago, Chile Rua 1 JN, n˚ 1411, Sala 16 – Jardim Novo, Rio Claro/SP – CEP, 13.502- 741, Brazil Minnesota, LLC Birchwood Genetics, Inc. Genetiporc International Génétiporc México, S.A. de Agroceres PIC Suínos Ltda Rua 1 JN, n˚ 1411, Sala 17 – Jardim Novo, Rio Claro/SP – CEP, 13.502- 741, Brazil 465 Stephens Road, West Manchester OH 45382, United States 100 BlueGrass Commons Blvd, Suite 2200, Hendersonville, TN 37075 United States Wenceslao de la Barquera No.7, Col. Villas del Sur, 76040 Queretaro, Queretaro, Mexico 100 BlueGrass Commons Blvd, Suite 2200, Hendersonville, TN 37075 United States Office 1106, Ramada Plaza, 509 Caobao Road, Xuhui District, Shanghai, 200233, China Riverside One, Sir John Rogerson's Quay, Dublin 2, Ireland Genetiporc USA, LLC Genus China Limited Hermitage Genetics Company C.V. Designated Activity Company HY-CO Hybridschweine- Cooperations GmbH LLC PIC Genetics Tegelberg 19 – 21, 24576 Bad Bramstedt, Germany 79 Narodnyy Boulevard, 308000, Belgorod, Russian Federation 142 Country of incorporation Direct/ indirect Group interest % of share capital/voting rights held by Group companies Share class Chile Indirect CLP1 common stock Indirect BRL1 ordinary Brazil 100% 49%1 Brazil Indirect BRL1 ordinary 49%1 United States United States Indirect No par value ordinary Indirect No par value ordinary 100% 100% Mexico Indirect MXN1 ordinary 100% United States Indirect US$100 LLC units China Indirect No par value common Stock Ireland Indirect €1.27 ordinary €1.27 redeemable preference shares No par value common stock Indirect RUB1 ordinary Russia Germany Indirect 100% 100% 100% 50%1 100% Genus plc | Annual Report 2017PIC Andina Venezuela S.A. Avenida De La Urbanización San Venezuela Chile Indirect US$65.449 ordinary Indirect VEF1 ordinary 100% 100% 35. Group entities continued Name of undertaking Registered address Morganite Investments Limited PIC (Zhangjiagang) Pig Improvement Co., Ltd. PIC Andina SpA Riverside One, Sir John Rogerson's Quay, Dublin 2, Ireland Office 1210, International Finance Tower, 20 Jingang Road, Zhangjiagang Bonded Zone, Zhangjiagang City, Jiangsu Province, China Avenida del Parque #4161 office #601, Huechuraba, Santiago, Chile PIC Canada Ltd. PIC France SA PIG Datendienst GmbH Pig Improvement Company de México, S. de R.L. de C.V. PIG Improvement Company Deutschland GmbH Pig Improvement Company España, S.A. Pig Improvement Company UK Limited PIC Italia S.r.l. PIC Philippines, Inc. PIC Polska Sp. z o.o. PIC Romania S.R.L. PIC USA, Inc. Jacinto , Residencias Ambar 1, Apto. E-2-A, Maracay, Estado Aragua, Venezuela, Bolivarian Republic of 4500 Bankers Hall East, 855 2nd Street SW, Calgary AB T2P 4K7, Canada 69 Chemin des Molieres, 69210, Lentilly, France Ratsteich 31, 24837 Schleswig, Germany Wenceslao de la Barquera No.7, Col. Villas del Sur, 76040 Queretaro, Queretaro, Mexico Jathostraβe 11a, D-30163 Hannover, Germany C/Pau Vila, 22 20 puerta 6, 08174 Sant Cugat del Valles, Barcelona, Spain Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Strada dei Loggi 22, 06135, Ponte San Giovanni, Perugia, Italy Unit 2101/2102, 21st Floor Jollibee Plaza, F. Ortigas, Jr. Rd., Ortigas Center, Pasig City, 1605, Philippines ul. Gwiazdzista 7 lok.2, 01 – 651, Warszawa, Poland PIC Romania SRL, 8, Caimatei Street, Sector 2, Bucharest, Romania 100 BlueGrass Commons Blvd, Suite 2200, Hendersonville, TN 37075 United States RenOVate Biosciences, Inc. 3500 South Dupont Highway, Reprodutores PIC, Lda Shaanxi PIC Pig Improvement Co., Ltd. Xianyang Yongxiang Agriculture Technology Co., Ltd. Dover, Delaware 19901, United States Avenida General Norton De Matos, 59A 10A/B, Miraflores, Oeiras, 1495- 148 Alges, Portugal Room 2008, Unit 1, Building 1, Block Saigao, Weiyang Road, Xi'an Economic and Technological Development Zone, Xi'an City, Shaanxi Province, China Qiaojiaguan Village, Jianjun Town Yongshou County, Xianyang Shaanxi Province, China Country of incorporation Direct/ indirect Group interest % of share capital/voting rights held by Group companies Share class Ireland Indirect €1 ordinary 100% China Indirect US$1 ordinary 100% Canada Indirect CAD1 ordinary 100% France Indirect €17 ordinary 100% Germany Indirect Mexico Indirect Germany Indirect Spain Indirect No par value common stock No par value common stock No par value common stock €25 ordinary 50%1 100% 100% 100% United Kingdom Indirect £0.10 ordinary 100% Italy Indirect €1 ordinary 85% Philippines Indirect Poland Indirect Romania Indirect PHP100 ordinary PLN1,000 ordinary RON2,983.10 ordinary 100% 100% 100% Indirect US$1 ordinary 100% United States United States Direct Portugal Indirect China Indirect US$0.001 series seed preferred No par value common stock No par value common stock 50% 100% 100% China Indirect No par value common stock 49%1 143 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 35. Group entities continued Other Name of undertaking Registered address Promar International Limited Accounting & Managerial Services S. de R.L. de C.V. Génétiporc Servicios Tecnicos S.A. de C.V. PIC Servicios Agropecuarios, S.A. de C.V. GIL Finance S.à.r.l. ABS International, Inc. ABS Pecplan Ltda. Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Kansas No. 2028, Quintas Campestre, 31214, Chihuahua, Chih., Mexico Wenceslao de la Barquera No.7, Col. Villas del Sur, 76040 Queretaro, Queretaro, Mexico Wenceslao de la Barquera No.7, Col. Villas del Sur, 76040 Queretaro, Queretaro, Mexico 121 Avenue de la Faiencerie , L – 1511 , Luxembourg 1525 River Road, De Forest WI 53532, United States Rod. BR 050 Km 196 + 150metros, Zona Rural, Delta, MG – 38108-000, Brazil Brazilian Holdings Limited Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Rua 1 JN, 12133, Piso Superior, Sala 13,, Jardim Novo, Cidade De Rio Claro, Estado De Sao Paulo, CEP 13.502.74, Brazil Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Alpha Building, London Road, Nantwich, Stapeley, Cheshire CW5 7JW, United Kingdom Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland 100 BlueGrass Commons Blvd, Suite 2200, Hendersonville, TN 37075 United States Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Place Saint-Lambert 14, 1200 Woluwe-Saint-Lambert Julia House, 3 Th Dervis Street, Nicosia, Ch 1066, Cyprus Fyfield (SM) Limited Fyfield Holland B.V. Genus Investments Limited PIC (UK) Limited PIC Do Brasil Empreendimentos e Participações Ltda. PIC Fyfield Limited Pig Improvement Company Overseas Limited Premium Genetics (UK) Limited Premium Genetics Limited Sygen, Inc. Sygen International Limited Agence Spillers N.V. Bellapais Farm Limited 144 Direct/ indirect Group interest Direct Country of incorporation United Kingdom Mexico Indirect % of share capital/voting rights held by Group companies 100% 100% Share class £1 ordinary MXN1 class 1 Mexico Indirect MXN 1 ordinary 100% Mexico Indirect MXN1,000 ordinary Luxembourg Indirect USD1 ordinary Indirect US$1 common United States Brazil Direct United Kingdom Indirect United Kingdom Indirect Netherlands Indirect United Kingdom Direct United Kingdom Indirect Brazil Indirect United Kingdom Indirect United Kingdom Indirect United Kingdom Indirect Ireland Indirect United States Indirect United Kingdom Direct Belgium Indirect Cyprus Indirect BRL1 ordinary £1 ordinary £1 ordinary NPV ordinary £1 ordinary £1 ordinary BRL0.01 ordinary £1 ordinary £1 ordinary £0.10 ordinary €1.27 ordinary US$10 common £0.10 ordinary No par value common stock No par value common stock 100% 34.1%1 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Genus plc | Annual Report 201735. Group entities continued Name of undertaking Registered address Bellapais Hatcheries Limited Bioscience Network Limited Julia House, 3 Th Dervis Street, Nicosia, Ch 1066, Cyprus 25 Bothwell Street, Glasgow, Lanarkshire G2 6NL Country of incorporation Direct/ indirect Group interest Cyprus Indirect United Kingdom Direct Brazilian Properties Limited Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom United Kingdom Direct Busby Participações Ltda. Av. Leopoldino de Oliveira, 4.113, Brazil Indirect Cannavarro Participações Ltda. Dalco Exportadora Ltda. Dalgety Pension Trust Limited Elmira ABC Ltd. Sala 303, Centro, CEP: 38010-000, UBERABA-MG Av. Leopoldino de Oliveira, 4.113, Sala 303, Centro, CEP: 38010-000, UBERABA-MG Rua Branco de Morais, No. 84, cj.06, Chacara Santo Antonio, Sao Paulo-SP, 04718-010, Brazil Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom 929 Arthur Street N. Elmira, N3B 2Z1, Canada Brazil Indirect Brazil Indirect United Kingdom Indirect Canada Indirect Fyfield Dormant Fyfield Ireland Limited Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom One Spencer Dock, North Wall Quay, Dublin 1, Ireland United Kingdom Indirect Ireland Indirect Genus Americas, Inc. Genus Quest Trustees Limited Genus Trustees Limited National Pig Development Company Limited PIC Benelux B.V. Pig Improvement Company Far East Limited Pigtales Limited Progen Ltd Skogluno Participações Ltda. 1525 River Road, De Forest WI 53532, United States Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Saffierborch 18, 5241 LN Rosmaien, Netherlands C/O Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Av. Leopoldino de Oliveira, , 4.113, Sala 303, Centro, CEP: 38010-000, UBERABA-MG United States Indirect United Kingdom United Kingdom Direct Direct United Kingdom Indirect Indirect Netherlands No par value common stock Hong Kong Indirect US$10 ordinary United Kingdom Indirect United Kingdom Indirect Brazil Indirect £1 ordinary £1 ordinary BRL1 ordinary Share class No par value common stock Limited by guarantee, without share capital £1 ordinary BRL1 ordinary BRL1 ordinary BRL1 ordinary £1 ordinary NPV Class ‘A’ special shares NPV Class ‘B’ special shares NPV common shares £1 ordinary €1.25 ‘A’ ordinary €1.25 ‘B’ ordinary US$0.001 common £1 ordinary £1 ordinary £1 ordinary % of share capital/voting rights held by Group companies 34.1%1 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 145 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Group Financial Statements continued For the year ended 30 June 2017 35. Group entities continued Name of undertaking Registered address Spillers Limited Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ, United Kingdom Spillers Overseas Limited Matrix House, Basing View, Spratts GmbH SyAqua México, S. de R.L. de C.V. Basingstoke, Hampshire RG21 4DZ, United Kingdom Ratsteich 31, 24837 Schleswig, Germany Av Camaron Sabalo No 310, Local 25 y 26 Zona Dorada, Mazatlan, Sinaioa, Mexico Country of incorporation Direct/ indirect Group interest % of share capital/voting rights held by Group companies Share class United Kingdom Indirect £0.25 ordinary £1 preference United Kingdom Indirect £0.25 ordinary Germany Indirect Mexico Indirect No par value common stock No par value common stock 100% 100% 100% 100% 100% 100% Sygen Investimentos Ltda. Rua Branco de Morais, No. 84, Brazil Indirect Usicafé SA cj.06, Chacara Santo Antonio, Sao Paulo-SP, 04718-010, Brazil c/o Cabinet Mayor, avocats, Rue Jean-Gabriel Eynard 6, 1205 Genève Switzerland Indirect BRL0.63 ordinary CHF1,000 ordinary 1 Associated undertakings including joint venture interests. 36. Acquisition of subsidiaries During the year, we formed De Novo Genetics, completed the purchase of Hermitage Genetics and acquired the remaining 49% shareholding of In Vitro Brasil S.A. Accounting policies Business combinations We use the purchase method to account for all business combinations. The cost of acquisition is the aggregate of the fair value at the date of exchange of assets we give, liabilities we incur or assume, and equity instruments we issue in exchange for control of the acquiree. We recognise acquisition-related costs in the profit and loss as we incur them. We recognise the acquiree’s identifiable assets, liabilities and contingent liabilities, which meet the conditions for recognition under IFRS 3, at their fair values at the acquisition date. The exceptions are non-current assets (or disposal Groups) that are classified as held for sale in accordance with IFRS 5 ‘Non-Current Assets Held for Sale and Discontinued Operations’, which we recognise and measure at fair value less costs to sell. Acquisition of interests from non-controlling shareholders In transactions with non-controlling parties that do not result in a change of control, the difference between the fair value of the consideration paid or received and the amount by which the non-controlling interest is adjusted is recognised in equity. 146 Genus plc | Annual Report 2017 36. Acquisition of subsidiaries continued De Novo Genetics On 1 September 2016, we formed De Novo Genetics, a 51% 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 gives us greater control of the genetics we need to create differentiated solutions that help commercial dairy farmers increase profitability through improved herd productivity, health and efficiency. The preliminary amounts recognised in respect of the identifiable assets acquired/transferred and liabilities assumed, at the date of acquisition, are set out in the table below. Intangible assets identified – customer relationships Biological assets (including asset transferred) Financial assets Financial liabilities Total identifiable net assets Equity attributable to non-controlling interest Goodwill Total consideration Satisfied by: Net cash outflow arising on acquisition of subsidiary Deferred cash consideration Deferred contingent cash consideration Biological assets transferred £m 5.0 11.5 0.5 (6.3) 10.7 (5.3) 5.4 4.8 10.2 2.3 3.5 0.8 3.6 10.2 The goodwill of £4.8m arising from the acquisition consists largely of future synergies expected from combining the acquired operations with existing Genus operations. None of the goodwill recognised is expected to be deductible for income tax purposes. The fair value of the financial assets includes trade receivables with a fair value of £0.5m and a gross contractual value of £0.5m. Hermitage Genetics On 31 March 2017, we acquired the entire share capital of Hermitage Genetics, which included technology being the genetic rights and intellectual property of Hermitage. As part of the agreement, the remaining Hermitage business will also become a strategic supply chain and distribution partner for PIC covering the supply of porcine genetics in several markets. In addition, we acquired certain Hermitage customer relationships in various geographies including Russia, the US and several European countries. The preliminary amounts recognised in respect of the identifiable assets acquired/transferred and liabilities assumed, at the date of acquisition, are set out in the table below. Intangible assets identified – Technology – Customer relationships Financial assets Financial liabilities Total identifiable net assets Goodwill Total consideration Satisfied by: Cash consideration Deferred contingent cash consideration £m 6.7 2.4 0.1 (1.1) 8.1 11.4 19.5 15.2 4.3 19.5 The goodwill of £11.4m arising from the acquisition consists largely of future synergies expected from combining the acquired operations with existing Genus operations. None of the goodwill recognised is expected to be deductible for income tax purposes. 147 FINANCIAL STATEMENTS Genus plc | Annual Report 2017 Notes to the Group Financial Statements continued For the year ended 30 June 2017 36. Acquisition of subsidiaries continued The fair value of the financial assets includes trade receivables with a fair value of £0.1m and a gross contractual value of £0.1m. If the acquisition of Hermitage Genetics had been completed on the first day of the financial period, Group revenues and Group profit would have been £2.9m and £1.5m, respectively. In Vitro Brasil S.A. During the year, with the agreement of the existing shareholder we purchased the remaining 49% of In Vitro Brasil S.A. for £11.4m, and the option was cancelled, with a gain of £1.0m being recognised as an exceptional credit. PIC Italia S.r.l On 29 September 2016, we increased our shareholding in PIC Italia S.r.l from 50% to 85%, for a cash consideration of £0.6m. Net acquisition and integration related costs included within exceptional items amount to £0.6m. 37. Post-balance sheet events There are no post-balance sheet events. 38. Non-controlling interest Non-controlling interest Put option over non-controlling interest (see note 24) Total non-controlling interest 2017 £m 6.1 (3.3) 2.8 2016 £m 5.0 (11.4) (6.4) Summarised financial information in respect of each of the Group’s subsidiaries that has a material non-controlling interest is set out below. The summarised financial information below represents amounts before intra-Group eliminations. De Novo Genetics Biological assets Current assets Non-current assets Current liabilities Net assets Equity attributable to owners of the Company Non-controlling interest for De Novo Genetics Other non-controlling interest Non-controlling interest 2017 £m 10.2 1.4 2.4 (2.1) 11.9 (6.1) 5.8 0.3 6.1 During the year £0.1m of dividends were paid to non-controlling interests (2016: £0.4m). During the year, with the agreement of the existing shareholder we purchased the remaining 49% of In Vitro Brasil S.A. for £11.4m. 148 Genus plc | Annual Report 2017Parent Company Balance Sheet As at 30 June 2017 Non-current assets Intangible assets Tangible assets Investments in subsidiaries Other investments Derivative financial asset Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Own shares Profit and loss account Hedging reserve Shareholders’ funds Note 41 42 43 44 50 45 47 48 51 2017 £m 3.1 0.8 84.4 1.9 1.3 91.5 465.2 – 465.2 (257.5) 207.7 299.2 (127.8) 171.4 6.1 112.8 (0.1) 51.5 1.1 171.4 2016 £m 2.4 0.7 82.4 – – 85.5 466.4 – 466.4 (291.3) 175.1 260.6 (116.1) 144.5 6.1 112.3 (0.1) 26.8 (0.6) 144.5 The Company recognised a total comprehensive profit for the year of £35.8m (2016: £9.3m loss). The financial statements were approved and authorised for issue by the Board of Directors on 6 September 2017. Signed on behalf of the Board of Directors Karim Bitar Chief Executive Stephen Wilson Group Finance Director Company number: 02972325 149 FINANCIAL STATEMENTS Genus plc | Annual Report 2017 Parent Company Statement of Changes in Equity For the year ended 30 June 2017 Called up share capital £m Share premium account £m Own shares £m Profit and loss account £m Hedging reserve £m Balance at 1 July 2015 Total comprehensive loss for the financial year Shares issued Dividends Share-based payment expense, net of tax Fair value of movement on cash flow hedges, net of tax Balance at 30 June 2016 Total comprehensive profit for the financial year Movement on pension asset recognition Shares issued Dividends Share-based payment expense, net of tax Fair value of movement on cash flow hedges, net of tax Balance at 30 June 2017 6.1 – – – – – 6.1 – – – – – – 6.1 112.2 – 0.1 – – – 112.3 – – 0.5 – – – 112.8 (0.1) – – – – – (0.1) – – – – – – (0.1) 45.2 (9.3) – (12.2) 3.1 – 26.8 35.8 (1.2) – (13.5) 3.6 – 51.5 – – – – – (0.6) (0.6) – – – – – 1.7 1.1 For information on dividends (see note 13), cash flow hedges (see note 24) and share-based payment expense (see note 28). Total equity £m 163.4 (9.3) 0.1 (12.2) 3.1 (0.6) 144.5 35.8 (1.2) 0.5 (13.5) 3.6 1.7 171.4 150 Genus plc | Annual Report 2017Notes to the Parent Company Financial Statements For the year ended 30 June 2017 39. Accounting information and policies Basis of preparation The Parent Company financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (‘FRS 101’) and the Companies Act 2006 (the ‘Act’). FRS 101 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in the standard, which addresses the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-adopted IFRS. The Company financial statements have been prepared using the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities and in accordance with the Act. The financial statements have been prepared on a going concern basis as set out in note 1 of the consolidated financial statements of Genus plc. The accounting policies set out below and stated in the relevant notes have been applied consistently to all periods presented in these financial statements. The Company has taken advantage of the disclosure exemptions available under FRS 101 in relation to share-based payments, business combinations, financial instruments, presentation of comparative information in respect of certain assets, presentation of a cash flow statement, standards issued not yet effective, impairment of assets and related party transactions. Where required, equivalent disclosures are given in the consolidated financial statements of Genus plc. As permitted by section 408 of the Act, the Company has not presented its own income statement in this Annual Report. Critical accounting judgements and key sources of estimation uncertainty Preparing Company financial statements in conformity with FRS 101 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the Company financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The areas of judgement that have the most significant effect on the amounts recognised in the financial statements are the review for impairment of investment carrying values and the valuation of share-based payments. Pensions A number of our employees are members of defined contribution pension schemes. We charge contributions to profit and loss as they become payable under the schemes’ rules. We show differences between the contributions payable and the amounts actually paid as either accruals or prepayments in the balance sheet. The schemes’ assets are held separately from those of the Company. Certain former employees of the Company are members of one of the Group’s defined benefit pension schemes, further details of which are given in note 27 of the Group financial statements. The schemes are all multi-employer defined benefit schemes, whose assets and liabilities are held independently from the Group but within their sponsored Group company. Significant accounting policies applied in the current reporting period that relate to the financial statements as a whole Taxation We provide for current tax, including UK corporation tax and foreign tax, at the amounts we expect to pay or recover, using the tax rates and the laws enacted or substantively enacted at the balance sheet date. Foreign currencies We record transactions in foreign currencies at the rate ruling at the transaction date or at the contracted rate, if the transaction is covered by a forward foreign currency contract. We retranslate monetary assets and liabilities denominated in foreign currencies at the prevailing rate of exchange at the balance sheet date or, if appropriate, at the forward contract rate. All differences are taken to the income statement. Own shares The Company has adopted FRS 101, which requires us to recognise the assets and liabilities associated with the Company’s investment in its own shares in the Company’s financial statements, where there is de facto control of the assets and liabilities. The Company’s own shares held by a Qualifying Employee Share Ownership Trust remain deducted from shareholders’ funds until they vest unconditionally with employees. 151 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Parent Company Financial Statements continued For the year ended 30 June 2017 39. Accounting information and policies continued Employee share schemes The Company’s Executive Directors and Chief Operating Officers receive part of their remuneration in the form of share awards, which vest upon meeting performance criteria over a three-year period. We measure the cost of these awards by reference to the shares’ fair value at the award date. At the end of each financial reporting period, we estimate the extent to which the performance criteria will be met at the end of three years, and record an appropriate charge in the profit and loss account, together with a corresponding credit to profit and loss reserves. Changes in estimates of the number of shares vesting may result in charges or credits to the profit and loss account in subsequent periods. Share-based payments We have implemented the generally accepted accounting principle for accounting for share-based payments with subsidiary undertakings under FRS 101, whereby the Company has granted rights to its shares to employees of its subsidiary undertakings under an equity-settled arrangement, and the subsidiaries have not reimbursed the Company for these rights. Under this arrangement, the Company treats the share-based payment recognised in the subsidiary’s financial statements as a cost of investment in the subsidiary and credits equity with an equal amount. Derivative financial instruments and hedging Our activities expose us primarily to the financial risks of changes in foreign currency exchange rates and interest rates. We use interest rate swaps to hedge interest rate risk. We also use forward foreign currency contracts, implemented through a medium-term US Dollar cross currency borrowing and related interest rate swap, to hedge exposure to translation risk associated with US Dollar net assets of subsidiaries. Forward foreign currency contracts do not qualify for hedge accounting in the Parent Company financial statements, as the hedged item is not in its balance sheet. Our use of financial derivative instruments is governed by the Group’s policies, which are approved by the Board of Directors. The notes to the Group financial statements include information about the Group’s financial risks and their management, and its use of financial instruments and their impact on the Group’s risk profile, performance and financial condition. The fair value of the US Dollar and interest rate swaps is the estimated amount that we would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, which is the present value of the quoted forward price. Cash flow hedges Where a derivative financial instrument is designated as hedging the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, we recognise the effective part of any gain or loss on the instrument directly in the hedging reserve. We recognise any ineffective portion of the hedge immediately in the profit and loss account. If we hedge a forecast transaction that subsequently results in our recognising a financial asset or liability, then we reclassify the associated gains and losses that we had recognised directly in equity into profit or loss. We do this in the same period or periods that the asset or liability affects profit or loss, which are the periods when we recognise the interest income or expense. If we expect a hedged forecast transaction to occur but the hedging instrument has expired, been sold, terminated or exercised, or we have revoked the designation of the hedge relationship, then the cumulative gain or loss at that point remains in equity and we recognise it in accordance with the above policy when the transaction occurs. If we no longer expect the hedged transaction to occur, we immediately recognise in the profit and loss account the cumulative unrealised gain or loss recognised in equity. When a hedging instrument expires or is sold, terminated or exercised, or we revoke designation of the hedge relationship, the cumulative gain or loss at that point remains in equity until we dispose of the investment it relates to. We treat derivatives embedded in other financial instruments or other host contracts as separate derivatives, when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with unrealised gains and losses reported in the income statement. 152 Genus plc | Annual Report 201740. Employees Staff costs, including Directors’ remuneration, during the year amounted to: Wages and salaries Social security costs Pension costs Share-based payment expense The average monthly number of employees including Directors during the year was as follows: Administration 2017 £m 4.9 1.5 0.1 2.0 8.5 2016 £m 5.3 0.7 0.1 1.7 7.8 2017 Number 37 2016 Number 34 Details of Directors’ remuneration, pensions and share options are included in the Directors’ Remuneration Report. 41. Intangible assets Accounting policies Patents, licences and software are stated at acquisition cost less accumulated amortisation. The amortisation period is determined by reference to expected useful life, which is reviewed at least annually. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. Cost Balance at 1 July 2016 Additions Balance at 30 June 2017 Amortisation Balance at 1 July 2016 Amortisation for the year Balance at 30 June 2017 Carrying amounts At 30 June 2017 At 30 June 2016 Software £m Patents and licences £m Total £m 1.0 0.3 1.3 0.7 0.2 0.9 0.4 0.3 2.2 1.5 3.7 0.1 0.9 1.0 2.7 2.1 3.2 1.8 5.0 0.8 1.1 1.9 3.1 2.4 Additions to patents and licences of £1.5m relate to a stage payment for the worldwide licence to use Caribou Biosciences, Inc.’s leading CRISPR-Cas9 gene editing technology platform. 42. Tangible assets Accounting policies We state fixed assets at cost, together with any incidental acquisition expenses, or at their latest valuation, less depreciation and any provision for impairment. We calculate depreciation on a straight-line basis, to write the assets down to their estimated residual values over their estimated useful lives. The rates of annual depreciation on tangible fixed assets are as follows: Leasehold improvements Equipment period of lease 3 to 20 years 153 FINANCIAL STATEMENTS Genus plc | Annual Report 2017 Notes to the Parent Company Financial Statements continued For the year ended 30 June 2017 42. Tangible assets continued We review the carrying value of fixed assets for impairment, if events or changes in circumstances indicate that the carrying value may not be recoverable. Cost Balance at 1 July 2016 Additions Balance at 30 June 2017 Depreciation Balance at 1 July 2016 Depreciation for the year Balance at 30 June 2017 Carrying amounts At 30 June 2017 At 30 June 2016 Short leasehold improvements £m Equipment £m Total £m 0.5 – 0.5 – 0.1 0.1 0.4 0.5 0.6 0.2 0.8 0.4 – 0.4 0.4 0.2 1.1 0.2 1.3 0.4 0.1 0.5 0.8 0.7 43. Investments in subsidiaries Accounting policies Shares in subsidiary undertakings are stated at cost less any provision for impairment. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, then we estimate the recoverable amount. If the recoverable amounts of the cash-generating unit is less than the value of the investment, it is considered to be impaired and we write it down to its recoverable amount. An impairment loss is recognised immediately in the profit and loss account. Cost Balance at 1 July 2016 Additions Balance at 30 June 2017 Provision for impairment Balance at 1 July 2016 Provided during the year Balance at 30 June 2017 Carrying amounts At 30 June 2017 At 30 June 2016 Shares in subsidiary undertakings £m 273.0 4.6 277.6 190.6 2.6 193.2 84.4 82.4 Additions relate to increasing our investment in ABS Pecplan Ltda. and Genus Investments Limited. Impairment has been recognised on our investment in Pecplan ABS Imp. e Exp. Ltda., which reflects changes in the business structure, as well as Sygen International Limited, due to recognised foreign exchange losses. Principal subsidiary undertakings The Company’s principal subsidiaries and their main activities are given in note 35. 154 Genus plc | Annual Report 201744. Other investments Accounting policies Listed equity investments are stated at fair value. Unlisted equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Listed investment Other investment 2017 £m 1.6 0.3 1.9 2016 £m – – – On 21 June 2017, as part of the NMR pension agreement we acquired 2,120,000 ordinary shares in National Milk Records plc – see note 27. We also invested £0.3m in Renovate Biosciences Inc. 45. Debtors Amounts due within one year Amounts owed by Group undertakings Corporation tax recoverable Other taxes and social security Prepayments and accrued income Deferred taxation Derivative financial asset Note 46 2017 £m 462.3 0.1 – 1.3 1.5 – 465.2 2016 £m 463.6 – 0.1 0.5 1.6 0.6 466.4 At the balance sheet date, the amounts owed by Group undertakings were £462.3m (2016: £463.6m). The carrying amount of these assets approximates their fair value. There are impaired receivable balances of £nil (2016: £nil). Of the amounts owed by Group undertakings, £334.7m (2016: £336.0m) is interest-bearing. 46. Deferred taxation Accounting policies We recognise deferred taxation in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in future or a right to pay less tax in future have occurred at the balance sheet date. We only recognise deferred taxation assets if we consider it more likely than not that we will have suitable profits from which we can deduct the future reversal of the underlying timing differences. Timing differences are differences arising between the Company’s taxable profits and its results as stated in the financial statements, and which are capable of reversing in one or more subsequent periods. We only recognise deferred taxation in respect of the future remittance of retained earnings of overseas subsidiaries to the extent that, at the balance sheet date, dividends have been accrued as receivable. We measure deferred taxation on a non-discounted basis, at the tax rates we expect to apply in the periods in which we expect the timing differences to reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The movements in deferred taxation are as follows: At the start of the year Recognised in income statement (Release)/recognised in equity At the end of the year 2017 £m 1.6 0.1 (0.2) 1.5 2016 £m 1.2 0.3 0.1 1.6 155 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Parent Company Financial Statements continued For the year ended 30 June 2017 46. Deferred taxation continued The amounts provided are as follows: Share-based payment expense Other timing differences 2017 £m 1.3 0.2 1.5 2016 £m 1.1 0.5 1.6 Unrecognised deferred tax assets At the balance sheet date, the Company had no unused tax losses available for offset against future profits with a potential tax benefit of £nil (2016: £nil). 47. Creditors: amounts falling due within one year Bank loans and overdrafts Trade creditors Other creditors Amounts owed to Group undertakings Accruals and deferred income Derivative financial liabilities Note 49 50 2017 £m 7.5 0.8 0.7 245.0 2.9 0.6 257.5 2016 £m 4.5 0.6 0.2 281.9 3.6 0.5 291.3 Included within amounts owed to Group undertakings are amounts of £209.6m (2016: £240.7m) which are interest- bearing and payable on demand. There are no outstanding contributions due to defined contribution pension schemes for the benefit of the employees (2016: £nil). 48. Creditors: amounts falling due after more than one year Bank loans and overdrafts Derivative financial liabilities Note 49 50 2017 £m 127.4 0.4 127.8 2016 £m 115.3 0.8 116.1 49. Loans and borrowings Accounting policies We initially state debt at the amount of the net proceeds, after deducting issue costs. The carrying amount is increased by the finance cost in respect of the accounting period and reduced by payments made in the period. We charge the finance costs of debt to the profit and loss account over the debt term, at a constant rate on the carrying value of the debt to which they relate. Loans and borrowings comprise amounts falling due: In one year or less or on demand In more than one year but not more than two years In more than two years but not more than five years Less: unamortised issue costs Amounts falling due within one year Amounts falling due after more than one year 2017 £m 2016 £m 8.1 – 128.2 136.3 (1.4) 134.9 (7.5) 127.4 5.0 – 116.1 121.1 (1.3) 119.8 (4.5) 115.3 During the year, we exercised an Accordion request, which increased our available credit facilities by £10m and US$25m. We also extended the Group’s credit facilities by one year, which now expire in February 2022. At the balance sheet date, the Group’s credit facilities comprised a £75m multi-currency revolving credit facility and a US$165m revolving credit facility. As part of its interest rate strategy, the Company has entered into interest rate swaps to hedge floating LIBOR rates. As a result, bank loan and overdrafts include borrowings of US$110m (£84.7m) fixed at 1.10% and GBP £20m fixed at 0.51%, excluding applicable bank margin. 156 Genus plc | Annual Report 2017 49. Loans and borrowings continued Terms and debt repayment schedule Terms and conditions of outstanding loans and overdrafts were as follows: Revolving credit facility and overdraft Revolving credit facility, term loan and overdraft Revolving credit facility and overdraft Other unsecured bank borrowings Total interest-bearing liabilities The above revolving credit facilities are unsecured. 50. Derivatives and other financial instruments Additional disclosure on financial instruments can be found in note 24. Currency Interest rate GBP USD EUR Other 1.5% 2.4% 0.7% 0.7% 2017 £m 22.6 106.2 – 6.1 134.9 2016 £m 26.2 86.0 6.2 1.4 119.8 51. Capital and reserves Share capital Issued and fully paid Ordinary shares of 10 pence 2017 Number 2016 Number 61,161,622 61,012,703 The holders of ordinary shares are entitled to receive dividends, as declared from time to time. The movement in share capital for the period was as follows: Issued under the Executive Share Option Plan Issued to Employee Benefits Trust 2017 Number 68,840 80,079 148,919 2016 Number 44,256 – 44,256 Shares issued under share option plans were issued at option prices as follows: 2017 £m 6.1 2017 £m – – – 2016 £m 6.1 2016 £m – – – Executive Share Option Plan 2017 Number Price (pence) 2016 Number Price (pence) – 1,984 2,847 2,434 8,065 24,139 9,206 20,165 68,840 440.00 582.00 776.00 654.50 729.83 977.83 1334.00 1413.00 4,992 527 – 629 4,860 26,799 6,449 – 44,256 440.00 582.00 776.00 654.50 729.83 977.83 1334.00 1413.00 Reserve for own shares The Company’s shares are held by a Qualifying Employee Share Ownership Trust (‘Quest’), which is an employee benefit trust established to facilitate the operation of our long-term incentive scheme for senior management. The reserve amount represents the deduction in arriving at shareholders’ funds for the consideration the trust paid for the Company’s shares, which had not vested unconditionally at the balance sheet date. The number and market value of the ordinary shares held by the employee benefit trust and the QUEST were: Shares allocated but not vested Unallocated shares 2017 Number 70,272 92,334 2016 Number 85,075 92,334 162,606 177,409 2017 £m 1.3 1.6 2.9 2016 £m 1.3 1.5 2.8 The shares have a nominal value of £16,261 (2016: £17,741). Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments net of taxation – see note 24. 157 FINANCIAL STATEMENTS Genus plc | Annual Report 2017Notes to the Parent Company Financial Statements continued For the year ended 30 June 2017 52. Operating leases Accounting policies For operating leases, we charge the rentals payable, and any incentives we receive to enter into an operating lease, to the income statement on a straight-line basis over the lease term. The Company has entered into non-cancellable commercial arrangements on certain equipment, properties and motor vehicles. The leases have various terms and renewal rights. Total of future minimum lease payments under non-cancellable operating leases which expire within: More than five years Operating lease rentals charged in the year: Other 2017 £m 1.0 2017 £m 0.2 2016 £m 1.2 2016 £m 0.2 53. Related party transactions The Company is exempt under FRS 101 from disclosing transactions with other members of the Group. Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Details of other related party transactions are disclosed in note 17, note 27 and note 34 in the Group financial statements. 54. Capital and other commitments At 30 June 2017, outstanding contracted capital expenditure amounted to £nil (2016: £nil). A software agreement was signed on 23 June 2017, with a minimum five-year term, with an annual cost of £0.8m. 55. Contingencies and bank guarantees On 23 June 2017, NMR withdrew from the MPF under a Flexible Apportionment Arrangement between NMR, Genus and the Trustees of the MPF. In return for the right to withdraw from the MPF, NMR made a one-off, lump sum cash payment of £10.1m to the MPF, equivalent to the undiscounted value of all NMR’s future payments under the existing MPF recovery plan which extends to March 2026; and NMR also made a payment to Genus of £4.7m, with £1.4m being satisfied by the issue NMR shares. As a result of the NMR withdrawal, Genus plc has recognised £5.7m as an exceptional credit, with £4.5m (£4.7m payment net of fees) being received directly from NMR, and £1.2m from the MPF pension scheme reflecting the impact of NMR paying undiscounted amounts into the scheme see note 27. The retirement benefit obligations referred to in note 27 include obligations relating to the MPF defined benefit scheme. Genus, together with other participating employers, is joint and severally liable for the scheme’s obligations. Genus has accounted for its section and its share of any orphan assets and liabilities, collectively representing approximately 85% (2016: 75%) of the MPF. As a result of the joint and several liability, Genus has a contingent liability for the scheme’s obligations that it has not accounted for. The total deficit of the MPF scheme from the most recent triennial valuation can be found in note 27. During the year, as part of a commercial agreement in favour of a third party, we entered into a bank guarantee for £4.1m which will expire within two years. 158 Genus plc | Annual Report 2017Five-Year Record – Consolidated Results ADDITIONAL INFORMATION The information included in the five-year record below is in accordance with IFRS as adopted for use in the European Union. Financial results Revenue from continuing operations Adjusted operating profit from continuing operations1 Adjusted operating profit including joint ventures and associates1 Adjusted profit before tax1 Basic adjusted earnings per share1 Diluted adjusted earnings per share1 Operating profit from continuing operations Profit before tax from continuing operations Profit after tax from continuing operations Basic earnings per share Diluted earnings per share Net assets Net debt 2017 £m 459.1 55.1 60.1 56.4 69.4p 68.4p 38.2 40.7 34.3 53.8p 53.0p 402.1 111.6 2016 £m 2015 £m 2014 £m 388.3 398.5 372.2 49.3 54.3 49.7 60.7p 60.1p 58.6 60.9 50.3 81.1p 80.3p 368.1 89.7 47.2 51.2 46.6 56.8p 56.1p 59.5 57.8 40.5 65.7p 64.9p 305.1 71.8 42.9 44.8 39.3 46.5p 46.4p 41.8 38.2 28.9 47.7p 47.6p 285.3 63.9 20132 £m 345.3 45.0 48.2 42.5 49.1p 48.4p 36.3 33.4 23.4 38.8p 38.3p 300.5 52.9 1 Adjusted operating profit, adjusted profit before tax and adjusted basic and diluted earnings per share are before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense, exceptional items and other gains and losses. 2 Restated due to adoption of the amendments of IAS 19. Genus plc | Annual Report 2017 159 Glossary AGM – Annual General Meeting. Artificial insemination or AI – Using semen collected from a bull or boar to impregnate a cow or sow when in estrus. Artificial insemination allows a genetically superior male to be used to mate with many more females than would be possible with natural mating. Biosecurity – The precautions taken to reduce the chance of transmitting disease agents from one livestock operation to another. Boar – A male pig. BRD – Bovine Respiratory Disease, a complex, bacterial and viral infection that causes lung disease in cattle (particularly calves) and is often fatal. CEO – Chief Executive Officer. Company – Genus plc. CIO – Chief Information Officer. COO – Chief Operating Officer. CPI – Consumer Prices Index. CRISPR-Cas 9 – Technology which accurately targets and cuts DNA to produce precise and controllable edits to the genome. CSR – Corporate Social Responsibility. DSBP – Deferred Share Bonus Plan. EPS – Earnings per share. Farrow – When a sow gives birth to piglets. FDA – US Food and Drug Administration. GELT – Genus Executive Leadership Team. Gender skew – The ability to influence the proportion of offspring being of a particular sex. Gene editing – The process that allows precise changes to be made in the genome of the animal without introducing genetic material from another organism. Genetic lag – The amount of time required to disseminate genetic gain from a nucleus herd to the commercial customer. Genetic nucleus – A specialised pig herd, where Genus PIC keeps its pure lines. Pigs are genetically tested at the nucleus to select the best animals to produce the next generation. Genomic bull – A bull which has been assessed through genomic testing. This typically refers to bulls which have not been progeny-tested. Genomically tested – An animal that has been DNA profiled. Genomics – The study of the genome, which is the DNA sequence of an animal’s chromosomes. Gilt – A young female pig, which has not yet given birth. GMS – ABS’s Genetic Management System, which creates a genetic solution tailored to each individual dairy producer to obtain improved herd genetics. Grandparent – The relationship of a breeding pig to the generation of terminal market pigs. A grandparent produces parents, who in turn produce the commercial generation of terminal pigs. Group – Genus plc and its subsidiary companies. GSS – Genus Sexed Semen. INAD – Investigational New Animal Drug. IVB – In Vitro Brasil S.A. In vitro fertilisation or IVF – The fertilisation of an oocyte with semen (outside an animal) in a laboratory for transfer into a surrogate. Genetic gain – The change of the genetic make up of a particular animal population in response to having selected parents that excelled genetically for important traits. Index/Indices – A formula incorporating economically important traits for ranking the genetic potential of animals as parents of the next generation. 160 Genus plc | Annual Report 2017Integrated pork producer – Producers of pork typically involved in raising animals to slaughter weight all the way through to packaged and/or branded pork products. PSP – Performance Share Plan. R&D – Research and development. IP – Intellectual property. JV – Joint venture. Line – Multiple animals that have been mated together in a closed breeding population. Pure lines can have their origins in one founding breed or in several breeds. Market pig equivalents (‘MPE’) – A calculated measure of the number of terminal pigs, of which each pig accounts for half a male MPE and half a female MPE, produced by each invoiced product. MPF – Milk Pension Fund. Multiplier – A producer whose farm contains grandparent sows. The farm crosses together two lines of grandparents, multiplying the number of genetically improved parents that are available for sale. NED – Non-Executive Director. Net Merit (‘NM’) – A multi-trait selection index published by the U.S. Council on Dairy Cattle Breeding (CDCB), based on the economic value of yield, fitness and conformation evaluations. NMR – National Milk Records plc. PEDv – Porcine epidemic diarrhoea virus, which causes older pigs to lose weight and is usually fatal for newborn piglets. PMT – Portfolio Management Team. PQA – Pork Quality Assurance. Progeny tested – Elite animals whose genetic value as a parent has been tested and validated through the performance of their offspring. PRRSv – Porcine Reproductive and Respiratory Syndrome virus. R&D PMT – Research and Development Portfolio Management Team. RMS – ABS’s Reproductive Management System, which is a systematic approach to maximising pregnancy production and its contribution to herd profitability. RPI – Retail Prices Index. RWD – ABS’s Real World Data System of observed performance data from many dairy herds. Sire – The male parent of an animal. Sire line – The male line selected for traits desirable for the market. Sow – A female pig which has given birth at least once. Straw – A narrow tube used to package frozen bull semen. Stud – Locations where bulls or boars are housed and their semen collected, evaluated, diluted into multiple doses/straws and packaged, ready for shipping to farms. Trait – A measurable characteristic that may be a target for genetic selection. TransitionRight™ – Genus ABS’s patent-pending genetic selection tool to help prevent multiple post calving metabolic disorders that occur during transition. Unit – A straw of frozen bull semen or tube/bag of fresh boar semen sold to a customer. Terminal boars – The male pig that is used to mate with a parent female to produce a terminal pig. 2013 – 2018 – The year ending 30 June respectively. Genus plc | Annual Report 2017 161 Notice of Annual General Meeting THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to the action you should take, you should consult your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000. If you have sold or transferred all your shares in Genus plc, please send this document and the accompanying documents as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. Notice of Annual General Meeting Notice is hereby given that the 2017 Annual General Meeting of Genus plc (the ‘Company’) will be held at Buchanan Communications, 107 Cheapside, London EC2V 6DN on 16 November 2017 at 11.00 am for the following purposes: To consider and if thought fit, to pass the following resolutions, of which numbers 1 to 12 will be proposed as ordinary resolutions and numbers 13 to 16 as special resolutions. Ordinary Resolutions 1. To receive the Company’s audited Financial Statements and the Directors’ Reports for the year ended 30 June 2017 (the ‘Annual Report and Accounts’). 2. To approve the Directors’ Remuneration Report for the year ended 30 June 2017, as set out on pages 60 to 77 of the Company’s Annual Report 2017. 3. To declare a final dividend of 16.2 pence per ordinary share, payable on 1 December 2017 to shareholders on the register of members at the close of business on 17 November 2017. 4. To re-elect Bob Lawson as a Director of the Company who, being eligible, offers himself for re-election. 5. To re-elect Karim Bitar as a Director of the Company who, being eligible, offers himself for re-election. 6. To re-elect Stephen Wilson as a Director of the Company who, being eligible, offers himself for re-election. 7. To re-elect Nigel Turner as a Director of the Company who, being eligible, offers himself for re-election. 8. To re-elect Lysanne Gray as a Director of the Company who, being eligible, offers herself for re-election. 9. To re-elect Duncan Maskell as a Director of the Company who, being eligible, offers himself for re-election. 10. To re-elect Lykele van der Broek as a Director of the Company who, being eligible, offers himself for re-election. 11. To reappoint Deloitte LLP as auditor of the Company to hold office from the conclusion of the Annual General Meeting until the conclusion of the next general meeting of the Company at which Financial Statements are laid and to authorise the Audit Committee of the Board to determine the remuneration of the auditor. 12. That the Directors be generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 (the ‘Act’) to exercise all the powers of the Company to allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company up to a maximum aggregate nominal amount of: 12.1. £2,039,151.86 being 20,391,518 ordinary shares of 10 pence each (‘Ordinary Shares’) representing one third of the issued share capital of the Company; and 12.2. £2,039,151.86 being 20,391,518 Ordinary Shares representing a further third of the issued share capital of the Company, provided that (i) they are equity securities (within the meaning of section 560(1) of the Act) and (ii) they are offered by way of an offer to holders of Ordinary Shares open for acceptance for a period fixed by the Directors to holders on the register on a fixed record date (as the Directors may determine) in proportion as nearly as may be to the respective numbers of Ordinary Shares held by them on any such record date and to other holders of equity securities entitled to participate therein, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with any fractional entitlements or legal or practical difficulties under the laws of, or the requirement of any recognised regulatory body or any stock exchange in, any territory or by virtue of shares being represented by depositary receipts or any other matter (a “rights issue”), such authority to expire on the conclusion of the Company’s Annual General Meeting next following or, if earlier, the close of business on the day which is 15 months after the date on which this resolution is passed but so that the Company may, before the expiry of such period, make an offer or agreement which would or might require shares to be allotted or such rights to be granted after such expiry and the Directors may allot shares and grant rights in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. 162 Genus plc | Annual Report 2017 Special Resolutions 13. That subject to and conditional on the passing of resolution 12, the Directors be empowered, pursuant to sections 570 and 573 of the Act, to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the authority conferred by resolution 12 or by way of a sale of treasury shares as if section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities (or sale of treasury shares): 13.1. in connection with an offer of securities (but in the case of the authority granted under paragraph 12.2 of resolution 12 above by way of rights issue only, as defined in that paragraph) to the holders of Ordinary Shares on a fixed record date (as the Directors may determine) in proportion as nearly as may be to the respective numbers of Ordinary Shares held by them, on any such record date and to such other holders of equity securities entitled to participate therein, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with any fractional entitlements or legal or practical difficulties under the laws of, or the requirement of any regulatory body or any stock exchange in, any territory or by virtue of shares being represented by depository receipts or any other matter; and 13.2. other than pursuant to paragraph 13.1 above, to any person or persons up to an aggregate nominal amount of £305,872.78 representing not more than 5% of the issued share capital of the Company as at 2 October 2017 (being the latest practicable date prior to the publication of this Notice), and shall expire upon the expiry of the general authority conferred by resolution 12 above, save that the Company may, before such expiry, make an offer or agreement which would, or might, require equity securities to be allotted, or treasury shares to be sold, after such expiry and the Directors may allot equity securities or sell treasury shares in pursuance of any such offer or agreement as if the power had not expired. 14. That subject to and conditional on the passing of resolution 12, the Directors be authorised in addition to any authority granted under resolution 13 to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the authority conferred by resolution 12 or by way of a sale of treasury shares as if section 561(1) of the Act did not apply to any such allotment or sale, provided that this power shall be: 14.1. limited to the allotment of equity securities, or sale of treasury shares, up to an aggregate nominal amount of £305,872.78 representing not more than 5% of the issued share capital of the Company as at 2 October 2017 (being the latest practicable date before publication of this Notice); and 14.2. used only for the purposes of financing (or refinancing, if the authority is to be used within six months after the original transaction) a transaction which the Directors of the Company determine to be an acquisition or other capital investment of a kind contemplated by the Statement of Principles on Disapplying Pre-Emption Rights most recently published by the Pre-Emption Group prior to the date of this Notice, and shall expire upon the expiry of the general authority conferred by resolution 12 above, save that the Company may, before such expiry, make an offer or agreement which would, or might, require equity securities to be allotted, or treasury shares sold, after such expiry and the Directors may allot equity securities or sell treasury shares in pursuance of any such offer or agreement as if the power had not expired. 15. That the Company be generally and unconditionally authorised to make market purchases (within the meaning of section 693(4) of the Act) of Ordinary Shares on such terms and in such manner as the Directors think fit provided that: 15.1. the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 6,117,455 (representing 10% of the Company’s issued ordinary share capital as at 2 October 2017, being the latest practicable date before publication of this Notice); 15.2. the minimum price, exclusive of any expenses, which may be paid for an Ordinary Share is 10 pence; 15.3. the maximum price, exclusive of any expenses, which may be paid for an Ordinary Share is an amount equal to the higher of: (a) 105% of the average of the middle market quotations for an Ordinary Share, as derived from the London Stock Exchange Daily Official List, for the five business days immediately before the day on which such share is contracted to be purchased; and (b) the higher of the price of the last independent trade and the highest current independent bid for an Ordinary Share in the Company on the trading venues where the market purchases by the Company pursuant to the authority conferred by this resolution 15 will be carried out; and 15.4. the authority conferred by this resolution shall expire on the conclusion of the Company’s Annual General Meeting next following or the close of business on the day which is 15 months after the date of its passing (whichever occurs first) unless previously renewed, varied or revoked by the Company in general meeting, except that the Company may, before such expiry, enter into a contract for the purchase of Ordinary Shares under the authority hereby conferred prior to the expiry of such authority, which will or may be completed by or executed wholly or partly after the expiration of this authority, and may purchase its Ordinary Shares in pursuance of any such contract. 16. That a General Meeting, other than an Annual General Meeting, may be called on not less than 14 clear days’ notice and that such authority shall expire on the conclusion of the Company’s Annual General Meeting next following. Genus plc | Annual Report 2017 163 Notice of Annual General Meeting continued The Board considers that all the resolutions to be considered at the Annual General Meeting are in the best interests of the Company and its members as a whole and are therefore likely to promote the success of the Company for the benefit of its members as a whole. The Directors unanimously recommend that you vote in favour of all the proposed resolutions as they intend to do in respect of their own beneficial holdings which amount in aggregate to 108,874 shares representing approximately 0.178% of the existing issued ordinary share capital of the Company. By order of the Board Registered office: Matrix House Basing View Basingstoke RG21 4DZ Registered in England and Wales with number 02972325 Dan Hartley Group General Counsel & Company Secretary 2 October 2017 164 Genus plc | Annual Report 2017Explanatory Notes This section contains an explanation of each of the resolutions to be put to the Annual General Meeting. Resolutions 1 to 12 are ordinary resolutions requiring the approval of a simple majority of shareholders present (in person or by proxy) and voting at the Annual General Meeting. Resolutions 13 to 16 are special resolutions requiring the approval of 75% of shareholders present (in person or by proxy) and voting at the Annual General Meeting. Resolution 1 – To Receive the Annual Report The Chairman will present the Annual Report to the Annual General Meeting. Resolution 2 – Approval of the Directors’ Remuneration Report The Company is required to offer an annual advisory vote on the implementation of the Company’s existing remuneration policy in terms of the payments and share awards made to Directors during the year (the ‘Directors’ Remuneration Report’) and a separate binding vote on the Company’s forward looking remuneration policy (the ‘Directors’ Remuneration Policy’) at least once every three years, or earlier if a change is made to the Directors’ Remuneration Policy, or if the advisory vote is not passed by shareholders. Resolution 2 seeks shareholder approval for the Directors’ Remuneration Report as set out on pages 60 to 77 of the Company’s Annual Report 2017. The Directors’ Remuneration Report gives details of the Directors’ remuneration for the year ended 30 June 2017. Resolution 2 is an advisory resolution and does not affect the future remuneration paid to any Director. The report also includes details of the Remuneration Committee’s representations and activities. The Company’s auditor Deloitte LLP has audited those parts of the Directors’ Remuneration Report which are required to be audited and their report is issued in the Company’s Annual Report 2017. Shareholder approval for the Directors’ Remuneration Policy was given at the Company’s Annual General Meeting held in November 2016. As there are no proposed changes to the Directors’ Remuneration Policy, it is not required to be offered at this year’s Annual General Meeting. For ease of reference, a table summarising the Directors’ Remuneration Policy has been included on pages 78 to 81 of the Directors’ Remuneration Report, but that table does not form part of the Directors’ Remuneration Report for the purposes of resolution 2. Resolution 3 – Final Dividend Final dividends must be approved by shareholders but must not exceed the amount recommended by Directors. If the meeting approves the recommended final dividend it will be paid out in accordance with resolution 3. An interim dividend of 7.4 pence per Ordinary Share was paid on 31 March 2017 to shareholders on the register at 3 March 2017, resulting in a total dividend for the year of 23.6 pence per Ordinary Share. Resolutions 4 to 10 – Re-election of Directors In accordance with provisions of the UK Corporate Governance Code, all Directors of the Company are required to offer themselves for annual re-election. Biographies of all of the current Directors can be found on pages 42 to 43 of the Company’s Annual Report 2017. The Board has confirmed, following a performance review, that all Directors standing for re-election continue to perform effectively and demonstrate commitment to their roles. The Board has considered whether each of the independent Non-Executive Directors is free from any relationship that could materially interfere with the exercise of his or her independent judgement and has determined that each continues to be considered to be independent. Resolution 11 – Appointment of Auditor and Auditor’s Remuneration The Company is required to appoint an auditor at each general meeting at which accounts are presented, to hold office until the end of the next such meeting. This resolution is recommended by the Audit Committee and proposes the reappointment of the Company’s existing auditor, Deloitte LLP and gives authority to the Audit Committee to agree the auditor’s remuneration. Resolution 12 – Authority to Allot Shares Resolution 12 is proposed as an ordinary resolution and seeks the approval of shareholders, in accordance with section 551 of the Act, to authorise the Directors to allot Ordinary Shares for a period as stated in resolution 12. The Investment Association (“IA”) guidelines on directors’ authority to allot shares state that IA members will regard as routine resolutions seeking the authority to allot shares representing up to two-thirds of the Company’s issued share capital, provided that any amount in excess of one-third of the Company’s issued share capital is only used to allot shares pursuant to a fully pre-emptive rights issue. In light of the IA guidelines, the Board considers it appropriate that Directors be granted authority to allot shares in the capital of the Company up to a maximum nominal amount of £4,078,303.72 representing two-thirds of the Company’s issued ordinary share capital as at 2 October 2017 (the latest practicable date prior to publication of this Notice). If the Company wishes to allot more than a nominal amount of £2,039,151.86 (representing one-third of the Company’s issued ordinary share capital), then any additional amount can only be allotted pursuant to a rights issue. The power will last until the end of the next Annual General Meeting of the Company or, if earlier, on the close of business on the day which is 15 months after the date on which resolution 12 is passed. The Directors have no current intention to allot new Ordinary Shares1 (other than in relation to the Company’s employee share schemes) and intend to comply with the guidance issued by the Investment Association. However, if the Directors do exercise this authority, the Directors intend to follow emerging best practice as regards to its use. As at the date of this Notice, no shares are held by the Company in treasury. Genus plc | Annual Report 2017 165 Notice of Annual General Meeting continued Resolutions 13 and 14 – Disapplication of Pre-emption Rights Resolutions 13 and 14 are special resolutions and give the Directors authority to allot Ordinary Shares in the capital of the Company pursuant to the authority granted under resolution 12 above for cash without complying with the pre-emption rights in the Act in certain circumstances. Resolution 13 will permit the Directors to allot: (a) equity securities for cash and sell treasury shares up to a nominal amount of £4,078,303.72, representing two-thirds of the Company’s issued share capital as at 2 October 2017 (the latest practicable date prior to publication of this Notice) on an offer to existing shareholders on a pre-emptive basis (that is including a rights issue or an open offer), with one-third being available only in connection with a rights issue (in each case subject to any adjustments, such as for fractional entitlements and overseas shareholders, as the Directors see fit); and (b) equity securities for cash and sell treasury shares up to a maximum nominal value of £305,872.78, representing approximately 5% of the issued ordinary share capital of the Company as at 2 October 2017 (the latest practicable date prior to publication of this Notice) otherwise than in connection with a pre-emptive offer to existing shareholders. Resolution 14 is being proposed as a separate resolution to authorise the Directors to allot additional equity securities for cash and sell treasury shares up to a maximum nominal value of £305,872.78, representing a further 5% of the issued ordinary share capital of the Company (as at 2 October 2017, being the latest practicable date prior to publication of this Notice), otherwise than in connection with a pre-emptive offer to existing shareholders for the purposes of financing a transaction (or refinancing within six months of the transaction) which the Directors determine to be an acquisition or other capital investment contemplated by the Pre-Emption Group’s Statement of Principles (the “Pre-Emption Group Principles”). The Pre-Emption Group Principles were revised in March 2015 to allow the authority for an issue of shares for cash otherwise than in connection with a pre-emptive offer to be increased from 5% to 10% of the Company’s issued share capital, provided that the Company confirms that it intends to use the additional 5% authority only in connection with an acquisition or specified capital investment which is announced contemporaneously with the issue or which has taken place in the preceding six-month period and is disclosed in the announcement of the issue (a ‘Relevant Acquisition or Specified Capital Investment’). The Directors believe that it is appropriate to seek this additional 5% authority in resolution 14 to give the Company the flexibility that this resolution affords. In line with Pre-Emption Group 2016 guidance, the annual disapplication of pre-emption rights is being proposed as two separate resolutions. The Board intends to adhere to the provisions in the revised Pre-Emption Group’s Statement of Principles and to not allot shares for cash on a non pre-emptive basis in excess of an amount equal to 7.5% of the total issued ordinary share capital of the Company (excluding treasury shares) within a rolling three-year period, without prior consultation with shareholders. The authority contained in resolutions 13 and 14 will expire upon the expiry of the authority to allot shares conferred in resolution 14 (that is at the end of the next Annual General Meeting of the Company or, if earlier, on the close of business on the day which is 15 months from the date of these resolutions). The Directors’ existing authority expires at the forthcoming Annual General Meeting. Resolution 15 – Authority to Purchase Own Shares Resolution 15, is proposed as a special resolution and seeks authority for the Company to purchase up to 10% of its Ordinary Shares at, or between, the minimum and maximum prices specified in this resolution. This power would be used only after careful consideration by the Directors, having taken into account market conditions prevailing at that time, the investment needs of the Company, its opportunities for expansion and its overall financial position. The Directors would exercise the authority to purchase Ordinary Shares only if they considered it to be in the best interests of shareholders as a whole and if the purchase could be reasonably expected to result in an increase in earnings per share. The Directors have no present intention of exercising the authority to purchase Ordinary Shares but consider it prudent to obtain the flexibility this resolution provides. In considering whether to use this authority, the Directors will take into account factors including the financial resources of the Company, the Company’s share price and future funding opportunities. The authority will be exercised only if the Directors believe that to do so would result in an increase in earnings per share and would be in the interests of shareholders generally. Any purchases of Ordinary Shares would be by means of market purchases through the London Stock Exchange. Under the Act, the Company is allowed to hold its own shares in treasury following a purchase of its own shares, instead of cancelling them. Such shares may be resold for cash or used to satisfy share options and share awards under the Company’s share incentive schemes but all rights attaching to them, including voting rights and any right to receive dividends, are suspended whilst they are held in treasury. If the Directors exercise the authority conferred by resolution 15, the Company will have the option of holding repurchased shares in treasury. If resolution 15 is passed at the Annual General Meeting, it is the Company’s current intention to hold in treasury all of the shares it may purchase pursuant to the authority granted to it. However, in order to respond properly to the Company’s capital requirements and prevailing market conditions, the Directors will reassess at the time of any and each actual purchase whether to hold the shares in treasury or cancel them, provided it is permitted to do so. As at the date of this Notice, no shares are held by the Company in treasury. 166 Genus plc | Annual Report 2017At 2 October 2017 (the latest practicable date prior to the publication of this Notice), options were outstanding to subscribe for 1,447,510 Ordinary Shares, representing 2.3% of the issued share capital at that date. If the full authority to purchase such shares (existing and sought) was exercised, they would represent 2.6% of the Company’s issued share capital as at that date. The authority sought at the Annual General Meeting will expire at the conclusion of the Annual General Meeting next following, or the close of business on the day which is 15 months from the date of this resolution (whichever is earlier). Resolution 16 – Notice Period for General Meetings Resolution 16, is proposed as a special resolution and seeks the approval of shareholders to reduce to 14 clear days the notice period required for a general meeting (other than an Annual General Meeting). The notice period required for general meetings for listed companies is 21 days but the Company may provide a shorter notice period of 14 clear days (for meetings other than Annual General Meetings) provided two conditions are met. The first condition is that the Company offers a facility for shareholders to vote by electronic means. This condition is met if the Company offers a facility, accessible to all shareholders, to appoint a proxy by means of a website. The second condition is that there is an annual resolution of shareholders approving the reduction of the minimum notice period from 21 days to 14 days. Annual General Meetings will continue to be held on at least 21 clear days’ notice. It is intended that the shorter notice period would not be used as a matter of routine for general meetings but only where the flexibility is merited by the business of the meeting and is thought to be in the interests of the shareholders as a whole. General Notes This Notice is being sent to all members and to any person nominated by a member of the Company under section 146 of the Act to enjoy information rights. Information regarding the Annual General Meeting, including the information required by section 311A of the Act, is available from www.genusplc.com. Proxies Members will find an attendance card and a form of proxy enclosed with this Notice. If you are attending the Annual General Meeting, you should bring the attendance card with you. Only holders of Ordinary Shares, or their duly appointed representatives, are entitled to attend, vote and speak at the Annual General Meeting. Any member so entitled may appoint one or more proxies to attend, speak and to vote instead of him or her. A proxy need not be a member of the Company but must attend the Annual General Meeting to represent you. Your proxy could be the Chairman, another Director of the Company or another person who has agreed to attend to represent you. Your proxy must vote as you instruct and must attend the meeting for your vote to be counted. Details of how to appoint one or more proxies are set out in the notes to the proxy form. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Annual General Meeting. To be valid, a duly executed form of proxy for use at the Annual General Meeting together, if appropriate, with the power of attorney or other authority (if any) under which it is signed or a duly certified copy of such power or authority must be deposited at the offices of Equiniti Registrars, Freepost RTHJ-CLLL-KBKU, Equiniti, Aspect House, Spencer Road, Lancing, BN99 8LU at least 48 hours before the time appointed for holding the Annual General Meeting or any adjournment thereof. Alternatively, proxies may be appointed by having an appropriate CREST message transmitted, if you are a user of the CREST system (further details are below). In the case of a member which is a company, the proxy form must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. To change your proxy instructions you may return a new proxy appointment using the methods set out above. Where you have appointed a proxy using the hard copy proxy form and would like to change the instructions using another hard copy proxy form, please contact Equiniti Limited, Aspect House, Spencer Road, Lancing BN99 6DA. The deadline for receipt of proxy appointments (see above) also applies in relation to amended instructions. Where two or more valid separate appointments of proxy are received in respect of the same share in respect of the same meeting, the one which is last sent shall be treated as replacing and revoking the other or others. Completion and return of a form of proxy will not preclude shareholders from attending the Annual General Meeting and voting in person if they wish to do so. The right to appoint a proxy does not apply to persons whose shares are held on their behalf by another person and who have been nominated to receive communications from the Company in accordance with section 146 of the Act (‘nominated persons’). Nominated persons may have a right under an agreement with the registered member who holds shares on their behalf to be appointed (or to have someone else appointed) as a proxy. Alternatively, if nominated persons do not have such a right, or do not wish to exercise it, they may have a right under such an agreement to give instructions to the person holding the shares as to the exercise of voting rights. Genus plc | Annual Report 2017 167 Notice of Annual General Meeting continued Voting record date Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the time by which a person must be entered on the register of members of the Company in order to have the right to attend and vote at the Annual General Meeting is 6.30pm on 14 November 2017 (or if the Annual General Meeting is adjourned, members on the register of members not later than 6.30pm on the day that is two working days prior to the reconvened Annual General Meeting). Changes to entries on the register of members after the relevant time will be disregarded in determining the rights of any person to attend or vote (and the number of votes they may cast) at the Annual General Meeting or adjourned meeting. Documents on display 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, and at the place of the Annual General Meeting for at least 15 minutes prior to the Annual General Meeting until its conclusion. CREST CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for this Annual General Meeting to be held on 16 November 2017 at 11.00am and any adjournment(s) thereof by using the procedures described in the CREST Manual found on the Euroclear website www.euroclear.com. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK and Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA19) by the latest time(s) for receipt of proxy appointments specified in this Notice of Annual General Meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK and Ireland Limited do not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001, as amended. Corporate Representatives Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. Total Voting Rights As at 2 October 2017 (being the latest practicable date before publication of this Notice), the Company’s issued share capital comprised 61,174,556 Ordinary Shares of 10 pence each. As at the date of this Notice, no shares are held by the Company in treasury. Each Ordinary Share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at 2 October 2017 is 61,174,556. The Company’s website, referred to above, will include the contents of this Notice, information on the number of shares and voting rights and, if applicable, any shareholders’ statements, shareholders’ resolutions or shareholders’ matters of business received by the Company after the date of this Notice. Questions Under section 319A of the Act, the Company must cause to be answered at the Annual General Meeting any question a member asks relating to the business being dealt with at the Annual General Meeting unless answering the question would interfere unduly with the preparation for the Annual General Meeting or involve the disclosure of confidential information; the answer has already been given on a website in the form of an answer to a question; or it is undesirable in the interests of the Company or the good order of the Annual General Meeting that the question be answered. 168 Genus plc | Annual Report 2017Requisition Rights Under section 527 of the Act, members meeting the threshold requirements set out in that section have the right to require the Company to publish on its website a statement setting out any matter relating to: (i) the audit of the Company’s Accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any circumstances connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Act. The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Act. Where the Company is required to place a statement on its website under section 527 of the Act, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Act to publish on its website. Voting at the meeting In order for the voting preferences of all shareholders including those who cannot attend the meeting but who validly appoint a proxy, to be taken into account, a poll will be conducted on all resolutions at the Annual General Meeting this year. Each shareholder and proxy present at the meeting will be invited to complete a poll card indicating how they wish to cast their votes in respect of each resolution. The results of the voting will be posted on the Company’s website as soon as practicable after the meeting. Except as provided above, members who have general queries about the Annual General Meeting should call Equiniti registrars on 0371 384 2290. Lines open 8.30am to 5.30pm, Monday to Friday (excluding UK public holidays). If calling from overseas, please call the Equiniti overseas helpline number of +44 121 415 7047. No other methods of communication will be accepted. You may not use any electronic address provided either in this Notice of Annual General Meeting, or any related documents (including the proxy form) to communicate with the Company for any purposes other than those expressly stated. Genus plc | Annual Report 2017 169 Notes Notes Notes Advisers SECRETARY AND REGISTERED OFFICE DAN HARTLEY Matrix House Basing View Basingstoke Hampshire RG21 4DZ Registered Number 02972325 FINANCIAL ADVISER HSBC BANK PLC 8 Canada Square London E14 5HQ STOCKBROKERS PEEL HUNT Moor House 120 London Wall London EC2Y 5ET LIBERUM CAPITAL LIMITED Ropemaker Place Level 12 25 Ropemaker Street London EC2Y 9LY STATUTORY AUDITOR DELOITTE LLP Abbots House Abbey Street Reading RG1 3BD SOLICITORS HERBERT SMITH FREEHILLS LLP Exchange House Primrose Street London EC2A 2EG BANKERS BARCLAYS BANK PLC 2nd Floor 90–92 High Street Crawley West Sussex RH10 1BP REGISTRARS EQUINITI LIMITED Aspect House Spencer Road Lancing West Sussex BN99 6DA WWW.GENUSPLC.COM Genus plc | Matrix House, Basing View, Basingstoke, Hampshire RG21 4DZ T: +44 (0)1256 347100 | F: +44 (0)1256 477385 

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