Globe International Limited Annual Report 2006

Plain-text annual report

(cid:204)(cid:192)(cid:62)(cid:152)(cid:195)(cid:118)(cid:156)(cid:192)(cid:147)(cid:136)(cid:152)(cid:125) (cid:69) (cid:1)(cid:152)(cid:152)(cid:213)(cid:62)(cid:143)(cid:202)(cid:44)(cid:105)(cid:171)(cid:156)(cid:192)(cid:204)(cid:202)(cid:211)(cid:228)(cid:228)(cid:200) G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Glanbia plc, Glanbia House, Kilkenny, Ireland. Tel. +353 56 777 2200 Fax. +353 56 777 2222 www.glanbia.com G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Glanbia plc is a leading international dairy foods and nutritional ingredients Group, headquartered in Ireland. The Group is successfully developing a strategic international presence, which today represents nearly 40% of revenue. At the same time, the Group continues to consistently improve the cost base, productivity and long-term sustainability of the Irish operations. Combined these give Glanbia a strong platform from which to continue to grow and develop. Contents Performance Highlights Our Business Chairman’s Statement Group Managing Director’s Review Our Strategy Explained Business Review Consumer Foods Agribusiness and Property Food Ingredients and Nutritionals Nutritionals Joint Ventures and Associates Corporate Social Responsibility Finance Review Board of Directors Management Report of the Directors Corporate Governance Financial Statements 1 2 4 6 10 12 12 16 18 21 24 27 30 32 34 35 38 46 e i . i n g s e d e c r u o s w w w . Performance Highlights G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 1 Revenue billion Operating proﬁ t million (Pre-exceptional) Proﬁ t before tax million * €2.1 €88.4 €74.4 €1.9 €85.6 €71.5 * * * Including share of results of joint ventures and associates Operating margin (Pre-exceptional) Adjusted earnings per share Dividend per share 4.6% 22.6 cent 5.8 cent (cid:127) 2006 was a good year for Glanbia. Results were in line with expectations, despite a particularly tough ﬁ rst half in Ireland. (cid:127) Glanbia completed a major nutritionals acquisition and commissioned a world-class dairy processing plant, both in the USA. (cid:127) Key ﬁ nancial performance indicators are trending positive and international operations and joint ventures are progressing well. (cid:127) As to the future, Glanbia is on target to deliver double digit earnings growth in 2007 and the outlook is for sustained high growth. 2 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Our Business (cid:44)(cid:105)(cid:219)(cid:105)(cid:152)(cid:213)(cid:105) (cid:37)(cid:163)(cid:176)(cid:153)(cid:202)(cid:76)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152) (cid:120)(cid:110)(cid:175) (cid:211)(cid:110)(cid:175) (cid:163)(cid:123)(cid:175) (cid:34)(cid:171)(cid:105)(cid:192)(cid:62)(cid:204)(cid:136)(cid:152)(cid:125)(cid:202)(cid:42)(cid:192)(cid:156)(cid:118)(cid:136)(cid:204)(cid:202) (cid:37)(cid:110)(cid:120)(cid:176)(cid:200)(cid:202)(cid:147)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152) (cid:120)(cid:211)(cid:175) (cid:211)(cid:153)(cid:175) (cid:163)(cid:153)(cid:175) Glanbia is organised into three divisions and has operations in Ireland, Europe and the USA, with international joint ventures in the UK, USA and Nigeria. 2006 revenue amounted to €1.9 billion and was €2.1 billion, including the Group’s share of joint ventures and associates, with approximately 40% generated by international operations. (cid:10)(cid:34)(cid:32)(cid:45)(cid:49)(cid:31)(cid:13)(cid:44)(cid:202)(cid:19)(cid:34)(cid:34)(cid:12)(cid:45) (cid:1)(cid:20)(cid:44)(cid:22)(cid:9)(cid:49)(cid:45)(cid:22)(cid:32)(cid:13)(cid:45)(cid:45)(cid:202)(cid:69)(cid:202)(cid:42)(cid:44)(cid:34)(cid:42)(cid:13)(cid:44)(cid:47)(cid:57) (cid:19)(cid:34)(cid:34)(cid:12)(cid:202)(cid:22)(cid:32)(cid:20)(cid:44)(cid:13)(cid:12)(cid:22)(cid:13)(cid:32)(cid:47)(cid:45)(cid:202)(cid:69)(cid:202)(cid:32)(cid:49)(cid:47)(cid:44)(cid:22)(cid:47)(cid:22)(cid:34)(cid:32)(cid:1)(cid:29)(cid:45) IRELAND Consumer Foods Leading brands & market positions Agribusiness & Property Key linkage to farmer supply base Food Ingredients Ireland Largest dairy processor in Ireland Business Review Page 12 Business Review Page 16 Business Review Page 18 Locations: 10 facilities in Ireland. Locations: Agribusiness: 61 locations nation-wide. Description: Agribusiness is the Group’s key linkage with it’s large farmer supply base. Property is newly formed and is focused on maximising the value of the Group’s property portfolio. Products: feed, fertilisers, farm inputs and the CountryLife retail range. Brands: Gain Feeds, IFI fertilisers, CountryLife. Description: The key business unit is dairy-based consumer foods. The second business is the processing of pigs and the manufacture of pigmeat products. Products: Branded liquid milk, dairy products, cheeses and fresh soups; fresh pork and bacon products. Market positions: No. 1 liquid milk No. 1 cream brand No. 1 pigmeat processor. Brands: Avonmore, Yoplait, Nash’s, CMP, Snowcream, Premier, Kilmeaden. Locations: Two manufacturing facilities located at Virginia, County Cavan and Ballyragget, County Kilkenny. Description: This business unit processes one-third of the total milk pool in Ireland and markets over 190,000 tonnes of dairy products and ingredients on a business-to-business basis worldwide. Products: Butters, acid and rennet casein, cheese, milk powders, cream mixes and other whey protein ingredients. Market positions: No. 1 dairy processor No. 1 cheese processor No. 1 casein producer in Europe. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 3 TOTAL GROUP (including joint ventures) 4,481 employees 5,312 milk suppliers 4.73 billion litres of milk processed 370,000 tonnes of cheese produced 210,000 tonnes of food ingredients manufactured INTERNATIONAL Food Ingredients USA Large scale, modern plants Nutritionals Science based innovation Joint Ventures Key element of growth strategy Business Review Page 20 Business Review Page 21 Business Review Page 24 Locations: Three processing plants in Idaho, which is the fourth largest and fastest growing milk state in the USA. Description: This business unit is a leading manufacturer of cheese and whey-based food ingredients. The operations process 1.7 billion litres of milk per annum. Products: American-style cheddar cheese and whey products. Market positions: No. 1 American-style cheddar No. 2 whey protein No. 3 lactose. Locations: Global operations include Ireland, UK, Germany, USA, South America and China. Locations: UK, USA and Nigeria. Description: The Group currently has three key International joint ventures. Glanbia Cheese in the UK, Southwest Cheese in the USA and Nutricima in Nigeria. Products: Pizza cheese for the UK and European markets. Cheese and whey products in the USA. Milk and milk powder in Nigeria. Market positions: No. 1 pizza cheese supplier in Europe. Description: This new business focuses on providing science based nutritional solutions in areas such as sports & performance, weight management, health & wellness and infant nutrition. Products: Whey protein isolates and other whey powders, lactose, calcium, lactoferrin, vitamin & mineral premixes. Market positions: No. 1 supplier of customised nutrient premixes Leading global supplier of advanced technology whey proteins and fractions. Brands: Provon, Thermax, Avonlac, Prolibra, Bioferrin, Salibra, Barﬂ ex, Barpro, Bartex, Barmax. 4 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Chairman’s Statement 2006 was a good year for the Group. Our results were in line with market expectations and taking our share of the revenue of our joint ventures and associates into account, we delivered top line revenue growth of 8% to €2.1 billion in 2006 (excluding joint ventures and associates revenue increased by 1% to €1.9 billion). This 2006 performance was against a background of a particularly tough ﬁ rst half and ongoing challenges in Ireland. A solid operating performance, the changing mix of business and the beneﬁ ts of prior year rationalisation initiatives improved proﬁ tability and margins. Operating proﬁ t pre-exceptional was up 6% to €85.6 million (2005: €80.9 million) and the operating margin pre-exceptional increased 20 basis points to 4.6% (2005: 4.4%). Net ﬁ nancing costs pre-exceptional increased by €0.9 million to €14.0 million (2005: €13.1 million). This reﬂ ects an increase in average debt in the year primarily driven by the acquisition of Seltzer, a leading USA nutritional solutions business in the second half. The Group’s share of results of joint ventures and associates, post interest and tax, increased to €2.8 million in 2006 (2005: €0.9 million). This result primarily reﬂ ects the improved performance in Glanbia Cheese, the Group’s UK joint venture with Leprino Foods and a small ﬁ rst time contribution from Southwest Cheese in the USA. Proﬁ t before tax pre-exceptional, including share of joint ventures and associates, increased 8% to €74.4 million (2005:€68.7 million). 2006 pre-exceptional tax charge was €8.0 million (2005: €7.6 million). Proﬁ t after tax pre-exceptional increased 9% to €66.4 million (2005:€61.1 million). Net exceptionals for the year amounted to €0.1 million (2005: €3.4 million). In 2006 exceptional costs associated with the closure of the Pigmeat cannery operations in Ireland and the disposal of the remaining 25% interest in the Cheese Company Holdings Limited were offset by exceptional tax credits relating to former UK operations. Earnings per share grew 14% to 22.5 cent (2005: 19.7 cent), while adjusted earnings per share increased 8% to 22.6 cent (2005: 20.9 cent). Business environment The EU dairy sector is in its fourth and ﬁ nal year of the implementation of the Mid-Term Review (MTR) of the Common Agriculture Policy. Managing a reduced level of EU support to the dairy industry was challenging in 2006, however world market conditions improved in the latter part of the year. Glanbia will continue to respond to this changing environment, seeking out new opportunities to offset the challenges that have come from the implementation of the MTR in a globalising dairy market. It is becoming increasingly apparent that Glanbia is well positioned to supply the improvement in world market conditions in light of its signiﬁ cant production platforms in Europe and the USA. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 5 Changing EU policy, the potential evolution of the WTO driven trade liberalisation and changing supply and demand dynamics, means that global dairy markets are in transition. Global markets are reasonably ﬁ rm at present and the outlook is currently positive for 2007. While this is a challenging time for the industry and for farmers, there is a sense of optimism with commercial farmers taking a positive, long term view supported by an ongoing Glanbia response to changes in the market place. Global demand for dairy products is expected to grow at close to 2% per annum. While developed markets will continue to dominate dairy consumption in absolute terms, in the near term, signiﬁ cant growth opportunities will come from developing countries. It is anticipated that global dairy supply may slow down from a trading perspective in the next ﬁ ve years, arising from higher costs of production - particularly in grain reliant dairy economies, - inherent supply constraints and changing climatic conditions in Oceania. The continuation of the quota regime in the EU up to 2015 also limits supply. However, some movement on quota policy could occur in advance of 2015. Other unknowns at this time are the degree to which USA dairy policy will be revised stemming from the legislative debate taking place in 2007. The outcome of the WTO Doha negotiations remain uncertain. It is essential that any possible agreement would not go beyond the reforms already undertaken by the dairy sector under MTR. The global nutritional market exhibited strong growth in 2006, estimated at €127 billion (US$159 billion), with half of this represented by the USA market. The weight management, health and wellness, sports and infant nutrition sectors are key targets for Glanbia Nutritionals where it is building strong positions. With the acquisition of Seltzer in 2006, the Group is now a leading global supplier of customised nutrient premixes – a market that is growing strongly year on year. Corporate and Social Responsibility Glanbia has a long and proud heritage of social and community involvement and as the organisation has evolved, so too has our Corporate and Social Responsibility Programme. In the last four years we have adopted an integrated programme that underpins our commitment to key stakeholders through four key pillars: Community, Workplace, Environment and Marketplace. The programme respects all stakeholders, encourages our role in building strong communities, guides our sustainable engagement with the environment and ensures we deliver the very best product to marketplace. This programme integrates business unit strategy with sustainability and is being extended to all business units. Dividends and Annual General Meeting (AGM) The Board is recommending a ﬁ nal dividend of 3.4 cent per share, compared with a 3.2 cent per share ﬁ nal dividend in 2005. This brings the total dividend for the year to 5.8 cent per share (2005: 5.5 cent per share), representing a 5% increase. Subject to shareholders approval, dividends will be paid on 22 May 2007 to shareholders on the register as at 27 April 2007. Irish dividend withholding tax will be deducted at the standard rate where appropriate. The AGM will be held on Wednesday 16 May 2007 and the Annual Report post out date is 13 April 2007. Board changes Two new Directors were elected to the Board in May 2006, these are Patrick Gleeson and Martin Keane, both farmers. They replaced John Miller and Eric Stanley, who retired as longstanding Board members. On behalf of the Board I would like to welcome the new Directors to the Board and to thank John Miller and Eric Stanley for their commitment to Glanbia and their contributions to the Board over the years. Vision The transformation of the Group to date is a strong reﬂ ection of the vision and leadership provided by the Group Managing Director, John Moloney, supported by a strong management team and expert staff throughout the Group. 8% top line growth including joint ventures 9% increase in proﬁ t after tax pre-exceptional items Glanbia has a strong strategic platform and is on target to deliver double digit growth in 2007 and beyond The Board would like to thank the Group Managing Director, management and staff for their continued commitment to building strong and sustainable foundations for the future and our customers for their continuous support for Glanbia. I am conﬁ dent that with our growing international presence and strong Irish operations, Glanbia has a solid strategic platform and is on target to deliver double digit growth in 2007 and beyond. Michael Walsh Chairman 6 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Group Managing Director’s Review The 2006 results reﬂ ect a year of growth and progress with ﬁ nancial performance indicators trending positively and international operations and joint ventures progressing well. We achieved key strategic milestones during the year including the €81.8 million (US$105 million) Seltzer acquisition, which will enhance the scope and scale of our Nutritionals Division. In conjunction with our joint venture partner we also successfully opened one of the largest natural cheese and whey processing plants in the world, Southwest Cheese, which is a €151 million (US$190 million) 50:50 joint venture and makes Glanbia the No. 1 supplier of American-style cheddar in the USA. The Seltzer acquisition is performing ahead of expectations. The Southwest Cheese plant is fully commissioned and is producing product to a world class standard. Strategy Glanbia’s vision is to be the most relevant supplier in international cheese, nutritional and dairy ingredients and selected consumer foods. This relevance to our customers will be achieved through a focus on international scale, leading technologies and growth markets. Our strategic objectives are to achieve and sustain double digit earnings growth, to improve operating margins, allocate capital to a mix of higher growth opportunities and to diversify the Group’s earning base to reduce volatility. Our adjusted earnings per share targets are within a range of 10% to 14%. Our potential development spend in 2007 is €150 million which we will fund within robust ﬁ nancial ratios. Signiﬁ cant progress was achieved in the pursuit of our objectives in 2006. We are developing a strategic international presence, which at this time represents nearly 40% of revenue. This gives the Group a strong platform from which to continue to grow and develop overseas. The scale agenda is being progressed through organic growth, acquisition and joint ventures. Glanbia has a clear acquisition strategy focusing on value, extending our geographic reach and achieving a strong complementary ﬁ t, particularly in the nutritionals sector where our vision is to be a key global provider of nutritional ingredients and nutritional solutions. This will be achieved by building a scalable, sustainable business. As I referenced above, the Seltzer acquisition last year is a signiﬁ cant milestone for the Group giving scale to our Nutritionals business in strong growth segments. Acquisition capability remains and is an ongoing focus for the Group. In particular we continue to examine nutritional ingredient companies with specialist or complementary products and technologies. Joint ventures have become an important part of Glanbia’s development strategy over the last number of years as we leverage our dairy and nutritionals technology and operational strength in strategic partnerships with complementary world class companies. We are building new businesses at ﬁ rst cost from the ground up, both in terms of physical asset construction and market development and now have a number of key platforms in place to drive growth and earnings momentum. In Glanbia Cheese, with our partner, Leprino Foods, we have leveraged unique technology and this business reported a good performance in 2006. We are conﬁ dent of a continued good performance in 2007. In the case of Nutricima in Nigeria, our joint venture with PZ Cussons plc, this business is expected to have annualised revenues of approximately US$100 million by the end of 2007. Southwest Cheese, the joint venture with key milk supply organisations in New Mexico, was commissioned on time and on budget in 2006 and will reach full capacity in 2007. We expect annualised revenues of US$350 million in 2007. Overall revenue in our joint ventures and associates grew strongly in 2006, with Glanbia’s share of revenue growing to €262.9 million from €131.4 million and we expect to see strong growth in 2007. Investment During 2006 the Group committed €50 million in development capital expenditure, including €5 million to build the Group’s ﬁ rst nutritionals operation in China and €22.5 million for a planned capacity expansion and new plant in the Nigerian joint venture, Nutricima. Acquisition and investment expenditure in 2006 totalled €73.3 million which primarily related to the acquisition of Seltzer. In December 2006 we divested our remaining 25% interest in The Cheese Company Holdings Limited realising €70 million for the Group. The Group has had a strong programme of investment behind its growth strategy in recent years with €214 million invested in development opportunities since 2004. Innovation Continuous innovation and market knowledge, clearly linked to the business, is critical to Glanbia. Our innovation platform is founded on an ongoing investment in R & D, successful commercialisation of research and effective partnerships with third level educational establishments. We have invested in deﬁ ned and strategically important technical innovation skills around nutritional and dairy ingredients that are driving formats and applications and that underpin our intellectual property offering to customers. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 7 €214 million development investment since 2004 Glanbia has a clear acquisition strategy and acquisitions are an ongoing focus for the Group 8 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Group Managing Director’s Review (continued) Continuous innovation and market knowledge, clearly linked to the business, is critical to Glanbia. Glanbia innovation is based on a close study of consumer lifestyle changes and consumer food choices. In order to be relevant and provide the most effective nutritional solution to customers, the Group continuously tracks health and wellness developments. There is also a growing market for convenient, on- the-move products and foods aimed at special diets. Trends like this provide the fuel for innovation and ensures that innovations are commercially relevant. Our capabilities We continue to underpin our strategic development through the ongoing evolution of our capabilities. We have achieved world class manufacturing skills in a wide variety of dairy products and ingredients. These skills are demonstrated in the large scale operations in Ireland and the USA, where excellent management of all aspects of processing operations is a primary focus. To deliver our stated strategy of being increasingly relevant to our customers we have developed the breadth, depth and strength of our customer relations and contacts in all key beverage, dairy food and food ingredients segments through strong technical and innovation skills. We work with our customers driving new solutions to meet consumer trends and needs. As stated earlier we have in 2006 developed our international joint ventures with key partners. In our Southwest Cheese joint venture in the USA we delivered a commissioned, large scale manufacturing facility from a greenﬁ eld site. Similarly we are building another business from the ground up in Nigeria where with our partner, PZ Cussons plc, we have committed further expenditure to maximise the opportunity afforded by the Nigerian consumer food market. With our partners, we look forward to the further development of these operations. Our capabilities stem from our people and ultimately the implementation of the Group growth strategy is dependant on people. The ability of the Glanbia team to change and adapt to the ever evolving environment in which we operate, is the basis for future growth and success. Joint ventures have become an important part of Glanbia’s development strategy over the last number of years as we leverage our dairy and nutritionals technology and operational strength in strategic partnerships with complementary world class companies. The Group has a constant focus on people development, at all levels, and operates three core programmes - senior leadership, management development and a graduate programme. 2007 outlook Ireland will remain challenging in light of the competitive retail environment and the ongoing effects of the implementation of EU dairy reform. Irish operations continue to focus on key aspects of business execution which drive performance, productivity and cost competitiveness. International operations are expected to perform well in 2007 and are well positioned for good growth going forward. Glanbia is successfully developing a strategic international presence, which today represents nearly 40% of revenue. This gives the Group a strong platform from which to continue to grow and develop overseas. At the same time, the Group continues to consistently and solidly improve the long-term sustainability of the Irish operations. As to the future, Glanbia is on target to deliver double digit earnings growth in 2007 and we believe the outlook is positive for sustained high growth. John Moloney Group Managing Director G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 9 Glanbia is developing a strategic international presence, which today represents nearly 40% of revenue. Working with our customers, driving new solutions, meeting consumer trends and needs 10 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Our Strategy Explained Glanbia is entering a different phase as the Group moves into 2007. It is timely, therefore, to clearly set out the Group’s vision and strategic roadmap for the next three years. VISION » Glanbia’s vision is to be the most relevant Group in international cheese, nutritional and dairy ingredients and selected consumer foods. STRATEGIC OBJECTIVES Our objectives are to: » Achieve and sustain double digit earnings growth. Improve operating margins. FINANCIAL TARGETS » Adjusted earnings per share growth 10-14% Diversify the Group’s earning base to reduce volatility. Operating margin pre joint ventures We will achieve this relevance for our customers through a focus on international scale, leading technologies and growth markets. Allocate capital to a mix of higher growth opportunities. 5%+ Operating proﬁ t from international operations & joint ventures >50% Potential development spend 2007 €150 million Free cash ﬂ ow €45 million+ EBIT interest cover 5-6 times G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 11 We are aware that we have a lot to deliver on. However, the investment and rationalisation programme undertaken in recent years has created, we believe, an excellent platform from which to drive the business forward. STRATEGIC IMPERATIVES » KEY INITIATIVES » 1 Deliver growth and performance in the period 2007 to 2009. Consumer Foods: expand beverages, food service and convenience offering. Pigmeat: maintain stable performance. Agribusiness: continue to reshape the business to ﬁ t changes in farming. Property: to maximise the value of the Group’s property assets. Food Ingredients Ireland: sustain cost competitiveness and manage remaining MTR impacts. Food Ingredients USA: deliver strong growth including integration with Southwest Cheese. Nutritionals: Deliver organic growth/ NPD. Leverage Seltzer acquisition. Joint ventures: drive growth and earnings momentum. GLANBIA’S CAPABILITIES » World class manufacturing skills in a wide variety of dairy products and ingredients. Depth and strength of customer relations and contacts in all key beverage, dairy food and food ingredients segments. Strong technical and innovation skills driving new formats, products and services. Partnering with leading companies and organisations in high growth markets. Project, plant and investment management skills to deliver from greenﬁ eld sites to full commissioning large scale manufacturing facilities. 2 Extend growth and performance beyond 2009. Further acquisitions, with focus on nutritionals. Expansion of international operations. Focus on cost reduction, competitiveness and productivity throughout the Group. 3 Improve ﬁ nancial ﬂ exibility. Maintain progress towards ﬁ nancial ﬂ exibility and improving ratios. 12 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Consumer Foods (cid:86) (cid:192) (cid:105) (cid:62) (cid:147) (cid:204)(cid:133)(cid:136)(cid:152)(cid:142)(cid:111) (cid:31)(cid:136)(cid:143)(cid:142) (cid:195) (cid:156) (cid:213) (cid:171) (cid:195) (cid:222) (cid:156) (cid:125) (cid:213) (cid:192) (cid:204) (cid:86) (cid:133) (cid:105) (cid:105) (cid:195) (cid:105) (cid:152)(cid:213)(cid:204)(cid:192)(cid:136)(cid:204)(cid:136)(cid:156)(cid:152)(cid:62)(cid:143)(cid:202) (cid:76)(cid:105)(cid:219)(cid:105)(cid:192)(cid:62)(cid:125)(cid:105)(cid:195) G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 13 Consumer Foods This division includes Consumer Foods Ireland which incorporates nutritional beverages, fresh dairy products and cheeses, soups and spreads; and Pigmeat, which produces a range of pork and bacon products. Revenue was up 3.5% to €511 million (2005: €493.6 million), 28% of total Group sales. Operating proﬁ t was down 10% to €24.5 million (2005: €27.1 million), leading to a 70 basis points reduction in the operating margin to 4.8% (2005: 5.5%). A steady performance from the consumer foods business was more than offset by difﬁ culties in Pigmeat, including margin erosion due to lower prices in certain segments and losses at the cannery operation. Consumer Foods Ireland Consumer Foods Ireland is focused on three distinct sectors of the Irish fast moving consumer goods market: nutritious beverages; fresh dairy products and cheeses, soups and spreads. Glanbia is the leading supplier of branded and value-added milk, yogurts, cheddar cheeses and fresh soups to the grocery trade. With household brands including ‘Avonmore’, ‘Premier’, ‘Yoplait’, ‘Kilmeaden’, ‘Snowcream’, ‘Petits Filous’ and ‘CMP’ Glanbia has No. 1 market positions in fresh milk, fresh cream, fruit yogurt, kids fromage frais, drinking yogurt and fresh soup. Consumer Foods Ireland employs over 800 people at 10 locations throughout Ireland and processes 260 million litres of milk annually. Overall the consumer foods business had a demanding but satisfactory year and revenue, operating proﬁ ts and margins were broadly similar to last year. The business signiﬁ cantly increased marketing investment, maintaining leading market share positions in key categories. In the context of increased energy and labour costs, the re-structuring of the fresh dairy production facilities at Inch, County Wexford and the integration of CMP, purchased from Dairygold in 2005, had a positive impact. The position of the brand portfolio in the Top 100 list of grocery brands improved signiﬁ cantly in 2006 with Avonmore Fresh Milk moving up from No. 5 to No. 3. Also the launch of Yoplait Essence resulted in a signiﬁ cant increase in market share position in the important functional segment of the fresh dairy products market. Environment The Irish grocery market is intensely competitive and concentrated with promotional activity a constant feature of the fresh dairy market. In most categories the share of retailer own brands increased in 2006. Health and convenience are the drivers of new product development and innovation in the Irish retail food sector. According to independent research conducted by both the Irish Food Board and Glanbia Consumer Foods, Irish consumers regard health and nutrition as the most important factor affecting their food purchase decisions, ahead of price. When asked what they wanted most to see next from their local convenience store, over 70% of respondents said that they wanted more health foods on-the- go. Against this background Glanbia continued its investment in product innovation and extension during 2006 with a strong pipeline of healthy and convenient offerings. Nutritional beverages The nutritional beverages business includes milks and juices and this business performed well in 2006, retaining its leading market share position in milk in the context of increased Northern Ireland imports and the growth of own label brands. Consumer Foods Ireland increased its marketing investment signiﬁ cantly and beneﬁ ted from volume increases from the integration of the CMP brand and the ongoing launch of new products. Glanbia commenced a series of Irish TV weather sponsorships in 2006 which have proved effective at driving awareness and recall of the Avonmore brand nationally. Colin Gordon CEO Consumer Foods Ireland Jim Hanley CEO Glanbia Meats (cid:47)(cid:133)(cid:192)(cid:105)(cid:105)(cid:202)(cid:222)(cid:105)(cid:62)(cid:192)(cid:202)(cid:192)(cid:105)(cid:219)(cid:105)(cid:152)(cid:213)(cid:105)(cid:202)(cid:62)(cid:152)(cid:62)(cid:143)(cid:222)(cid:195)(cid:136)(cid:195)(cid:202)(cid:173)(cid:37)(cid:189)(cid:228)(cid:228)(cid:228)(cid:174) (cid:123)(cid:120)(cid:163)(cid:93)(cid:163)(cid:211)(cid:123) (cid:123)(cid:153)(cid:206)(cid:93)(cid:120)(cid:110)(cid:211) (cid:120)(cid:163)(cid:163)(cid:93)(cid:228)(cid:211)(cid:211) (cid:228)(cid:123) (cid:228)(cid:120) (cid:228)(cid:200) Market Positions: No.1 Liquid Milk No.1 Cream Brand No.1 Pigmeat Processor 14 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Consumer Foods (continued) Progress was also made in extending the product range targeting the growing consumer trend towards more nutritious and healthier beverages. The launch of Avonmore probiotic milk extended the brand’s presence in the all important functional area while the launch of Avonmore coffee milk has provided incremental volume growth to the ﬂ avoured milk range targeting older consumers. Growth in the market continues to be driven by demand for more value added products where the Avonmore brand has a leading share position. The CMP brand was integrated successfully into existing operations, allowing the business to extend its beverage portfolio into water and juice categories where performance was in line with expectations. The key opportunity for this business will be to continue to deliver fresh and convenient product solutions and to extend the product range, focusing on the growing consumer trend for more innovative foods in convenient formats. Strategy The strategy of the business is to grow market share by building the relevance of the core brands, increased customer partnerships and through sustained innovation growth. Outlook Nutritious, fresh and natural continue to be the key drivers for food and beverages among Irish consumers. However, the marketplace is becoming more competitive which is driving the need for a lower cost base. Against this background Consumer Foods will continue with its product innovation and cost management programmes, underpinned by strong marketing investment to maintain the relevance of its product portfolio to customers and consumers. Pigmeat The pigmeat business, Glanbia Meats, is the leading pork processor in Ireland producing a range of pork and bacon products for domestic and export markets. The business, which employs 975 people, operates from three facilities including two modern slaughtering plants at Roscrea, County Tipperary and Edenderry, County Offaly. Fresh dairy products In 2006 the business successfully stabilised its overall market share and improved its position in the growing functional foods area with the launch of products targeting health beneﬁ ts. The manufacturing cost base continues to improve, despite increased energy and labour costs, as a result of competitiveness initiatives including the rationalisation of the Yoplait production facilities undertaken in 2005 together with ongoing improvements in supply chain management and capacity consolidation. Within the functional segment, the Yoplait brand increased its share position signiﬁ cantly as a result of the launch of its Essence range of health shots while Everybody/Everykid had a positive year overall, assisted by brand extensions. Cheese, soups and spreads A concerted marketing and innovation focus helped Glanbia’s cheese, soup and spreads businesses defend and grow their overall market share positions in these increasingly competitive food categories during 2006. Kilmeaden cheese extended its offering further into the premium segment of the market, which saw it grow its leading market share position in the natural block cheese segment, while Avonmore cheese also defended its position. Avonmore soup retained its leading market position and achieved overall market growth in this sector. Soups also beneﬁ ted from the re-launch of the core range with a more contemporary image and the introduction of a new fresh soup meal, under the Avonmore Fresh Fare banner, which brings greater convenience and freshness to today’s time conscious consumer. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 15 Environment 2006 was a satisfactory year for European pork markets with product prices high during the summer due to strong demand on domestic and export markets. Production of pigs in Ireland declined by 3% in 2006, continuing the trend of the last few years. The business expectation is for Irish pig production to stabilise as conﬁ dence returns to the sector. Consumption of pork continues to grow on a global basis by 1% annually and demand from Asia remains strong as a result of population growth and increasing wealth. Domestic demand in Ireland strengthened within retail and foodservice channels and this has been as a result of strong population growth, a growing consumer preference for added value products (where pig meat is often the protein of choice) as well as the comparative price advantage that pig meat enjoys relative to prime beef cuts. Strategy The Glanbia Meats strategy is to focus activities on primary pork processing. The business continues to hold a very strong position as supplier of choice to all of the major multiples and value added processors in Ireland and it has strengthened its relationship with customers in all key export markets. Outlook The outlook for the pigmeat business is for an improved performance in 2007. Pig production is expected to stabilise and improvements in operational efﬁ ciency continue as a consequence of ongoing consolidation and modernisation of the sector. In 2006 Glanbia Meats processed 1.3 million animals, or 50% of national supply. Products include a wide range of boneless pork and bacon cuts. Sales are evenly split between domestic and export markets. Key export markets in 2006 were the UK, Japan, China and Russia. Segments of the business had a difﬁ cult 2006 and its overall performance declined. The two key factors affecting performance were margin erosion due to lower prices in certain segments of the business and the accelerated decline of the cannery operation leading eventually to the decision to close this business in November 2006. Investment in labour and energy saving projects as well as improved operational efﬁ ciency and product and customer mix, helped to offset market difﬁ culties. The closure of the cannery operation gave rise in 2006 to an exceptional item of €3.3 million primarily relating to redundancy costs. The overall cost associated with this rationalisation is expected to be largely neutral when the property element of this business is disposed of in due course. Primary processing The slaughtering and deboning business performed satisfactorly in 2006 with sales improvement domestically and on export markets, in particular in the Russian market where consumer buying power is increasing year on year. Canned meats The canned meats sector has been in decline as a result of changing consumer needs and a growing preference for fresh and chilled foods. As a result, signiﬁ cant competitive pressures had built up within the sector and this, together with signiﬁ cant increases in meat, tinplate and energy prices in 2006, resulted in the decision to focus investment on primary meat processing and to close the cannery operation in Ireland. Over 70% of consumers tell us they want more health foods-on-the-go from their local stores 16 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Agribusiness and Property (cid:1) (cid:125) (cid:192) (cid:136) (cid:135) (cid:29) (cid:136) (cid:152) (cid:142) (cid:20) (cid:62) (cid:152) (cid:136) (cid:202) (cid:19) (cid:105) (cid:105) (cid:96) (cid:195) (cid:204)(cid:133)(cid:136)(cid:152)(cid:142)(cid:111) (cid:10)(cid:156)(cid:213)(cid:152)(cid:204)(cid:192)(cid:222)(cid:29)(cid:136)(cid:118)(cid:105) (cid:20)(cid:143)(cid:62)(cid:152)(cid:76)(cid:136)(cid:62)(cid:202)(cid:13)(cid:195)(cid:204)(cid:62)(cid:204)(cid:105)(cid:195) (cid:31) (cid:62) (cid:195) (cid:204) (cid:105) (cid:192) (cid:86) (cid:192) (cid:156) (cid:171) (cid:19) (cid:105) (cid:192) (cid:204) (cid:136) (cid:143) (cid:136) (cid:195) (cid:105) (cid:192) Agribusiness and Property Revenue was up 15% to €264.5 million (2005: €229.1 million). Operating proﬁ t was up 58% to €16.9 million (2005: €10.7 million), substantially driven by Property. The operating margin was up 170 basis points to 6.4% (2005: 4.7%). The Agribusiness margin was 3.7% (2005: 3.6%). Agribusiness Agribusiness is the primary interface through which Glanbia trades with its farmer suppliers. The business is engaged primarily in feed milling, grain processing and marketing, and the retailing of a range of farm inputs, including fertilisers, feed and grain, as well as a broader CountryLife product offering. Glanbia Agribusiness also has a modest involvement in the bio energy sector through a shareholding in Eilish Oils, a County Wicklow based business which pioneered the commercial production and use of pure plant oil biofuel from oilseed rape. With a strong portfolio of leading brands, Glanbia Agribusiness is market leader in animal feeds, fertilisers, seed grain, chemicals and veterinary product sales. Among the brands in the range are: CountryLife, Gain Feeds, IFI, Mastercrop and Mastervet. In recent years Agribusiness has reorganised its retail branch structure and now operates from 61 locations – of which nine are CountryLife stores. The business employs 400 people and operates in 16 counties in Ireland. Environment 2006 was a satisfactory year for the business with some improvement in revenue, proﬁ ts and margins. This performance is measured against a background of ongoing challenges in farming due to the implementation of EU policy changes under MTR. The 2006 result was driven by good demand in key segments, such as feed and fertiliser, and growth in market share as a result of competitive pricing and strong promotional activity. The business continued to rollout the Countrylife format with nine branches redeveloped to date. As a key assembler of tillage crops in Ireland, Glanbia has called for a meaningful level of Government support for the ﬂ edgling bio energy industry to encourage energy diversity and the establishment of a domestic bio fuels infrastructure linked to agricultural production. Strategy The strategy for the business is to grow market share in core sectors while continuing to reshape the business to ﬁ t the changing face of farming. Irish agriculture is in transition from an era characterised by strong price support systems to one with reduced production supports, concerns for environmental management and greater reliance on direct income payments. While undoubtedly 2006 was a challenging time for farmers, there is a sense of optimism as the industry reaches the ﬁ nal year of MTR with commercial farmers taking a positive, long term view. Glanbia is responding to these changes with a tailored service to meet the needs of farmers while also recognising the potential created by growing rural populations. The needs of farmers are such that Agribusiness is moving inputs from factory to farm at minimum cost and selling these inputs at competitive prices. To be relevant to the part-time farmer and also non farmers living in rural Ireland, the business is building on strategic branch locations with a wider range of retail products under the CountryLife concept. The retailing strategy is to capture the convenience needs of a growing rural population for pet food, gardening, hardware and outdoor clothing through CountryLife while also catering for the needs of the core farmer customer base. It is planned that 19 branches will be redeveloped under this CountryLife concept by the end of 2007. The competitiveness of the business is also sustained by continuous cost efﬁ ciency programmes and technology upgrades, which are an integral element in the reshaping of the business. Outlook Agribusiness will continue to evolve with a continued expansion of the product offering. In particular Agribusiness continues to work to meet the challenges of the implications of EU Reform and to remain relevant and competitive for its growing customer base. Property In 2005 Glanbia established a dedicated property business to create a strategic focus on the Group’s property portfolio which for many years has been an integral feature of the Irish businesses. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 17 Colm Eustace CEO Glanbia Agribusiness Ger Mullally CEO Glanbia Property (cid:47)(cid:133)(cid:192)(cid:105)(cid:105)(cid:202)(cid:222)(cid:105)(cid:62)(cid:192)(cid:202)(cid:192)(cid:105)(cid:219)(cid:105)(cid:152)(cid:213)(cid:105)(cid:202)(cid:62)(cid:152)(cid:62)(cid:143)(cid:222)(cid:195)(cid:136)(cid:195)(cid:202)(cid:173)(cid:37)(cid:189)(cid:228)(cid:228)(cid:228)(cid:174) (cid:211)(cid:211)(cid:199)(cid:93)(cid:206)(cid:200)(cid:110) (cid:211)(cid:211)(cid:153)(cid:93)(cid:163)(cid:123)(cid:211) (cid:211)(cid:200)(cid:123)(cid:93)(cid:123)(cid:153)(cid:211) (cid:228)(cid:123) (cid:228)(cid:120) (cid:228)(cid:200) Agribusiness has 61 locations nationwide including nine CountryLife outlets The remit of this business, based in Ireland and trading as Glanbia Estates, is to maximise the potential value of the Group’s property portfolio and to review options for key sites. 2006 was a good year for the business which successfully completed the disposal of non-core assets arising mainly as a result of Agribusiness branch network rationalisation. Property values in Ireland grew strongly in 2006 with residential prices increasing by approximately 15% and development activity in both residential and commercial sectors reaching record levels. Outlook Glanbia Estates has identiﬁ ed a pipeline of potential transactions and these are expected to be completed at a steady pace over the medium term. 18 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Food Ingredients and Nutritionals (cid:55) (cid:133) (cid:105) (cid:222) (cid:195)(cid:62)(cid:222) (cid:111)(cid:86)(cid:192)(cid:105)(cid:62) (cid:147) (cid:10) (cid:133)(cid:105)(cid:105)(cid:195)(cid:105) (cid:62) (cid:147) (cid:105)(cid:192)(cid:136)(cid:86)(cid:62)(cid:152) (cid:133)(cid:105)(cid:96)(cid:96)(cid:62)(cid:192) (cid:147) (cid:171) (cid:156) (cid:136)(cid:143)(cid:142) (cid:220) (cid:96) (cid:105) (cid:192) Food Ingredients and Nutritionals Revenue decreased by 3% to €1.08 billion (2005: €1.11 billion) due to lower market prices in dairy ingredients. Despite lower revenue, operating proﬁ t was up 3% to €44.2 million (2005: €43.1 million) and the operating margin grew 20 basis points to 4.1% (2005: 3.9%), mainly because of the increased contribution from the higher margin Nutritionals business. Overall, this division delivered a good performance, particularly in light of the difﬁ cult market environment in the ﬁ rst half. Food Ingredients Ireland Glanbia is the largest dairy ingredients business in Ireland, assembling a milk pool of 1.4 billion litres from the Group’s 5,000 Irish milk suppliers and processing it into butter, cheese, milk proteins and whey derivatives. It markets over 190,000 tonnes of dairy products and ingredients on a business-to-business basis to customers in over 40 countries. Food Ingredients Ireland employs over 400 people at two locations, Ballyragget, County Kilkenny and Virginia, County Cavan. The Ballyragget facility is the largest integrated dairy site in Europe, processing 20% of the Irish milk pool and has a signiﬁ cant whey output, with 40% of the Irish whey pool processed into a range of infant formula and nutritional ingredients. Food Ingredients Ireland is the largest supplier of lactose and other whey proteins to the three largest infant formula manufacturers in the world, all of which have production facilities in Ireland. It is also the largest manufacturer of casein – another protein found in milk – and the Ballyragget facility produces both acid casein and rennet casein for European and USA markets. The Virginia facility in County Cavan produces a range of fat ﬁ lled milk powders and fresh cream. It has been the principal cream supplier to Baileys Irish Cream Liqueurs for over thirty years. It is also the main supplier of milk powder to Nutricima, the Glanbia PZ Cussons plc joint venture in Nigeria. Environment 2006 was the third year of implementation of EU reform through MTR, and as such was a particularly challenging time for both producers and processors in the Irish dairy industry. The reduction of market supports to dairy processors progressed aggressively in 2006, with a number of supports, including casein aid, reduced to zero. Market returns in the ﬁ rst half of the year were weak with the added difﬁ culty of reduced milk supply due to difﬁ cult weather conditions. The second half was stronger with an increase in volumes and more stable world markets. Energy costs eased somewhat in the second half of 2006 following a period of historically high prices. The case for rationalisation of the industry at both supplier and processor level remains compelling in an Irish context. Consequently the Irish Government launched a €100 million Dairy Capital Fund in 2006 which offers grant aid of up to 50% for capital projects, subject to competitive tender. Glanbia has submitted a number of projects for consideration and the outcome is expected in quarter two 2007. Strategy Food Ingredients Ireland continues to strive to maximise product mix in a changing global dairy market. Recognising that EU policy changes are rebalancing the relative performance of certain dairy products, we are restructuring our product offerings to reﬂ ect global trends and are exploring opportunities in growing segments of the market. The Irish manufacturing environment continues to present cost and competitive challenges. The business maintains its relentless pursuit of efﬁ ciencies to offset these challenges and our cost reduction programmes are delivering considerable beneﬁ ts in plant performance, conversion efﬁ ciencies and quality development. We further augmented the management team in 2006 which we believe will strengthen the business in meeting challenges and maximising the opportunities ahead. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 19 Jeff Williams President Glanbia Foods Inc Jim Bergin CEO Food Ingredients Ireland (cid:47)(cid:133)(cid:192)(cid:105)(cid:105)(cid:202)(cid:222)(cid:105)(cid:62)(cid:192)(cid:202)(cid:192)(cid:105)(cid:219)(cid:105)(cid:152)(cid:213)(cid:105)(cid:202)(cid:62)(cid:152)(cid:62)(cid:143)(cid:222)(cid:195)(cid:136)(cid:195)(cid:202)(cid:173)(cid:37)(cid:189)(cid:228)(cid:228)(cid:228)(cid:174) (cid:163)(cid:93)(cid:228)(cid:199)(cid:120)(cid:93)(cid:163)(cid:120)(cid:206) (cid:163)(cid:93)(cid:163)(cid:228)(cid:199)(cid:93)(cid:211)(cid:110)(cid:110) (cid:163)(cid:93)(cid:228)(cid:199)(cid:199)(cid:93)(cid:153)(cid:163)(cid:206) (cid:228)(cid:123) (cid:228)(cid:120) (cid:228)(cid:200) Process and manufacturing capability to a world class standard 20 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Food Ingredients and Nutritionals (continued) Strategy The business strategy is to be the number one supplier of American-style cheese to key industrial customers. Glanbia markets the cheese and whey output of the Southwest Cheese joint venture in New Mexico and the successful commissioning of this plant further consolidated Glanbia’s position of scale in regions with growing milk supply. In 2006 Glanbia Foods Inc made signiﬁ cant progress in integrating the supply chain network comprising the Idaho plants and Southwest Cheese. Glanbia Foods Inc has strong and long standing relationships with customers of scale who are linked to growth opportunities in the consumer market place. These relationships are the bedrock of the business and are based on shared strategic direction. Joint new product and innovation projects focus on new consumer trends, such as the growing demand for organic and BST free products. The business strives for product excellence and regularly is an award winner at the World and USA Cheese Championships. In addition constant innovation is essential to expand the product offering and develop product variants which utilise existing assets, expertise and routes to market. Outlook In the USA, demand and milk availability are expected to be strong in 2007. Idaho milk supply is forecast to grow further in the current year and our USA operations are expected to run at full capacity. This business is expected to perform well in 2007 and will continue its focus on operational excellence and increasing it’s market position. Implementation of our co-operation agreement with Dairygold was completed in 2006 with the contract manufacture by Dairygold of cheese for Glanbia and by Glanbia of butter for Dairygold. Our joint venture with Corman SA, which is the largest butterfat processor in the world, progressed steadily through 2006. Advanced butter fractionation has commenced and will enable the production of butter fractions for customised solutions in the bakery and confectionery industries. The Glanbia Innovation Centre provides a further platform for our innovation programme. The demands of our new consumer business in Nigeria in addition to joint innovation programmes with our leading customers underpin our commitment to organic growth through our experience and technical capabilities. Outlook The outlook for 2007 is for another challenging year, notwithstanding a more favourable dairy market outlook and a less penal energy environment. Cheese Over 80% of the Idaho milk supply goes into cheese production, with Glanbia producing half of Idaho cheese output. Glanbia Foods Inc processes 1.7 billion litres of milk into over 180,000 tonnes of cheese in its two Idaho cheese factories. Cheese is sold on a business to business basis to USA customer s predominantly as “natural” American-style cheese in a block format, for the retail or food service sectors. Approximately a quarter of production is in a 500 pound barrel format sold primarily to the food service channel as an American “processed” cheese slice which is used in quick serve restaurants. Nutritional ingredients Glanbia is a global leader in the supply of dairy based nutritional ingredients, producing over 47,000 tonnes. The world market for dairy based nutritional ingredients, and in particular for whey products, is growing as consumers become more familiar with the beneﬁ ts of whey. Global dairy markets are currently reasonably ﬁ rm. In Ireland, the ﬁ nal year of MTR continues to affect producers and processors and there is no expectation of a material uplift in performance from Food Ingredients Ireland. However, this business continues to pursue productivity, quality and efﬁ ciency gains and is reorganising it’s product offering to reﬂ ect changes in market demand. Environment Cheese is a growing market in the USA with American-style cheese production growing at 3.3% in 2006. American-style cheddar is the most popular cheese type, representing approximately 42% of the total cheese production in the USA. This category has a historical average annual growth rate of 1.8%, however, it grew at a robust rate of 4% in 2006. Food Ingredients USA Glanbia Foods, Inc. with our joint venture Southwest Cheese, is the largest manufacturer of American-style cheddar cheese in the USA , with a market share of 16% and also is one of the worlds leading producers of whey based nutritional ingredients. Glanbia Foods Inc. is located in Idaho - the third fastest growing milk state in the USA behind Texas and New Mexico. It employs 540 people and operates three plants - two cheese facilities at Twin Falls and Gooding, which is the largest barrel cheese plant in the world, as well as a specialist nutritionals facility at Richﬁ eld. Production volumes in Glanbia Foods Inc. reached record levels in 2006 and demand was excellent for all cheese types. Milk supply in Idaho was up 7% year on year. While cheese pricing was volatile, there was a strong demand for dairy proteins, especially in the second half of the year and this lifted whey protein and lactose prices to near record levels by the year end. Food Ingredients USA delivered a good performance in 2006 with excellent management of manufacturing costs. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 21 Nutritionals Glanbia Nutritionals Glanbia Nutritionals is a growing business in a growth market, delivering innovative, science-based nutritional solutions to the global nutrition industry. Glanbia is a leading supplier of advanced technology whey proteins and fractions and in recent years has expanded its portfolio to include customised nutrient vitamin and mineral premixes and olive-based antioxidants. Glanbia’s growth in the premix market was strengthened considerably with the acquisition of Seltzer, a leading USA nutritional solutions company. Environment The global nutritional market exhibited strong growth in 2006, estimated at US$159 billion with half of this represented by growth in the USA. Key sectors, such as weight management, sports nutrition, health/wellness and infant nutrition had positive growth trends during the year. Glanbia Nutritionals services the health and wellness, functional foods, sports nutrition, infant and clinical nutrition sectors with a range of patented or branded products. Through these patents and brands the Company is building a worldwide reputation for customised products, innovative processing technologies and outstanding customer service. The business produces a wide range of speciality whey proteins and other nutritional ingredients for use by food and beverage companies in ready- to-drink and powdered beverages, nutritional bars, dairy products, snacks and confectionery applications. The business continues to evolve with over 240 employees at global locations in Ireland (Kilkenny); USA (Wisconsin, Idaho, Illinois and California); Germany; UK; Belgium; Brazil; Uruguay; Argentina; China and Singapore. 22 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Science of Nutritionals (cid:42) (cid:192) (cid:156) (cid:29) (cid:136) (cid:76) (cid:192) (cid:62) (cid:34) (cid:143) (cid:136) (cid:219) (cid:1) (cid:86) (cid:204) (cid:136) (cid:219) (cid:210) (cid:204)(cid:133)(cid:136)(cid:152)(cid:142)(cid:111) (cid:69) (cid:21)(cid:105)(cid:62)(cid:143)(cid:204)(cid:133)(cid:202) (cid:55)(cid:105)(cid:143)(cid:143)(cid:152)(cid:105)(cid:195)(cid:195) (cid:86)(cid:213)(cid:195)(cid:204)(cid:156)(cid:147)(cid:136)(cid:195)(cid:105)(cid:96)(cid:202) (cid:152)(cid:213)(cid:204)(cid:192)(cid:136)(cid:204)(cid:136)(cid:156)(cid:152)(cid:202)(cid:76)(cid:62)(cid:192)(cid:195) (cid:136) (cid:55) (cid:105) (cid:125) (cid:133) (cid:204) (cid:143) (cid:20) (cid:156) (cid:219) (cid:156) (cid:152) (cid:210) (cid:45) (cid:171) (cid:156) (cid:192) (cid:204) (cid:195) (cid:202) (cid:171) (cid:105) (cid:192) (cid:118) (cid:156) (cid:192) (cid:147) (cid:62) (cid:152) (cid:86) (cid:105) (cid:147) (cid:62) (cid:152) (cid:62) (cid:125) (cid:105) (cid:147) (cid:105) (cid:152) (cid:204) Development/Investments During 2006 additional investments were made in building a strong team with a blend of science based research and development, marketing and operational skills to drive the business forward. The most signiﬁ cant development in this business in 2006 was the acquisition of Seltzer in September. This acquisition is a strong ﬁ t with the existing Nutritionals business and with its strategy of building a nutritional premix business of scale to pursue global growth in this fast growing sector. This acquisition, combined with the Glanbia premix business in Germany and the planned €5 million investment in a new facility in China, will further advance the international development of the Glanbia Nutritonals strategy. Innovation The development work in the Group’s Innovation Centres in the USA and Ireland, assisted by teams in Germany and the UK, led to a number of commercial developments in 2006. The business continues to develop products and solutions that match a market need, or a customer requirement, working closely with universities and other research agencies. During 2006 we invested heavily in a number of clinical trials to support the products and applications being developed in the innovation centres. Outlook The Nutritionals business is expected to deliver a strong performance in 2007. Existing operations are expected to continue to grow organically and Seltzer will contribute for a full year in 2007. Nutritionals (continued) With over 300 million adults obese worldwide (reference: WHO and the International Obesity Task Force), the anti-obesity effect of dietary calcium - supported by cellular, animal, human epidemiological studies and clinical trials - presents a strong growth opportunity for Glanbia. The sports nutrition market is expected to grow at 4% to 6% per annum over the next three years due to the increasing popularity of sports supplements. This market is valued at US$2.4 billion and Glanbia Nutritionals, with its guaranteed scale supply of whey protein, has a strong position within the sector. Glanbia Nutritionals is a leading supplier to the infant nutrition market, which is worth US$15 billion and growing at 3% to 4% per annum. China, with a population of 1.3 billion and growing at 0.9% per annum, is expected to become the largest market in the world for infant formula by 2009. Glanbia will further augment its position in the infant formula sector when the €5 million investment in a nutritional manufacturing facility in China is complete in 2008. A development focus of Glanbia Nutritonals is the growing premix market. Key markets are beverages, cereals and functional foods all of which exhibit positive growth trends. Strategy The vision of Glanbia Nutritionals is to become one of the most relevant players in the delivery of science-based nutritional solutions to the global nutrition industry. This will be achieved through acquisition and joint venture, capacity expansion and through continued investment in research and development, in both dairy and non dairy sectors, to deliver new and innovative products and solutions that will afford Glanbia a point of difference in the market and deliver value added to customers. A key platform in successful delivery is strong customer partnerships - based on continuous research and a clear focus on ﬁ nding innovative solutions to achieve commercialisation. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 23 Jerry O’Dea CEO Glanbia Nutritionals Americas Hugh McGuire CEO Glanbia Nutritionals Europe and Asia Paciﬁ c Wayne Seltzer President of Seltzer Companies Inc. Nutritional solutions Consumer products Protein fortiﬁ cation Bars and drinks Sports and performance nutrition Ready to mix powders Weight management Bars and beverages Health and wellness Bars and protein fortiﬁ ed drinks Nutrition bar solutions Mineral and vitamin premixes 24 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Joint Ventures and Associates (cid:20)(cid:143)(cid:62)(cid:152)(cid:76)(cid:136)(cid:62) (cid:10)(cid:133)(cid:105)(cid:105)(cid:195)(cid:105)(cid:202) (cid:32) (cid:213) (cid:204) (cid:192) (cid:136) (cid:136) (cid:86) (cid:147) (cid:62) (cid:10) (cid:133) (cid:105) (cid:105) (cid:195) (cid:105) (cid:45) (cid:156) (cid:213) (cid:204) (cid:133) (cid:220) (cid:105) (cid:195) (cid:204) (cid:20)(cid:143)(cid:62)(cid:152)(cid:76)(cid:136)(cid:62)(cid:202)(cid:10)(cid:133)(cid:105)(cid:105)(cid:195)(cid:105)(cid:202)(cid:211)(cid:228)(cid:228)(cid:200)(cid:202)(cid:220)(cid:136)(cid:152)(cid:152)(cid:105)(cid:192)(cid:202) (cid:42)(cid:136)(cid:226)(cid:226)(cid:62)(cid:202)(cid:69)(cid:202)(cid:42)(cid:62)(cid:195)(cid:204)(cid:62)(cid:202)(cid:1)(cid:195)(cid:195)(cid:156)(cid:86)(cid:136)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:202)(cid:32)(cid:105)(cid:220)(cid:202) (cid:22)(cid:152)(cid:125)(cid:192)(cid:105)(cid:96)(cid:136)(cid:105)(cid:152)(cid:204)(cid:202)(cid:156)(cid:118)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:57)(cid:105)(cid:62)(cid:192)(cid:202)(cid:1)(cid:220)(cid:62)(cid:192)(cid:96)(cid:202) Joint Ventures and Associates Revenue (€'000)1 Proﬁ t after interest and tax (€'000)2 Up100% 2006: €262,871 2005: €131,444 Up 205% 2006: €2,842 2005: €932 (1) Not included in Group revenue (2) Included in the income statement as share of results of joint ventures and associates The Group currently has three key international joint ventures which leverage Glanbia’s strength in world class dairy operations and are an important part of the Group’s growth strategy. These are Glanbia Cheese in the UK, Southwest Cheese in the USA and Nutricima in Nigeria. Overall the joint ventures and associates grew strongly in 2006 with Glanbia’s share of revenue up 100% to €262.9 million and proﬁ t after interest and tax up 205% to €2.8 million. This result primarily reﬂ ects the improved performance in Glanbia Cheese, the Group’s UK joint venture with Leprino Foods and a small ﬁ rst time contribution from Southwest Cheese in the USA. UK - Glanbia Cheese Glanbia has a 51% interest in Glanbia Cheese which is a joint venture with Leprino Foods in the USA. Glanbia Cheese produces mozzarella cheese for the European market in QLC, chilled, shredded, ribbon, block and string formats. It is the number one mozzarella supplier to the European market. The business employs 350 people at three sites, which includes two cheese processing facilities at Magheralin, Northern Ireland, Llangefni, North Wales and an administrative centre in Northwich, England. Glanbia Cheese reported an improved performance in 2006 arising from increased demand and the beneﬁ ts of product development for existing and new customers. In the last ﬁ ve years Glanbia Cheese has invested €52 million (Stg£35 million) in the introduction of the Leprino patented and proprietary technology to its manufacturing facilities. The Glanbia Cheese strategy is to maintain and build on its position as the leading supplier of mozzarella cheese in Europe. This will be achieved through a combination of on-going innovation in mozzarella production technology - product quality, ﬂ exibility and functionality. These value offerings enable the business to offer signiﬁ cantly differentiated products to the marketplace. Outlook The ongoing investment in technology transfer will continue in 2007 with a new string cheese plant in Magheralin.The business had a good performance in 2006 and this is expected to continue in 2007. Nigeria - Nutricima Glanbia entered a 50:50 joint venture with PZ Cussons plc - Nutricima - which supplies evaporated milk and milk powder to the local Nigerian market. Glanbia brings to this joint venture a knowledge of the operation of food plants and food innovation, while PZ Cussons, which has over a century of experience in trading in Nigeria has signiﬁ cant knowledge of the Nigerian marketplace. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 25 International joint ventures are a key platform in developing a strategic international presence Building new businesses at ﬁ rst cost, from the ground up 26 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Joint Ventures and Associates (continued) Nutricima employs 244 people at its facility – an evaporated milk manufacturing plant and a milk powder packing facility. Much of the milk powder packed and sold in Nigeria is sourced in Ireland. In December 2006 the partners announced plans to double the capacity of the evaporated milk facility and to develop a second facility to produce a further range of beverages to meet the increasing requirements of Nigeria’s fast growing, dynamic consumer market. Glanbia is to invest €22.5 million in these projects over the next two years. Despite strong competition Nutricima grew market share and delivered strong top line growth in 2006. The business performed satisfactorily although overall results were impacted by signiﬁ cant market development expenditure. The product portfolio was strengthened in 2006 with two new brands ‘Coast’ a powdered milk product and ‘Powerﬁ st’ an energy drink, complementing the successful ‘Nunu’ powdered milk brand. A pipeline of new products, including ﬂ avoured milk powders under the ‘Nunu’ brand and capacity expansion is underway and this business is forecast to achieve further top line growth in 2007. USA: Southwest Cheese Southwest Cheese, located in Clovis, New Mexico, is one of the largest natural cheese and high protein whey processing plants in the world. It is a €151 million (US$190 million) 50:50 joint venture between Glanbia plc and the Greater Southwest Agency. Given our knowledge of large scale dairy operations, Glanbia was responsible for the plant design and construction of the Southwest Cheese facility, which was commissioned on time and on budget in 2006. Glanbia Foods Inc and Glanbia Nutritionals sell the cheese and whey produced by Southwest Cheese on a commission basis. The milk is supplied by the Greater Southwest Agency who co-ordinate supplies from Dairy Farmers of America, Select Milk Producers, Inc., Lone Star Milk Producers and Zia Milk Producers. During 2006 both the cheese line and the whey plant were commissioned. At full capacity in 2007, Southwest Cheese will process 250 million gallons of milk and 230 million gallons of high value- added whey per annum into American- style cheeses and proteins for the global nutritional market. The large scale, automated, state of the art plant allows Southwest Cheese to produce a high quality product in high volume to meet the needs of the national and growing international markets. Milk supply continues to grow in the New Mexico/West Texas region. Sales of natural cheese in the USA continues to grow at 1% to 2% per annum and also global demand for high quality milk proteins continues to grow. During its ﬁ rst year of operation, in addition to serving the domestic USA market, Southwest Cheese product has been sold into markets in Mexico, Africa, South America, Asia and Europe. Southwest Cheese has built a strong team capable of delivering world class performance in an ever changing marketplace. Currently over 200 people are employed at Southwest Cheese where quality, consistency and efﬁ ciency are the key drivers of success. Outlook Southwest Cheese will continue its ramp up to full capacity in 2007. It is already producing product to world class standards and is forecast to perform as planned in 2007. Overall Outlook Glanbia is successfully developing a strategic international presence and our international joint ventures are a key platform for this development. We are pleased with the progress made in 2006 and our international joint ventures are all well positioned for growth in 2007. Corporate Social Responsibility G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 27 As a Group whose origins are rooted in the founding principles of the Co-Operative Movement, Glanbia has evolved a strong Corporate & Social Responsibility (CSR) programme which respects all stakeholders, encourages our role in building strong communities, guides our sustainable engagement with the environment and ensures we deliver the very best product to the marketplace. Over the last number of years the Group has established the four key pillars of its CSR programme: Community, Workplace, Environment and Marketplace. Through strong and progressive programmes we are seeking to further deploy the principles across all elements of the Group’s businesses, bringing more employees and stakeholders into the process of operating a holistic CSR programme. “Glanbia is a wonderful supporter of the Boys and Girls Clubs and through their contributions have allowed us to provide nutritious meals for club members from our new modern commercial kitchen” Don Hall, Executive Director, Boys and Girls Club, Magic Valley (cid:127) Character & Leadership Development (cid:127) Education & Career Development (cid:127) Health & Life Skills (cid:127) The Arts (cid:127) Sports, Fitness & Recreation During 2006, local Champions hosted a number of initiatives to raise funds and widened the circle of awareness of the Boys and Girls Club. Overall 2006 was a successful year for the USA Champions who helped to install a full commercially enhanced kitchen for the Magic Valley Club and plans are progressing rapidly on the development of a new Club in the neighbouring town of Buhl. Community – Ireland In 2006 the employees of Glanbia operations in Ireland hosted a number of events for their chosen charity, Our Lady’s Children’s Hospital, Crumlin, Dublin. Community Glanbia endeavours to be an active and willing participant in local communities in the areas in which it operates. A formal community programme encourages and facilitates a range of initiatives – principally in Ireland and the USA – to foster this spirit of community involvement. The Group’s key community initiatives include: a programme of corporate giving to employee nominated charities, a volunteering programme with Junior Achievement Ireland and local sports sponsorships that link in to the Group ethos. Through a policy of volunteering, Glanbia employees elect to become ‘Community Champions’ which means that employees, in the corporate giving programme, direct not only the selection of charities but also the area of giving within these initiatives. Community – USA In 2006, the Food Ingredients USA employees hosted a number of events for their chosen charity, The Boys & Girls Club of Magic Valley, Idaho. The mission of the Boys & Girls Clubs of Magic Valley is "to inspire and enable all young people, especially those from disadvantaged circumstances, to realise their full potential as productive, responsible and caring citizens". It has ﬁ ve core programming areas: 28 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Corporate Social Responsibility (continued) “Glanbia‘s enormous commitment to helping others is highly commended by all the staff in Our Lady’s” Eamonn Coghlan, Director Fundraising & Development, Our Lady’s Children’s Hospital Our Lady's Children’s Hospital Crumlin is an acute paediatric teaching hospital with 243 beds, employing 1,200 staff. It is Ireland's largest paediatric hospital and is responsible for the provision of the majority of tertiary care services for children and medical research for childhood illnesses. In 2006 the Glanbia corporate contribution to the hospital commissioned seven much needed food trolleys to improve transportation, at optimum temperature, from kitchen to patient. Complementing the corporate contribution the Glanbia Champions raised a total of €35,000 by organising a variety of fund- raising events with the end goal of ﬁ tting out of a dedicated Air Ambulance for the hospital. During the year a number of female employees ran in the Dublin Mini Marathon and the Champions organised a special sponsored cycle. A golf classic, which brought together teams of employees, customers and suppliers, proved a success both from a funding and a general awareness perspective. Community Workplace What we have in place (cid:127) Employee driven programmes for corporate charities - USA and Ireland. (cid:127) Commitment to local sports and well being sponsorships. What we have in place (cid:127) Extensive employee communication via face to face brieﬁ ngs and other mediums. (cid:127) A commitment to achieving an injury (cid:127) A volunteering programme with Junior free work environment. Achievement Ireland. (cid:127) A Health and Safety Forum which allows sharing of best practice and discussion and review of legislation changes. Environment Marketplace What we have in place (cid:127) Integrated environmental and business What we have in place (cid:127) We consider consumer needs and unit goals. (cid:127) ISO 14001 accredited environmental management at all Irish sites. (cid:127) In the USA all manufacturing sites have adopted the EPA framework and are accredited to this environmental management system. wants in framing all consumer communications. (cid:127) Commitment to Guideline Daily Amount (GDA) communication. (cid:127) Both the Idaho and Ballyragget ingredients businesses won gold for their cheese at the USA and World Cheese Awards 2007. In September the Champions brought the cause to the heart of the farming community, with another fundraising event at the National Ploughing Championships, Ireland’s biggest annual outdoor festival. All these and a number of other events contributed to this year’s special Air Ambulance project, which made its inaugural ﬂ ight in early 2007. In Ireland, a signiﬁ cant number of Glanbia personnel contribute their time to another company cause, Junior Achievement Ireland. Junior Achievement is helping to create a culture of enterprise within the education system. Programmes begin at primary school level, teaching children how they can impact the world around them as individuals, employees and consumers and continue through to secondary school, preparing students for their future careers. Business volunteers recruited from supporting organisations teach the Junior Achievement programmes including 15 Glanbia volunteers who taught over 460 pupils in 2006. Glanbia continued its support for the GAA in 2006 with the sponsorship of the Kilkenny and Waterford senior hurling teams. These sponsorships – which reach deep into these local communities - provide a positive link between the GAA, which represents strong community values and actively promotes health and ﬁ tness and Glanbia as a food and nutrition business. The workplace The Group employs 3,926 people worldwide and is proud to be regarded as an employer of choice in what is a dynamic and challenging food industry environment. In our unfolding Workplace programme our objective in 2006 was twofold - to enhance Internal Communications and Health and Safety. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 29 Internal communication The internal communications policy encourages and facilitates dialogue and face-to-face communication. Internal communication methodology was enhanced in 2006 with systems and solutions deployed to enable quicker and more open channels of communications. Communication tools, such as publications, magazines and an intranet function, were further enhanced to complement the face-to-face meetings and bring Group wide news and events consistently to Group employees. Health and Safety The Group’s Health and Safety policy places the utmost importance on the safety of our staff, contractors and the public. A Group Health and Safety Task Forum is in place to facilitate the sharing of best practice and review legislative changes and impacts on health and safety policy. The Forum also ensures that policy is clearly communicated to all employees and implemented throughout the organisation. In addition we have implemented an annual health and safety audit to measure the effectiveness of the policy. The environment Our primary objective is to manage our business in an environmentally responsible manner. We are deeply conscious of our role in managing our environmental impacts and are committed to sustainable growth in harmony with our environment and the communities where we operate. This commitment is delivered by: (cid:127) Environmental goals and risk management being intrinsic to overall business strategy; (cid:127) Ongoing communications with local communities and authorities, regulatory agencies and interest groups; (cid:127) recycling and re-using raw materials and reducing discharges to land, air or water; (cid:127) maintaining an environmental management system at all our manufacturing plants. In 2006 the Group achieved the ISO14001 Environmental Management System at all Irish manufacturing plants. In the USA our new wastewater treatment facility, commissioned in 2006 at our Gooding, Idaho plant was awarded the Paciﬁ c Northwest Clean Water Association Idaho Outstanding Water Reuse Award. The marketplace The objective of the marketplace programme is to manage our corporate brand reputation. As a business we are conscious that we must bring to the market the very best product we can. This requires a strong commitment to customers and consumers, from the public consumer to industrial user. These relationships are the very foundation of our brand. During 2006 the Irish Consumer Foods business brought forward initiatives involving greater market research, a strong investment in nutritional education, as well as a new programme for tracking and reporting complaints, consumer satisfaction and measuring consumer satisfaction within a qualitative matrix. As part of the nutritional education initiative, Guideline Daily Amount communication has been adopted by Glanbia to appear in 2007. This development complements our commitment to highlighting the BIG 8 (information on the content of key nutrients) on all packaging. 30 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Finance Review Accounting policies The consolidated ﬁ nancial statements of the Group have been prepared in accordance with EU endorsed International Financial Reporting Standards (“IFRS”), IFRIC interpretations and Companies Acts, 1963 to 2006 applicable to companies reporting under IFRS. Further details of the basis of preparation and signiﬁ cant accounting policies of the Group are included in pages 55 to 64. Results Revenue grew by 1% in 2006 to €1.9 billion primarily driven by growth in the Consumer Foods, Nutritionals and Agribusiness segments of the business. Including the Group’s share of revenue of its joint ventures and associates, revenue grew by 8% in 2006 to €2.1 billion. A solid operating performance, the changing mix of business and the beneﬁ ts of prior year rationalisation initiatives improved proﬁ tability and margins. Operating proﬁ t pre-exceptional was up 6% to €85.6 million (2005: €80.9 million) and the operating margin pre-exceptional increased 20 basis points to 4.6%. Pre- exceptional proﬁ t before taxation was up 8% to €74.4 million. The Group’s pre- exceptional net ﬁ nancing cost increased €0.9 million to €14.0 million in 2006. Details of divisional operating performance are given in the Business Review on pages 12 to 26. Net ﬁ nance cost ratios 2006 2005 2004 EBIT: Net ﬁ nance cost (times) Net debt: EBITDA (times) 6.1 1.9 6.2 2.1 5.4 2.3 These ratios are a measure of performance and ﬁ nancial strength of the Group which has been improving in recent years. The Group has strong net ﬁ nance cost cover and despite signiﬁ cant development expenditure, which has amounted to €214 million since 2004, net debt to EBITDA ratios have declined. Operating margins Ireland International Group 2006 2005 2004 4.3% 5.3% 4.6% 4.4% 4.5% 4.4% 5.2% 4.2% 4.9% International operations now represent almost 40% of total Group revenue. The Group’s international margins grew by 80 basis points to 5.3% in 2006, demonstrating continued successful expansion of the Group’s international operations. Ireland continues to remain challenging with the Group’s focus on business execution, improving productivity and management of the cost base. Exceptional items Net exceptional loss for the year amounted to €0.1 million compared with a restated 2005 loss of €3.4 million. The 2006 exceptional items include, €3.3 million restructuring costs related to the closure of Pigmeat Cannery operations, €9.1 million relating to disposal of the Group’s remaining 25% interest and related Stg£35 million loan note from The Cheese Company Holdings Limited and an exceptional credit of €12.3 million which is the recognition of a deferred tax asset relating to tax losses in former UK operations which are now being utilised. Joint ventures and associates The Group has three key international joint ventures, producing cheese, whey and milk products; Glanbia Cheese, in the UK, Southwest Cheese in the USA and Nutricima in Nigeria. Glanbia’s share of revenues increased 100% in 2006 to €262.9 million, driven by strong growth in Southwest Cheese. The Group’s share of proﬁ t after interest and tax increased 205% to €2.8 million. This result primarily reﬂ ects the improved performance in Glanbia Cheese and a small ﬁ rst time contribution from Southwest Cheese. Joint ventures and associates € million (Glanbia share) 2006 2005 2004 Revenues 262.9 131.4 95.0 Operating proﬁ t after interest and tax 2.8 0.9 (1.5) The Group has invested signiﬁ cantly in its joint ventures and associates, whose net assets were €66.4 million at December 2006. The Group has committed to further investments of €22.5 million in Nutricima during 2007. Geoff Meagher Group Finance Director Taxation 2006 Group tax of €8.0 million (2005: €7.6 million) was offset by an exceptional tax credit of €12.3 million, which was the recognition of a deferred tax asset relating to tax losses in former UK operations which are now being utilised. The pre-exceptional taxation charge of €8.0 million represents an effective tax rate of 11%, reﬂ ecting the mix of proﬁ ts in the various tax jurisdictions in which the Group operates. Earnings per share Earnings per share grew 14% to 22.5 cent (2005: 19.7 cent), while adjusted earnings per share increased 8% to 22.6 cent (2005: 20.9 cent). Cash generation Summary cash ﬂ ows for 2006, 2005 and 2004 are set out on page 31. Net cash generated from operations amounted to €33.2 million compared to €137.6 million in 2005. 2006 net cash generated from operations included a €40 million working capital increase arising from continued business expansion and year end cash ﬂ ow timing. Acquisition and investment expenditure during the year amounted to €73.3 million, consisting primarily of the purchase of Seltzer, a leading USA nutritionals solutions business. The Group realised €70 million from the disposal of the Group’s remaining interest in The Cheese Company Holdings Limited. The Group has made solid progress in strengthening its cash generation characteristics, which has ensured that debt levels at December 2006 remain consistent with 2005. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 31 Cash ﬂ ow 2006 €'000 2005 €'000 2004 €'000 Proﬁ t for the year (pre-exceptional items) Exceptional items Depreciation, amortisation and other adjusting items 66,404 (134) 61,123 (3,410) 70,625 1,294 32,692 33,017 41,009 Cash generated from operations pre working capital movements Working capital movements Net interest and taxes paid 98,962 (40,476) (25,241) 90,730 73,105 (26,284) 112,928 (29,481) (15,821) Net cash generated from operations 33,245 137,551 67,626 Cash ﬂ ows from investing activities Acquisitions and investments Capital expenditure Disposals of assets and investments Cash ﬂ ows from ﬁ nancing activities Share capital issued Dividends paid (73,298) (37,962) 83,349 (24,580) (46,214) 18,665 (65,368) (60,946) 84,686 312 (16,472) 2,376 (15,612) 761 (14,814) Net (increase)/decrease in net debt (10,826) 72,732 11,399 Net debt at the beginning of the year Effect of exchange rate changes, fair value and IFRS adjustments (224,152) (272,167) (269,556) 10,484 (24,717) (14,010) Net debt at the end of the year (224,494) (224,152) (272,167) Balance sheet Equity shareholders’ funds increased by €76.8 million to €200.5 million at the end of 2006. This increase was delivered through proﬁ t for the year of €66.3 million and a reduction of €40.1 million in the deﬁ cit in the Group’s deﬁ ned beneﬁ t pension schemes. The beneﬁ t of actuarial gains, combined with improvements in investment returns resulted in an overall reduction in the Group’s retirement beneﬁ t obligation to €124.9 million (€113.2 million net of deferred tax asset). The Group continues to invest in capital projects to support its growth strategy and capital expenditure of €37.9 million amounted to 1.27 times depreciation (2005:1.69 times). Group net debt of €224.5 million remains consistent with the restated 2005 level of €224.2 million. The Group’s net debt as a percentage of shareholder’s equity has improved to 112% from 181% in 2005, as has the Group’s net debt as a percentage of market capitalisation, with an improvement to 26% (2005: 32%) Financial instruments and derivative ﬁ nancial instruments The conduct of its ordinary business operations necessitates the holding and issuing of ﬁ nancial instruments and derivative ﬁ nancial instruments by the Group. The main risks arising from issuing, holding and managing these ﬁ nancial instruments typically include liquidity risk, interest rate risk and currency risk. The Group approach is to centrally manage these risks against comprehensive policy guidelines. The Board agrees and regularly reviews these guidelines. Currency risk The Group has signiﬁ cant investment in overseas subsidiaries. As a result the Group’s Euro denominated balance sheet can be signiﬁ cantly affected by rate movements. The Group seeks to mitigate the effects of these structural currency exposures by borrowing in the same currencies as the operating or functional currencies of its main operating entities, thereby matching to some extent the currency of its borrowings with that of its assets. The Group also has transactional currency exposures that arise from sales or purchases by an operating entity in currencies other than the operating functional currency. The Group requires all its operating entities to mitigate such currency exposures under strategies agreed by the Board and utilising approved currency hedging instruments. Liquidity risk The Group’s objective is to maintain a balance between the continuity of funding and ﬂ exibility through the use of borrowings with a range of maturities. In order to preserve continuity of funding, the Group’s policy is that, at a minimum, committed facilities should be available at all times to meet the full extent of its anticipated ﬁ nance requirements, arising in the ordinary course of business, during the succeeding two year period. At the year end, the Group had multi-currency committed bank term facilities of €622.1 million of which €138.3 million was undrawn. The weighted average period to maturity of these facilities was 4.3 years. Finance and interest rate risk The Group’s objective in relation to interest rate management is to minimise the impact of interest rate volatility on interest costs in order to protect reported proﬁ tability. The Group borrows at both ﬁ xed and ﬂ oating rates of interest and uses interest rate swaps to manage the Group’s exposure to interest rate ﬂ uctuations. At the year end 41% (2005: 50%) of debt was held at ﬂ oating rates. Further information on borrowings and ﬁ nancial liabilities is contained in note 30 to the ﬁ nancial statements. Share price The Company’s ordinary shares traded in the range €1.93 to €3.13 during 2006. The year end share price was €2.96 (2005: €2.40), representing a capital appreciation in 2006 of 23%. Summary 2006 was a good year for the Group with earnings growth and further strengthening of the Group’s balance sheet. The Group continues its programme of investment behind its growth strategy within robust ﬁ nancial parameters. With the positive trends achieved in key ﬁ nancial performance indicators, the Group is well positioned to take advantage of value enhancing development opportunities. Geoff Meagher Deputy Group Managing Director/Group Finance Director 32 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Board of Directors 1 4 2 3 5 6 7 8 Executive Directors 1. John J Moloney B.Agr.Sc., MBA, (aged 52) is Group Managing Director since 2001. He was appointed to the Board in 1997. He was appointed Deputy Group Managing Director in 2000 and assumed the responsibilities of Chief Operating Ofﬁ cer in 2001. He joined the Group in 1987 and held a number of senior management positions including Chief Executive of the Food Ingredients and Agricultural Trading Divisions. He previously worked with the Department of Agriculture, Food and Forestry and in the meat industry in Ireland. He is a Director of The Irish Dairy Board Co-operative Limited and a Council Member of both the Irish Business and Employers Confederation and the Irish Management Institute. 2. Geoffrey J Meagher CPA, (aged 57) joined the Board as Group Finance Director in 1993 and is also Deputy Group Managing Director since June 2005. He joined the Group in 1975 and held a number of positions including that of Group Financial Controller. Prior to that he trained and worked with PricewaterhouseCoopers, Chartered Accountants. 3. Kevin E Toland FCMA, (aged 41) was appointed to the Board in 2003. He is CEO & President Glanbia USA & Nutritionals, having previously held the positions of Group Development Director and Chief Executive of the Consumer Foods Division. Prior to joining Glanbia in 1999, he held a number of senior management positions with Coca-Cola Bottlers in Russia and with Grand Metropolitan plc in Ireland and Central Europe. Non-Executive Directors 4. Michael J Walsh (aged 64) is Chairman of Glanbia plc. He was appointed to the Board in 1989, was appointed Vice-Chairman of the Company in 1996 and was appointed Chairman of the Company in 2005. He is also Chairman of Glanbia Co-operative Society Limited and is a director of a number of other Irish societies including Irish Co-operative Organisation Society Limited and The Irish Dairy Board Co- operative Limited. He farms at Coolroe, Graiguenamanagh, Co. Kilkenny. 8. Paul Haran (aged 49) was appointed to the Board in 2005. He also serves on the Court of Directors of the Bank of Ireland and the Board of the Mater Private Hospital. He is a member of the Road Safety Authority. He is Principal of the UCD College of Business and Law. Paul Haran chairs the Boards of the UCD Michael Smurﬁ t Graduate School of Business, the National Qualiﬁ cations Authority and Edward Dillon and Company. He also chairs the Working Group on Legal Costs. He retired in 2004 as Secretary General of the Department of Enterprise, Trade and Employment. 5. Liam Herlihy (aged 55) is Vice-Chairman of Glanbia plc. He was appointed to the Board in 1997 and was appointed Vice-Chairman of the Company in 2001. He is also Vice-Chairman of Glanbia Co-operative Society Limited and a Director of Irish Co-operative Organisation Society Limited. He completed the Institute of Directors Development Programme (2006) and holds a certiﬁ cate of merit in Corporate Governance from the Institute of Directors Centre for Corporate Governance at UCD. He also completed the ICOS Diploma in Corporate Direction in 2002. He farms at Headborough, Knockanore, Tallow, Co. Waterford. 6. John V Quinlan B.Agr.Sc., (aged 61) is Vice- Chairman of Glanbia plc. He was ﬁ rst appointed to the Board in 1996, re-appointed in 2001 and appointed Vice- Chairman of the Company in June 2005. He is Chairman of Irish Co-operative Society Limited and a Director of a number of Irish companies including Malting Company of Ireland Limited. He completed the ICOS Diploma in Corporate Direction in 2004. He farms at Baptistgrange, Lisronagh, Clonmel, Co. Tipperary. 7. John E Callaghan FCA, FIB, (aged 64) was appointed to the Board in 1998. He is a Director of a number of Irish companies including Rabobank Ireland plc and Vivas Insurance Limited. He was formerly Managing Partner of KPMG (Ireland), Chief Executive of Fyffes plc and Chairman of First Active plc. 9. Jerry V Liston B.A., MBA, (aged 66) was appointed to the Board in 2002. He is Chairman of the Irish Aviation Authority and holds directorships in various other companies including Balcas Timber Limited and Kevin Broderick Limited. He was formerly Chief Executive of United Drug plc, a past Chairman of the Irish Management Institute and past Executive Chairman of the Michael Smurﬁ t Graduate School of Business. 10. William G Murphy B. Comm, (aged 61) retired as Deputy Group Managing Director of Glanbia plc in 2005. He joined the Group in 1977 and has held a number of senior management positions. He was appointed to the Board in 1989. He is a Director of IAWS plc and a number of unlisted companies. The following non-executive Directors are farmers and are also Directors of Glanbia Co-operative Society Limited: 11. Henry V Corbally (aged 52) completed the ICOS Diploma in Corporate Direction in 2002. He is also Vice-Chairman of the National Dairy Council and a Director of Kilmainhamwood Community Employment Scheme Limited. He farms at Kilmainhamwood, Kells, Co. Meath. 12. John G Fitzgerald (aged 51) farms at Ross, Kilmeaden, Co. Waterford. He has completed an ICOS course in co-operative training. 13. Edward P Fitzpatrick (aged 59) is a Director of both South Eastern Cattle Breeding Society Limited and Castlegannon Show Limited. He completed the ICOS Diploma in Corporate Direction in 2003. He farms at Knockmoylan, Mullinavat, Co. Kilkenny. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 33 9 14 18 10 15 19 11 16 20 12 17 21 13 22 14. James A Gilsenan (aged 47) completed the ICOS Diploma in Corporate Direction in 2003. He farms at Drogheda Road, Collon, Co. Louth. 15. Patrick Gleeson (aged 45) was appointed to the Board in May 2006. He is also a Committee Member of Centenary Thurles Co-operative Society Limited and farms at Loughmore, Templemore, Co. Tipperary. 16. Christopher L Hill B.Agr.Sc., (aged 48) is a Director of Wicklow Rural Partnership Limited and a member of the Wicklow County Development Board. He completed the ICOS Diploma in Corporate Direction in 2002. He farms at Johnstown House, Arklow, Co. Wicklow. 17. Martin Keane (aged 51) was appointed to the Board in May 2006. He is also a Director of Donaghmore Famine Work House and Agricultural Museum Co-operative Society Limited and farms at Errill, Portlaoise, Co. Laois. 18. Michael Keane (aged 54) farms at Foxhall, Ballinamona, Ardmore, Youghal, Co. Waterford. 19. Matthew Merrick (aged 55) is the Vice-Chairman of the County Offaly Enterprise Board and a board member of IFAC Accountants. He farms at Shean, Edenderry, Co. Offaly. 20. Michael Parsons (aged 57) is Chairman of Kilkenny Co-operative Livestock Market Limited and a Director of Kilkenny, Carlow and District Farm Relief Services Society Limited. He farms at Outrath, Kilkenny. 21. Eamon M Power (aged 52) completed the ICOS Diploma in Corporate Direction in 2004 and is a Master Farmer. He also represents the Group on the Tus Forum and the Progressive Genetic Advisory Committee. He farms at Corse, Fethard-on-Sea, Co. Wexford. Directors offering themselves for re-appointment The following Directors are retiring by rotation in accordance with the Articles of Association of the Company and, being eligible, offer themselves for re-appointment: JE Callaghan (aged 64) CL Hill (aged 48) JJ Moloney (aged 52) WG Murphy (aged 61) M Parsons (aged 57) Messrs Mn Keane and P Gleeson were appointed to the Board of Directors during the year and retire in accordance with the Articles of Association and, being eligible, offer themselves for re-election. In accordance with the provisions of the 2003 Combined Code on Corporate Governance of the Irish and London Stock Exchanges, Messrs MJ Walsh, JV Quinlan and L Herlihy, being directors who have each served a period in excess of nine years on the Board will retire at the AGM and, being eligible, offer themselves for re-appointment. All are farmers and are Directors with the exception of JE Callaghan, JJ Moloney and WG Murphy. Board Committees Audit Committee JE Callaghan-Chairman, HV Corbally, JG Fitzgerald, PM Haran, L Herlihy, JV Liston, EM Power, JV Quinlan. Remuneration Committee JV Liston -Chairman, JE Callaghan, PM Haran, L Herlihy, JV Quinlan, MJ Walsh. Nomination Committee MJ Walsh-Chairman, JE Callaghan, PM Haran, JV Liston. Secretary and Registered Ofﬁ ce 22. Michael Horan B. Comm, FCA, Glanbia House, Kilkenny, Ireland. Registrar and Transfer Ofﬁ ce Computershare Investor Services (Ireland) Limited, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland. Auditors PricewaterhouseCoopers, Ballycar House, Newtown, Waterford, Ireland. Principal Bankers ABN AMRO Bank N.V., Allied Irish Banks, p.l.c., Bank of Ireland, BNP Paribas S.A., Barclays Bank Ireland PLC, Citibank, N.A., IIB Bank Limited, National Irish Bank Limited, Rabobank Ireland plc, Ulster Bank Ireland Limited. Solicitors Arthur Cox, Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland. Pinsent Masons, 3 Colmore Circus, Birmingham B4 6BH, UK. Stockbroker J & E Davy, 49 Dawson Street, Dublin 2, Ireland. (Corporate Broker) Oriel Securities Limited, 125 Wood Street, London EC2V 7AN. (London Broker) Shareholder Enquiries All shareholders’ enquiries should be addressed to the Registrar, Computershare Investor Services (Ireland) Limited, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18. The Registrar can be contacted on telephone number 01 2475349 (within Ireland), 00353 1 247 5349 (outside Ireland), or by e-mail to webqueries@computershare.ie Shareholders may check their accounts on the Company’s Share Register by accessing the Company’s website at www.glanbia.com, clicking on “Investors” and “Shareholder Information”. Shareholders may check their shareholdings, recent dividend payment details and can also download forms required to notify the Registrar of changes in their details. Electronic Communication For Shareholders who wish to avail of the convenience of electronic communication, you may register your e-mail address by accessing our Registrar’s website at www. computershare.com/register/ie , selecting Glanbia plc from the drop down menu “Company Selection” and clicking on ”submit”. You will need your Shareholder Reference Number (SRN) which is located on your share certiﬁ cate or dividend counterfoil. This will allow shareholders to receive communications (interim/annual reports, etc) as soon as they are published and should beneﬁ t the environment and reduce the Company’s costs. We also have a system to allow you to submit your proxy via the internet and via the CREST system. Please see proxy form for details of how to operate such systems. 34 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Senior Management Group CEO’s A Senior Executive Management team is chaired by John Moloney, Group Managing Director and oversees the development and execution of the Group’s strategy. It also has overall responsibility for achieving business results. Members: John Moloney, Group Managing Director Geoff Meagher, Deputy Group Managing Director and Group Finance Director Kevin Toland, CEO and President, Glanbia USA and Nutritionals Siobhan Talbot, Deputy Group Finance Director Jim Bergin, CEO , Food Ingredients Ireland Colin Gordon, CEO, Consumer Foods Ireland Brian Phelan, Group HR Director The Group CEO’s are as follows: Consumer Foods – Colin Gordon Pigmeat – Jim Hanley Agribusiness – Colm Eustace Property – Ger Mullally Food Ingredients Ireland – Jim Bergin Food Ingredients USA – Jeff Williams Nutritionals USA – Jerry O’Dea Nutritionals Europe and Asia Paciﬁ c – Hugh McGuire Seltzer Companies Inc. – Wayne Seltzer Biographies John Moloney B.Agr.Sc., MBA, (aged 52) is Group Managing Director since 2001. He was appointed to the Board in 1997. He was appointed Deputy Group Managing Director in 2000 and assumed the responsibilities of Chief Operating Ofﬁ cer in 2001. He joined the Group in 1987 and held a number of senior management positions including Chief Executive of the Food Ingredients and Agricultural Trading Divisions. He previously worked with the Department of Agriculture, Food and Forestry and in the meat industry in Ireland. He is a Director of The Irish Dairy Board Co-operative Limited and a Council Member of both the Irish Business and Employers Confederation and the Irish Management Institute. Geoff Meagher CPA, (aged 57) joined the Board as Group Finance Director in 1993 and is also Deputy Group Managing Director since June 2005. He joined the Group in 1975 and held a number of positions including that of Group Financial Controller. Prior to that he trained and worked with PricewaterhouseCoopers, Chartered Accountants. Biographies Jim Hanley age 44, was appointed Chief Executive of Glanbia Meats in March 2007. He joined the Group in 1989 and has worked in the pigmeat sector for 25 years. Since joining Glanbia he has held a number of positions including General Sales Manager and more recently Deputy CEO for Meats. Ger Mullally (B.Agr Sc. MBA) age 49, is Chief Executive of Glanbia Estates. He was appointed to this role in November 2005 after six years as Chief Executive of Agribusiness. He joined the Group in 1980 where he has held a number of senior positions within Agribusiness. Colm Eustace ((B. Agr Sc. MBA) age 46, is CEO for Glanbia Agribusiness since November 2005. He joined the Group in 1986 where he has held a number of senior positions. Kevin Toland FCMA, (aged 41) was appointed to the Board in 2003. He is CEO & President Glanbia USA & Nutritionals, having previously held the positions of Group Development Director and Chief Executive of the Consumer Foods Division. Prior to joining Glanbia in 1999, he held a number of senior management positions with Coca-Cola Bottlers in Russia and with Grand Metropolitan plc in Ireland and Central Europe. Jeff Williams (BSC Sc. Marketing, MBA) age 50, is President of Glanbia Foods, Inc., a position he has held since January 2005. He joined the Group in 1990 during which time he has held a number of senior positions. Prior to this he was involved in Commercial and Investment Banking. He is a member of the International Dairy Foods Association Board, National Cheese Institute Board and the Leadership Idaho Agriculture Board of Trustees. Siobhan Talbot (B.Comm, FCA) age 43 was appointed Deputy Group Finance Director of Glanbia plc in June 2005. She was formerly Group Secretary. Prior to this she held a number of senior positions in ﬁ nance since she joined the Group in 1992, including Group Operations Controller. Prior to joining the Group she worked with PricewaterhouseCoopers in Dublin and Sydney, Australia. Hugh McGuire (M.Sc, Dip Finance) age 36, is CEO for Glanbia Nutritionals in Europe and Asia Paciﬁ c. He joined the Group in 2003 from McKinsey & Co. where he worked as a Consultant across a range of industry sectors. Prior to this he worked in the consumer goods industry with Nestle and Leaf. Brian Phelan (B. Comm, FCA) age 40, is Group Human Resources Director of Glanbia plc. Brian was appointed to this role in 2004. Prior to this he was Chief Financial Ofﬁ cer of the Consumer Foods Division. He also worked in Glanbia Ingredients in Ireland and the USA. Prior to joining the Group in 1994 he worked with KPMG. Jerry O’Dea (BSC Food Sc., MBA) age 47, is President of Glanbia Nutritionals, Inc., a position he has held since October 2002. He joined the Group in 1981 and has held a number of senior positions including Vice President, General Manager of Glanbia Ingredients USA. He is a member of the Nominations Committee of the United States Dairy Export Council (USDEC) and the board of the American Dairy Products Institute (ADPI). Jim Bergin (B. Comm, MSc Mngt Practice) age 44 is Chief Executive of Glanbia Ingredients Ireland. He was appointed in March 2005. He joined the Group in 1984 and has held a number of senior positions including Group IT Manager and subsequently Group Business Process Director. He joined the Ingredients Business as Operations Manager in May 2003. Wayne Seltzer age 64, is President of Seltzer Companies Inc., which he founded in 1981. He is a graduate of University of California at Los Angeles and has been with the Group since Glanbia acquired Seltzer in September of last year. Prior to establishing Seltzer Companies he held a senior position at Gillies International. Colin Gordon (BBS, MBS, FMII) age 45, is Chief Executive of Glanbia Consumer Foods Ireland. He joined the Group in March 2006. He previously worked in C&C Group plc, the drinks and snack food company where he held a number of senior positions including, most recently Managing Director of C&C (Ireland) Ltd. In February 2007 John Madden, CEO of Glanbia Meats, retired after 12 years in the organisation. Report of the Directors for the year ended 30 December 2006 Introduction The Directors are pleased to present their report to shareholders together with the audited ﬁ nancial statements for the year ended 30 December 2006. Principal activities Glanbia plc is an international dairy, consumer foods and nutritional products company. It is principally engaged in the processing and marketing of cheese, dairy-based food ingredient and nutritional products; dairy-based consumer products and meat products; manufacture of animal feedstuffs and trading in agricultural products; and maximising the value of the Group’s property assets. Group processing operations are located in Ireland, the UK, Germany and the USA. Sales and marketing activities are undertaken in various European countries and in the USA, South America, Asia and Africa. The Group serves a broad customer base in the retail, food service and food and beverage processing sectors. The Group’s strategy is to build international relevance in cheese, nutritional ingredients and selected consumer foods, balancing it’s strong market positions in Ireland with an increasing presence in overseas markets. The joint ventures in Nigeria and the USA are central to this strategic development, as is the continuing development of its Nutritionals business. Business review Full-year results were in line with market expectations, despite a tough ﬁ rst half and ongoing challenges in Ireland. A solid operating performance, the changing mix of business and the beneﬁ ts of prior year rationalisation initiatives improved proﬁ tability and margins. Key ﬁ nancial performance indicators are trending positively and international operations and joint ventures are progressing well. The highlights of the results for the year were as follows: G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 35 Key strategic milestones were reached during the year including a US$105 million US Nutritionals acquisition, Seltzer, and the opening of one of the largest natural cheese and whey processing plants in the world, Southwest Cheese, which is a US$190 million 50:50 joint venture. The Seltzer acquisition is performing ahead of expectations. The Southwest Cheese plant is fully commissioned and is manufacturing product to a world class standard. A further €50 million of development capital expenditure was committed in 2006, including €5 million to build the Group’s ﬁ rst nutritionals operation in the Asia Paciﬁ c region and €22.5 million for a planned capacity expansion and new plant in the Nigerian joint venture. The Group Managing Director’s review on pages 6 to 9 provides an overview of the Group’s vision and strategy for the next three years. The Business Review on pages 12 to 26 includes analysis, by operational division, of the 2006 results, trading environment and current business outlook of each business unit including joint ventures. The Finance Review on pages 30 to 31 analyses the ﬁ nancial results for 2006 including commentary on the ﬁ nancial ratios and Group balance sheet. 2006 2005 (as restated) Change Revenue Operating proﬁ t pre-exceptional Operating margin pre-exceptional Net ﬁ nancing costs pre-exceptional Share of results of joint ventures and associates after interest and tax Proﬁ t before tax pre-exceptional Proﬁ t after tax pre-exceptional Exceptional items Earnings per share Adjusted earnings per share Dividend per share in respect of the year Net debt €1,853.4 m €1,830.0 m €80.9 m 4.4% €85.6 m 4.6% (€14.0 m) €2.8 m €74.4 m €66.4 m (€0.1 m) 22.5 c 22.6 c 5.8 c €224.5 m Up 1% Up 6% Up 20 bps (€13.1 m) Up €0.9 m Up 205% Up 8% Up 9% See note Up 14% Up 8% Up 5% Similar €0.9 m €68.7 m €61.1 m (€3.4 m) 19.7 c 20.9 c 5.5 c €224.2 m Exceptional items are €3.3 million restructuring costs relating to the closure of the Pigmeat cannery operation, €9.1 million being the cost of the disposal of the Group’s remaining 25% interest and related loan note in The Cheese Company Holdings Limited to Milk Link Limited for €70 million and €12.3 million being the recognition of a deferred tax asset relating to the Group’s former UK operations. 36 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Report of the Directors (continued) for the year ended 30 December 2006 Outlook The Group’s aim is to achieve strong leadership positions in markets that offer proﬁ table long-term growth. The Group looks to achieve this through a combination of being relevant to its customers, growing its existing businesses, acquiring complementary new businesses, with emphasis on Nutritionals opportunities and achieving a high level of operational efﬁ ciency and productivity. Ireland will remain challenging in light of the competitive retail environment and the ongoing effects of the implementation of the Mid Term Review of the Common Agricultural Policy. Irish operations continue to focus on key aspects of business execution which drive performance, productivity and cost competitiveness. International operations are expected to perform well in 2007 and are well positioned for good growth. The Group is successfully developing a strategic international presence, which today represents nearly 40% of revenue. This gives the Group a strong platform from which to continue to grow and develop overseas. At the same time, the Group continues to consistently and solidly improve the long-term sustainability of the Irish operations. As to the future, the Group is on target to deliver double digit earnings growth in 2007 and the Group believe the outlook is positive for sustained high growth. Share Capital The authorised share capital of the Company is 306,000,000 ordinary shares of €0.06 each. The issued share capital as at 30 December 2006 was 293,238,684 ordinary shares of €0.06 each. Dividends On 4 October 2006 an interim dividend of 2.4c per share on the ordinary shares amounting to €6.9 million was paid to shareholders on the register of members as at 15 September 2006. The Directors have recommended the payment of a ﬁ nal dividend of 3.4c per share on the ordinary shares which amounts to €10 million. Subject to shareholders approval this dividend will be paid on Tuesday, 22 May 2007 to shareholders on the register of members as at Friday, 27 April 2007, the record date. Directors Messrs GE Stanley and JJ Miller retired on 24 May 2006. Messrs P Gleeson and MN Keane were appointed to the Board on 24 May 2006. In accordance with the Articles of Association of the Company, they will retire at the 2007 Annual General Meeting and, being eligible, offer themselves for re- appointment. In accordance with the Articles of Association of the Company, Messrs JE Callaghan, CL Hill, JJ Moloney, WG Murphy and M Parsons retire from the Board by rotation and, being eligible, offer themselves for re-appointment. In accordance with the provisions of the 2003 Combined Code on Corporate Governance of the Irish and London Stock Exchanges, Messrs MJ Walsh, L Herlihy and JV Quinlan, being Directors who have each served a period in excess of nine years on the Board will retire at the AGM and, being eligible, offer themselves for re-appointment. None of the Directors proposed for re-appointment has a service contract with the Company. The Chairman wishes to conﬁ rm that following the completion of the performance evaluation process all Directors proposed for re-election continue to be effective and these Directors continue to demonstrate commitment to their roles. Employees The Group’s 3,926 employees are the key to building sustainable growth through delivery of the strategy. The Group provides opportunity, development and reward to those who enjoy working in a challenging delivery focussed environment and is proud to be an employer of choice at its worldwide locations. Research and development The Group is committed to an ongoing and extensive innovation programme to support a customer-led business and marketing approach. There is growing consumer awareness of the link between health and diet and the Group is committed to achieving the highest standards of best practice in relation to science-based innovation. It is directed towards the development of technically superior dairy-based food ingredient and nutritional products, cheese, high value consumer food products, other products and the enhancement of proprietary technologies and processes. Through its research and development facilities in Kilkenny and Idaho, USA, the Group’s business has developed and launched advanced, differentiated and branded ingredients and consumer products targeted at a range of nutritional beneﬁ ts such as weight management and immune enhancement. Substantial Interests As at 23 February 2007, the Company has been advised of the following notiﬁ able interests in its ordinary share capital: Shareholder No. of ordinary: shares % of issued share capital Glanbia Co-operative Society Limited Bank of Ireland Nominees Limited* Bank of Ireland Asset Management Limited** 160,277,308 25,309,608 54.7% 8.6% 14,163,481 4.8% * Bank of Ireland Nominees Limited has conﬁ rmed that it has no beneﬁ cial interest in the 25,309,608 shares. ** Bank of Ireland Asset Management Limited has conﬁ rmed that it has no beneﬁ cial interest in the 14,163,481 shares of which 14,038,750 are included in the Bank of Ireland Nominees Limited holding. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 37 Directors’ and Secretary’s share interests The interests of the Directors and Group Secretary and their spouses and minor children in the share capital of the Company, subsidiary companies and the holding society are disclosed in note 42 to the ﬁ nancial statements. Principal risks and uncertainties and ﬁ nancial risk management Under Irish company law (Statutory Instrument 116.2005- European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005), the Group is required to give a description of the principal risks and uncertainties which it faces. These appear on page 44 of the Corporate Governance Report. A comprehensive analysis on the ﬁ nancial risk management objectives and policies of the Company and the Group, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used and the exposure of the Company and the Group to price risk, credit risk, liquidity risk and cash ﬂ ow risk, is contained in notes 3, 30 and 36 to the ﬁ nancial statements. Subsidiary and associated undertakings A list of the principal subsidiary and associated undertakings is included in note 43 to the ﬁ nancial statements. Political donations The Electoral Act, 1997 requires companies to disclose all political donations over €5,079 in aggregate made during the ﬁ nancial year. The Directors, on enquiry, have satisﬁ ed themselves that no such donations in excess of this amount have been made by the Company. Books of account The measures taken by the Directors to secure compliance with the Company’s obligations to keep proper books of account are the use of appropriate systems and procedures and employment of competent persons. The books of account are kept at Glanbia House, Kilkenny, Ireland. Corporate governance The Directors of the Company are committed to maintaining the highest standards of corporate governance and a statement of how the Company applies the main and supporting principles of the 2003 Combined Code on Corporate Governance of the Irish and London Stock Exchanges (“the Combined Code”) appears on pages 38 to 41. Auditors The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in ofﬁ ce in accordance with Section 160(2) of the Companies Act, 1963. Special business at the Annual General Meeting Notice of the 2007 Annual General Meeting with details of the special business to be considered at the meeting is set out in a separate circular which is enclosed with this Annual Report. Authority to allot shares Under the ﬁ rst item of special business, shareholders are being asked to renew the Directors’ authority to allot relevant securities, within the meaning of Section 20 of the Companies (Amendment) Act, 1983, up to an aggregate nominal amount of €765,678.96. Disapplication of Pre-Emption Rights, Purchase of Company Shares and Treasury Shares Under the second item of special business, shareholders are being asked to renew the authority to disapply the strict statutory pre-emption provisions in the event of a rights issue or in any other issue up to an aggregate amount of €765,678.96 in nominal value of ordinary shares, representing 4.4% of the nominal value of the Company’s issued ordinary share capital for the time being. This authority will expire on the earlier of the close of business on 15 August 2008 or the date of the Annual General Meeting of the Company in 2008. At the last Annual General Meeting of the Company shareholders passed a resolution to give the Company, or any of its subsidiaries, the authority to purchase up to 10% of its own shares. This authority will expire on 16 May 2007. Under the third item of special business, shareholders are being asked to extend this authority until the earlier of the close of business on 15 August 2008 or the date of the Annual General Meeting of the Company in 2008. While the Directors do not have any current intention to exercise this power, this authority is being sought as it is common practice for public companies. Shareholders are also being asked under the fourth item of special business to pass a resolution authorising the Company to reissue such shares purchased by it and not cancelled as treasury shares. Such purchases would be made only at price levels which it considered to be in the best interests of the shareholders generally, after taking into account the Company’s overall ﬁ nancial position. Furthermore the authority being sought from shareholders will provide that the minimum price which may be paid for such shares shall not be less than the nominal value of the shares and the maximum price will be 105% of the then market price of such shares. On behalf of the Board MJ Walsh Chairman JJ Moloney Group Managing Director Glanbia House Kilkenny 6 March 2007 38 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Directors’ Statement of Corporate Governance Glanbia plc (“the Company”) has primary listings on the Irish and London Stock Exchanges. The Directors of the Company are committed to maintaining the highest standards of corporate governance and this statement describes how the Company applies the main and supporting principles of the 2003 Combined Code on Corporate Governance of the Irish and London Stock Exchanges (“the Combined Code”). Board of Directors Role The Board is responsible for the leadership, direction and control of the Company and its subsidiary companies (“the Group”) and is accountable to shareholders for ﬁ nancial performance. The Board has a formal schedule of matters reserved to it for decision such as the approval of annual and strategic business plans, capital expenditure, any change in Group strategy and any acquisition or disposal of Group assets, the approval of any dividends and Group treasury and risk management policies. The role of the Chairman, which is non-executive, is separate (and always has been separate) from the role of the Group Managing Director. The division of responsibilities between the Chairman and Group Managing Director have been clearly established, set out in writing and agreed by the Board. Board composition The Company is a subsidiary of Glanbia Co-operative Society Limited (“the Society”). The Society nominates from its Board of Directors, which is elected on a three-year basis, fourteen non-executive Directors for appointment to the Board of the Company. The Society, an Irish industrial and provident society, owns 54.7% of the share capital of the Company and many of its members supply milk and trade with Irish subsidiaries of the Company. The remaining Directors comprise three executive Directors and four non-executive Directors. Biographies of each of the Directors are set out on pages 32 and 33. The Board considers that the Directors bring to the Company the range of skills, knowledge and experience, including international experience, necessary to lead the Group. All Directors have been advised of their ﬁ duciary duties and of their obligation to bring an independent judgement to bear on the issues of strategy, performance, resources, including key appointments and standards of conduct. All Directors receive monthly Group ﬁ nancial statements and reports and full Board papers are sent to each Director in sufﬁ cient time before Board meetings. Any required further information is available to all Directors on request. Chairman and Vice-Chairmen Mr MJ Walsh has been Chairman of the Board since 9 June 2005. The Chairman is responsible for the efﬁ cient and effective working of the Board. He ensures that Board agendas cover the key strategic issues confronting the Group and that Directors receive accurate, timely, clear and relevant information. While Mr MJ Walsh holds a number of other directorships (see details on page 32) and farms at Coolroe, Graiguenamanagh, County Kilkenny, the Board considers that these do not interfere with the discharge of his duties to the Group. The Company has two Vice-Chairmen, Mr L Herlihy and Mr JV Quinlan. Senior Independent Director Mr JE Callaghan is the Senior Independent Director. As Senior Independent Director, Mr Callaghan is available to shareholders if they have concerns, which contact through the normal channels has failed to resolve. Managing Director The day to day management of the Group has been delegated to the Group Managing Director, Mr JJ Moloney, whose appointment to that position was effective from July, 2001. His responsibilities include the formulation of strategy and related plans and, subject to Board approval, their execution. He is also responsible for ensuring an effective organisation structure, for the appointment and direction of the senior executive management and for the operational management of all the Group’s businesses. Company Secretary Mr M Horan is the Group Secretary. All Directors have access to the advice and service of the Group Secretary who is responsible to the Board for ensuring that Board procedures are complied with and that applicable rules and regulations are followed. Both the appointment and removal of the Secretary is a matter for the Board. Terms of appointment The terms and conditions of appointment of non-executive Directors are available for inspection at the Company’s registered ofﬁ ce during normal business hours and at the Annual General Meeting of the Company. Information on professional development Directors are provided with a comprehensive information pack on joining the Company and advised of their legal and other duties and obligations as a director of a listed company. In addition, all new Directors receive induction on their appointment covering such matters as the operation and activities of the Company and the Group, the role of the Board and the Group’s corporate governance procedures. As part of this programme, major shareholders are offered an opportunity to meet new non-executive Directors. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 39 Directors are also briefed, where appropriate, on changes to legislation, regulation or market practices, as well as receiving brieﬁ ngs from business groups throughout the year. All Directors have access to independent professional advice at the Group’s expense where they judge it necessary to discharge their responsibilities as Directors. Committees are provided with sufﬁ cient resources to undertake their duties. Fourteen of the remaining ﬁ fteen non-executive Directors are nominated by the Board of Glanbia Co-operative Society Limited for appointment to the Board of the Company. Additionally, Mr WG Murphy retired as Deputy Group Managing Director in 2005 but remains on the Board as a non- executive Director. The Board recognises that these Directors do not meet the criteria for independence as speciﬁ ed in the Combined Code however, the Board considers that they are independent in character and judgement. Eight of the Directors nominated to the Board by Glanbia Co-operative Society Limited have completed the ICOS Diploma in Corporate Direction. All of the non-executive Directors bring an independent perspective to their advisory and monitoring roles. Performance evaluation During the year a performance evaluation has been conducted of the Board, its Committees and individual Directors which was led by the Chairman. In completing the performance evaluation, the Chairman met with each Director individually to discuss the performance of the Board and individual Directors. In advance of the meetings, the Chairman circulated a comprehensive questionnaire to Directors for their consideration and encouraged the Directors to raise any other issues on Board matters during the meetings. Based on the verbal and written feedback from the Directors, the Chairman then prepared a report for the Board summarising the outcome of the performance evaluation process and recommending a number of actions. The performance of the Chairman was considered at a meeting of the non-executive Directors which was chaired by Mr JE Callaghan, the Senior Independent Director. The Board also evaluated the performance of the Audit Committee, Nomination Committee and Remuneration Committee. Independence The Board has evaluated the independence of the non- executive Directors under the guidelines speciﬁ ed in the Combined Code. Following this assessment, the Board has determined that throughout the reporting period, Mr JE Callaghan, Mr P Haran and Mr JV Liston were independent. In particular, the Board reviewed the position of Mr JE Callaghan in the context of the guidance in the Combined Code and determined that, despite his 9 years on the Board, he remains independent. In the same manner as the other non-executive Directors, he discharges his duties in a proper and consistently independent manner and constructively and appropriately challenges the executive Directors and the Board. Share ownership and dealing In order to maintain investor conﬁ dence in the stock markets, quoted companies have an obligation to ensure that their directors and employees, and anyone closely associated or connected to them, do not place themselves in positions where investors might suspect them of abusing inside information. For this reason, the Company issued in early 2006 revised rules covering share dealings by Directors and employees who regularly, or even occasionally, have access to inside information. The main principle underlying the rules is that no one should trade in shares of the Company while in possession of inside information about the Company. Likewise, no one should deal in the shares of the Company, if it would give rise to a suspicion that they are abusing inside information. As a safeguard against any actual or potential abuse of these rules, the Company has appointed as Compliance Ofﬁ cers, the Group Secretary and the Deputy Group Finance Director from whom approval must be obtained, in advance, for any share dealings by persons to whom the rules apply. The interests of the Directors and Secretary and their spouses and minor children in the share capital of the Company, the holding society and subsidiary companies/societies are set out on pages 103. Board succession planning The Board plans for its own succession with the assistance of the Nomination Committee. In so doing, the Board considers the knowledge and experience necessary to allow it to meet the strategic vision for the Company and the Group. Meetings There were 12 scheduled meetings of the Board during 2006. Details of Directors’ attendance at those meetings are set out in the table on the next page: 40 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Directors’ Statement of Corporate Governance (continued) MJ Walsh L Herlihy JV Quinlan JJ Moloney JE Callaghan HV Corbally EP Fitzpatrick JG Fitzgerald JA Gilsenan P Gleeson** P Haran CL Hill Mn Keane** Ml Keane JV Liston GJ Meagher M Merrick JJ Miller* WG Murphy M Parsons EM Power GE Stanley* KE Toland Board B 12 12 12 12 12 12 12 12 12 8 12 12 8 12 12 12 12 4 12 12 11 4 9 A 12 12 12 12 12 12 12 12 12 8 12 12 8 12 12 12 12 4 12 12 12 4 12 Audit Committee B A Nomination Committee B A Remuneration Committee B A 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 5 5 5 5 5 5 5 5 5 5 5 5 5 4 5 4 Column A indicates the number of meetings held during the period the Director was a member of the Board and /or Committee. Column B indicates the number of meetings attended during the period the Director was a member of the Board and /or the Committee. * Retired 24 May 2006 ** Appointed 24 May 2006 Board Committees The Board has established a committee structure to assist it in the discharge of its responsibilities. The committees and their membership are detailed on page 33 of this report. All committees of the Board have written terms of reference dealing with their role and authority delegated by the Board and are available on the Group’s website at www.glanbia.com. Membership of the Nomination, Audit and Remuneration Committees is comprised exclusively of non-executive Directors. The Group Secretary acts as secretary to each of these committees. Nomination Committee Fourteen non-executive Directors are nominated by the Board of Glanbia Co-operative Society Limited (“the Society”) for appointment to the Board of the Company. For the remaining non-executive and executive Directors, the Nomination Committee of the Company leads the process for Board appointments. The appointment to the Board of non-executive Directors nominated by the Society is subject to and co-terminus with their appointment as Directors of the Society and is further subject to their removal as Directors under the Articles of Association. The remaining non-executive Directors are appointed to the Board on the basis of a 3-year term which may be renewed and are also subject to early removal under the Articles. All Directors are subject to election by shareholders at the ﬁ rst Annual General Meeting after their appointment and to re- election thereafter at intervals of no more than three years. In addition, in accordance with the provisions of the Combined Code, non-executive Directors serving for more than nine years must seek re-election annually. The Nomination Committee did not use an external search consultancy or open advertising in the appointment of the new non-executive Directors, Messrs Mn Keane and P Gleeson, as they were nominated by the Board of the Society for appointment to the Board. The Nomination Committee uses industry and professional contacts to identify suitable candidates for the appointment of independent Directors. The Nomination Committee also considers and recommends the appointment of the Chairman of the Company and the Vice-Chairmen. It is the custom and practice that the Chairman and Vice-Chairmen of the Society are also Chairman and Vice-Chairmen of the Company. The Chairman of the Company chairs meetings of the Nomination Committee except when it is dealing with the appointment of a successor to the Chairmanship. The Chairman of the Nomination Committee reports to the Board after each meeting of the Committee. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 41 Audit Committee The main role and responsibilities of the Audit Committee are set out in written terms of reference which are available on the Group’s website at www.glanbia.com and include: • to monitor the integrity of the ﬁ nancial statements of the Company, and any formal announcements relating to the Company’s ﬁ nancial performance, reviewing signiﬁ cant ﬁ nancial reporting judgements contained in them; • to review the Company’s internal ﬁ nancial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the Company’s internal control and risk management systems; • to monitor and review the effectiveness of the Company’s internal audit function; • to make recommendations to the Board, and to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditors and to approve the remuneration and terms of engagement of the external auditors; • to review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant Irish professional and regulatory requirements; • to develop and implement policy on the engagement of the external auditors to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit ﬁ rm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; and • to review the arrangements by which staff of the Company may, in conﬁ dence, raise concerns about possible improprieties in matters of ﬁ nancial reporting or other matters. In discharging its responsibilities the Audit Committee met ﬁ ve times during the period. It reviewed the interim and ﬁ nal results for the Group prior to their submission to the Board for approval. It approved the Internal Audit Plan and reviewed progress against this plan at intervals during the year. The Chairman and Members of the Audit Committee received an executive summary of all audit reports issued by the Internal Audit Department and maintains dialogue with the Group Internal Auditor on a regular basis. The Audit Committee has approved a policy on the engagement of the external auditors to provide non-audit services. This policy provides that the Group shall not retain its independent auditors to provide services other than audit and audit related services other than in exceptional circumstances. The following services are prohibited unless approved under the terms of the Policy: • Bookkeeping or other administrative services related to the Group’s accounting records or ﬁ nancial statements; • Financial information systems design and implementation • Internal audit services; • Management functions, executive searches for the Group Managing Director or Group Finance Director and legal services. Mr Callaghan is Chairman of the Audit Committee and he reports to the Board after each meeting of the Committee. US Advisory Board During 2005, a US Advisory Board was established to assist the Board in developing a greater awareness of activities and market trends in the relevant USA industry sectors. Mr T Corcoran, Glanbia Group Chairman from 2000 to 2005, is Chairman of the US Advisory Board. The membership of the Advisory Board also currently comprises Mr JE Callaghan, Senior Independent Director, Mr K Toland, Executive Director, Mr L Herlihy, Mr JV Quinlan, Vice Chairmen, and Messrs J McCullough and P Rogers and Ms S Davis, USA based members.* The Group Chairman and Group Managing Director also attend meetings of the US Advisory Board. * Mr McCullough recently retired as Chief Executive Ofﬁ cer of CRH Americas Products and Distribution. He joined CRH in 1979 and has held a number of senior management positions with that company. Mr Rogers, retired, was previously President of Nabisco Foods Americas and held a variety of other senior positions in food companies. Ms Davis is Chairperson of Susan Davis International, a Washington D.C based public affairs agency. Remuneration Committee The Remuneration Committee determines, on behalf of the Board, the Group’s framework of executive remuneration and the speciﬁ c packages and conditions of employment for each of the executive Directors and certain senior executives, as decided by the Board. The Committee consults the Group Managing Director regarding remuneration proposals and obtains internal and external professional advice as deemed appropriate. The Remuneration Committee operates the Company’s Share Option and Long Term Incentive Schemes. The remuneration of the non-executive Directors is determined by the Remuneration Committee within the total amount approved by the Company’s shareholders in general meeting from time to time. The terms of reference of the Remuneration Committee, including its role and the authority delegated to it by the Board, are available on the Group’s website at www.glanbia.com. Mr Liston is Chairman of the Remuneration Committee and formally reports to the Board after each meeting of the Committee. 42 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Directors’ Statement of Corporate Governance (continued) Remuneration Remuneration Policy Remuneration policy is based on attracting, retaining and motivating executives to ensure that they perform in the best interests of the Group and its shareholders. Performance-related elements of remuneration form a signiﬁ cant proportion of the total remuneration package of executive Directors. The Remuneration Committee obtains external advice on remuneration in comparable companies as necessary and has given full consideration to the Combined Code. Currently the components of the remuneration package for executive Directors are basic salary and beneﬁ ts, performance-related annual bonus, participation in the Long Term Incentive Plan (“LTIP”) and participation in a deﬁ ned beneﬁ t pension scheme. Executive Directors also participated in the share option scheme of the Company which expired in August 1998. Basic Salaries and Beneﬁ ts The basic salaries of executive Directors are reviewed annually having regard to personal performance, competitive market practice or where a change of responsibility occurs. Beneﬁ ts- in-kind consist principally of a company car. No fees are payable to executive Directors for their attendance at board meetings. Performance-Related Annual Bonus The Group operates a performance-related bonus scheme for executive Directors, senior executives and other management. Payments under the scheme for executive Directors depend on the achievement of pre-determined goals for Group performance and an assessment of individual performance against agreed objectives. Long Term Incentive Plan In 2002 the shareholders approved the introduction of a Long Term Incentive Plan (“2002 LTIP”) for selected Group employees in order to further align the interests of key Group personnel with those of shareholders. Under the 2002 LTIP options cannot be exercised before the expiration of three years from the date of grant and can only be exercised if a predetermined performance criterion for the Company has been achieved. The performance criterion is that there has been an increase in the adjusted earnings per share of the Company of at least the increase in the Consumer Price Index plus 5% compounded over a three year period. To encourage participating executives to hold the shares issued to them on the exercise of their options, share awards speciﬁ ed as a percentage of the shares held will be made on the second and ﬁ fth anniversary of the exercise of the option. The number of shares which may be the subject of such awards may not exceed 20% and 10% of the number of shares so held on the respective anniversaries. Beneﬁ ts under the 2002 LTIP are not pensionable. Employee Savings Related Share Options Scheme In 2002 the shareholders approved the introduction of an employee Savings Related Share Option (“Sharesave Scheme”). In 2002 options were granted over 2,988,622 ordinary shares under the Sharesave Scheme. During the year, 101,982 ordinary shares were transferred to employees of the Group who exercised their options under the Scheme. The options granted under the Sharesave Scheme in 2002 expired on 31 March 2006. Pension Beneﬁ ts Pension beneﬁ ts for executive Directors are calculated on basic salary only. Beneﬁ ts, which are agreed on appointment, are designed to provide a percentage of basic salary at retirement for full service. Service Contracts No Director has a service contract with a notice period in excess of one year or with provisions for pre-determined compensation on termination which exceed one year’s salary and beneﬁ ts-in-kind. Directors’ Emoluments and Attributable Pension Beneﬁ ts Details of Directors’ emoluments and attributable pension beneﬁ ts are set out in note 9 and details of share options are included in note 42 to the ﬁ nancial statements. Other Directorships The Group Managing Director, Mr JJ Moloney, is a Director of The Irish Dairy Board Co-operative Limited for which he received fees of €12,000 which he retained. Share Options Options outstanding under the Company’s 1988 Share Option Scheme and the LTIP as at 30 December 2006 amounted to 2,734,000 ordinary shares (31 December 2005: 3,116,913 inclusive of 109,913 options outstanding as at 31 December 2005 under the Sharesave Scheme, which expired on 31 March 2006 ) made up as follows: Share option scheme and 2002 LTIP No of Price Dates ordinary shares range exercisable 2,734,000 €1.55 - €4.25 GBP£2.90 2006 – 2016 2006 – 2008 As detailed in note 42 to the ﬁ nancial statements at 30 December 2006, 262,503 ordinary shares were held in an employee beneﬁ t trust for the purpose of the Sharesave Scheme (“the Employees’ Share Trust”). Corporate Social Responsibility The Group’s Corporate Social Responsibility Programme relies on a careful balance of economic, environmental and social policies while the Group aims to fulﬁ l its strategic goals of building a sustainable business and long term growth. Group policies and implementation systems are summarised on pages 27 to 29. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 43 Accountability and Audit Financial Reporting Directors’ responsibilities for preparing the ﬁ nancial statements for the Company and the Group are detailed on page 35. The external auditors’ report details the respective responsibilities of Directors and auditors. Going Concern After making enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operation and existence for the foreseeable future, and accordingly they continue to adopt a Going Concern basis in preparing the ﬁ nancial statements. Internal Control The Directors are required by the Combined Code to maintain a sound system of internal control to safeguard shareholders’ investment and the Group’s assets. The Board conﬁ rms that there are ongoing procedures for identifying, evaluating and managing signiﬁ cant risks faced by the Group. These, or their equivalent, have been in place for the year covered in this Annual Report and ﬁ nancial statements and up to the date of its approval and are themselves regularly reviewed by the Board and accord with the Turnbull guidance which the Board has fully adopted. The Board has also reviewed the effectiveness of the current system of internal control speciﬁ cally for the purpose of this statement. While acknowledging its responsibility for the system of internal control, the Board is aware that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The risk appetite of the Group is set by the Board. The strategy for managing risk is formulated by the Group’s Executive Committee, a management committee chaired by the Group Managing Director, and recommended to the Board. In judging the effectiveness of the Group’s controls, the Board monitors the reports of the Audit Committee and management. Without diminishing its own responsibilities the Board has delegated certain acts to the Audit Committee. These include detailed reviews of key risks inherent in the business and of the systems for managing these risks. The Chairman of the Audit Committee reports to the Board after each meeting of the Committee. The Group’s control systems include: • a Code of Conduct that deﬁ nes a set of agreed standards and guidelines for corporate behaviour; • an organisational structure with clearly deﬁ ned lines of responsibility and delegation of authority; • appropriate terms of reference for Board committees with responsibility for policy areas; • a formal schedule of matters speciﬁ cally referred to the Board for its decision; • a comprehensive system of ﬁ nancial reporting to the Board, based on an annual budget with monthly reports against actual results, analysis of variances, review of key performance indicators and regular re-forecasting; • clearly deﬁ ned guidelines for capital expenditure, including detailed budgeting, appraisal and post-investment review; • a Group ﬁ nancial management manual that clearly sets out the accounting policies and ﬁ nancial control procedures to be followed by business units; • a treasury risk management policy approved by the Board which ensures that foreign exchange and interest rate exposures of the Group are managed within deﬁ ned parameters; • a Group-wide risk assessment process which is maintained by business unit management reporting to the Group Executive and Board as required; • a Group internal audit function operating globally which monitors and supports the internal ﬁ nancial control system and reports to the Audit Committee and management. Internal audit work is focused on the areas of greatest risk to the Group determined on the basis of a risk management approach to audit; and • the Audit Committee, a formally constituted committee of the Board comprising non-executive Directors only, meets with internal and external auditors to satisfy itself that control procedures are in place and are being followed. Finally, the Directors, through the use of appropriate procedures and systems, have ensured that measures are in place to secure compliance with the Company’s obligation to keep proper books of account. These books of account are kept at the registered ofﬁ ce of the Company. 44 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Directors’ Statement of Corporate Governance (continued) Principal Risks and Uncertainties and Financial Risk Management Under Irish Company Law (Statutory Instrument 116.2005 − European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005), the Company is required to give a description of the principal risks and uncertainties which it faces. The principal risks are set out below: 1. Food Safety The Board is committed to maintaining the highest standards of food safety. To manage food safety risks, our processing sites operate world class quality and food safety systems which are regularly reviewed to ensure they remain effective and follow best practice, including compliance with all regulatory requirements. 2. Environment Protection and preservation of the environment and natural resources lies at the heart of our objective to manage our business in an environmentally responsible manner. The Group continues to be committed to sustainable growth in harmony with the environment and the communities in which it operates, which is achieved by attention to such elements as: • the inclusion of environmentally friendly goals and risk management as part of the overall business strategy; the maintenance of relationships with local communities and authorities, regulatory agencies and interest groups to create better understanding and co-operation; and the recycling and the re-using of raw materials and the reducing of discharges to land, air and water. • • 3. Health and Safety The Board are committed to protecting the health, safety and welfare of all employees, visitors and the public in general. Processes have been put in place to ensure that workplace conditions, practices and procedures are maintained to the highest possible level of safety and in full compliance with relevant health, safety and welfare legislation. 4. Energy The efﬁ cient consumption of energy is a key objective for the Company. In order to minimise the impact on energy costs of price volatility, the Company will, where necessary, enter into ﬁ xed price arrangements to cover certain future energy requirements. 5. Loss of a Major Site The Group operates from many key sites the loss or signiﬁ cant destruction of any one of which would present signiﬁ cant operational difﬁ culties. The Group’s operations have business continuity and communication plans in place to manage the impact of such an event. The Group also has insurance programmes designed to mitigate the ﬁ nancial consequences. 6. Growth The Group pursues a strategy of growth through acquisitions and investment in existing businesses. There is a risk to the business if the Group is unable to continue to grow as outlined in its business plan due to an inability to identify attractive targets, complete acquisitions and integrate the operations of the acquired businesses. The Group’s management team has signiﬁ cant experience in the areas of both pre-acquisition due diligence and post acquisition integration. Where appropriate, external resources are engaged to assist with acquisitions and investments. 7. Legislation and Regulation The Group’s operations in the processing, distribution, packaging and labelling of food are governed by extensive legislation, regulations, codes of practice and guidance. The Group conforms to international and local food safety, quality and environmental regulations and is committed to sustainable growth in harmony with the environment and the communities where it operates. 8. Competition The Group operates in competitive markets. Signiﬁ cant product innovations, technical advances or the intensiﬁ cation of price competition could adversely affect the Group. The Group invests in research and development and ensures that the introduction of new products and improved production processes positions the Group well in its chosen markets. The Group also continually works to streamline its cost base to ensure it remains competitive. 9. Attracting and Retaining High Quality Senior Management and Staff The on-going success of the Group is dependent on attracting and retaining high quality senior management and staff. The Group mitigates any risk associated with loss of key personnel through robust succession planning, strong recruitment processes, long term management incentives and retention initiatives. 10. Supply Chain The Group’s ability to fulﬁ l the demand for its products is dependent on no signiﬁ cant disruptions to its supply chain. The Group mitigates this risk by maintaining a broad supplier base and the Group is committed to ensuring that suppliers continue to choose the Group as the partner of choice. A comprehensive analysis on the ﬁ nancial risk management objectives and policies of the Company and the Group, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used and the exposure of the Company and the Group to price risk, credit risk, liquidity risk and cash ﬂ ow risk, is contained in note 3 to the ﬁ nancial statements. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 45 Relations with Shareholders Dialogue with Institutional Shareholders The Company has dialogue with institutional shareholders during the year and immediately following the announcement of the half year and full year results. The Company presents these results to investors and analysts. The Chairman discusses governance and strategy with major shareholders. Non-executive Directors are offered an opportunity to attend meetings with major shareholders. The Senior Independent Director has also attended meetings with major shareholders. The Company responds to enquiries from all shareholders and welcomes their attendance at the Annual General Meeting. The Group’s website, www.glanbia.com, provides the full text of the Annual and Interim Reports and presentations to analysts and investors through the Investors Section. Stock Exchange announcements are also made available in the Investors Section of the website, after release to the Stock Exchange. Annual General Meeting The Notice of the 2006 Annual General Meeting was despatched to shareholders not less than 20 working days before the meeting. Separate resolutions were proposed at the meeting on each substantially separate issue, including a resolution to receive and consider the 2005 ﬁ nancial statements and the reports of the Directors and auditors thereon. The level of proxy votes for and against was announced after each resolution had been passed on a show of hands. It is our policy for all Directors to attend the Annual General Meeting. In normal circumstances, the Chairman of the Audit, Nomination and Remuneration Committee attend the Annual General Meeting and are available to answer relevant questions. Compliance The Board believes that, except in relation to the composition of the Board and Remuneration Committee, as noted above, the Company has complied throughout the ﬁ nancial period with the principles and provisions of the Combined Code. Statement of Directors’ responsibilities The Directors are responsible for preparing the annual report and the ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁ nancial statements for each ﬁ nancial year. Under that law the Directors have prepared the group and parent company ﬁ nancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The ﬁ nancial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the proﬁ t or loss of the Group for that period. In preparing these ﬁ nancial statements the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable and prudent; • State that the ﬁ nancial statements comply with IFRSs as adopted by the European Union; • Prepare the ﬁ nancial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualiﬁ cations as necessary. The Directors conﬁ rm that they have complied with the above requirements in preparing the ﬁ nancial statements. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the ﬁ nancial position of the Company and the Group and to enable them to ensure that the ﬁ nancial statements comply with the Companies Acts 1963 to 2006 and, as regards the group ﬁ nancial statements, article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group 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 web site. Legislation in the Republic of Ireland concerning the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. On behalf of the Board MJ Walsh Chairman JJ Moloney Group Managing Director Glanbia House Kilkenny 6 March 2007 46 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Financial Statements contents Independent auditors’ report: to the members of Glanbia plc Consolidated income statement Consolidated statement of recognised income and expense Consolidated balance sheet Consolidated cash ﬂ ow statement Company balance sheet Company statement of recognised income and expense and cash ﬂ ow statement Notes to the ﬁ nancial statements Inventories Segment information Exceptional items Employee beneﬁ t expense Summary of signiﬁ cant accounting polices Financial risk management Intangible assets Investments in associates Investments in joint ventures Investments 1 General information 2 3 4 Critical accounting estimates and assumptions 5 6 Operating proﬁ t 7 8 9 Directors’ remuneration 10 Finance income and costs 11 Income taxes 12 Earnings per share 13 Dividends 14 Property, plant and equipment – Group 15 16 17 18 19 Trade and other receivables 20 21 Cash and cash equivalents 22 Reconciliation of changes in equity 23 Share capital 24 Other reserves 25 Retained earnings 26 Own shares (Company and Group) 27 Capital reserves 28 Merger reserve – Group 29 Minority interests 30 Borrowings 31 Deferred income taxes 32 Retirement beneﬁ t obligations 33 Provisions for other liabilities and charges 34 Capital grants 35 Trade and other payables 36 Derivative ﬁ nancial instruments 37 Contingent liabilities 38 Commitments 39 Cash generated from operations 40 Business combinations 41 Related party transactions 42 Directors’ and Secretary’s interests 43 Principal subsidiary and associates undertakings 47 49 50 51 52 53 54 55 55 55 64 65 66 70 71 71 72 73 74 75 75 76 78 79 80 81 82 83 83 84 85 87 88 88 89 89 89 90 92 93 96 96 97 97 98 98 99 99 101 103 106 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 47 Independent auditors’ report: to the members of Glanbia plc We have audited the Group and Parent Company ﬁ nancial statements (the “ﬁ nancial statements”) of Glanbia plc for the year ended 30 December 2006, which comprise the consolidated income statement, the consolidated and Parent Company balance sheets, the consolidated and Parent Company cash ﬂ ow statements, the consolidated and Parent Company statement of recognised income and expense and the related notes. These ﬁ nancial statements have been prepared under the accounting policies set out therein. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the ﬁ nancial statements, in accordance with applicable Irish law and International Financial Reporting Standards (IFRSs) as adopted by the European Union, are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the ﬁ nancial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 193 of the Companies Act, 1990 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Group ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union. We report to you our opinion as to whether the Parent Company ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, as applied in accordance with the provisions of the Companies Acts, 1963 to 2006. We also report to you whether the ﬁ nancial statements have been properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 2006 and Article 4 of the IAS Regulation. We state whether we have obtained all the information and explanations we consider necessary for the purposes of our audit, and whether the ﬁ nancial statements are in agreement with the books of account. We also report to you our opinion as to: • whether the Company has kept proper books of account; • • whether the Directors’ Report is consistent with the ﬁ nancial statements; and whether at the balance sheet date there existed a ﬁ nancial situation which may require the Company to convene an extraordinary general meeting of the Company; such a ﬁ nancial situation may exist if the net assets of the Company, as stated in the Company balance sheet, are not more than half of its called-up share capital. We also report to you if, in our opinion, any information speciﬁ ed by law or the Listing Rules of the Irish Stock Exchange regarding Directors’ remuneration and Directors’ transactions is not disclosed and, where practicable, include such information in our report. We review whether the Corporate Governance Statement which is included in the Directors’ Report, reﬂ ects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code speciﬁ ed for our review by the Listing Rules of the Irish Stock Exchange, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited ﬁ nancial statements. The other information comprises only the Directors’ Report, the Chairman’s Statement, the Group Managing Director’s Report, the Operating Review and the Financial Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁ nancial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the ﬁ nancial statements. It also includes an assessment of the signiﬁ cant estimates and judgments made by the Directors in the preparation of the ﬁ nancial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁ cient evidence to give reasonable assurance that the ﬁ nancial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the ﬁ nancial statements. 48 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Independent auditors’ report: to the members of Glanbia plc (continued) Opinion In our opinion: • • • the Group ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 30 December 2006 and of its proﬁ t and of its cash ﬂ ows for the year then ended; the Parent Company ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, as applied in accordance with the provisions of the Companies Acts, 1963 to 2006, of the state of the Parent Company’s affairs as at 30 December 2006 and cash ﬂ ows for the year then ended; the ﬁ nancial statements have been properly prepared in accordance with the Companies Acts, 1963 to 2006 and Article 4 of the IAS Regulation. We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the Company. The Company balance sheet is in agreement with the books of account. In our opinion the information given in the Directors’ Report is consistent with the ﬁ nancial statements. The net assets of the Company, as stated in the Company balance sheet are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 30 December 2006 a ﬁ nancial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the Company. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Waterford 6 March 2007 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 49 Consolidated income statement for the year ended 30 December 2006 Pre- Pre- exceptional Exceptional Total exceptional Exceptional 2006 2006 2006 2005 2005 Total 2005 Notes €’000 €’000 €’000 (as restated) €’000 (as restated) €’000 (as restated) €’000 5 1,853,427 (1,596,547) - 1,853,427 - (1,596,547) 1,830,012 (1,589,686) 256,880 - 256,880 240,326 - - - 1,830,012 (1,589,686) 240,326 7 6 10 10 (105,724) (65,589) - (12,455) (105,724) (78,044) (94,743) (64,651) - (5,041) (94,743) (69,692) 85,567 (12,455) 73,112 80,932 (5,041) 75,891 4,883 (18,918) 2,842 - - - 4,883 (18,918) 4,209 (17,358) - (5,304) 4,209 (22,662) 2,842 932 - 932 74,374 (7,970) (12,455) 12,321 61,919 4,351 68,715 (7,592) (10,345) 6,935 58,370 (657) 11 Revenue Cost of sales Gross proﬁ t Distribution expenses Administration expenses Operating proﬁ t Finance income Finance costs Share of results of joint ventures and associates Proﬁ t before taxation Income taxes Proﬁ t for the year 66,404 (134) 66,270 61,123 (3,410) 57,713 Attributable to: Equity holders of the Parent Minority interests Basic earnings per share (cent) Diluted earnings per share (cent) 12 12 65,934 336 66,270 22.51 22.47 57,396 317 57,713 19.69 19.62 On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher 50 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Consolidated statement of recognised income and expense for the year ended 30 December 2006 Actuarial gain/(loss) - deﬁ ned beneﬁ t schemes Deferred tax on actuarial gain/(loss) Share of actuarial gain - joint venture Currency translation differences Fair value adjustments - Group - Joint venture Net income/(expense) recognised directly in equity Proﬁ t for the year Total recognised income for the year Attributable to: Equity holders of the Parent Minority interest Effects of changes in accounting policy (adoption of IAS 32 and IAS 39): Equity holders of the Parent Minority interest Notes 2006 2005 32 31 22 22 22 22 €’000 (as restated) €’000 36,852 (3,923) 230 (9,401) 2,367 367 (42,303) 4,054 - 889 (873) - 26,492 66,270 (38,233) 57,713 92,762 19,480 92,426 336 19,163 317 92,762 19,480 - - - (2,592) - (2,592) On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher Consolidated balance sheet as at 30 December 2006 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 51 ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in associates Investments in joint ventures Available for sale investments Trade and other receivables Derivative ﬁ nancial instruments Deferred tax assets Current assets Inventories Trade and other receivables Derivative ﬁ nancial instruments Cash and cash equivalents Total assets EQUITY Issued capital and reserves attributable to equity holders of the Parent Share capital Other reserves Retained earnings Minority interests LIABILITIES Non-current liabilities Borrowings Deferred tax liabilities Trade and other payables Retirement beneﬁ t obligations Provisions for other liabilities and charges Derivative ﬁ nancial instruments Capital grants Current liabilities Borrowings Provisions for other liabilities and charges Trade and other payables Current tax liabilities Derivative ﬁ nancial instruments Total liabilities Total equity and liabilities On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher Notes 2006 2005 €’000 (as restated) €’000 14 15 16 17 18 19 36 31 20 19 36 21 335,152 138,724 10,933 58,668 12,527 - 2,095 23,923 340,503 57,963 11,090 59,832 29,511 56,874 1,825 15,869 582,022 573,467 145,158 169,540 6,776 259,311 144,250 143,610 1,125 104,405 580,785 393,390 1,162,807 966,857 23 24 25 29 22 30 31 35 32 33 36 34 30 33 35 36 98,304 113,696 (18,116) 193,884 6,635 97,964 120,192 (100,737) 117,419 6,299 200,519 123,718 444,570 38,611 11,373 124,888 6,032 3,406 10,660 327,424 34,471 - 165,016 6,072 - 14,855 639,540 547,838 39,235 7,110 270,773 1,942 3,688 1,133 8,433 278,583 4,605 2,547 322,748 295,301 962,288 843,139 1,162,807 966,857 52 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Consolidated cash ﬂ ow statement for the year ended 30 December 2006 Cash ﬂ ows from operating activities Cash generated from operations Interest received Interest paid Tax paid Net cash from operating activities Cash ﬂ ows from investing activities Acquisition of subsidiary, net of cash acquired Purchase of property, plant and equipment Purchase of available for sale investments Disposal of subsidiary, net of cash disposed Disposal of available for sale investments Repayment of loan note Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issue of ordinary shares Sharesave Scheme Increase/(decrease) in borrowings Finance lease principal payments Dividends paid to Company’s shareholders Repayment of minority interest Capital grants received Net cash from/(used in) ﬁ nancing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Notes 39 2006 €’000 2005 €’000 58,486 1,000 (19,967) (6,274) 163,835 670 (23,177) (3,777) 33,245 137,551 (69,892) (38,085) (3,406) (323) 22,185 52,822 8,665 (19,366) (46,979) (5,214) (147) 14,394 - 4,418 (28,034) (52,894) 23 13 190 122 169,851 (1,077) (16,472) - 123 731 2,191 (20,242) (1,449) (15,612) (7) 772 152,737 (33,616) 157,948 51,041 104,405 (3,042) 51,625 1,739 Cash and cash equivalents at the end of the year 21 259,311 104,405 Reconciliation of net cash ﬂ ow to movement in net debt Net increase in cash and cash equivalents Cash (outﬂ ow)/inﬂ ow from debt ﬁ nancing Debt acquired with subsidiaries Fair value of interest rate swaps qualifying as fair value hedges Exchange translation adjustment on net debt Movement in net debt in the year Net debt at the beginning of the year Net debt at the end of the year On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher 2006 €’000 2005 €’000 157,948 (168,774) 51,041 21,691 (10,826) - 3,978 6,506 72,732 (1,786) - (24,717) (342) (224,152) 46,229 (270,381) (224,494) (224,152) G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 53 Company balance sheet as at 30 December 2006 ASSETS Non-current assets Investments in associates Investments in subsidiaries Current assets Trade and other receivables Cash and cash equivalents Total assets EQUITY Issued capital and reserves attributable to equity holders of the Company Share capital Retained earnings Capital reserve Total equity LIABILITIES Non-current liabilities Borrowings Current liabilities Trade and other payables Total liabilities Total equity and liabilities Notes 2006 €’000 2005 €’000 16 18 1,395 510,412 1,395 510,469 511,807 511,864 19 21 1,881 4,376 6,257 934 16,281 17,215 518,064 529,079 23 25 27 453,572 47,924 4,674 453,232 47,437 4,503 506,170 505,172 30 - 3,397 35 11,894 20,510 11,894 23,907 518,064 529,079 On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher 54 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Company statement of recognised income and expense and cash ﬂ ow statement for the year ended 30 December 2006 Company statement of recognised income and expense Proﬁ t for the year Total recognised income for the year Company cash ﬂ ow statement Cash ﬂ ows from operating activities Cash generated from operations Interest received Net cash from operating activities Cash ﬂ ows from investing activities Disposal of available for sale investments Dividends received Net cash used in investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issue of ordinary shares Sharesave Scheme - receipt from Trustees Decrease in borrowings Dividends paid to Company’s shareholders Net cash used in ﬁ nancing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year 2006 €’000 2005 €’000 16,959 23,964 16,959 23,964 Notes 2006 €’000 39 (4,981) 2,125 2005 €’000 8,281 2,053 (2,856) 10,334 - 10,508 916 16,214 10,508 17,130 23 13 190 122 (3,397) (16,472) 731 2,191 - (15,612) (19,557) (12,690) (11,905) 14,774 16,281 1,507 Cash and cash equivalents at the end of the year 21 4,376 16,281 As permitted by Section 148(8) of the Companies Act, 1963 and Section 7(1A) of the Companies Amendment Act, 1986 the Parent Company is availing of the exemption from presenting its separate income statement in these ﬁ nancial statements and from ﬁ ling it with the Registrar of Companies. The proﬁ t for the year dealt with in the ﬁ nancial statements of Glanbia plc, amounts to €16,959,000 (2005: €23,964,000). On behalf of the Board MJ Walsh Directors JJ Moloney GJ Meagher G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 55 Notes to the ﬁ nancial statements for the year ended 30 December 2006 1 General information Glanbia plc (“the Company”) and its subsidiaries (together “the Group”) is an international dairy, consumer foods and nutritional products group with operations in Ireland, Europe, the USA and Nigeria. Business units are structured around developing the Group’s strategic focus on the consumer foods, food ingredients and nutritionals markets. The Company is a public limited company incorporated and domiciled in Ireland. The address of its registered ofﬁ ce is Glanbia House, Kilkenny, Ireland. The Company shares are quoted on the Dublin and London Stock Exchanges. These consolidated ﬁ nancial statements have been approved for issue by the Board of Directors on 6 March 2007. 2 Summary of signiﬁ cant accounting polices The principal accounting policies adopted in the preparation of these ﬁ nancial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (a) Basis of preparation These consolidated ﬁ nancial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (“IFRS”), IFRIC interpretations and the Companies Acts, 1963 to 2006 applicable to companies reporting under IFRS. The consolidated ﬁ nancial statements have been prepared under the historical cost convention as modiﬁ ed by use of fair values for available for sale ﬁ nancial assets and derivative ﬁ nancial instruments. A summary of the more important Group accounting policies is set out below. The preparation of the ﬁ nancial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the ﬁ nancial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates. These ﬁ nancial statements are prepared for a 52 week period ending on 30 December 2006, comparatives are for the 52 week period ended 31 December 2005. The balance sheets for 2006 and 2005 have been drawn up as at 30 December 2006 and 31 December 2005 respectively. (b) Consolidation The Group ﬁ nancial statements incorporate: (i) The ﬁ nancial statements of Glanbia plc (the Company) and enterprises controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the ﬁ nancial and operating policies of an entity so as to obtain beneﬁ ts from its activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities incurred or assumed at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition less the fair value of the net assets of the subsidiary acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of the identiﬁ able net assets acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Where necessary, the accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (ii) The Group’s share of the results and net assets of associated companies and joint ventures are included based on the equity method of accounting. An associate is an enterprise over which the Group has signiﬁ cant inﬂ uence, but not control, through participation in the ﬁ nancial and operating policy decisions of the investee. A joint venture is an entity subject to joint control by the Group and other parties. Under the equity method of accounting, the Group’s share of the post-acquisition proﬁ ts and losses of associates and joint ventures is recognised in the income statement and its share of post acquisition movements in reserves is recognised directly in equity. The cumulative post acquisition movements are adjusted against the cost of the investment. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associate or joint venture. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associate or joint venture. 56 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (c) Segment reporting The Group reports segment information by class of business and by geographical area. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. The Group’s primary reporting segment, for which more detailed disclosures are required, is by class of business. A geographic segment is a distinguishable component of the Group that is engaged in providing products or services within a particular economic environment. (d) Foreign currency translation (i) Functional and presentation currency Items included in the ﬁ nancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated ﬁ nancial statements are presented in euro, which is the Company’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Currency translation differences on monetary assets and liabilities are taken to the income statement, except when deferred in equity as qualifying cash ﬂ ow hedges. Translation differences on non-monetary ﬁ nancial assets and liabilities held at fair value through proﬁ t or loss are recognised in the income statement as part of the fair value gain or loss. Translation differences on non-monetary ﬁ nancial assets such as equities classiﬁ ed as available for sale are included in the fair value reserve in equity. (iii) Group companies The income statement and balance sheet of Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities at each balance sheet date are translated at the closing rate at the date of the balance sheet; • income and expenses in the income statement are translated at average exchange rates for the year. Resulting exchange differences are taken to a separate currency reserve within equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as local currency assets and liabilities of the foreign entity and are translated at the balance sheet rate. In accordance with IFRS 1, the cumulative translation differences on foreign subsidiaries was set to zero on IFRS transition date (4 January 2004). (e) Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost less subsequent depreciation less any impairment loss. Historic cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash ﬂ ow hedges of foreign currency purchases of properties, plant and equipment. Certain items of property, plant and equipment that had been revalued prior to the date of transition to IFRS (4 January 2004) are measured on the basis of deemed cost, being the revalued amount depreciated to date of transition. Items of property, plant and equipment that were fair valued at date of transition are also measured at deemed cost, being the fair value at date of transition. Depreciation is calculated on the straight-line method to write-off the cost of each asset over their estimated useful life at the following rates: Land Buildings Plant and equipment Motor vehicles % Nil 2.5 – 5 5 – 33 20 – 25 The assets’ useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 57 Assets held under ﬁ nance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Property, plant and equipment is tested for impairment when indicators arise. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating proﬁ t. Repairs and maintenance are charged to the income statement during the ﬁ nancial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic beneﬁ ts in excess of the originally assessed standard of performance of the existing asset will ﬂ ow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. (f) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identiﬁ able assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill associated with the acquisition of associates is included within the investment in associates. Goodwill is carried at cost less accumulated impairment losses, if applicable. Goodwill is tested for impairment on an annual basis. Goodwill impairments are not reversed. In accordance with IFRS 1, goodwill written off to reserves prior to date of transition to IFRS remains written off. In respect of goodwill capitalised and amortised at transition date, its carrying value at date of transition to IFRS remains unchanged. The fair values of intangible assets acquired as part of business combinations are based on the discounted cash ﬂ ows expected to be derived from the eventual use and sale of those assets, unless impaired. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units or groups of cash generating units that are expected to beneﬁ t from the business combination in which the goodwill arose. (ii) Development costs Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Development costs are amortised using the straight line method over their estimated useful lives, which is normally 5 to 8 years. (iii) Intellectual property Expenditure to acquire intellectual property is capitalised and amortised using the straight-line method over its useful life, which is normally between 15 and 20 years. (iv) Computer software Costs incurred on the acquisition of computer software are capitalised, as are costs directly associated with developing computer software programmes, if they meet the recognition criteria of IAS 38. Computer software costs recognised as assets are written off over their estimated useful lives, which is normally between 5 and 10 years. (g) Investments The Group classiﬁ es all its investments as available for sale ﬁ nancial assets. They are initially recognised at fair value and are subsequently adjusted to fair value at each balance sheet date. Unrealised gains and losses arising from changes in the fair value of investments classiﬁ ed as available for sale are recognised in equity. When such investments are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains or losses from investments. The fair values of quoted investments are based on current bid prices. If the market for a ﬁ nancial asset is not active the Group establishes fair value using valuation techniques. Where the range of reasonable fair values is signiﬁ cant and the probability of various estimates cannot be reasonably assessed, the Group measures the investment at cost. Investments in subsidiaries held by the Company are carried at cost. 58 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (h) Leases Leases of assets where the Group has substantially all the risks and rewards of ownership are classiﬁ ed as ﬁ nance leases. A determination is also made as to whether the substance of an arrangement could equate to a ﬁ nance lease, considering whether fulﬁ lment of the arrangement is dependant upon the use of a speciﬁ c asset and the arrangement contains the right to use an asset. If the speciﬁ ed criteria are met, the arrangement is classiﬁ ed as a ﬁ nance lease. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and ﬁ nance charges so as to achieve a constant rate on the ﬁ nance balance outstanding. The corresponding rental obligation, net of ﬁ nance charges, is included in borrowings, split between current and non-current as appropriate. The interest element of the ﬁ nance cost is charged to the income statement over the lease period. The property, plant and equipment acquired under ﬁ nance leases is depreciated over the shorter of the useful life of the asset or the lease term. Leases where a signiﬁ cant portion of the risks and rewards of ownership are retained by the lessor are classiﬁ ed as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (i) Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined by the ﬁ rst-in, ﬁ rst-out (“FIFO”) method. The cost of ﬁ nished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the cost of selling expenses. (j) Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Signiﬁ cant ﬁ nancial difﬁ culties of the debtor, probability that the debtor will enter bankruptcy or ﬁ nancial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying value and the estimated future cash ﬂ ows. The carrying amount of the asset is reduced through the use of a provision account and the amount of the loss is recognised in the income statement within distribution costs. When a trade receivable is uncollectible, it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against distribution costs in the income statement. Loan receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. These are classiﬁ ed as non-current assets, except for those maturing within 12 months of the balance sheet date. (k) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of 3 months or less and bank overdrafts. In the balance sheet, bank overdrafts, if applicable, are included in borrowings in current liabilities. (l) Income taxes Current tax represents the expected tax payable or recoverable on the taxable proﬁ t for the period, taking into account adjustments relating to prior years. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the ﬁ nancial statements. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁ t will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable proﬁ t or loss. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 59 (m) Employee beneﬁ ts (i) Pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both deﬁ ned beneﬁ t and deﬁ ned contribution plans. The liability recognised in the balance sheet in respect of deﬁ ned beneﬁ t pension plans is the present value of the deﬁ ned beneﬁ t obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised past-service costs. The deﬁ ned beneﬁ t obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the deﬁ ned beneﬁ t obligation is determined by discounting the estimated future cash outﬂ ows using interest rates of high-quality corporate bonds that are denominated in the currency in which the beneﬁ ts will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The fair value of plan assets are measured at their bid value. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in the Statement of Recognised Income and Expense in the period in which they arise. Past-service costs are recognised immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a speciﬁ ed period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. Payments to deﬁ ned contribution schemes are charged as an expense when they fall due. (ii) Share based payments The Group operates a number of equity settled share based compensation plans which include executive share option schemes, employee sharesave schemes and share awards. The charge to the income statement in respect of share-based payments is based on the fair value of the equity instruments granted and is spread over the vesting period of the instrument. The fair value of the instruments is calculated using the Trinomial model. In accordance with the transition arrangements set out in IFRS 2 (Share Based Payments), this standard has been applied in respect of share options granted after 7 November 2002 which had not vested by transition date (4 January 2004). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. (n) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities and are credited to the income statement on a straight-line basis over the expected lives of the related assets. (o) Revenue recognition Revenue comprises the fair value of the sale of goods and services to external customers net of value added tax, rebates and discounts. Revenue from the sale of goods is recognised when signiﬁ cant risks and rewards of ownership of the goods are transferred to the buyer, which generally arises on delivery, or in accordance with speciﬁ c terms and conditions agreed with customers. Revenue from the rendering of services is recognised in the period in which the services are rendered. Interest income is recognised using the effective interest method. Dividends are recognised when the right to receive payment is established. Revenue from the sale of property is recognised when there is an unconditional and irrevocable contract for sale. 60 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (p) Impairment of assets (i) Financial assets The Group assesses at each balance sheet date whether there is objective evidence that a ﬁ nancial asset or a group of ﬁ nancial assets is impaired. In the case of equity securities classiﬁ ed as available for sale, a signiﬁ cant or prolonged decline in the fair value of the security below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available for sale ﬁ nancial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that ﬁ nancial asset previously recognised in the proﬁ t or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in (j) above. (ii) Non-ﬁ nancial assets Assets which have a ﬁ nite useful life are subject to amortisation and reviewed for impairment when events or changes in circumstance indicate that the carrying value may not be recoverable. Goodwill is reviewed at least annually for impairment. An impairment loss is recognised to the extent that the carrying value of the assets exceeds its recoverable amount. The recoverable amount is the higher of the assets fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁ able cash ﬂ ows (cash generating units). (q) Share capital Ordinary shares are classiﬁ ed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds. Own shares The cost of own shares, held by an Employee Share Trust in connection with the Company’s Sharesave Scheme, is deducted from equity. (r) Dividends Dividends to the Company’s shareholders are recognised as a liability of the Company when approved by the Company’s shareholders. (s) Derivative ﬁ nancial instruments The activities of the Group expose it primarily to the ﬁ nancial risks of changes in foreign currency exchange rates and interest rates. The Group uses derivative ﬁ nancial instruments such as foreign exchange contracts and options, interest rate swap contracts and forward rate agreements to hedge these exposures. The Group accounts for ﬁ nancial instruments under IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement). Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at balance sheet date. The fair value of forward foreign currency contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on discounting estimated future cash ﬂ ows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a ﬁ rm commitment (fair value hedge); (2) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash ﬂ ow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash ﬂ ows of hedged items. (i) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 61 If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to proﬁ t or loss over the period to maturity. (ii) Cash ﬂ ow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂ ow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects proﬁ t or loss (for instance when the forecast sale that is hedged takes place). The recycled gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within ‘ﬁ nance costs’. The recycled gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in the income statement within revenue. However, when the forecast transaction that is hedged results in the recognition of a non-ﬁ nancial asset (for example, inventory) or a non-ﬁ nancial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (iii) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash ﬂ ow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are transferred to the income statement when the foreign operation is partially disposed of or closed. (iv) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. (v) Financial guarantee contracts Financial guarantee contracts are issued to banking institutions by the entity Glanbia plc on behalf of certain of its subsidiaries. These subsidiaries engage in ongoing ﬁ nancing arrangements with these banking institutions. Under the terms of amended IAS 39 (Financial Instruments: Recognition and Measurement) ﬁ nancial guarantee contracts are required to be recognised at fair value at inception and subsequently measured as a provision under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) on the Glanbia plc company balance sheet. (t) Earnings per share Earnings per share represents the proﬁ t in cent attributable to equity holders of the Company, divided by the weighted average number of equity shares in issue in respect of the period. Adjusted earnings per share is calculated by excluding exceptional items. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. (u) Borrowing costs Borrowing costs incurred for assets under construction are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. (v) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Preference shares, which are mandatorily redeemable on a speciﬁ c date, are classiﬁ ed as liabilities. The dividends on these preference shares are recognised in the income statement as interest expense. Borrowings are classiﬁ ed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 62 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (w) Provisions Provisions are recognised when the Group has a constructive or legal obligation as a result of past events; it is more likely than not that an outﬂ ow of resources will be required to settle the obligation; and the amount has been reliably estimated. (x) Termination beneﬁ ts Termination beneﬁ ts are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these beneﬁ ts. The Group recognises termination beneﬁ ts when it is demonstrably committed to either; terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination beneﬁ ts as a result of an offer made to encourage voluntary redundancy. (y) Exceptional items The Group has adopted an income statement format, which seeks to highlight signiﬁ cant items within the Group results for the year. Such items may include restructuring, impairment of assets, proﬁ t or loss on disposal or termination of operations, litigation settlements and proﬁ t or loss on disposal of investments. Judgement is used by the Group in assessing the particular items, which by virtue of their scale and nature, should be disclosed in the income statement and notes as exceptional items. (z) Business combinations The purchase method of accounting is employed in accounting for the acquisition of subsidiaries by the Group. The cost of a business combination is measured as the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued in exchange for control together with any directly attributable costs. To the extent that settlement of all or any part of a business combination is deferred, the fair value of the deferred component is determined through discounting the amounts payable to their present value at the date of exchange. The discount component is unwound as an interest charge in the income statement over the life of the obligation. Where a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the amount of the adjustment is included in the cost at the acquisition date if the adjustment can be reliably measured. Contingent consideration is included in the acquisition balance sheet on a discounted basis. The assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. When the initial accounting for a business combination is determined provisionally, any adjustments to the provisional values allocated to the identiﬁ able assets, liabilities and contingent liabilities are made within 12 months of the acquisition date. Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the intangible asset meets the deﬁ nition of an asset and the fair value can be reliably measured on initial recognition. In accordance with IFRS 1, business combinations that took place before the transition date (4 January 2004) have not been restated. All goodwill written off to reserves or amortised prior to the transition date remains written off. (aa) New accounting standards and IFRIC interpretations Certain new accounting standards and IFRIC interpretations are mandatory for accounting periods beginning on or after 31 December 2006. The Group’s assessment of the impact of these new standards and interpretations is set out below; (i) IFRS 7 – Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures The Group assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment to IAS 1. The Group will apply IFRS 7 and the amendment to IAS 1 for annual periods beginning on or after 31 December 2006. Amendments to existing standards and interpretation effective in 2006 and adopted by the Group: The following amendments and interpretations of existing standards have been adopted by the Group in the current period and have resulted in a change in accounting policy for the Group: IAS 21 (Amendment) – Net Investment in a Foreign Operation, - IAS 39 and IFRS 4 (Amendment) – Financial Guarantee Contracts, and - - IFRIC 4 – Determining whether an Arrangement contains a Lease. These changes in accounting policies are outlined in more detail at note (bb). G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 63 Standards, amendments and interpretations effective in 2006 but not relevant to the Group’s operations: The following standards, amendments and interpretations are mandatory for the Group for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group’s operations: - - - - IAS 39 (Amendment) – Cash Flow Hedge Accounting of Forecast Intragroup Transactions; IAS 39 (Amendment) – the Fair Value Option; IFRS 6 – Exploration for and Evaluation of Mineral Resources; IFRS 1 (Amendment) – First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; IFRIC 6 – Liabilities arising from Participating in a Speciﬁ c Market - Waste Electrical and Electronic Equipment; IFRIC 5 – Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. - - Standards and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards, amendments to and interpretations to existing standards have been published and are mandatory for future accounting periods and have not been early adopted: (ii) IFRS 8 – Operating segments This standard is effective for accounting periods beginning on or after 1 January 2009. IFRS 8 sets out the requirements for disclosure of ﬁ nancial and descriptive information about an entity’s operating segments and also about the entity’s products and services, the geographical areas in which it operates, and its major customers. The IFRS replaces IAS 14 Segment Reporting. The Group will apply IFRS 8 from 1 January 2009 and is currently considering the impact of this standard on its disclosures. (iii) IFRIC 7 – Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinﬂ ationary Economies (effective for periods beginning on or after 1 March 2006) IFRIC 7 provides guidance on how to apply requirements of IAS 29 in a reporting period in which an entity identiﬁ es the existence of hyperinﬂ ation in the economy of its functional currency, when the economy was not hyperinﬂ ationary in the prior period. As none of the Group entities have a currency of a hyperinﬂ ationary economy as its functional currency, IFRIC 7 is not relevant to the Group’s operations; (iv) IFRIC 8 – Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006) IFRIC 8 requires consideration of transactions involving the issuance of equity instruments – where the identiﬁ able consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 31 December 2006, but it is not expected to have any impact on the Group’s ﬁ nancial statements; (v) IFRIC 9 – Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006) IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity ﬁ rst becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that signiﬁ cantly modiﬁ es the cash ﬂ ows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is not expected to have any impact on the Group’s ﬁ nancial statements. (vi) IFRIC 10 – Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006) IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in ﬁ nancial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 31 December 2006, but it is not expected to have any impact on the Group’s ﬁ nancial statements. (vii) IFRIC 12 Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008) Service concessions are arrangements whereby a government or other public sector entity grants contracts for the supply of public services – such as roads, airports, prisons and energy and water supply and distribution facilities – to private sector operators. As the Group is not a service concession operator IFRIC 12 is not relevant to the Group’s activities. 64 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (bb) Prior year adjustments (i) Foreign currency The Group has adopted the amendment to IAS 21, ‘Net Investment in a Foreign Operation’, in the Group’s ﬁ nancial statements from 1 January 2006. The adoption of this amendment has resulted in a change in accounting policy. The adoption of this amendment requires that all foreign exchange gains and losses on inter-company loans that form part of the net investment in a foreign operation, including loans between fellow subsidiaries, are recognised directly in equity on consolidation. Prior period comparative ﬁ gures have been restated to reﬂ ect the impact of this change. In the prior year, such loans between fellow subsidiaries did not qualify as part of the net investment and therefore the exchange gains and losses on these loans were recognised directly in the income statement. This change results in the recognition of a gain of €3.9 million, previously included within administration expenses in the income statement in the prior year, directly in equity in the currency reserve. There is no net impact on equity as a result of this change. The overall impact represents an increase in currency reserve amounting to €3.9 million and a decrease in retained earnings amounting to €3.9 million. The change in accounting policy has resulted in a decrease in basic and diluted EPS for the year ended 31 December 2005 of 1.35 cent and 1.30 cent respectively. (ii) Leases The Group has adopted IFRIC 4, Determining whether an Arrangement contains a Lease, in the Group’s ﬁ nancial statements from 1 January 2006. The Group reviews arrangements that do not take the legal form of a lease and a determination is also made as to whether the substance of an arrangement could equate to a ﬁ nance lease, considering whether fulﬁ lment of the arrangement is dependant upon the use of a speciﬁ c asset and the arrangement contains the right to use an asset. If the speciﬁ ed criteria are met, the arrangement is classiﬁ ed as a ﬁ nance lease. In prior years the annual cost of this arrangement was recognised as an expense as incurred. The effect of this change in accounting policy has resulted in an increase in property, plant and equipment and lease liabilities amounting to €8.5 million and €8.5 million respectively at 31 December 2005. This has also resulted in a decrease in administration expenses of €0.93 million, an increase in depreciation of €0.57 million and an increase in interest expense of €0.36 million in the year ended 31 December 2005. The change in accounting policy has resulted in no impact to basic or diluted EPS for the year ended 31 December 2005. 3 Financial risk management The conduct of its ordinary business operations necessitates the holding and issuing of ﬁ nancial instruments and derivative ﬁ nancial instruments by the Group. The main risks arising from issuing, holding and managing these ﬁ nancial instruments typically include liquidity risk, interest rate risk and currency risk. The Group approach is to centrally manage these risks against comprehensive policy guidelines, which are summarised below. The Group does not engage in holding or issuing speculative ﬁ nancial instruments or derivatives thereof. The Group ﬁ nances its operations by a mixture of retained proﬁ ts, preference shares, medium and short-term committed bank borrowings and uncommitted bank borrowings. The Group borrows in the major global debt markets in a range of currencies at both ﬁ xed and ﬂ oating rates of interest, using derivatives where appropriate to generate the desired effective currency proﬁ le and interest rate basis. Currency risk Although the Group is based in Ireland, it has signiﬁ cant investment in overseas operations primarily in the USA. As a result movements in US dollar/euro exchange rates can signiﬁ cantly affect the Group’s euro balance sheet and income statement. The Group seeks to match, to a reasonable extent, the currency of its borrowings with that of its assets. The Group also has transactional currency exposures that arise from sales or purchases by an operating unit in currencies other than the unit’s operating functional currency. The Group requires all its operating units to mitigate such currency exposures, by means of forward foreign currency contracts. Liquidity and cash ﬂ ow risk The Group’s objective is to maintain a balance between the continuity of funding and ﬂ exibility through the use of borrowings with a range of maturities. In order to preserve continuity of funding, the Group’s policy is that, at a minimum, committed facilities should be available at all times to meet the full extent of its anticipated ﬁ nance requirements, arising in the ordinary course of business, during the succeeding 12 month period. This means that at any time the lenders providing facilities in respect of this ﬁ nance requirement are required to give at least 12 months notice of their intention to seek repayment of such facilities. At the year end, the Group had multi-currency committed term facilities of €622.1 million of which €138.3 million was undrawn. The weighted average period to maturity of these facilities was 4.3 years. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 65 Finance and interest rate risk The Group’s objective in relation to interest rate management is to minimise the impact of interest rate volatility on interest costs in order to protect reported proﬁ tability. This is achieved by determining a long-term strategy against a number of policy guidelines, which focus on (a) the amount of ﬂ oating rate indebtedness anticipated over such a period and (b) the consequent sensitivity of interest costs to interest rate movements on this indebtedness and the resultant impact on reported proﬁ tability. The Group borrows at both ﬁ xed and ﬂ oating rates of interest and uses interest rate swaps to manage the Group’s exposure to interest rate ﬂ uctuations. Price risk The Group is exposed to equity securities price risk because of investments held by the Group and classiﬁ ed on the consolidated balance sheet as available for sale. Credit risk The Group has no signiﬁ cant concentrations of credit risk. It has policies in place to ensure that credit sales of products are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high- credit–quality ﬁ nancial institutions. 4 Critical accounting estimates and assumptions Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by deﬁ nition, seldom equal the related actual results. The estimates and assumptions that could have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. (a) Impairment reviews of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2(f). The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of estimates. The assets of Seltzer Companies, Inc., including goodwill arising on acquisition of €62.1 million, were tested for impairment using projected cash ﬂ ows over a 10 year period. A reduction in projected EBITDA of 10% or an increase in the discount factor used from 9% to 10% would not result in an impairment of the assets. A rate of 0% has been used to estimate cash ﬂ ow growth between 5 and 10 years. (b) Income taxes The Group is subject to income tax in numerous jurisdictions. Signiﬁ cant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the ﬁ nal tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Notwithstanding the above, the Group believes that it has adequate tax provisions to cover all risks across all jurisdictions. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁ t will be available against which the unused tax losses and unused tax credits can be utilised. The Group estimates the most probable amount of future taxable proﬁ ts, using assumptions consistent with those employed in impairment calculations, and taking into consideration applicable tax legislation in the relevant jurisdiction. These calculations require the use of estimates. (c) Post-employment beneﬁ ts The Group operates a number of post employment deﬁ ned beneﬁ t plans. The rates of contributions payable, the pension cost and the Group’s total obligation in respect of deﬁ ned beneﬁ t plans is calculated and determined by independent qualiﬁ ed actuaries and updated at least annually. The Group also has plan assets totalling €376.6 million giving a net pension liability of €124.9 million for the Group. The size of the obligation and cost of the beneﬁ ts are sensitive to actuarial assumptions. These include demographic assumptions covering mortality and longevity, and economic assumptions covering price inﬂ ation, beneﬁ t and salary increases together with the discount rate used. The size of the plan assets is also sensitive to asset return levels and the level of contributions from the Group. 66 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (d) Establishing lives for depreciation of property, plant and equipment and intangible assets Long-lived assets comprising primarily of property, plant and equipment and intangible assets, represent a signiﬁ cant portion of total assets. The annual depreciation and amortisation charge depends primarily on the estimated lives of each type of asset and, in certain circumstances, estimates of fair values and residual values. The Directors regularly review these useful lives and change them as necessary to reﬂ ect current thinking on remaining lives in light of technological change, pattern of consumption, the physical condition and expected economic utilisation of the asset. Changes in the useful lives can have a signiﬁ cant impact on the depreciation and amortisation charge for the period. Details of the useful lives are included in the accounting policy 2(e) and 2(f). The impact of any change could vary signiﬁ cantly depending on the individual changes in assets and the classes of assets impacted. (e) Providing for doubtful debts The Group trades with a large and varied number of customers on credit terms. Some debts due will not be paid as a result of the default of a small number of customers. The Group uses estimates based on historical experience and current information in determining the level of debts for which a provision for impairment is required. Factors that the Group will consider include ﬁ nancial difﬁ culties of the debtor, probability that the debtor will enter bankruptcy or ﬁ nancial reorganisation and default or delinquency in payments. Any signiﬁ cant impact on the level of customers that default on payment would have a consequential impact on operating result. The level of provision required is reviewed on an ongoing basis. 5 Segment information Primary reporting format – business segments At 30 December 2006 the Group is organised into three main business segments: - - - Consumer Foods Food Ingredients and Nutritionals Agribusiness and Property The segment results for the year ended 31 December 2005 are as follows: Food 2005 Total gross segment revenue Inter-segment revenue Ingredients Agribusiness and Consumer and Foods Nutritionals (as restated) €’000 €’000 Property Unallocated (as restated) €’000 €’000 Group (as restated) €’000 493,667 (85) 1,215,559 (108,271) 239,826 (10,684) - - 1,949,052 (119,040) Revenue 493,582 1,107,288 229,142 - 1,830,012 Operating proﬁ t pre-exceptional items Exceptional items 27,139 (11,860) 43,109 (2,649) 10,684 (1,160) - 10,628 80,932 (5,041) 15,279 40,460 9,524 10,628 75,891 Finance income and costs Share of results of joint ventures and associates Proﬁ t before tax Tax Proﬁ t for the year (18,453) 932 58,370 (657) 57,713 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 67 The segment results for the year ended 30 December 2006 are as follows: Food 2006 Total gross segment revenue Inter-segment revenue Ingredients Agribusiness and Consumer and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 511,077 (55) 1,186,890 (108,977) 264,492 - - - 1,962,459 (109,032) Revenue 511,022 1,077,913 264,492 - 1,853,427 Operating proﬁ t pre-exceptional items Exceptional items 24,525 (3,277) 44,166 - 16,876 - - (9,178) 85,567 (12,455) 21,248 44,166 16,876 (9,178) 73,112 Finance income and costs Share of results of joint ventures and associates Proﬁ t before tax Tax Proﬁ t for the year (14,035) 2,842 61,919 4,351 66,270 Inter-segment transfers or transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties. Other segment items included in the income statement for the year ended 31 December 2005 are as follows: Food 2005 Ingredients Agribusiness and Consumer and Foods Nutritionals (as restated) €’000 €’000 Property Unallocated €’000 €’000 Group (as restated) €’000 Depreciation restated Amortisation of intangibles Capital grants released to income statement Restructuring costs 6,870 2,380 (1,411) 11,860 14,356 821 (7) 2,649 2,859 112 (6) 1,160 - - - - 24,085 3,313 (1,424) 15,669 Other segment items included in the income statement for the year ended 30 December 2006 are as follows: Food 2006 Ingredients Agribusiness and Consumer and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 Depreciation Amortisation of intangibles Capital grants released to income statement Restructuring costs - exceptional item 7,989 2,567 (4,269) 3,277 15,000 1,607 (12) - 2,426 278 (41) - - - - - 25,415 4,452 (4,322) 3,277 68 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 The segment assets and liabilities at 31 December 2005 and capital expenditure for the year then ended are as follows: Food 2005 Assets Associates and joint ventures Total assets Liabilities Ingredients Agribusiness and Consumer and Foods Nutritionals (as restated) €’000 €’000 Property Unallocated €’000 €’000 Group (as restated) €’000 175,389 - 477,963 - 122,309 - 120,274 70,922 895,935 70,922 175,389 477,963 122,309 191,196 966,857 (131,503) (280,359) (72,144) (359,133) (843,139) Group capital expenditure and acquistions 12,096 30,006 8,439 495 51,036 The segment assets and liabilities at 30 December 2006 and capital expenditure for the year then ended are as follows: Food 2006 Assets Associates and joint ventures Total assets Liabilities Ingredients Agribusiness and Consumer and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 149,129 - 488,926 - 140,632 - 314,519 69,601 1,093,206 69,601 149,129 488,926 140,632 384,120 1,162,807 (77,232) (161,113) (35,000) (688,943) (962,288) Group capital expenditure and acquisitions 6,275 102,817 11,252 (71) 120,273 Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, derivatives designated as hedges of future transactions and receivables. They exclude deferred taxation, investments and derivatives held for trading or designated as hedges of borrowings. Segment liabilities comprise operating liabilities. They exclude items such as taxation, corporate borrowings and related hedging derivatives. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 69 Secondary reporting format - geographical segments The Group’s three main business segments operate in three main geographical areas, even though they are managed on a worldwide basis. Revenue Ireland Rest of Europe USA/other Revenue is allocated based on the country in which the customer is located. Total assets Ireland Rest of Europe USA/other Associates and joint ventures Unallocated assets Total assets Total assets are allocated based on where the assets are located. Capital expenditure Ireland Rest of Europe USA/other 2006 €’000 2005 €’000 781,940 214,942 856,545 735,034 226,545 868,433 1,853,427 1,830,012 2006 €’000 2005 (as restated) €’000 471,259 30,382 277,046 545,667 11,673 218,321 778,687 775,661 69,601 314,519 70,922 120,274 1,162,807 966,857 2006 €’000 2005 €’000 31,720 799 87,754 35,922 685 14,429 120,273 51,036 Capital expenditure, including acquisitions is allocated based on where the assets are located. 70 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 6 Operating proﬁ t The following items have been included in arriving at operating proﬁ t: Depreciation of property, plant and equipment (note 14) - Owned assets - Leased assets under ﬁ nance leases Proﬁ t on disposal of property, plant and equipment 2006 €’000 2005 (as restated) €’000 23,730 1,685 21,878 2,207 (7,531) (2,509) Repairs and maintenance expenditure on property, plant and equipment 25,264 25,891 Amortisation of intangible assets (note 15) - Software costs - Other intangible assets Increase in inventories 3,370 1,082 2,784 529 908 10,831 Raw materials and consumables used 1,355,388 1,356,020 Trade receivables - impairment charge for bad and doubtful debts Amortisation of government grants received (note 34) Operating lease rentals payable - Plant and machinery - Other Employee beneﬁ t expense Auditors’ remuneration Research and development costs Net foreign exchange (gains)/losses Gain on interest rate swaps not qualifying as hedges Other Total operating expenses - pre-exceptional Exceptional items (note 7) Total operating expenses 696 (270) (1,180) (1,424) 3,317 4,715 2,798 5,767 178,671 177,104 599 561 6,275 5,991 (2,008) 196 - (2,098) 172,879 142,824 1,767,860 1,749,080 12,455 5,041 1,780,315 1,754,121 7 Exceptional items Restructuring cost The Cheese Company Holdings Limited (Loss) on sale or termination of operations Proﬁ t on sale of quoted investments Exceptional tax credit (note 11) Exceptional ﬁ nance cost (note 10) Net exceptional items G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 71 Notes (a) (b) 2006 €’000 2005 (as restated) €’000 (3,277) (9,178) - - (15,669) - (331) 10,959 (12,455) (5,041) 12,321 6,935 - (5,304) (134) (3,410) (a) Restructuring costs relate to the closure of the Pigmeat cannery operation. Costs include redundancy and the release of unamortised capital grants. (b) On 29 December 2006, the Group disposed of its 25% interest and related 2008-2018 loan note in The Cheese Company Holdings Limited to the majority shareholder, Milk Link Limited. 8 Employee beneﬁ t expense Wages and salaries Termination costs (including exceptional items - note 7) Social security costs Share option and Sharesave Scheme costs Pension costs - deﬁ ned contribution plans (note 32) Pension costs - deﬁ ned beneﬁ t plans (note 32) 2006 €’000 2005 €’000 152,358 7,232 17,093 290 1,026 6,435 143,623 12,331 14,364 259 738 5,789 184,434 177,104 The average number of employees in 2006 was 3,926 (2005: 3,837) and is analysed into the following categories: Consumer Foods Food Ingredients and Nutritionals Agribusiness and Property 2006 2005 1,894 1,349 683 1,879 1,299 659 3,926 3,837 72 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 9 Directors’ remuneration The salary, fees and other beneﬁ ts for each of the Directors during the year were: Executive JJ Moloney GJ Meagher KE Toland WG Murphy (note (a)) 2006 2005 Non-executive MJ Walsh (note (b)) L Herlihy JV Quinlan (note (c)) JE Callaghan HV Corbally J Fitzgerald EP Fitzpatrick JA Gilsenan P Gleeson (note (d)) P Haran (note (e)) CL Hill ML Keane (note (e)) MN Keane (note (d)) JV Liston M Merrick (note (e)) JJ Miller (note (f)) WG Murphy (note (a)) M Parsons EM Power GE Stanley (note (f)) TP Corcoran (note (g)) TP Heffernan (note (h)) 2006 2005 Total 2006 Total 2005 Salary €’000 Fees €’000 438 263 287 - 988 1,053 - - - - - - - - - - - - - - - - - - - - - - - - 988 1,053 - - - - - - 80 38 38 57 17 17 17 17 11 57 17 17 11 57 17 7 57 17 17 7 - - 573 475 573 475 Performance Pension bonus contribution €’000 €’000 329 206 226 - 761 313 126 79 85 - 290 290 2006 Total €’000 927 569 605 - 2,101 Other beneﬁ ts €’000 34 21 7 - 62 50 2005 Total €’000 642 420 462 182 1,706 57 36 29 52 16 16 16 16 - 31 16 10 - 52 10 16 14 16 16 16 32 8 80 38 38 57 17 17 17 17 11 57 17 17 11 57 17 7 57 17 17 7 - - 573 2,674 475 2,181 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 761 313 290 290 62 50 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 73 (a) Mr WG Murphy retired as an executive Director on 9 September 2005 and remains on the Board as a non-executive Director. (b) Mr MJ Walsh was appointed Chairman on 9 June 2005. (c) Mr JV Quinlan was appointed Vice Chairman on 9 June 2005. (d) Messrs P Gleeson and MN Keane were appointed as Directors on 24 May 2006. (e) Messrs P Haran, ML Keane and M Merrick were appointed as Directors on 9 June 2005. (f) Messrs JJ Miller and GE Stanley resigned as Directors on 24 May 2006. (g) Mr TP Corcoran resigned both as Chairman and Director on 9 June 2005. (h) Mr TP Heffernan resigned as a Director on 9 June 2005. Details of Directors’ share options are set out in note 42 to the ﬁ nancial statements. The Remuneration Committee of the Board, which comprises solely of non-executive Directors, determines the Company’s policy on executive Director remuneration and sets the remuneration package of each of the executive Directors. There are no contracts of service for executive Directors which are required to be made available for inspection. Transfer value of increase in accrued pension €’ 000 Annual pension accrued in 2006 in excess of inﬂ ation €’ 000 Total annual accrued pension at 30 December 2006 €’ 000 361 128 135 624 648 20 6 14 40 35 259 192 62 513 649 JJ Moloney GJ Meagher KE Toland 2006 2005 10 Finance income and costs (a) Finance income Interest income (i) (b) Finance costs - pre-exceptional Interest expense - Bank borrowings repayable within ﬁ ve years - Finance lease Finance cost of preferred securities and preference shares Total ﬁ nance costs - pre-exceptional Finance costs - exceptional Cancellation of preferred securities (ii) Total ﬁ nance costs 2006 €’000 4,883 2005 €’000 4,209 2006 €’000 2005 (as restated) €’000 (15,096) (380) (10,291) (472) (15,476) (10,763) (3,442) (6,595) (18,918) (17,358) - (5,304) (18,918) (22,662) (i) Interest income consists mainly of interest on a Stg£35 million subordinated secured loan note granted by The Cheese Company Holdings Limited in 2004, representing part proceeds on the sale by the Group of a 75% interest in its UK hard cheese business. On 29 December 2006, the Group disposed of its remaining 25% interest in The Cheese Company Holdings Limited and related 2008-2018 loan note, to the majority shareholder, Milk Link Limited. (ii) On 15 June 2005 the Group prepaid the US$100 million 7.99% cumulative guaranteed preferred securities, giving rise to a cost of €5.3 million, which was disclosed as an exceptional item. 74 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 11 Income taxes Irish corporation tax Adjustments in respect of prior years Current tax on income for the year Foreign tax Adjustments in respect of prior years Current tax on income for the year Total current tax Deferred tax (note 31) Pre-exceptional tax charge Exceptional tax credit 2006 €’000 3,080 238 3,318 1,035 (46) 989 2005 €’000 2,460 (1,285) 1,175 594 (1,056) (462) 4,307 713 3,663 7,970 (12,321) 6,879 7,592 (6,935) (4,351) 657 A deferred tax asset of €12.1 million arising from the expected use in future years of UK tax losses, which previously had not been recognised due to uncertainty as to recoverability, has been recognised in the 2006 ﬁ nancial statements. Also, in 2006, the restructuring provision in the Pigmeat Division resulted in a corporation tax credit of €699,000 and a deferred tax charge of €489,000. In 2005, a taxation beneﬁ t arising from the disposal of certain US operations in prior years, which previously had not been recognised in the ﬁ nancial statements was ﬁ nalised and gave rise to a gain of €6.9 million. The tax credits in 2006 and 2005, by virtue of their size and nature, have been separately disclosed as exceptional credits in the ﬁ nancial statements. The tax on the Group’s proﬁ t before tax differs from the theoretical amount that would arise using the corporation tax rate in Ireland, as follows: Proﬁ t before tax (pre-exceptional items) Tax calculated at Irish rate of 12.5% (2005: 12.5%) Earnings at reduced and higher Irish rates Difference due to overseas tax rates Utilisation of previously unrecognised tax losses Adjustment to tax charge in respect of previous periods Tax on proﬁ ts of joint ventures and associates shown in proﬁ t before tax Expenses not deductible for tax purposes and other differences Pre-exceptional tax charge Exceptional tax credit 2006 €’000 2005 €’000 74,374 68,715 9,297 (622) 2,489 (544) (58) (355) (2,237) 8,589 (759) 3,072 (3,781) (59) (116) 646 7,970 7,592 (12,321) (6,935) Details of deferred tax charged or credited directly to equity during the year are outlined in note 31. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 75 12 Earnings per share Basic Basic earnings per share is calculated by dividing the net proﬁ t attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as own shares (note 26). 2006 €’000 2005 (as restated) €’000 Proﬁ t attributable to equity holders of the Company 65,934 57,396 Weighted average number of ordinary shares in issue 292,958,667 291,469,902 Basic earnings per share (cent per share) 22.51 19.69 Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Share options are dilutive potential ordinary shares. In respect of share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. 2006 €’000 2005 €’000 Weighted average number of ordinary shares in issue Adjustments for share options 292,958,667 480,072 291,469,902 1,134,139 Adjusted weighted average number of ordinary shares 293,438,739 292,604,041 Diluted earnings per share (cent per share) 22.47 19.62 At year end options over 1,405,000 ordinary shares could potentially dilute basic earnings per share in the future but are anti-dilutive during the year ended 30 December 2006. Adjusted Proﬁ t attributable to equity holders of the Company Exceptional items Adjusted earnings per share (cent per share) Diluted adjusted earnings per share (cent per share) 2006 €’000 65,934 134 66,068 22.55 22.52 2005 €’000 57,396 3,410 60,806 20.86 20.78 13 Dividends The dividends paid in 2006 and 2005 were €16.5 million (5.62 cent per share) and €15.6 million (5.36 cent per share) respectively. On 4 October an interim dividend of 2.38 cent per share on the ordinary shares amounting to €6.98 million was paid to shareholders on the register of members as at 15 September 2006. The Directors have recommended the payment of a ﬁ nal dividend of 3.41 cent per share on the ordinary shares which amounts to €10.0 million. Subject to shareholders approval this dividend will be paid on Tuesday, 22 May 2007 to shareholders on the register of members as at Friday, 27 April 2007, the record date. These ﬁ nancial statements do not reﬂ ect this ﬁ nal dividend payable. 76 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 14 Property, plant and equipment – Group Previously stated at 1 January 2005 Cost Accumulated depreciation Previously stated net book amount Implementation of IFRIC 4 Land and buildings (as restated) €’000 Plant and equipment Motor vehicles €’000 €’000 Total (as restated) €’000 184,019 (59,692) 495,186 (317,951) 17,359 (16,864) 696,564 (394,507) 124,327 9,067 177,235 - 495 - 302,057 9,067 Restated net book amount 133,394 177,235 495 311,124 Year ended 31 December 2005 Opening net book amount Exchange differences Acquisition of subsidiaries Additions Disposals Reclassiﬁ cation Depreciation charge 133,394 3,644 1,637 11,573 (3,210) (1,054) (4,350) 177,235 9,247 1,146 31,334 (3,035) 1,054 (19,192) 495 16 32 1,159 (79) - (543) 311,124 12,907 2,815 44,066 (6,324) - (24,085) Closing net book amount 141,634 197,789 1,080 340,503 At 31 December 2005 Cost Accumulated depreciation Net book amount Year ended 30 December 2006 Opening net book amount Exchange differences Acquisition of subsidiaries (note 40) Additions Disposals Reclassiﬁ cation Depreciation charge Closing net book amount At 30 December 2006 Cost Accumulated depreciation Net book amount 203,833 (62,199) 527,039 (329,250) 18,204 (17,124) 749,076 (408,573) 141,634 197,789 1,080 340,503 141,634 (3,102) 419 6,337 (1,543) - (4,745) 197,789 (7,489) 859 24,544 (225) (29) (20,074) 1,080 (11) - 376 (101) 29 (596) 340,503 (10,602) 1,278 31,257 (1,869) - (25,415) 139,000 195,375 777 335,152 202,932 (63,932) 537,849 (342,474) 18,123 (17,346) 758,904 (423,752) 139,000 195,375 777 335,152 Depreciation expense of €25,415,366 (2005: €24,084,506) has been charged to cost of sales €22,647,360 (2005: €21,797,308), €2,053,075 (2005: €1,915,298) in distribution costs and €714,931 (2005: €371,900) in administration expenses. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 77 Leased assets, comprising plant and equipment, included in the table on page 76, where the Group is a lessee under a ﬁ nance lease, comprise as follows: Cost - capitalised ﬁ nance leases Accumulated depreciation Net book amount 2006 €’000 2005 (as restated) €’000 43,976 (24,998) 43,965 (22,747) 18,978 21,218 Operating lease rentals amounting to €8,031,578 (2005: €8,564,871) are included in the income statement. Included in the cost of plant and equipment is an amount of €4,652,730 (2005: €14,881,934) incurred in respect of assets under construction. Borrowing costs incurred on signiﬁ cant capital projects are capitalised. The amount capitalised, using the Group’s incremental cost of borrowing, amounted to €517,000 in 2006 (2005: €623,000). Capitalised borrowing costs will be amortised to the income statement and will be deducted in determining taxable proﬁ t over the life of the underlying asset. 78 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 15 Intangible assets At 1 January 2005 Cost Accumulated amortisation Goodwill €’000 Other intangibles €’000 Software €’000 Development costs €’000 Total €’000 12,563 - 4,362 (35) 30,547 (10,739) - - - 47,472 (10,774) 36,698 Net book amount 12,563 4,327 19,808 Year ended 31 December 2005 Opening net book amount Exchange differences Additions Disposals Acquisition of subsidiaries Reclassiﬁ cation Amortisation 12,563 33 493 - 8,968 1,035 - 4,327 - - - 8,905 (1,035) (529) 19,808 210 4,652 (508) - - (2,784) - - 1,825 - - - - 36,698 243 6,970 (508) 17,873 - (3,313) Previously stated closing net book amount Adjustment to provisional fair values 23,092 1,500 11,668 (1,500) 21,378 - 1,825 - 57,963 - Restated closing net book amount 24,592 10,168 21,378 1,825 57,963 At 31 December 2005 Cost Accumulated amortisation 24,592 - 10,732 (564) 34,995 (13,617) 1,825 - 72,144 (14,181) Net book amount 24,592 10,168 21,378 1,825 57,963 Year ended 30 December 2006 Opening net book amount Exchange differences Additions Acquisition of subsidiaries (note 40) Amortisation 24,592 (1,780) 172 62,148 - 10,168 (254) 300 16,589 (868) 21,378 (355) 6,459 - (3,370) 1,825 (135) 2,069 - (214) 57,963 (2,524) 9,000 78,737 (4,452) Closing net book amount 85,132 25,935 24,112 3,545 138,724 At 30 December 2006 Cost Accumulated amortisation 85,132 - 27,367 (1,432) 41,099 (16,987) 3,759 (214) 157,357 (18,633) Net book amount 85,132 25,935 24,112 3,545 138,724 Other intangibles include intellectual property (primarily unpatented know-how), customer relationships and brands recognised at the time of acquisition of subsidiary undertakings. Formal valuations have been completed on these assets associated with the acquisition of Pro-Fibe and CMP, with the resulting adjustment to provisional values applied at the time of acquisition being treated as a restatement (€1.5 million). As outlined in note 40 fair values assigned to the identiﬁ able assets and liabilities associated with the acquisition of Seltzer have been determined provisionally. Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) identiﬁ ed according to country of operation and business segment. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 79 A segment level summary of the goodwill allocation is presented below: Food Consumer and Foods Nutritionals Ingredients Agribusiness and Property (as restated) €’000 €’000 €’000 Total (as restated) €’000 At 31 December 2005 Ireland Rest of Europe USA/other At 30 December 2006 Ireland Rest of Europe USA/other 5,635 - - 540 16,580 1,146 691 - - 6,866 16,580 1,146 5,635 18,266 691 24,592 5,650 - - 540 16,852 61,399 691 - - 6,881 16,852 61,399 5,650 78,791 691 85,132 The recoverable amount of a CGU is determined based on value in use calculations. These calculations use cash ﬂ ow projections based on ﬁ nancial budgets approved by management covering a three year period. Cash ﬂ ows beyond the three year period are extrapolated using estimated growth rates consistent with forecasts included in industry reports. Key assumptions include management’s estimates of future proﬁ tability, capital expenditure requirements and working capital investment. Discount rates used reﬂ ect speciﬁ c risks relating to the relevant segments. The value in use calculations are prepared using pre tax discount rates, which range from 7.5% to 10%, and incorporate terminal values. 16 Investments in associates At the beginning of the year Share of proﬁ t after tax Exchange differences Additions Disposals Deferred tax liability 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group €’000 1,395 - - - - - 11,090 66 (142) 367 (448) - 1,395 - - - - - 10,918 341 182 - (190) (161) At the end of the year 1,395 10,933 1,395 11,090 80 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 The Group’s share of the results of principal associates, all of which are unlisted, and its share of the assets (including goodwill) and liabilities are as follows: 2005 Co-operative Animal Health Limited South Eastern Cattle Breeding Society Limited Malting Company of Ireland Limited South East Port Services Limited Westgate Biological Limited Other 2006 Co-operative Animal Health Limited South Eastern Cattle Breeding Society Limited Malting Company of Ireland Limited South East Port Services Limited Westgate Biological Limited Other Assets €’000 Liabilities €’000 Revenues €’000 Proﬁ t/ (loss) €’000 Interest held % 8,578 1,839 4,939 4,004 80 475 5,718 449 2,562 1,989 38 288 14,664 1,642 3,458 1,223 - 1,210 155 (15) 143 179 (156) 35 50 57 33.33 49 28 19,915 11,044 22,197 341 Assets €’000 Liabilities €’000 Revenues €’000 Proﬁ t/ (loss) €’000 Interest held % 8,064 1,842 4,966 3,930 209 27 6,047 460 2,583 1,867 76 288 14,718 1,647 3,391 1,388 - - 155 (8) 6 82 (169) - 50 57 33.33 49 41.8 19,038 11,321 21,144 66 Further details in relation to principal associates are outlined in note 43. 17 Investments in joint ventures At the beginning of the year Implementation of IAS 32 and IAS 39 Share of proﬁ t after tax Other reserve movements Exchange differences Additions At the end of the year 2006 €’000 2005 €’000 59,832 - 2,776 568 (4,514) 6 48,281 (72) 591 - 6,573 4,459 58,668 59,832 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 81 The following amounts represent the Group’s share of the assets and liabilities, revenue and results in joint ventures: Assets Non-current assets Current assets Liabilities Long-term liabilities Current liabilities Net assets Revenue Expenses Proﬁ t after income tax Proportionate interest in joint venture’s commitments A listing and description of interests in signiﬁ cant joint ventures is outlined in note 43. 18 Investments 2006 €’000 2005 €’000 113,644 50,965 118,802 33,355 164,609 152,157 61,848 44,093 61,948 30,377 105,941 92,325 58,668 59,832 241,727 (238,951) 109,247 (108,656) 2,776 14,600 591 510 At the beginning of the year Implementation of IAS 32 and IAS 39 Exchange differences Acquisition of subsidiaries Disposals/redemption Fair value adjustment Additions Investments in subsidiaries Available for sale Investments investments in subsidiaries Available for sale investments 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group €’000 510,469 - - - (57) - - 29,511 - 376 - (17,811) 102 349 512,174 - - - (1,705) - - 28,672 1,165 460 14 (3,977) - 3,177 At the end of the year 510,412 12,527 510,469 29,511 82 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 Investments include the following: Listed securities - Equity securities – eurozone countries Unlisted securities - The Cheese Company Holdings Limited - Irish Dairy Board - Glanbia Enterprise Fund Limited - Moorepark Technology - Other Group companies Loan to joint venture Other Investments in subsidiaries Available for sale Investments investments in subsidiaries Available for sale investments 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group €’000 1 864 1 762 - - 1,290 - 509,121 - - - 9,558 1,290 202 - - 613 - - 1,290 - 509,178 - - 14,481 9,215 1,290 245 - 2,905 613 510,412 12,527 510,469 29,511 The Group sold its 25% interest in The Cheese Company Holdings Limited on 29 December 2006 to the majority shareholder, Milk Link Limited. Available for sale investments are fair valued annually at year end. For investments traded in active markets, fair value is determined by reference to Stock Exchange quoted bid prices. For other investments, fair value is estimated by reference to the current market value of similar instruments or by reference to cash ﬂ ows discounted using a rate based on the market interest rate and the risk premium speciﬁ c to the unlisted securities. Available for sale investments are classiﬁ ed as non-current assets, unless they are expected to be realised within 12 months of the balance sheet date or unless they will need to be sold to raise operating capital. 19 Trade and other receivables Trade receivables Less provision for impairment of receivables Trade receivables - net Prepayments Receivable from associates and joint ventures Loans to related parties (note 41) Valued added tax Other receivables Less non-current portion: loans to related parties 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group €’000 - - 142,336 (10,439) - - 120,560 (11,716) - 1,881 - - - - 131,897 16,025 3,301 4,929 4,725 8,663 1,881 - 169,540 - - 934 - - - - 934 - 108,844 15,378 1,529 56,874 5,670 12,189 200,484 (56,874) 1,881 169,540 934 143,610 In 2004 a Stg£35 million subordinated secured loan note was granted by The Cheese Company Holdings Limited, representing part proceeds arising on the sale by the Group of its 75% interest in its UK hard cheese business. The loan note yielded interest at 1.75% above LIBOR with the principle amount and compounded interest repayable over 40 quarterly instalments from 1 April 2008 to 1 January 2018. On 29 December 2006, the Group sold its remaining 25% interest, in The Cheese Company Holdings Limited, and Stg£35 million loan note to the majority shareholder, Milk Link Limited. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 83 In 2006, under a Debt Purchase Agreement with a ﬁ nancial institution, the Group has transferred credit risk and retained late payment risk on certain trade receivables, amounting to €24.5 million. The Group has continued to recognise an asset of €557,000, representing the extent of its continuing involvement, and an associated liability of a similar amount. The fair values of receivables are not materially different to the book values. The net movement in the provision for impairment of receivables has been included in distribution expenses in the income statement. There is no concentration of credit risk with respect to trade receivables, as the Group has a large number of customers, internationally dispersed. 20 Inventories Raw materials Finished goods Expense 2006 €’000 2005 €’000 18,852 111,045 15,261 21,404 107,512 15,334 145,158 144,250 Included in the above are inventories carried at fair value less costs to sell amounting to €32.7 million (2005: €34.2 million). 21 Cash and cash equivalents Cash at bank and in hand Short term bank deposits 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group €’000 4,376 - 63,596 195,715 16,281 - 59,536 44,869 4,376 259,311 16,281 104,405 The fair value of cash and cash equivalents are not materially different to the book values. 84 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 22 Reconciliation of changes in equity Notes Share capital €’000 (note 23) Other reserves €’000 (note 24) Retained earnings €’000 (note 25) Minority interest €’000 (note 29) Total €’000 Balance at 1 January 2005 95,208 116,414 (97,797) 6,085 119,910 Adoption of IAS 32 and IAS 39 Amendment to IAS 21 (note 2) - - 3,017 (798) (5,609) 798 - - (2,592) - Restated balance at 2 January 2005 95,208 118,633 (102,608) 6,085 117,318 Actuarial loss - deﬁ ned beneﬁ t schemes Deferred tax on pension loss Currency translation differences Fair value adjustments Net expense recognised directly in equity Proﬁ t for the year Total recognised income for 2005 Change in minority interest in subsidiaries Shares issued Premium on shares issued Cost of share options Sharesave Scheme - discount cost Sharesave Scheme - options exercised Sharesave Scheme - discount on options Dividends paid in 2005 32 31 23 23 27 27 23 27 - - - - - - - - 28 703 - - 1,645 380 - 2,756 - - 2,553 (873) 1,680 - (42,303) 4,054 (1,664) - (39,913) 57,396 - - - - (42,303) 4,054 889 (873) - 317 (38,233) 57,713 1,680 17,483 317 19,480 - - - 161 98 - (380) - (121) - - - - - - - (15,612) (15,612) (103) - - - - - - - (103) (103) 28 703 161 98 1,645 - (15,612) (13,080) Restated balance at 31 December 2005 97,964 120,192 (100,737) 6,299 123,718 Actuarial gain - deﬁ ned beneﬁ t schemes Deferred tax on pension gain Share of actuarial gain - joint ventures Currency translation differences Fair value adjustments Net expense recognised directly in equity Proﬁ t for the year Total recognised income for 2006 Shares issued Premium on shares issued Cost of share options Sharesave Scheme - options exercised Sharesave Scheme - discount on options Dividends paid in 2006 32 31 24 23 23 27 23 27 - - - - - - - - 7 183 - 122 28 - 340 - - - (9,401) 2,734 (6,667) - 36,852 (3,923) 230 - - 33,159 65,934 - - - - - 36,852 (3,923) 230 (9,401) 2,734 - 336 26,492 66,270 (6,667) 99,093 336 92,762 - - 199 - (28) - 171 - - - - - (16,472) (16,472) - - - - - - - 7 183 199 122 - (16,472) (15,961) Balance at 30 December 2006 98,304 113,696 (18,116) 6,635 200,519 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 85 23 Share capital Company At 1 January 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme At 31 December 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme Number of shares (thousands) Ordinary shares €’000 292,644 - - 472 293,116 - - 123 17,559 - - 28 17,587 - - 7 Share premium Company €’000 435,480 - - 703 436,183 - - 183 Own shares €’000 Total Company €’000 (2,563) 1,645 380 - 450,476 1,645 380 731 (538) 122 28 - 453,232 122 28 190 At 30 December 2006 293,239 17,594 436,366 (388) 453,572 Group At 1 January 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme At 31 December 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme Number of shares (thousands) Ordinary shares €’000 292,644 - - 472 293,116 - - 123 17,559 - - 28 17,587 - - 7 Share premium Group €’000 80,212 - - 703 80,915 - - 183 Own shares €’000 (2,563) 1,645 380 - (538) 122 28 - Total Group €’000 95,208 1,645 380 731 97,964 122 28 190 At 30 December 2006 293,239 17,594 81,098 (388) 98,304 The total authorised number of ordinary shares is 306 million shares (2005: 306 million shares) with a par value of €0.06 per share (2005: €0.06 per share). All issued shares are fully paid. 86 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 Share options Share options are granted to Directors and to employees. Movements in the number of share options outstanding are as follows: At the beginning of the year Granted Exercised Lapsed At the end of the year Sharesave Scheme (note 26) Total at the end of the year Expiry date in 2006 2008 2008 2012 2013 2014 2014 2016 2006 Average exercise 2006 2005 Average exercise 2005 price in € Number of options per share price in € Number of options per share 2.41 3,007,000 50,000 2.87 (123,000) 1.55 (200,000) 3.23 2.34 3,608,500 - (471,500) (130,000) - 1.55 3.78 2.39 2,734,000 2.41 3,007,000 - - 1.20 109,913 2,734,000 3,116,913 Exercise price 2006 Number 2005 Number - 1.20 10,000 Stg£2.90 4.25 315,000 1.55 1,069,000 1.90 160,000 2.73 1,030,000 100,000 2.47 50,000 2.87 109,913 10,000 390,000 1,192,000 160,000 1,105,000 150,000 - 2,734,000 3,116,913 Total options over 2,409,000 ordinary shares were outstanding at 30 December 2006 under the 2002 Long Term Incentive Plan (“LTIP”), at prices ranging between €1.55 and €2.87. Furthermore, in accordance with the terms of the LTIP, certain executives to whom options were granted in 2002 and 2004 are eligible to receive share awards related to the number of ordinary shares which they hold on the second anniversary of the exercise of the option, to a maximum of 146,900 (2005: 191,300) ordinary shares. In May 2002, the Company established an Employee Share Trust to operate in connection with the Company’s Sharesave Scheme. As detailed in note 26 to the ﬁ nancial statements, the Employee Share Trust held 262,503 ordinary shares at 30 December 2006. The dividend rights in respect of these shares have been waived. Options over 325,000 ordinary shares, which were granted in 1998, under the Avonmore Foods plc 1988 Share Option Scheme remain outstanding at a price of €4.25 or Stg£2.90. Under the LTIP and the 1988 Share Option Scheme, options cannot be exercised before the expiration of three years from the date of grant and can only be exercised if a predetermined performance criterion for the Group has been achieved. The performance criterion is that there has been an increase in the adjusted earnings per share of the Group of at least the Consumer Price Index plus 5% over a three year period. The fair value of share options had been calculated using the Trinomial Model. Options over 1,394,000 (2005: 1,701,913) ordinary shares were exercisable at 30 December 2006 at a weighted average price of €2.18 (2005: €2.16). G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 87 24 Other reserves Capital and mergers reserves €’000 Notes Currency reserve €’000 Fair value reserves €’000 Total €’000 Balance at 1 January 2005 116,371 43 - 116,414 Adoption of IAS 32 and IAS 39 Amendment to IAS 21 - - - (798) 3,017 - 3,017 (798) Restated balance at 2 January 2005 116,371 (755) 3,017 118,633 Translation differences on foreign currency net investments Gains on interest rate swaps Foreign exchange contracts - loss in year Transfers to income statement - Foreign exchange contracts - Available for sale investments Revaluation of forward commodity contracts Deferred tax on fair value adjustments Cost of share options Discount on own shares vested Sharesave Scheme - discount cost 27 27 27 - - - - - - - 161 (380) 98 2,553 - - - - - - - - - - 2,467 (1,466) (1,631) (410) (253) 420 - - - 2,553 2,467 (1,466) (1,631) (410) (253) 420 161 (380) 98 Restated balance at 31 December 2005 116,250 1,798 2,144 120,192 Translation differences on foreign currency net investments Revaluation of interest rate swaps - gain in year Foreign exchange contracts - gain in year Transfers to income statement - Foreign exchange contracts - gain in year - Forward commodity contracts - loss in year - Interest rate swaps - gain in year Revaluation of forward commodity contracts - gain in year Revaluation of investments - gain in year Deferred tax on fair value adjustments Cost of share options Discount on own shares vested 27 27 - - - - - - - - - 199 (28) (9,401) - - - - - - - - - - - 2,378 1,840 (540) 227 (1,169) 591 102 (695) - - (9,401) 2,378 1,840 (540) 227 (1,169) 591 102 (695) 199 (28) Balance at 30 December 2006 116,421 (7,603) 4,878 113,696 Capital and merger reserves Capital and merger reserves reﬂ ect (i) Sharesave Scheme through which charges relating to granting of both shares and options are recorded (ii) the net share premium, that is the excess of fair value over nominal value of ordinary shares issued, in connection with the merger of Avonmore Foods plc and Waterford Foods plc. Currency reserve Currency reserve reﬂ ects the foreign exchange gains and losses that form part of the net investment in foreign operations. Where Group companies have a functional currency different from the presentation currency, their assets and liabilities are translated at closing rate at the balance sheet date, income and expenses in the income statement are translated at the average rate for the year, resulting exchange differences are taken to the currency reserve within equity. Fair value reserve Fair value reserve reﬂ ects the effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂ ow hedges. Amounts accumulated in the fair value reserve are recycled to the income statement in the periods when the hedged item affects proﬁ t or loss. Unrealised gains and losses arising from changes in the fair value of available for sale investments are recognised in the fair value reserve. When such investments are sold or impaired, the accumulated fair value adjustments are recycled to the income statement. 88 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 25 Retained earnings Company retained earnings €’000 Group retained earnings €’000 Group goodwill write-off €’000 Group Total €’000 Balance at 1 January 2005 39,085 (4,836) (92,961) (97,797) Adoption of IAS 32 and IAS 39 Amendment to IAS 21 - - (5,609) 798 - - (5,609) 798 Restated balance at 2 January 2005 39,085 (9,647) (92,961) (102,608) Actuarial loss - deﬁ ned beneﬁ t schemes Deferred tax on pension loss Currency translation differences Net expense recognised directly in equity Proﬁ t for the year Recognised income for 2005 Dividends paid in 2005 - - - (42,303) 4,054 (1,664) - 23,964 (39,913) 57,396 23,964 17,483 (15,612) (15,612) - - - - - - - (42,303) 4,054 (1,664) (39,913) 57,396 17,483 (15,612) Restated balance at 31 December 2005 47,437 (7,776) (92,961) (100,737) Actuarial gain - deﬁ ned beneﬁ t schemes Deferred tax on pension gain Share of actuarial gain - joint venture Net income recognised directly in equity Proﬁ t for the year Total recognised income for 2006 Dividends paid in 2006 - - - 36,852 (3,923) 230 - 16,959 33,159 65,934 16,959 99,093 (16,472) (16,472) - - - - - - - 36,852 (3,923) 230 33,159 65,934 99,093 (16,472) Balance at 30 December 2006 47,924 74,845 (92,961) (18,116) 26 Own shares (Company and Group) At the beginning of the year Sharesave Scheme - options exercised Sharesave Scheme - discount on options At the end of the year 2006 €’000 2005 €’000 (538) 122 28 (2,563) 1,645 380 (388) (538) The amount included above as own shares relates to 262,503 (2005: 364,485) ordinary shares in Glanbia plc held by an Employee Share Trust which was established in May 2002 to operate in connection with the Company’s Saving Related Share Option Scheme (‘Sharesave Scheme’). The trustee of the Employee Share Trust is Mourant & Co.; a Jersey based trustee services company. The shares purchased by the Employee Trust cost €387,717 and had a market value of €777,009 at 30 December 2006. The transfer from capital reserve represents the excess of the purchase price over the option price in respect of 101,982 ordinary shares (2005: 1,370,464 ordinary shares) on which options vested during the year. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 89 The purpose of the Sharesave Scheme, which was open to Irish and UK employees, was to provide a tax efﬁ cient method for employees to save money for the purpose of acquiring shares in the Company. To participate in the Sharesave Scheme in 2002, employees agreed to save a ﬁ xed amount between €12 and €320 (GBP£10 and GBP£250 in the UK) each month for a three year period in a Revenue approved Save as You Earn (“SAYE”) contract. 27 Capital reserves At the beginning of the year Sharesave Scheme - discount on options Sharesave Scheme - discount cost Cost of share options 2006 Company €’000 2006 Group €’000 2005 Company €’000 4,503 (28) - 199 3,102 (28) - 199 4,624 (380) 98 161 2005 Group €’000 3,223 (380) 98 161 At the end of the year 4,674 3,273 4,503 3,102 28 Merger reserve – Group Share premium – representing excess of fair value over nominal value of ordinary shares issued in connection with the merger of Avonmore Foods plc and Waterford Foods plc Merger adjustment Share premium and other reserves relating to nominal value of shares in Waterford Foods plc 2006 €’000 2005 €’000 355,271 (327,085) 84,962 355,271 (327,085) 84,962 113,148 113,148 The merger adjustment represents the difference between the nominal value of the issued share capital of Waterford Foods plc, and the fair value of the shares issued by Avonmore Foods plc in 1997 (now named Glanbia plc). 29 Minority interests At the beginning of the year Share of proﬁ t for the year Reduction in minority interest in subsidiaries Increase in minority interest in subsidiaries At the end of the year 2006 €’000 2005 €’000 6,299 336 (1) 1 6,085 317 (104) 1 6,635 6,299 90 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 30 Borrowings Current Cumulative redeemable preference shares Finance lease liabilities Non-current Bank borrowings Cumulative redeemable preference shares Finance lease liabilities Total borrowings 2006 2006 2005 Company €’000 Group €’000 Company €’000 2005 (as restated) Group €’000 - - - - - - - - 38,184 1,051 39,235 - - - - 1,133 1,133 437,708 - 6,862 3,397 - - 281,581 37,986 7,857 444,570 3,397 327,424 483,805 3,397 328,557 Bank borrowings are secured by cross-guarantees from Group companies. Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default. The Group has restated prior year borrowings to reﬂ ect the adoption of IFRIC 4, “Determining Whether an Arrangement contains a Lease”. The impact of this restatement has been an increase in ﬁ nance lease liabilities of €8.5 million at 31 December 2005 (note 2 (bb) (ii)). The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years Over 5 years 2006 €’000 2005 (as restated) €’000 1,133 254,507 188,930 38,981 284,293 4,150 444,570 327,424 The exposure of the Group’s total borrowings to interest rate changes having consideration for the contractual repricing dates at the balance sheet date are as follows: 6 months or less Between 6 and 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years 2006 €’000 2005 €’000 247,924 38,184 - - 197,697 281,911 - 38,146 - 8,500 483,805 328,557 The effective interest rates at the balance sheet date, were as follows: Bank overdrafts Bank borrowings 4.29% 4.41% 3.06% 5.23% 5.60% 5.89% 5.10% 5.21% 10.25% 5.95% 9.25% 4.69% EUR GBP USD 2006 2005 2006 2005 2006 2005 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 91 The carrying amounts and fair values of non-current borrowings are as follows: Net carrying amount Estimated fair values 2006 €’000 2005 €’000 2006 €’000 2005 €’000 Non-current borrowings 444,570 327,424 441,310 330,480 The carrying amounts of the Group’s total borrowings are denominated in the following currencies: Euro GBP Sterling US Dollar The Group has the following undrawn borrowing facilities: Floating rate: - Expiring within one year - Expiring beyond one year Finance lease liabilities minimum lease payments: 12 months or less Between 1 and 2 years Between 2 and 5 years Over 5 years Future ﬁ nance charges on ﬁ nance leases Present value of ﬁ nance lease liabilities The present value of ﬁ nance lease liabilities is as follows: 12 months or less Between 1 and 2 years Between 2 and 5 years Over 5 years 2006 €’000 2005 €’000 271,362 81,614 130,829 104,293 74,074 150,190 483,805 328,557 2006 €’000 2005 €’000 17,501 120,770 17,856 158,327 138,271 176,183 2006 €’000 2005 (as restated) €’000 1,360 1,143 3,430 3,429 1,486 1,307 3,430 4,573 9,362 (1,449) 10,796 (1,806) 7,913 8,990 2006 €’000 2005 (as restated) €’000 1,051 869 2,821 3,172 1,133 995 2,712 4,150 7,913 8,990 92 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 31 Deferred income taxes Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same ﬁ scal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet: Deferred tax assets Deferred tax liabilities Net deferred tax liability The gross movement on the deferred income tax account is as follows: At the beginning of the year Implementation of IAS 32 and IAS 39 Income statement - pre-exceptional charge (note 11) Income statement - exceptional credit Transfer to associate Acquisition of subsidiary and purchase of intellectual property Deferred tax charged to the fair value reserve (note 24) Deferred tax charge/(credit) relating to the actuarial gain/(loss) in the year Exchange differences At the end of the year 2006 €’000 2005 €’000 (23,923) (15,869) 38,611 34,471 14,688 18,602 2006 €’000 2005 €’000 18,602 - 3,663 (11,622) - 1,330 695 3,923 (1,903) 18,076 630 6,879 (6,421) (161) 1,791 (420) (4,054) 2,282 14,688 18,602 The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax liabilities Accelerated tax depreciation €’000 Deferred Fair value development costs €’000 gains €’000 At 1 January 2005 Implementation of IAS 32 and IAS 39 Charged/(credited) to income statement Credited to equity Transfer to associate Acquisition of subsidiaries and intellectual property Exchange differences 23,438 - 4,144 - - 104 2,056 - 630 - (420) - - - - - 228 - - - - Other €’000 Total €’000 6,937 - (4,398) - (161) 1,687 226 30,375 630 (26) (420) (161) 1,791 2,282 At 31 December 2005 29,742 210 228 4,291 34,471 Charged/(credited) to income statement Charged against equity (note 24) Acquisition of subsidiaries and intellectual property (note 40) Exchange differences 5,000 - - (1,881) - 695 - - 176 - - (28) (1,303) - 1,330 151 3,873 695 1,330 (1,758) At 30 December 2006 32,861 905 376 4,469 38,611 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 93 Deferred tax assets At 2 January 2005 Charged to income statement Credited to equity At 31 December 2005 Charged/(credited) to income statement Charged against equity Exchange differences Retirement obligations €’000 Impairment of assets €’000 Tax losses €’000 Other €’000 Total €’000 (12,299) 484 (4,054) (15,869) 279 3,923 - - - - - - - - - - - - (12,111) - (145) - - - (12,299) 484 (4,054) - (15,869) - - - (11,832) 3,923 (145) At 30 December 2006 (11,667) - (12,256) - (23,923) The deferred tax charged/(credited) to equity during the year is as follows: Fair value reserves in shareholders equity - Available for sale investments - Hedging reserve Impact of increase in retirement beneﬁ t obligations 2006 €’000 2005 €’000 20 675 3,923 (82) (338) (4,054) 4,618 (4,474) The decrease in the retirement beneﬁ t obligation has given rise to a reduction in the related deferred tax asset. A deferred tax asset has been recognised on the basis that the realisation of the related tax beneﬁ t through future taxable proﬁ ts is probable. Deferred tax assets are recognised for tax losses carry forwards to the extent that realisation of the related tax beneﬁ t through the future taxable proﬁ ts is probable. The Group has unrecognised tax losses of €25.9 million (2005: €67.2 million) to carry forward against future taxable income. Deferred tax liabilities have not been recognised for withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries, associates and joint ventures. 32 Retirement beneﬁ t obligations Pension beneﬁ ts The Group operates a number of deﬁ ned beneﬁ t and deﬁ ned contribution schemes which provide retirement and death beneﬁ ts for the majority of employees. The schemes are funded through separate trustee controlled funds. The contributions paid to the deﬁ ned beneﬁ t schemes are in accordance with the advice of professionally qualiﬁ ed actuaries. The latest actuarial valuation reports for these schemes, which are not available for public inspection, are dated between 30 June 2003 and 1 January 2006. The contributions paid to the scheme in 2006 are in accordance with the contribution rates recommended in the actuarial valuation reports. The amounts recognised in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Liability in the balance sheet The pension plan assets include 189,610 of the Company’s ordinary shares. 2006 €’000 2005 €’000 (501,473) 376,585 (503,845) 338,829 (124,888) (165,016) 94 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 The amounts recognised in the income statement are as follows: Service cost - current Service cost - past Interest cost Expected return on plan assets Curtailment Deﬁ ned contribution The actual movement on plan assets was €37.7 million (2005: €53.5 million). The movement in the liability recognised in the balance sheet over the year is as follows: At the beginning of the year Exchange differences Movements relating to disposed operations Liability assumed on acquisition of CMP Total expense – as shown above Actuarial gains/(losses) – shown in equity Contributions paid At the end of the year The movement in obligations over the year is as follows: At the beginning of the year Exchange differences Movements relating to disposed operations Liability assumed on acquisition of CMP Current service cost Past service cost Interest cost Actuarial gains/(losses) – shown in equity - Experience losses - Change in assumptions Contributions by plan participants Curtailments Beneﬁ ts paid At the end of the year 2006 €’000 2005 €’000 (10,176) (375) (17,266) 20,100 1,282 (7,702) - (15,718) 16,908 723 (6,435) (5,789) (1,026) (738) 2006 €’000 2005 €’000 (165,016) (825) (614) - (6,435) 36,852 11,150 (126,676) (751) (607) (350) (5,789) (42,303) 11,460 (124,888) (165,016) 2006 €’000 2005 €’000 (503,845) (2,180) (4,967) - (10,176) (375) (17,266) (412,052) (2,085) (4,589) (350) (7,702) - (15,718) (12,651) 37,928 (4,382) 3,670 12,771 (2,037) (68,649) (4,578) 2,929 10,986 (501,473) (503,845) G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 95 The movement in the fair value of plan assets over the year is as follows: At the beginning of the year Exchange differences Movements relating to disposed operations Expected return on plan assets Actuarial gains shown in equity - experience gains Contributions by plan participants Contributions by employer Curtailments Beneﬁ ts paid At the end of the year 2006 €’000 2005 €’000 338,829 1,355 4,353 20,100 11,575 4,382 11,150 (2,388) (12,771) 285,376 1,334 3,982 16,908 28,383 4,578 11,460 (2,206) (10,986) 376,585 338,829 The principal actuarial assumptions used were as follows: 2006 2005 IRL UK IRL UK Discount rate Expected return on plan assets Future salary increases Future pension increases 4.7% 4.7%-8.5% 3.5% 2.25%-3.5% 5.3%-5.4% 4%-8.0% 3.75% 2.25%-3.25% 4.3% 4.8%-8.5% 3.5% 2.25%-3.5% 4.9%-5.0% 4.1%-8.0% 3.55% 2.0%-3.25% 2006 €’000 2005 €’000 Actuarial (gains)/losses recognised in the statement of recognised income and expense (36,852) 42,303 Cumulative actuarial losses recognised in the statement of recognised income and expense 51,206 88,058 Plan assets are comprised as follows: Equity Bonds Other 2006 €’000 244,240 92,125 40,220 % 65 24 11 2005 €’000 222,943 89,660 26,226 % 66 26 8 376,585 100 338,829 100 The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on ﬁ xed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property reﬂ ect long-term real rates of return experienced in the respective markets. Expected contributions to post-employment beneﬁ t plans for the year ending 29 December 2007 are broadly in line with 2006 contributions. Mortality rates Assumptions regarding future mortality experience are set based on actuarial advice in accordance with published statistics and experience in each territory. The mortality assumptions imply the following life expectancies in years of a pensioner retiring at age 65: Male Female Irish mortality UK mortality rates rates 17.9 20.9 19.8 22.8 96 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 At year end Present value of deﬁ ned beneﬁ t obligation Fair value of plan assets Deﬁ cit 2006 €’000 2005 €’000 2004 €’000 (501,473) 376,585 (503,845) 338,829 (412,052) 285,376 (124,888) (165,016) (126,676) Experience adjustments on plan liabilities (12,651) (2,037) (6,341) Experience adjustments on plan assets 11,575 28,383 5,911 33 Provisions for other liabilities and charges At 31 December 2005 Charged to the consolidated income statement - Additional provisions Net amounts (credited)/charged to provision Exchange differences Restructuring €’000 UK pension €’000 Other €’000 Total €’000 8,433 5,535 537 14,505 5,810 (7,133) - - (323) 124 - 223 (64) 5,810 (7,233) 60 At 30 December 2006 7,110 5,336 696 13,142 Non-current Current - 7,110 5,336 - 696 - 6,032 7,110 7,110 5,336 696 13,142 (a) Restructuring provision relates to the closure of the Pigmeat cannery operation. (b) The UK pension provision relates to administration and certain costs associated with pension schemes relating to businesses disposed of in prior years. 34 Capital grants At 31 December 2005 Receivable for year In acquired subsidiaries Currency translation adjustment Released to income statement (note (i)) At 30 December 2006 2006 €’000 2005 €’000 14,855 123 - 4 (4,322) 15,276 772 231 - (1,424) 10,660 14,855 (i) Includes amounts released to the income statement as an exceptional credit in respect of capital grants relating to the Pigmeat operation (note 7). G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 97 35 Trade and other payables Trade payables Amounts due to associates and joint ventures Amounts due to other related parties (note 41) Amounts due to subsidiary companies PAYE and PRSI Accrued expenses Other payables Less non-current portion: deferred consideration The fair value of payables are not materially different to the book values. 36 Derivative ﬁ nancial instruments Interest rate swaps not qualifying as hedges Interest rate swaps - cash ﬂ ow hedges Interest rate swaps - fair value hedges Forward foreign exchange contracts - cash ﬂ ow hedges Other cash ﬂ ow hedges Other fair value hedges 2006 Company €’000 2006 Group €’000 2005 Company €’000 20 - - 10,474 - 1,400 - 96,612 18,669 17 - 3,824 140,375 22,649 20 - 551 18,512 - 1,427 - 2005 Group €’000 118,874 10,823 6,271 - 3,677 134,526 4,412 11,894 - 282,146 (11,373) 20,510 - 278,583 - 11,894 270,773 20,510 278,583 2006 Assets €‘000 2006 Liabilities €‘000 2005 Assets €‘000 2005 Liabilities €‘000 - 3,593 - 1,843 636 2,799 - - (4,242) (11) (42) (2,799) - 2,752 - 92 44 62 (630) - - (1,558) (297) (62) Total 8,871 (7,094) 2,950 (2,547) Less non-current portion Interest rate swaps - cash ﬂ ow hedges Interest rate swaps - fair value hedges 2,095 - - (3,406) 1,825 - - - Current portion 6,776 (3,688) 1,125 (2,547) Other cash ﬂ ow hedges and other fair value hedges represent commodity futures. Forward foreign exchange contracts The notional principal amounts of the outstanding foreign exchange contracts at 30 December 2006 are €58.0 million (2005: €75.1 million). Gains and losses recognised in the fair value reserve in equity on forward foreign exchange contracts as of 30 December 2006 will be released to the income statement at various dates within one year from the balance sheet date. Interest rate swaps The notional principal amounts of the outstanding interest rate swap contracts, qualifying as cashﬂ ow hedges, at 30 December 2006 were €248.7 million (2005: €118.3 million). The notional principal amounts of the outstanding interest rate swap contracts, qualifying as fair value hedges, at 30 December 2006 were €272.5 million (2005: €nil). At 30 December 2006, the ﬁ xed interest rates vary from 3.2375% to 4.3300% (2005: 3.2375% to 4.3300%) and the main ﬂ oating rates are set in advance by reference to inter-bank interest rates (3.8353% EURIBOR, 5.35438% $LIBOR). Gains and losses recognised in the hedging reserve in equity on interest rate swap contracts as of 30 December 2006 will be continuously released to the income statement until repayment of the bank borrowings. 98 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 Financial guarantee contracts In accordance with Group accounting policy, management has reviewed the fair values associated with ﬁ nancial guarantee contracts, as deﬁ ned within IAS 39 (Financial Instruments: Recognition and Measurement) issued in the name of Glanbia plc (the Company) and has determined that their value is not signiﬁ cant. No adjustment has been made to the Glanbia plc company balance sheet to reﬂ ect fair value of the ﬁ nancial guarantee contracts issued in its name. 37 Contingent liabilities Company The Company has guaranteed the liabilities of certain subsidiaries in Ireland in respect of any losses or liabilities (as deﬁ ned in Section 5 (c) of the Companies (Amendment) Act 1986) for the year ended 30 December 2006 and the Directors are of the opinion that no losses will arise therefrom. These subsidiaries avail of the exemption from the ﬁ ling of audited ﬁ nancial statements, as permitted by Section 17 of the Companies (Amendment) Act, 1986. Group (i) Bank guarantees, amounting to €13,794,000 (2005: €15,252,000) are outstanding as at 30 December 2006, mainly in respect of payment of EU subsidies. The Group does not expect any material loss to arise from these guarantees. (ii) Under the terms of a Sale and Purchase Agreement concluded with Milk Link Limited dated 21 February 2004, the Group retained a 25% interest in its UK hard cheese business through The Cheese Company Holdings Limited (“TCCH”). On 29 December 2006 the Group sold its remaining 25% interest and Stg£35 million loan note in TCCH to the majority shareholder, Milk Link Limited. A subsidiary of TCCH, The Cheese Company Limited (“TCC”) has become the subject of an investigation by the Ofﬁ ce of Fair Trading (“OFT”) in the UK under Chapter 1 of the Competition Act 1998 into whether TCC agreed and/or concerted with other undertakings on prices in the supply of cheese and other products at the wholesale/retail level. We understand TCC continue to assist the OFT in its investigation. A possible contingent liability remains for the Group under the terms of the Sale and Purchase Agreement dated 21 February, 2004. 38 Commitments Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the ﬁ nancial statements is as follows: Property, plant and equipment Capital commitments not contracted for amounted to €76.6 million (2005: €55.6 million). 2006 €’000 2005 €’000 11,787 23,258 Operating lease commitments - where the Group is the lessee The Group leases various assets. Generally operating leases are on a short-term basis with no purchase options. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years 2006 €’000 4,717 11,418 7,401 2005 €’000 6,595 14,204 7,258 23,536 28,057 Other commitments The Group together with the other shareholders in Southwest Cheese Company LLC (“the Joint Venture”) is a party to a Sponsor Support Agreement, as part of the ﬁ nancing of the Joint Venture. Under the agreement, each sponsor severally agrees to provide support to the Joint Venture either by equity contributions or by way of loan: - to enable the Joint Venture to achieve the project construction completion date; and - to indemnify the Joint Venture for any amounts necessary to discharge Mechanics Liens. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 99 39 Cash generated from operations 2006 Company €’000 2006 Group €’000 2005 Company €’000 2005 Group (as restated) €’000 Proﬁ t for the year 16,959 66,270 21,879 57,713 Non-cash restructuring costs Non-cash loss on repayment of loan note Share of results of associates and joint ventures Income taxes Depreciation Amortisation Cost of share options Gain on disposal of investments Loss on write-off of investments Gain on disposal of property, plant and equipment Interest income Interest expense Dividends received Amortisation of government grants received Net proﬁ t before changes in working capital Change in net working capital - Increase in inventory - (Increase)/decrease in short-term receivables - (Decrease)/increase in short-term liabilities - (Decrease)/increase in provisions - - - - - - 199 - 57 - (2,125) - (10,508) - - 9,178 (2,842) (4,351) 25,415 4,452 199 (1,541) - (7,531) (4,883) 18,918 - (4,322) - - - - - 98 161 (898) 1,687 - (2,053) - (16,214) - 2,172 - (932) 657 24,085 3,313 161 (10,959) - (2,509) (4,209) 22,662 - (1,424) 4,582 98,962 4,660 90,730 - (947) (8,616) - (2,684) (25,137) (11,332) (1,323) - 1 3,620 - (5,501) 35,419 36,045 7,142 Cash generated from operations (4,981) 58,486 8,281 163,835 40 Business combinations Seltzer acquisition On 6 September 2006, the Group acquired the business of Seltzer Chemicals, Inc. Seltzer is a leading US nutritional solutions business with strong expertise in the development of customised formulations and the distribution of speciality ingredients for the nutritional supplement, food and pharmaceutical markets for a consideration of US$105 million. The acquired business contributed operating proﬁ t of €1.7 million to the Group for the period from 6 September 2006 to 30 December 2006. 100 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 Details of net assets acquired and goodwill arising from the above business combinations are as follows: Purchase consideration: - Cash paid - Contingent consideration - Direct costs relating to the acquisition Total purchase consideration Fair value of assets acquired Goodwill (note 15) €’000 62,333 19,470 1,314 83,117 20,969 62,148 The goodwill is attributable to the proﬁ tability and workforce of the acquired business and the beneﬁ ts associated with the extension of Glanbia’s scale and speciﬁ c capabilities to the acquired business, synergies and other beneﬁ ts. The assets and liabilities arising from the acquisition are as follows: Cash and cash equivalents Property, plant and equipment (note 14) Other intangible assets (note 15) Inventories Receivables Deferred tax (note 31) Payables Net assets acquired Purchase consideration settled in cash Contingent consideration Cash outﬂ ow on acquisition Fair value €’000 779 1,278 16,589 1,857 5,831 (1,330) (4,035) Acquiree’s carrying amount €’000 779 1,278 - 1,857 5,831 - (4,035) 20,969 5,710 83,117 (19,470) 63,647 The contingent consideration is dependant on the achievement of a targeted earnings ﬁ gure. The fair values assigned to the identiﬁ able assets and liabilities have been determined provisionally. Any adjustments to these provisional valuations will be recognised within 12 months of the acquisition date. In the year ended 31 December 2005, the Group acquired the following: (a) CMP Dairy, an Irish based dairy processing business. (b) Pro-Fibe Nutrition, a UK company specialising in customised solutions for the sports nutrition market. (c) A 100% share in Zymalact, a small family owned dairy blending and processed cheese manufacturing company. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 101 41 Related party transactions The Group is controlled by Glanbia Co-operative Society Limited (“the Society”), which holds 54.66% of the issued share capital of the Company and is the ultimate parent of the Group. The following transactions were carried out with related parties: (a) Sales of goods and services Sales of goods: - Associates - Joint ventures - Key management Sales of services: - The Society - Joint ventures - Subsidiaries 2006 Company €’000 2006 Group €’000 2005 Company €’000 - - - - 3,644 57,549 574 61,767 - - - - - - 6,416 1,325 5,399 - - - 7,377 2005 Group €’000 3,496 21,931 527 25,954 1,849 902 - 6,416 6,724 7,377 2,751 Sales to related parties were carried out on normal commercial terms and conditions. (b) Purchases of goods and services Purchases of goods: - Associates - Joint ventures - Key management Purchases of services: - The Society - Joint ventures - Key management - Subsidiaries 2006 Company €’000 2006 Group €’000 2005 Company €’000 - - - - 10,760 17,326 1,800 29,886 - - - - - - - 1,729 - 404 4 - 254 - - 1,539 1,729 408 1,793 2005 Group €’000 10,628 18,313 1,762 30,703 254 - - - 254 Purchases from related parties were carried out on normal commercial terms and conditions. 102 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (c) Key management compensation Salaries and other short-term employee beneﬁ ts Post-employment beneﬁ ts 2006 Company €’000 2006 Group €’000 2005 Company €’000 - - - 3,539 487 4,026 - - - (d) Year-end balances arising from sales/purchases of goods/services 2005 Group €’000 2,504 413 2,917 2005 Group €’000 217 1,312 67 1,596 6,271 1,233 9,590 11 - 2006 Company €’000 2006 Group €’000 2005 Company €’000 - - - - 237 3,064 14 3,315 - - - - - - - - 10,474 17 1,068 17,601 - - 551 - - - 18,512 10,474 18,686 19,063 17,105 2006 Company €’000 2006 Group €’000 2005 Company €’000 - - - 4,929 - - - - - 2005 Group €’000 - 56,874 2,905 Receivables from related parties: - Associates - Joint ventures - Key management Payables to related parties: - The Society - Associates - Joint ventures - Key management - Subsidiaries (e) Other related party balances Loan to Southwest Cheese Company Loan to The Cheese Company Holdings Limited Loan to Glanbia Cheese Limited (f) Glanbia Co-operative Society Limited made a decision in 2006 to support its members during the difﬁ culties arising from the Common Agricultural Policy Reform by way of a €16 million bonus payment to milk and grain suppliers. Glanbia Co-operative Society Limited is the majority shareholder of the Company. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 103 42 Directors’ and Secretary’s interests The interests of the Directors and Secretary and their spouses and minor children in the share capital of the Company, the holding Society and subsidiary companies/societies were as follows: (a) Glanbia plc Beneﬁ cial Directors MJ Walsh L Herlihy JV Quinlan JJ Moloney JE Callaghan HV Corbally JG Fitzgerald EP Fitzpatrick JA Gilsenan P Gleeson P Haran CL Hill MN Keane ML Keane JV Liston GJ Meagher M Merrick WG Murphy M Parsons EM Power KE Toland Secretary M Horan * § § * * * Executive Director. ** Or at date of appointment if later. § Appointed on 24 May 2006. Ordinary shares of €0.06 30/12/2006 01/01/2006 ** 23,708 81,804 21,347 94,593 35,000 3,495 24,171 50,501 2,842 21,423 7,462 30,029 20,000 22,104 15,000 212,327 1,600 230,827 26,344 37,893 23,243 23,708 81,804 21,347 84,593 35,000 1,495 24,171 50,501 2,842 2,423 7,462 31,966 - 22,104 5,000 212,327 - 230,827 26,344 37,893 23,243 4,593 4,593 104 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 (b) Glanbia plc Directors’ and Secretary’s options Details of movements on outstanding options over the Company’s ordinary share capital are set out below. Outstanding options are exercisable on dates between 2006 and 2014. Options - Ordinary shares of €0.06 Movements 01/01/2006 during year 30/12/2006 Beneﬁ cial Directors JJ Moloney 1988 Share Option Scheme 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan GJ Meagher 1988 Share Option Scheme 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 150,000 290,000 150,000 75,000 205,000 75,000 - - - - - - 150,000 290,000 150,000 75,000 205,000 75,000 Exercise price € 4.25 1.55 2.725 4.25 1.55 2.725 WG Murphy 1988 Share Option Scheme 75,000 (75,000) - 4.25 KE Toland 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 164,000 100,000 - - 164,000 100,000 1.55 2.725 [a] [b] [c] [a] [b] [c] [a] [b] [c] Options: [a] Exercisable by Directors at any time up to May 2008. [b] Exercisable by Directors at any time up to 2012. [c] Exercisable by Directors between 2007 and 2014. There were no other changes in the interests of the Directors and Secretary between 30 December 2006 and 23 February 2007. GJ Meagher, JJ Moloney and KE Toland as participants of the 2002 Long Term Incentive Plan as noted at [b] above, are eligible for a share award of 10% of the ordinary shares they continue to hold following the second anniversary of the exercise of the option. GJ Meagher as a participant of the 2002 Long Term Incentive Plan as noted at [c] above, is eligible for a share award of 10% of the ordinary shares he continues to hold following the second anniversary of the exercise of the option. JJ Moloney as participant of the 2002 Long Term Incentive Plan as noted at [c] above, is eligible for a share award of 6.6% of the ordinary shares he continues to hold following the second anniversary of the exercise of the option. Participants in the Sharesave Scheme are deemed to be interested in 262,503 ordinary shares beneﬁ cially owned by the Glanbia Employees’ Share Trust as at 30 December 2006 (262,503 ordinary shares as at 23 February 2007). The market price of the ordinary shares as at 30 December 2006 was €2.96 and the range during the year was €1.93 to €3.13. The average price for the year was €2.55. The 1988 Share Option Scheme expired on 31 August 1998. G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 105 (c) Glanbia Co-operative Society Limited ‘A’ Ordinary shares of €1 Convertible loan stock units of €0.01269738 ‘C’ shares of €0.01 30/12/2006 01/01/2006 30/12/2006 01/01/2006 30/12/2006 01/01/2006 ** ** ** Beneﬁ cial Directors MJ Walsh L Herlihy JV Quinlan JJ Moloney HV Corbally JG Fitzgerald EP Fitzpatrick JA Gilsenan CL Hill MN Keane ML Keane * GJ Meagher * M Merrick WG Murphy M Parsons EM Power Secretary M Horan 14,374 89,398 9,585 - 5,675 25,563 24,034 2,844 20,480 6,117 18,972 - 1,824 - 7,810 26,300 13,774 87,916 9,090 - 4,265 22,457 23,044 2,365 18,396 5,593 18,381 - 1,504 - 6,820 25,082 198,691 1,600,438 - - 320,305 526,823 340,786 289,947 - 224,023 437,231 - 395,495 - 304,961 340,976 242,589 1,100,000 1,983,609 1,866,068 33,452,288 16,626,637 1,067,686 1,509,000 4,634,869 7,452,304 63,498 168,706 - - 6,497,492 7,213,532 3,714,146 7,157,402 3,426,974 4,340,461 56,376 84,564 253,948 575,940 8,880,921 8,500,000 200,000 - 2,904,610 3,095,071 1,269,738 1,980,360 4,945,207 6,785,305 - - 374,467 637,924 416,134 335,196 - 224,023 539,623 - 469,002 - 344,734 416,623 - - - - 1,000,000 - Executive Director. * ** Or at date of appointment if later. There have been no changes in the above interests between 30 December 2006 and 23 February 2007. 106 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes to the ﬁ nancial statements (continued) for the year ended 30 December 2006 43 Principal subsidiary and associated undertakings (a) Subsidiaries Incorporated and operating in Principal place of business Principal activities Group interest % Ireland Glanbia Foods Society Limited Ballyragget, Co. Kilkenny and Citywest, Dublin 24 Dairying, liquid milk, consumer food products and general trading Glanbia Consumer Foods Limited Inch, Co. Wexford and Kilkenny Fresh dairy products and soups Glanbia Ingredients (Ballyragget) Limited Glanbia Ingredients (Virginia) Limited Ballyragget, Co. Kilkenny Milk products Virginia, Co. Cavan Milk products Glanbia Fresh Pork Limited Edenderry, Co. Offaly Pork and bacon products Glanbia Farms Limited Glanbia Feeds Limited Glanbia Estates Limited Avonmore Proteins Limited Glanbia Financial Services Glanbia Investments (Ireland) Limited Glassonby Waterford Foods plc Cavan and Mayo Pig rearing Enniscorthy, Co. Wexford and Portlaoise, Co. Laois Manufacture of animal feed products Kilkenny Kilkenny Kilkenny Kilkenny Kilkenny Kilkenny Property and land dealing Financing Financing Holding company Investment holding Holding company D. Walsh & Sons Limited Palmerstown, Co. Kilkenny Grain and fertilizers 100 100 100 100 100 100 100 100 100 100 100 100 100 60 Grassland Fertilizers (Kilkenny) Limited Britain and Northern Ireland Palmerstown, Co. Kilkenny Fertilizers 73.34 Glanbia Feedstuffs Limited Tamworth, Staffordshire Supply of animal feeds Glanbia (UK) Limited Tamworth, Staffordshire Holding company Glanbia Holdings Limited Tamworth, Staffordshire Holding company Glanbia Investments (UK) Limited Tamworth, Staffordshire Investment holding Glanbia Nutritionals (UK) Limited Middlesborough Sports nutrition products Glanbia Foods (NI) Limited Portadown, Co. Armagh Consumer food products United States Glanbia Foods Inc. Glanbia Inc. Twin Falls, Idaho Milk products Delaware Holding company Seltzer Companies Inc. San Diego, California Nutrient delivery systems Germany Glanbia Nutritionals Deutschland GmbH Netherlands Glanbia Foods BV Mexico Orsingen-Nensingen Nutrient delivery systems Moergestel Holding company Zymalact Mexico S.A. de C.V. Lerma Dairy blending and processed cheese 100 100 100 100 100 100 100 100 100 100 100 100 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 107 (b) Associates and joint ventures Incorporated in Ireland Co-operative Animal Health Limited South Eastern Cattle Breeders Society Limited Malting Company of Ireland Limited South East Port Services Limited Nashs Mineral Waters (Marketing) Limited Corman Miloko Ireland Limited Britain and Northern Ireland Dates to which results included Principal place of business Principal activities Group interest % 31 December 2005 Tullow, Co. Carlow Agri chemicals 31 December 2005 Thurles, Co. Tipperary Cattle breeding 50 57 31 October 2006 Togher, Co. Cork Malting 33.33 30 December 2006 Kilkenny Port services 30 December 2006 30 December 2006 Newcastle West, Co. Limerick Carrick-on-Suir, Co. Tipperary Magheralin and Llangefni Mineral waters and soft drinks Butter products Cheese products Evaporated and powdered milk Glanbia Cheese Limited 30 December 2006 Milk Ventures (UK) Limited 30 November 2006 Nigeria United States Southwest Cheese Company, LLC Mexico Conabia de Mexico S.A. de C.V. 30 December 2006 Clovis, New Mexico Milk products 30 December 2006 Mexico City Dairy ingredients 49 50 45 51 50 50 50 Pursuant to Section 16 of the Companies Act, 1986 a full list of subsidiaries, joint venture and associated undertakings will be annexed to the Company’s Annual Return to be ﬁ led in the Companies Registration Ofﬁ ce in Ireland. 108 G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Notes G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Glanbia plc is a leading international dairy foods and nutritional ingredients Group, headquartered in Ireland. The Group is successfully developing a strategic international presence, which today represents nearly 40% of revenue. At the same time, the Group continues to consistently improve the cost base, productivity and long-term sustainability of the Irish operations. Combined these give Glanbia a strong platform from which to continue to grow and develop. Contents Performance Highlights Our Business Chairman’s Statement Group Managing Director’s Review Our Strategy Explained Business Review Consumer Foods Agribusiness and Property Food Ingredients and Nutritionals Nutritionals Joint Ventures and Associates Corporate Social Responsibility Finance Review Board of Directors Management Report of the Directors Corporate Governance Financial Statements 1 2 4 6 10 12 12 16 18 21 24 27 30 32 34 35 38 46 e i . i n g s e d e c r u o s w w w . (cid:204)(cid:192)(cid:62)(cid:152)(cid:195)(cid:118)(cid:156)(cid:192)(cid:147)(cid:136)(cid:152)(cid:125) (cid:69) (cid:1)(cid:152)(cid:152)(cid:213)(cid:62)(cid:143)(cid:202)(cid:44)(cid:105)(cid:171)(cid:156)(cid:192)(cid:204)(cid:202)(cid:211)(cid:228)(cid:228)(cid:200) G L A N B I A P L C A N N U A L R E P O R T 2 0 0 6 Glanbia plc, Glanbia House, Kilkenny, Ireland. Tel. +353 56 777 2200 Fax. +353 56 777 2222 www.glanbia.com

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