Globe International Limited Annual Report 2007

Plain-text annual report

�� 07 �� 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 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 7 Our performance and outlook An excellent performance in 2007 delivered double digit earnings growth, a sustainable margin position and a diversiﬁed earnings base. We are conﬁdent of another good performance this year and Glanbia is on target to achieve further double digit earnings growth in 2008. Revenue €2.2 billion 2006 €1.9 billion Operating proﬁt (pre exceptional) €115.8 million 2006 €85.6 million up 19% up 35% Operating margin (pre exceptional) 5.2% 2006 4.6% up 60 basis points Proﬁt before tax (pre exceptional) €99.5 million 2006 €74.4 million Adjusted earnings per share 28.2 cent 2006 22.6 cent Dividend per share 6.08 cent 2006 5.79 cent up 34% up 25% up 5% 1 1 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Our business Glanbia is organised into three divisions and has operations in Ireland, Europe, USA, Canada and China with key international joint ventures in the UK, USA and Nigeria. In 2007, including the Group’s share of Joint Ventures & Associates, Ireland accounted for 31% of revenue and 26% of pre exceptional operating proﬁt, while International markets accounted for 69% of revenue and 74% of pre exceptional operating proﬁt. Total Group (including Joint Ventures & Associates) 4,900 employees 5,500 milk suppliers 4.12 billion litres of milk processed 400,000 tonnes of cheese produced 260,000 tonnes of food ingredients manufactured Consumer Foods d n a e r I l Business Review Page 12 Agribusiness & Property Revenue* Operating proﬁt* 20% 15% Business Leading brands and market positions. 11% 11% Key linkage to farmer supply base. Business Review Page 14 Food Ingredients & Nutritionals 55% 70% Food Ingredients Ireland Largest dairy processor in Ireland. Food Ingredients USA Largest dairy processor in Idaho, USA. Nutritionals Global leader in science based innovation. Business Review Page 16 Joint Ventures & Associates 14% 4% Three major international joint ventures in cheese and consumer products. Business Review Page 22 *Share of Group including Joint Ventures & Associates l a n o i t a n r e t n I 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 7 2007 Revenue 2007 Operating proﬁt (pre exceptional) 31% 26% 69% 74% Ireland International (including Joint Ventures & Associates) Locations Ten locations in Ireland. Description This business is one of the largest suppliers to the Irish grocery sector. Products Branded milk, fresh dairy products, natural cheeses and fresh soups. Market positions No.1 Fresh milk No.1 Fresh cream No.1 Fruit yogurts No.1 Fromage frais No.1 Fresh soups Brands Avonmore, Yoplait, Petits Filous, Nash’s, CMP, Snowcream, Premier, Kilmeaden. Agribusiness: 61 retail locations nationwide and two feed mills. Agribusiness is the Group’s key linkage with its large farmer supply base. Feed, fertilisers, farm inputs and the CountryLife retail range. Gain Feeds, IFI fertilisers, CountryLife, Mastercrop, Mastervet. Property is focused on maximising the value of the Group’s property portfolio. Two manufacturing facilities located in Ireland. This business processes one-third of the total milk pool in Ireland processing 1.4 billion litres of milk per annum in to cheese and food ingredients. Cheese, butters, acid and rennet casein, milk proteins, whey products and formulated milk. No.1 Irish dairy processor No.1 Irish cheese processor No.1 European producer of casein Three processing plants in Idaho, which is the third largest and one of the fastest growing milk states in the USA. This business is a leading manufacturer of cheese and whey-based food ingredients processing 1.9 billion litres of milk per annum. American style cheddar cheese and whey products. No.1 American style cheddar No.2 Whey protein No.3 Lactose Global operations include Ireland, UK, Germany, USA, Canada and China. This business focuses on providing science based nutritional solutions in areas such as sports & performance, weight management, health & wellness and infant nutrition. Whey protein isolates and other whey protein powders, protein peptides and bioactives, milk protein isolates and concentrates, lactose, milk calcium, lactoferrin, vitamin & mineral premixes, ﬂax seeds and lignans. Leading supplier of customised nutrients. Leading global supplier of advanced technology whey proteins and fractions. No.1 Whey/dairy based ingredients No.5 Globally in B2B nutritional Provon, Trucal®, Thermax, Avonlac, Prolibra, Bioferrin, Salibra, Barﬂex, Barpro, CFM™, Olivactive®, Meadowpure™. UK, USA and Nigeria. The Group currently has three key international joint ventures: Glanbia Cheese in the UK; Southwest Cheese in the USA; and Nutricima in Nigeria. Pizza cheese for the UK and European markets. Cheese and whey products in the USA. Consumer products in Nigeria. solutions No.1 North American producer of ﬂax oil derivatives No.1 Pizza cheese supplier in Europe No. 1 American style cheddar in USA No. 3 Consumer packaged dairy powders in Nigeria NuNu, Coast, Powerﬁst, Olympic. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 3 Chairman’s statement “ The Group had an excellent year in 2007, delivering beneﬁts to all stakeholders. Operating proﬁt pre exceptional rose 35% to €115.8 million and adjusted earnings per share were up 25% to 28.2 cent. These results reﬂect the beneﬁts of the strategic investment programmes implemented over recent years and the Group’s spread of businesses, against a backdrop of positive global dairy markets.” An excellent year International operations gained momentum in 2007 and were the driver of this year’s results. Our international presence comprises Food Ingredients & Nutritionals, which delivered a strong performance with good organic growth, improvements in operational efﬁciency and sustainable margin expansion. Revenue from Food Ingredients & Nutritionals increased 30% to €1.4 billion (2006: €1.1 billion). Operating proﬁt was up 93% to €85.2 million (2006: €44.2 million) while margins grew by 200 basis points to 6.1%. The operating proﬁt and margin growth was due to a good performance from Food Ingredients USA, an increased contribution from Nutritionals and a recovery of margins in Food Ingredients Ireland to their historic levels. The Group operates in Ireland through our Consumer Foods and Agribusiness & Property divisions. Revenue from Irish operations grew 3.6% to €803.4 million (2006: €775.5 million). Operating proﬁt declined 26% to €30.6 million (2006: €41.4 million) and operating margins dropped 150 basis points to 3.8%. Performance was impacted by the timing of recovery of higher milk costs for Consumer Foods Ireland. During the year Glanbia took the decision to exit its pigmeat business in Ireland and a Management Buy Out was announced on 3 March 2008. 4 A growing global footprint The successful execution of Glanbia’s growth strategy has transformed the Group in recent years and created a good spread of Irish and international business in key food markets and sectors. In growing the businesses, Glanbia has invested €293 million in acquisition and development capital expenditure in the last four years up to the end of 2007, with the main focus being on developing international operations. During the same period the Group’s portfolio of businesses has been reshaped with disposals releasing €200 million for strategic investments. An ongoing development programme will expand operations in Ireland, Nigeria and the USA further in 2008. Three major international joint ventures are part of our strategic international expansion - Southwest Cheese in the USA, Glanbia Cheese in the UK and Nutricima in Nigeria. These businesses were operationally excellent in 2007 and delivered strong top line growth of 41%. However, Glanbia’s share of proﬁt after tax and interest declined €1.8 million to just under €1 million, directly as a consequence of the performance of Glanbia Cheese, which suffered as a result of the time lag in recovering the dramatic increase in milk cost during the year. A detailed review of the Group’s operational performance is explained on pages 12 to 23 of this report. Dividends The Board is recommending a ﬁnal dividend of 3.58 cent per share, compared with a 3.41 cent per share ﬁnal dividend in 2006. This brings the total dividend for the year to 6.08 cent per share (2006: 5.79 cent per share), representing a 5% increase. Subject to shareholders approval, dividends will be paid on Tuesday, 20 May 2008 to shareholders on the register of members as at Friday, 25 April 2008. Irish dividend withholding tax will be deducted at the standard rate where appropriate. Board changes At the conclusion of the Annual General Meeting on 14 May, I will retire as Chairman and from the Board. I would like to convey my appreciation to my fellow Board members, to our shareholders, to the management and to the staff of Glanbia for their support and commitment during my tenure. I consider myself fortunate in having had the opportunity to chair Glanbia at a time which has been both exciting and challenging for the Group and for the farming sector. On 31 May 2007 Nicholas Dunphy replaced Michael Keane, who retired after two years on the Board and on behalf of the Board I would like to welcome Nicholas and to thank Michael for his contribution and commitment during the time he served as a member of the Board. Effective Corporate Governance A detailed statement setting out Glanbia’s key governance principles and practices is provided on pages 37 to 45. The Board and management are committed to achieving the highest standards of corporate governance and being ethical in the conduct of the business, and are satisﬁed that appropriate systems of internal control are in place throughout the Group. A decade of progress In 2007, the Group reached a signiﬁcant milestone - the tenth anniversary of the formation of Glanbia plc, which resulted from the merger of two Irish companies, Waterford Foods plc and Avonmore Foods plc in September 1997. Since then Glanbia has grown into a vibrant cheese and nutritional ingredients business. In the process the Group has overcome many challenges, grasped new opportunities, taken risks and succeeded more often than not. Today, Glanbia employs 4,900 people. It is the enthusiasm and commitment of the management and staff, past and present, that has transformed and grown Glanbia. On behalf of the Board I would like to thank John Moloney and all our employees for their contribution and dedication and congratulate them on an excellent 2007 and the prospect of sustained high growth into the future. Michael Walsh Chairman 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 7 A ten year transformation 1997-2007 97 Avonmore Foods and Waterford Foods merge to form Avonmore Waterford Group (AWG). 99 AWG is renamed and rebranded Glanbia plc, a name that has its roots in the Irish language. 00 Glanbia enters its ﬁrst international joint venture with Leprino Foods to form Glanbia Cheese, which is the no.1 mozzarella cheese supplier in Europe today. 01 John Moloney is appointed Group Managing Director of Glanbia plc. 02 Exit from UK food service and consumer foods businesses. Establishment of Group Nutritionals business. 03 Glanbia agrees Nigerian joint venture with PZ Cussons plc - Nutricima. 04 Building commenced at Southwest Cheese, a Glanbia joint venture with the Great Southwest Milk Agency in New Mexico, USA. Glanbia acquires Kortus Foods, Germany - its ﬁrst European nutritionals business. 05 Opening of Group Innovation Centre, Kilkenny. 06 Ofﬁcial opening of Southwest Cheese, USA. Purchase of Seltzer Companies, Inc., USA. 07 Expansion of Nutritionals business with the completion of a new premix plant in China and the acquisition of Pizzey’s Milling in Canada. 5 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Group Managing Director’s review “ The successful execution of Glanbia’s growth strategy transformed the Group in recent years and positions us well to enhance our future performance. We are well on our way to achieving our vision, which is to be a world leader in cheese and nutritional ingredients, delivering superior customer solutions. Our overall objective is to increase shareholder value through sustained double digit earnings growth.” 2007 performance highlights It was a good year. Food Ingredients & Nutritionals, the primary focus of investment in recent years, delivered a strong performance. Food Ingredients Ireland restored margins to historic levels, while also delivering signiﬁcant beneﬁts to suppliers. Food Ingredients USA had a strong year with positive USA cheese markets, and solid underlying demand. Milk growth in our key regions of Idaho for Food Ingredients USA and New Mexico/ West Texas for our Southwest Cheese joint venture, was amongst the highest in the USA. which is the key active ingredient in weight loss product “Celebrity Slim” in the Australian market; and Glovon, a natural antimicrobial capable of acting as a parabens replacement in the cosmetics sector. Our largest division Food Ingredients & Nutritionals delivered good volumes, improvements in operating efﬁciency and solid growth in margins. The Nutritionals business achieved good organic growth and had commercial success with important new product development (NPD) projects such as CFM Nitro, which is a sports nutrition product used to build up blood supply to muscles. Other successful products included: Provon Revive, a performance and recovery product launched as an internet-oriented offering; Prolibra, Nutritionals also beneﬁted from a full year contribution from Seltzer Companies, Inc. which was acquired in September 2006. Seltzer is a leading provider of customised vitamin and mineral premixes to the USA food and beverage markets. 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 7 In September 2007 Nutritionals acquired Pizzey’s Milling, a leading industry supplier of ﬂax seed solutions, which will extend our offering into non-dairy Omega-3 and lignan products. The build phase of a new premix plant, in Suzhou, near Shanghai, China was completed in December and this facility is now progressing through the commissioning phase. Consumer Foods Ireland made good progress with a number of new innovations and renovations to its product portfolio including Avonmore Supermilk and the introduction of new Avonmore milk shakes and low fat ﬂavoured milk products. Other successful launches included Yoplait Mixed Seeds, Yoplait Superfruits and Yoplait Smootheze. Despite this success the business struggled to recover raw material price increases in the market place because of the magnitude and speed of the changes in milk cost. Towards the latter end of the year price increases were implemented in key customer groups and margin and performance recovery is a key focus for the business in 2008. Buoyant sector development Glanbia’s strong 2007 performance was against a backdrop of positive world dairy markets. Global dairy demand is exceeding supply and is likely to continue to do so for the foreseeable future. Good progress by developing economies with emerging middle classes underpins growth in consumption of dairy products. Government support for dairy products in countries such as China is also positive and a number of countries, including Russia and Vietnam, have lowered tariffs to support domestic supply and thus trade. Food stocks, a historical feature of the sector, particularly in Europe, are at historic lows. This, together with strong demand, led to sharp price increases in dairy commodities during the year. Substitute or competing ingredients like vegetable oil and soya have also risen sharply in tandem. A further constraint on supply has been an increase in alternative land use for bio fuel production. These developments created a positive backdrop for our operations and future development. Core model for Food Ingredients & Nutritionals �� A major focus on efﬁciency The Group has signiﬁcant manufacturing operations, such as our scale western USA dairy facilities in Idaho and New Mexico. These maintain a major focus on yields, quality parameters and throughput measures, which support and drive efﬁciency gains. The relentless pursuit of efﬁciencies is a key component of managing Glanbia. In a competitive and challenging industry, costs and productivity are high on the agenda and we have a number of programmes around the Group that focus on further automation of process and plant. One such programme is the 2007 energy management initiative undertaken in Food Ingredients Ireland. This project was a resounding success and Food Ingredients Ireland became the ﬁrst Irish owned company to be awarded the IS393 Standard for Energy Management. Developing Glanbia Our vision is to be a world leader in cheese and nutritional ingredients. Glanbia’s core business model in Food Ingredients & Nutritionals is predicated on having access to a series of large dairy milk pools, which are then processed into a range of cheese and dairy products. Derived from these scale processing operations is a large valuable whey stream which, with the application of innovation and the acquisition of complementary ingredients and technologies, creates a further product range of high margin nutritional ingredients, focused on high growth markets. Our portfolio of nutritional ingredients will not be exclusively dairy but will have complementary non dairy components which will enable us to deliver full solutions to customers. Science and innovation will be important factors for success both in terms of developing new ingredients products but also in driving applications for customers. The characteristics of this portfolio of businesses are a diversiﬁed earnings base, a sustainable margin proﬁle, positive cash generation and favourable market dynamics. At the centre is scale manufacturing operations with a major focus on efﬁciency, cost competitiveness and productivity. These businesses are run with strong commercial and operational competencies, creating a solid foundation for future growth, as Glanbia continues to move towards a higher percentage of Group revenue and proﬁtability from higher margin, higher growth nutritional ingredients. Internationalisation will also continue to be a driver of the business. In developed economies our focus will be on advanced nutritional solutions for health and wellness and general nutrition. In developing regions such as in Nigeria we are building a range of products which can deliver mass market nutrition. Complementary acquisitions will be important across a number of core sectors together with the delivery of strong, proﬁtable and sustainable organic growth. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 7 Group Managing Director’s review (continued) This, together with strong Irish operations, is positive for the Group’s outlook and I look forward to reporting another good performance against our key ﬁnancial and strategic targets in 2008. Looking further ahead Last year we set out three strategic imperatives for the Group. Number one was to deliver growth and performance in the period 2007 to 2009 and we are well on track to achieve this. Number two was to extend growth and performance beyond 2009 with further acquisitions, expansion of international operations and focusing on cost reduction, competitiveness and productivity. Here again we are on track and remain focused on delivery of a signiﬁcant investment or acquisition in the nutritionals area. Finally our number three goal was to improve our ﬁnancial ﬂexibility and maintain progress in ﬁnancial ratios. In 2007 the ﬁnancial capacity of Glanbia has signiﬁcantly improved and we intend to maintain this momentum into 2008. John Moloney Group Managing Director Good risk management While risk is inherent in any business, the identiﬁcation and management of risk is critical to the achievement of our ﬁnancial and strategic goals. Glanbia has good processes in place to manage the myriad of risks facing a business with large scale, geographically diverse operations. One of the principal risks the Group faces, I believe, is the potential for a signiﬁcant global economic downturn which could curtail demand for dairy products. This is an area of exposure for many sectors, but being in the food sector and our spread of businesses affords us some protection. On page 30 of this report we have set out the key risks the Board has identiﬁed and the steps we take as a Group to mitigate them. Measuring our progress Last year we set out conﬁdent ﬁnancial targets and a strategic roadmap for the period 2007 to 2009. The Group’s strategic objectives are clear: • Achieve and sustain double digit earnings growth • Improve and maintain higher operating margins • Diversify the Group’s earnings base to reduce volatility • Allocate capital to a mix of higher growth opportunities. In 2007 we performed very well against our ﬁnancial targets. Our development spend was, however, lower than our target, despite ongoing efforts by Glanbia’s development teams. The Group continuously assesses a pipeline of potential transactions and investment opportunities. The timing of transactions is of course unpredictable. Nevertheless acquisitions, particularly in the Nutritionals area remain a priority for the Group and we are focused on delivering another successful one, such as the Seltzer Companies, Inc. acquisition, which was completed in late 2006. Apart from the targets we set out last year, we also measure organic revenue growth and return on capital employed. Revenue growth, adjusted for acquisitions, disposals and the impact of foreign translation effects was 19.1% in 2007, compared with 1% in 2006 and all segments of the business had good organic growth for the year. Return on capital employed is an important metric as we seek to measure the success of our key strategic objectives of allocating capital to a mix of higher growth opportunities. Return on capital employed grew from 14.7% in 2006 to 18.8% in 2007. Overall our growth strategy is delivering and we are well placed to continue this momentum into 2008. Driving future growth Over the past number of years Glanbia has been transformed through a number of phases including signiﬁcant reorganisation and rationalisation of the business, particularly of underperforming or non core activities, as well as building a solid foundation to support the business as it gains momentum in its current growth phase. These foundations include being: • The largest milk processor in Ireland • The largest cheddar cheese producer in the USA • A major global whey processor/supplier of whey ingredients and derivatives. 2008 Outlook We are conﬁdent of another good performance this year and Glanbia is on target to deliver further double digit earnings growth in 2008. More importantly we continue to successfully build a strategic international presence in cheese and nutritional ingredients. 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 7 2007-2009 Financial targets 2007 progress Adjusted earnings per share growth 10-14% Operating margin (pre Joint Ventures & Associates) 5%+ Free cash ﬂow (pre exceptional) +25% 5.2% €45 million+ €56.3 million Potential development spend 2007 €150 million EBIT from international operations >50% EBIT interest cover €57.5 million 74% 5-6 times 6.7 times w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 9 Our global footprint Glanbia has a strong position in key food markets and sectors around the world and an ongoing investment programme will expand operations in Ireland, China, Nigeria, and the USA further in 2008. The Group operates in the Irish market through the Consumer Foods and the Agribusiness & Property businesses. International markets are serviced by the Food Ingredients & Nutritionals division and international joint ventures. Internationalisation will continue to be a driver of the business and a key element of our growth strategy going forward. In developed economies we focus on health and wellness and general nutrition. In developing economies we are building a range of products, which can deliver mass market nutrition. �� Supported by Innovation During the year Glanbia invested in several intervention studies helping the Group develop scientiﬁcally sound nutritional solutions to match speciﬁc needs and add value to various whey fractions. Studies focused around key development areas for future product offerings including weight loss, protein utilisation, and the use of novel anti-microbial offerings in beverage and cosmetic preservation. These studies have been completed by independent professional organisations and academic institutions and leverage the expert capabilities of the Glanbia Scientiﬁc Advisory Committee members who both challenge and inform the design of these programmes. 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 7 A world of cheese and nutritional ingredients In addressing speciﬁc consumer needs around health, the innovation team at the Glanbia Innovation Centres in the USA and Ireland, assisted by teams in the business units, led to a number of commercial developments in 2007. These included new consumer products under the Yoplait brand - Mixed Seeds, Superfruits and a new smoothie range called Smootheze. New nutritional ingredient brands launched include: Solmiko advanced milk proteins; sports and performance oriented CFM Nitro and Provon Revive, in addition to the extension of body composition applications for Prolibra. 11 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O �� Consumer Foods No.1 Glanbia has no.1 market positions in all varieties of fresh milk and cream, family yogurt, kids fromage frais, drinking yogurt and fresh soup. Three year revenue analysis (€’000) 493,582 511,022 510,782 2005 2006 2007 Consumer Foods Ireland Consumer Foods Ireland is one of the largest suppliers into the Irish grocery sector with seven brands in the Top 100 brands – more than any other Irish food company. The division operates across a wide range of packaged grocery sectors including all varieties of fresh milk and cream, juice, water, yogurt, fromage frais, natural cheese, spreads, butter, fresh soups, fresh sandwiches and smoothies. Consumer Foods Ireland employs 820 people at 10 locations throughout Ireland and processes 300 million litres of milk annually. 2007 Performance Consumer Foods Ireland had a challenging year in a competitive and concentrated market place. Increasing promotional costs coupled with the dramatic rise of raw material milk costs put signiﬁcant pressure on margins and impacted the nutritional beverages business, in particular, in the second half. Growth in the nutritional beverages category continues to be driven by demand for more value added products, where the Avonmore brand has the leading market position. Despite the increased margin pressure due to high input costs, considerable progress was made with the launch of new products including a family pack of Avonmore Supermilk and the introduction of new Avonmore milk shakes and low fat ﬂavoured milk products. Demand for natural cheese drove the growth in total cheese consumption but at the expense of processed cheeses. Formats that provide additional convenience are achieving most of this growth where Consumer Foods successfully launched a number of more convenient choices and healthier options. Fresh soup demand continues to increase with the Avonmore range growing their overall market share. 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 7 Revenue * Excluding pigmeat +7% Operating proﬁt pre exceptional -27% Colin Gordon, CEO Consumer Foods Ireland Consumer Foods Summary 2007 €510.8m Revenue Operating proﬁt pre exceptional €17.8m 3.5% Operating margin 2006 €511.0m €24.5m 4.8% This division includes Consumer Foods Ireland which incorporates nutritional beverages, fresh dairy products and cheeses, soups and spreads and Glanbia Meats, the Group’s pigmeat operations. Revenue in this division was broadly ﬂat at €510.8 million (2006: €511.0 million) with growth in Consumer Foods Ireland offset by a decline in Glanbia Meats revenue. Operating proﬁt pre exceptional items decreased 27% or €6.7 million to €17.8 million (2006: €24.5 million) and the operating margin decreased 130 basis points to 3.5%. The decline in the operating proﬁt and margin was driven primarily by a timing lag in the recovery of a dramatic rise in raw material costs within Consumer Foods Ireland. Health and convenience continue to be core drivers of demand in the Irish retail food sector. Research conducted by both the Irish Food Board and Glanbia Consumer Foods, shows Irish consumers have high regard for health and nutrition as the most important factor affecting their food purchase decisions. Against this background, Consumer Foods Ireland continued to invest in product innovation and launched a number of other new products into the Irish market place in 2007 - including Yoplait Mixed Seeds, Yoplait Superfruits and Yoplait Smootheze. Strategy Overall, the strategy of the business is to grow market share by building the relevance of core brands, increasing customer partnerships and sustaining growth through innovation. A number of initiatives have been undertaken during the year to maintain and grow Glanbia’s leading market positions. These include continuing innovation, trade marketing developments, a reshaping of the business in Northern Ireland, establishing a new Convenience Division “Fresh Direct”, together with increasing the businesses proﬁle and reputation among key customers. Cost competitiveness is critically important and the business continues to invest to deliver cost efﬁciencies at its production and supply chain sites. 2008 Outlook Nutritious, fresh and natural continue to be the key drivers of demand for food and beverage products among Irish consumers. Continued investment to support our brands, a drive to restore margins through price recovery and disciplined cost management will underpin a better result from this business in 2008. Pigmeat The performance of Glanbia Meats was neutral in 2007 when compared with 2006. Glanbia announced the sale of the pigmeat business on 3 March 2008 and the exit created a net exceptional charge of €20.4 million. 13 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Every day Irish consumers take home almost 2 million Glanbia consumer food products. Agribusiness & Property Market Leader In recent years Agribusiness has reorganised its branch structure and now operates from 61 retail locations – of which 12 are CountryLife stores. Three year revenue analysis (€’000) 229,142 264,492 292,581 2005 2006 2007 Strategy The strategy for the business is to grow market share in core sectors by focusing on the development of distinctive propositions for target customers in retail and farm segments. The reshaping of the business will continue to ensure Glanbia has the most cost effective, efﬁcient value chain for each core offering. The retailing strategy under the CountryLife banner is to capture the convenience needs of a growing rural population with a focused offering in horticulture, pet care and equestrian, whilst also catering for the needs of the core farmer customer base with an extended farm hardware offering. Agribusiness Agribusiness is engaged primarily in feed milling, grain processing and marketing, and the retailing of a range of farm inputs, to the Group’s farmer supply base. Its portfolio also includes CountryLife, which is a broader retail offering. Agribusiness is market leader in animal feeds, fertilisers, seed grain, chemicals and veterinary product sales. The business employs 510 people and operates in 16 counties in Ireland. 2007 Performance Agribusiness had a satisfactory performance in a competitive trading environment and results were broadly in line with 2006. This business unit performed well in its core feed and fertiliser markets and continued to rationalise and reinvest to ensure a cost effective and efﬁcient supply chain. The Agribusiness retail strategy, under the CountryLife format, is making good progress with 12 branches redeveloped to date. 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 7 Colm Eustace, CEO Glanbia Agribusiness Ger Mullally, CEO Glanbia Estates Agribusiness & Property Summary Revenue +11% Operating proﬁt pre exceptional -24% Revenue Operating proﬁt Operating margin 2007 €292.6m €12.8m 2006 €264.5m €16.9m 4.4% 6.4% This division includes Agribusiness which is the key link to the Group’s Irish farmer supply base; and Property, which is tasked with maximising the value of the Group’s property portfolio. Revenue in this division was up 11% to €292.6 million (2006: €264.5 million) driven by volume growth and pricing in Agribusiness. Operating proﬁt was down 24% by €4.1 million to €12.8 million (2006: €16.9 million) as a stable performance in Agribusiness was offset by a reduction in proﬁt from Property due to the timing of property disposals during the year. Outlook 2007 was a reasonable year for farmers, notwithstanding the challenges in the beef and pigmeat sectors. There is undoubtedly a sense of optimism amongst farmers about the long term future of food production in Ireland. Over the longer term the number of commercial farmers will continue to reduce and Glanbia Agribusiness is positioning itself to be able to service the changing needs of this farmer base whilst recognising the potential created by growing rural population. There is a positive outlook for key farming sectors, including dairy and cereals, which underpins an expected satisfactory performance in 2008. Property The remit of the Property business, which trades as Glanbia Estates, is to review and maximise the value of Glanbia’s portfolio of properties, with a particular focus on a number of properties which have development or alternative use potential. 2007 Performance The timing and pacing of property transactions is difﬁcult to manage with a degree of precision. During 2007 the number of property disposals completed was lower than 2006, mainly due to timing issues and as a result the operating proﬁt of the property business was lower than in 2007. Good progress was made in progressing the next phase of potential property transactions. Strategy The property business is focused on the implementation of the most appropriate strategy on a site by site basis and includes a mix of potential options including disposals. 2008 Outlook With a signiﬁcant number of its properties commercial in nature, Glanbia is well placed to beneﬁt from the resilience of this part of the market. As a result, the Property business expects to continue to contribute positively to Group proﬁtability and cash ﬂow, with a pipeline of transactions which are forecast to be completed at a steady pace over the medium term. 15 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Food Ingredients & Nutritionals No. 1 cheese International operations gained momentum in 2007 with strong revenue, proﬁt and margin increases. These businesses delivered good organic growth and sustainable margin expansion, against a backdrop of favourable market conditions. Food Ingredients Ireland This business is the largest dairy ingredients business in Ireland, assembling a milk pool of 1.4 billion litres from the Group’s 4,500 Irish milk suppliers and processing it into butter, cheese, milk proteins and whey derivatives. It markets over 200,000 tonnes of dairy products and ingredients on a business-to-business basis to customers in over 40 countries and most of its total output is sold to international markets. In addition to milk supplies from Glanbia’s farmer members, a network of suppliers of cream, raw whey and skimmed milk is an important element of the strategic development of the business. Food Ingredients Ireland employs 550 people at two locations, Ballyragget, County Kilkenny and Virginia, County Cavan. 2007 Performance 2007 was a positive year for both producers and processors in the Irish dairy industry. Favourable market conditions including increased global dairy demand drove prices to high levels during the year. This situation provided an opportunity for the European Commission to reduce all export refunds to zero and the absence of a balancing mechanism between the EU and world markets, which had been in place for many years, gave rise to signiﬁcant volatility and high prices. Energy costs, a signiﬁcant element of cost discipline in a large manufacturing business, were lower relative to 2006 for the peak processing season. These market conditions enabled the business to restore margins to historic levels and deliver signiﬁcant beneﬁts to milk suppliers. 16 Rafael Jozelic and Alexander Simic on the cheese packing line in our Twin Falls facility, Idaho. Three year revenue analysis (€’000) 1,107,288 1,077,913 1,403,204 2005 2006 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 7 Kevin Toland, CEO & President Glanbia USA & Nutritionals Jim Bergin, CEO Food Ingredients Ireland Revenue +30% Jeff Williams, President Glanbia Foods Inc. Jerry O’Dea, CEO Glanbia Nutritionals - Ingredient Technologies Hugh McGuire, CEO Glanbia Nutritionals - Customised Solutions Wayne Seltzer, President Seltzer Companies, Inc. Operating proﬁt pre exceptional Food Ingredients and Nutritionals Summary +93% Revenue Operating proﬁt Operating margin 2007 €1.4bn €85.2m 6.1% 2006 €1.1bn €44.2m 4.1% Revenue increased 30% to €1.4 billion (2006: €1.1 billion) primarily due to volume growth and higher global dairy markets in 2007. Operating proﬁt was up 93% to €85.2 million (2006: €44.2 million) while margins grew strongly, by 200 basis points, to 6.1%. The operating proﬁt and margin growth was due to a good performance from Food Ingredients USA, an increased contribution from the higher margin Nutritionals business and a recovery of margins in Food Ingredients Ireland to their historic levels. Strategy The strategy for this business continues to be to maximise returns from raw material inputs, through a focus on providing a growing and innovative offering of dairy ingredient solutions to its expanding customer base. Food Ingredients Ireland is also increasing resources in its innovation function with the support of Enterprise Ireland. This function also develops a pipeline of new products for Nutricima in Nigeria. Food Ingredients Ireland’s supply strategy includes growing the business in line with milk expansion from its supplier base, continuing to identify sensible consolidation opportunities in the industry, strengthening the product mix in the context of a changing market environment and continuously pursuing efﬁciencies to offset increasing costs. The past year has seen the installation of a new Milk Protein Concentrate facility with proprietary technology to produce high speciﬁcation protein ingredients for the nutritional and fresh dairy product sectors. This plant will be in full production in the ﬁrst quarter of 2008. The cheese facility is undergoing a signiﬁcant investment programme which will increase capacity by 30% and utilise new technology targeted to produce niche cheese variants for emerging and developing markets. Both projects have been supported by The Department of Agriculture, Fisheries & Food and Enterprise Ireland. The pursuit of efﬁciencies is a key component of managing this business and an ongoing cost reduction programme is based on further automation of processes and plants. 17 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Food Ingredients & Nutritionals (continued) During 2007 a particular emphasis was placed on energy management and as a result Food Ingredients Ireland became the ﬁrst Irish dairy company to be awarded the IS393 Standard for Energy Management. 2008 Outlook The current long term outlook for dairy markets is positive based on demand growth outstripping supply growth. The impact of bio fuels, grain prices, energy prices, climate change and changes in the global economy are major factors impacting the operating environment. Energy and climate change issues serve to underpin Ireland’s position as a relatively low cost producer of high quality dairy products. Irish milk suppliers and processors will take on the challenge of developing their production capability and expanding their enterprises to underpin the growth of a world class industry. Pat Bergin pictured with the ﬁrst two blocks of cheese produced in the newly expanded cheese facility in Ballyragget, Ireland. 18 Food Ingredients Ireland is well set for the challenges of short term volatility in markets. Investment in its business processes and product mix positions the business to sustain performance in 2008. Food Ingredients USA Combined with its joint venture Southwest Cheese, the Group is the largest producer of American style cheddar cheese in the USA with close to a 17% market share. Glanbia USA is also one of the world’s leading producers of whey-based nutritional ingredients. Food Ingredients USA is located in one of the fastest growing milk regions in the country - Idaho. Both Idaho and New Mexico, which is the location of the Southwest Cheese joint venture, are in the top 10 states for milk production in the USA. The Idaho facilities employ 600 people. In total the Idaho and Southwest Cheese facilities processed nearly 2.8 billion litres of milk in 2007 and sold over 318,000 tonnes of cheese, achieving a record US$1 billion revenue from cheese for the ﬁrst time. Cheese is sold on a business-to-business basis to some of the largest cheese suppliers of natural and processed cheese, in both branded and private label formats, to the retail, food service and food ingredient sectors. Glanbia operations in the USA also produced nearly 57,000 tonnes of dairy- based nutritional ingredients in 2007. 2007 Performance In 2007, strong cheese markets in the USA and global whey markets, together with production expansion drove good revenue growth in Food Ingredients USA. Demand for American style cheddar cheese increased during the year and production output was expanded to meet this growing market demand. As the number one supplier of American style cheddar cheese, this business continues to increase its relevance to customers with new product development initiatives and in 2007 commenced the production of organic cheddar cheese to serve a fast growing segment of the market. 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 7 Overall, the Food Ingredients USA business performed very well and delivered a strong set of results, in a favourable market environment. Strategy Glanbia’s USA cheese strategy is to be the most relevant supplier of American style cheddar cheese to key industrial customers and to retain and grow its number one position. This business also plans to diversify into value-added products, such as organic cheddar cheese. A new and growing demand for American style cheddar cheese internationally has opened up further export opportunities for the business. Foods Ingredients USA has strong and long-standing relationships with leading suppliers who, in turn, have well- established relationships with industry leaders in retail, food service and food ingredient sectors of the cheese business. Product excellence is a core value proposition and Glanbia cheese is a perennial multiple medal winner at World and USA Cheese Championships. 2008 Outlook The outlook for milk production in Idaho, as well as New Mexico, is excellent for 2008. Domestic demand for American style cheddar cheese is greater than the current supply and, commercially viable export opportunities are increasing. The weaker US Dollar has been a factor in driving this export demand. Export sales will enhance customer relationships, as Food Ingredients USA seeks to meet the needs of its customers in other countries. A good performance is expected from this business in 2008. 19 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Food Ingredients & Nutritionals (continued) % growth in sports nutrition market Glanbia Nutritionals produces a wide range of speciality whey proteins, customised premix solutions and other nutritional ingredients for use by infant formula, food and beverage companies in ready-to-drink and powdered beverages, nutritional bars, dairy products, snacks and confectionery applications. Nutritionals The Nutritionals business unit is a leading supplier of advanced technology whey proteins and fractions. In recent years it has expanded its portfolio to include a global capability in customised nutrient, vitamin and mineral premixes through its acquisition of Seltzer Companies, Inc. in the USA and Kortus Food Ingredients in Europe. Glanbia Nutritionals services the health and wellness, functional foods, sports nutrition, infant and clinical nutrition sectors with a range of patented, branded solutions. This business unit is building a worldwide reputation for customised products, innovative processing technologies and excellent customer service. The business continues to evolve with 350 employees at locations in USA: (Wisconsin, Idaho, Illinois and California); Canada; Europe (Ireland, Germany, UK, Belgium); South America (Brazil, Uruguay, Argentina) and Asia Paciﬁc (Shanghai, Suzhou, Singapore, Malaysia). 2007 Performance Revenues, proﬁts and margins grew in the Nutritionals business in 2007 driven by strong global whey markets, good organic growth and the ﬁrst full year contribution from the 2006 Seltzer acquisition. The Group’s Nutritionals business continued to grow and perform well, driven by the successful commercialisation of several new ingredient solutions, the strong demand for whey protein worldwide and the increased demand for premix solutions. In addition, the global nutritional market exhibited positive growth in key sectors of weight management, sports nutrition and infant nutrition. Glanbia Nutritionals is continuously developing new technologies and processes to improve its portfolio of nutritional solutions. 20 % growth in sports nutrition market Innovation 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 7 Through our network spanning Asia, Europe, the USA and Canada, our well resourced Innovation Centres in Ireland and the USA, and through partnerships with academic institutions, the Glanbia Nutritionals Innovation team delivers expert science-based nutritional solutions to meet customer demands. These innovative nutritional solutions include a variety of specialty whey protein and fractions, milk proteins, dairy calcium, minerals, vitamins, ﬂax, and other nutritional ingredients. Our brands include Provon® WPI, Avonlac™ WPC, Thermax® whey proteins, Prolibra® weight management solution, Meadowpure™, CFM® WPI, Bioferrin® lactoferrin, Salibra® bioactive whey fraction, Trucal® dairy calcium, Provon Revive® a sports protein recovery solution, Olivactive® an olive based antioxidant, Barﬂex®, BarMax™, BarGain™ and BarPro™ bar solutions as well as CVH and ActiNOS™ peptides. During 2007 additional investments were made in the business including: • In September, Glanbia acquired Pizzey’s Milling, the industry’s leading supplier of ﬂax seed solutions, thereby expanding its nutritional portfolio beyond milk-based solutions into Omega-3 and lignan products • In December, a new premix facility was completed in China • During the year sales ofﬁces were opened in Singapore, Malaysia and Indonesia. The South East Asia market offers strong growth prospects in addition to China and this market presence supports the Group’s planned expansion in the region. Strategy The vision of Glanbia Nutritionals is to become one of the most relevant players in the delivery of science-based nutritional ingredients and 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. Innovation is key to the future development of this business and is supported by Group Innovation, which is centred in Ireland. The strategic objective is to deliver new and innovative products and solutions that will afford Glanbia a point of difference in the market place and deliver value to customers. Successful delivery of strong customer partnerships is based on a clear focus on ﬁnding innovative solutions to customer needs. 2008 Outlook Key global consumer trends in health and wellness create a very positive background for the Nutritionals business. Very strong dairy markets prevailed throughout 2007 and while prices are expected to retreat from their 2007 peaks, the expectation is that prices will remain above historical averages in the medium term. Glanbia’s growth in the vitamin and premix market was strengthened further in 2007 with the building of a new state of the art manufacturing facility in Suzhou, China. Overall strong organic growth is forecast for the Nutritionals business unit in 2008. 21 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O The global nutritional market exhibited strong growth in 2007 and is a market with an estimated value of US$228 billion per annum. The ability to isolate and market key anti-obesity dairy components - supported by cellular, animal and human dietary intervention studies - presents a strong growth opportunity for Glanbia. Joint Ventures & Associates Key locations UK, USA and Nigeria. Description Southwest Cheese, New Mexico, is one of the largest natural cheese and high protein whey processing plants in the world. Glanbia Cheese is the no. 1 producer of mozzarella cheese for the European market. Nutricima manufactures and markets branded dairy based consumer products for the Nigerian market. The Group has a number of smaller Agribusiness and Food Ingredients Joint Ventures & Associates. Joint Ventures & Associates Glanbia’s share of revenue was up 41% to €372.1 million in 2007 as key joint ventures delivered strong top line growth and good operational performances. However, Glanbia’s share of proﬁt after tax and interest declined €1.8 million to €1.0 million, directly as a consequence of the performance of Glanbia Cheese, which suffered as a result of a time lag in recovering increased milk cost in the market place. 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 50:50 joint venture between Glanbia and the Greater Southwest Agency. The milk is supplied by members of the Greater Southwest Agency, - Dairy Farmers of America, Select Milk Producers Inc., Lone Star Milk Producers and Zia Milk Producers. With a background in large scale dairy operations, Glanbia was responsible for the plant design and construction of the facility, which was commissioned in 2006. Glanbia sells the cheese and whey produced on a commission basis. The business employs 240 people. 2007 Performance The Southwest Cheese facilities ramped up towards full capacity in 2007 and strong revenue growth was achieved as the business performed very well. Margins, however, were reduced as buoyant dairy markets drove raw material input costs to a level which was not recovered in the market place during the year. Overall, Southwest Cheese achieved key operational metrics in 2007 and produced 123,000 tonnes of American style cheddar cheese, equivalent to 7% of the USA market. International joint ventures are a key element of the Group’s growth strategy and represent an excellent opportunity for leveraging Glanbia’s core capabilities in cheese, scale processing and developing new markets. In 2007, Southwest Cheese also produced 8,000 metric tonnes of high protein whey powder for domestic and international nutritional markets. The large scale, automated facility allows Southwest Cheese to produce a high quality product in high volume. 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 7 Glanbia’s share of revenue +41% 2008 Outlook 2007 represented a milestone in terms of the evolution of the business. Southwest Cheese has built a strong team capable of delivering world class performance in an ever changing market place, with a clear focus on quality, consistency and efﬁciency. The facility is now operating at capacity, delivering premium products to a growing market. The impact of higher milk prices on the broad dairy spectrum is being managed and the business is in a good position to capitalise on its scale and efﬁciency. Based on current market conditions, Southwest Cheese is expected to deliver improved results in 2008. UK: Glanbia Cheese Glanbia has a 50% interest in Glanbia Cheese which is a joint venture with Leprino Foods, USA. Glanbia Cheese produces chilled and individually quick frozen mozzarella cheese for the European market in a variety of formats. The company is the largest mozzarella producer in Europe. The business employs 350 people at three sites, which includes two cheese processing facilities and an administrative centre. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 2007 Performance This business had a difﬁcult 2007. Performance was impacted by escalating milk prices and reduced milk availability, and the time lag in achieving the necessary price increases in the market place. During the year Glanbia Cheese successfully strengthened its position as Europe’s leading supplier. The business also continued to invest in new technology and during 2007 completed the installation of a new string cheese plant to meet the growing demand. 2008 Outlook 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 by quality product, quality people and quality service. Cheese price increases were secured as 2007 progressed and a better result is forecast for this business in 2008. Nigeria: Nutricima Nutricima is a 50:50 joint venture with PZ Cussons and supplies reconstituted evaporated milk, milk powder and energy powder to the local Nigerian market. This is a large and growing market which has a population of 140 million. The milk market is valued at US$550 million and the overall food processing market is growing at a rate of 14% per annum. Increased oil prices and a relatively stable political environment has underpinned strong economic growth. This is giving rise to increased wealth and an emerging middle class, which supports good demand for dairy products. Nutricima employs 260 people at its evaporated milk manufacturing plant and a powder packing facility. 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 ready to drink beverages to meet the increasing requirements of this fast growing, dynamic consumer market. Glanbia is investing €16 million in these projects. 2007 Performance Despite strong competition, Nutricima grew its market share and delivered strong top line growth in 2007. While the business performed satisfactorily, results were impacted by signiﬁcant raw material price increases together with the need to invest heavily in building its brand. The business continues to innovate, bringing new products to consumers. New product development is strongly supported by the Group Innovation Centre, based in Kilkenny. 2008 Outlook Nutricima is expected to make good progress in 2008. The construction of a second factory has commenced, with completion forecast by the end of 2008. A number of new product launches are also planned including yogurt powder, new Powerﬁst formats and ﬂavoured condensed milk. 23 Corporate social responsibility As Glanbia grows and develops as a leading international Group in cheese and nutritional ingredients, so also does our commitment to conducting our business in a way that is economically, socially and environmentally sustainable. During 2007 we made further progress in our corporate citizenship objectives under the four pillars of Community, Environment, Workplace and Marketplace. Environment Better management of our energy resources and usage is not only an important contribution to protecting the environment and to the challenge of dealing with climate change, but it makes good business sense as well. Glanbia Food Ingredients Ireland is IPPC licensed and ISO14001 Environmental Management System accredited. During 2007 Glanbia Ingredients Ireland also became the ﬁrst Irish owned company to receive the IS 393 Energy Management System certiﬁcation.To complement this accreditation staff were trained with respect to energy and waste management and by comparison to 2006 ﬁgures waste to landﬁll was reduced by a further 13% in 2007. Progress in Ireland was echoed in the USA where the Idaho Food Ingredients business made further strides on energy efﬁciency, waste water treatment and on recycling. Initiatives include the Idaho water re use projects which saved 600,000 gallons of water per day and our recycling projects which removed 30,693 kgs of cardboard, 1,340 kgs of aluminium, and 3,608 pallets from landﬁll in 2007. In the USA we are reducing energy consumption with the use of bio gas for boiler fuel in Gooding. In 2007, we have implemented important environmental and energy management steps that we intend to build on. • Our Southwest Cheese joint venture in New Mexico recycles 4.5 million litres of water daily recovered from the milk processing operations. David Doran, CEO, CMRF at Our Lady’s Hospital Crumlin showing Brian Phelan, Glanbia Human Resources & Operational Development Director the murals provided by Glanbia employees. In the USA, we continued our strong support for local communities in Idaho - through a three year programme of support for the Boys’ and Girls’ Club. Food Ingredients USA funded a new nutrition centre at the Twin Falls centre and also supported another nutrition centre at the Buhl Club, so bringing to an end the project with the Club, which involved employees and their families as well as customers in a range of support activities. Elsewhere our Nutritionals team in Suzhou near Shanghai were pleased to host the Irish Volunteers when the Special Olympics were held in China last October. • Over the past three years the Group has made a signiﬁcant difference through fundraising and practical support for Our Lady’s Hospital for Sick Children in Ireland and the Boys’ and Girls’ Club in Idaho, USA. Community Glanbia continues to foster company and employee involvement and support for the local communities where we operate. In Ireland we continue our strong association with Junior Achievement Ireland through ongoing employee volunteering whereby the Group allows people time out to mentor primary and secondary school students, particularly on business subjects. We also continue to encourage the promotion of ﬁtness and health through our ongoing and long standing corporate relationship with the GAA (The Gaelic Athletic Association) through sponsorships of the Kilkenny and Waterford senior hurling teams. We have just come to the end of a very worthwhile three year programme in support of Our Lady’s Hospital for Sick Children Crumlin, in Dublin. In 2007 Glanbia invested in providing six new state of the art anaesthetic machines. Through our employees involvement the hospital was able to commission murals on the walls of the hospital’s Radiography Department. Thus, a traditionally gloomy and somewhat daunting section of the hospital has been enlivened and the reaction of children and their parents has been very positive. 24 Workplace Glanbia employs 4,900 people. We are determined to attract and retain high performing people and work with individuals to realise their potential, which is critical to our growth and success. In 2007 training was provided at all levels - technical development for operational personnel, professional development for ﬁnance, sales, marketing and innovation, and management development targeted at the appropriate levels of management experience. In all 504 employees received a total of 863 days of development training. Importantly we have robust health and safety policies and practices in place throughout all businesses. Our key indicators have shown continuous improvement since we were formed in 1997, with continuous Health & Safety training for employees around the globe. During 2007, 1,054 employees received a total of 5,960 days of health and safety training. We have policies in place to deal with diversity, ethics, equal opportunities, disability, harassment and bullying. In 2007, we delivered a strong programme to enhance the quality of internal communications with the re- launch of the Group intranet site. 76% of all employees had face-to-face team brieﬁngs and we continued to invest in ongoing performance development programmes. • Since Glanbia plc was formed in 1997, the frequency and cost of workplace accidents has continuously improved - down from 348 in 2002 to 190 in 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 7 Community Workplace For the past two years we have been working some magic with the Boys’ and Girls’ Club, Idaho. The Club offers disadvantaged kids a caring, safe and fun place to learn and develop. Amanda Montano, Southwest Cheese, USA employee, New Mexico who works as a cheese operator in the company. Health and safety at work is an important part of our business and we have policies and practices in place to protect our employees. Environment Marketplace This year, Glanbia achieved an energy ‘ﬁrst’ - when we were accredited to the IS 393 Energy Management System. The Food Ingredients Ireland team are featured here with Brian Motherway, Sustainable Energy Ireland and John Ryan, Certiﬁcation Europe. We are what we eat. That’s why increasingly consumers want to know more about the ingredients in the food products they eat. 92% of Glanbia products display information about the ‘Big 8’ key nutrients. Marketplace With Irish household brands, including Avonmore, Premier, Yoplait, Kilmeaden, Snowcream and CMP, Glanbia‘s consumer foods brands have been at the heart of Irish life for decades. These brands have a proud legacy and a reputation founded on trust and loyalty - values which are at the core of our vision and brand values and to which the business is fully committed through responsible brand management. Glanbia processes and markets almost two million consumer packs in Ireland each day. From farm to plate we take our responsibility to consumers seriously with initiatives such as the annual Glanbia Milk Quality Awards and the annual Glanbia Grain Quality Awards to recognise the critical role played by milk suppliers and grain growers in food safety and quality. Glanbia is also accredited by the British Retail Consortium global standard and our consumer foods facilities are all accredited to the ISO14001 Environmental standard. Glanbia engages with our consumers in a variety of ways - we listen through focus groups and independent research and we are committed to providing consumers with all the information they need to make informed choices about healthy eating. We already provide information on key nutrients on more than 92% of our products and are currently developing a system to include GDA (Guideline Dietary Amount) information on all packaging. • We check on consumer satisfaction with our products continuously. In Ireland in 2007 we spoke directly to more than 6,700 consumers to make sure they were satisﬁed with our products and advertising. • Food Ingredients USA and Southwest Cheese won gold again for their cheese at the 2007 World Cheese Championship. 25 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Finance review “ Good organic growth, disciplined cost and margin management saw the Group deliver a 34% increase in pre exceptional proﬁt before tax and a 68% increase in free cash ﬂow.” Joint Ventures & Associates The Group’s share of results of joint ventures and associates, post interest and taxation amounted to €1.0 million compared with €2.8 million in 2006, despite strong top line growth of 41%. This result reﬂects margin pressures in the businesses due to a time lag in the recovery of signiﬁcant increases in dairy raw material prices across the world, particularly in Glanbia Cheese, the UK mozzarella joint venture with Leprino Foods. The Group’s share of operating proﬁt of joint ventures & associates (pre interest and tax) grew by €0.5 million to €5.9 million. Proﬁt before tax Proﬁt before tax pre exceptional increased 34% from €74.4 million in 2006 to €99.5 million in 2007. Summary The successful delivery of Glanbia’s growth strategy has enhanced the Group’s earnings and cash ﬂow and is reﬂected in an excellent set of results this year. In 2007, revenue increased 19% to €2,206.6 million (2006: €1,853.4 million), driven by a 30% increase in revenue in the Food Ingredients & Nutritionals division, where a combination of price and volume growth and a full year contribution from Seltzer Companies, Inc. acquired in September 2006, drove a strong performance. Operating proﬁt pre exceptional grew 35% (€30.2 million) to €115.8 million (2006: €85.6 million). Operating margin pre exceptional increased 60 basis points to 5.2% (2006: 4.6%). Net ﬁnancing costs Financing costs pre exceptional increased €3.3 million to €17.3 million (2006: €14.0 million) due primarily to higher interest rates. Interest cover was 6.7 times in 2007, an increase from 6.1 times in 2006. 26 Summary income statement Revenue(1) Operating proﬁt pre exceptional Operating margin pre exceptional Net ﬁnancing costs Share of results of joint ventures and associates(1) Proﬁt before tax pre exceptional Taxation pre exceptional Proﬁt after tax pre exceptional Exceptional items(2) Earnings per share Adjusted earnings per share(3) Dividend per share in respect of 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 7 2007 2006 Change €2,206.6m €1,853.4m €115.8m €85.6m Up 19% Up 35% 5.2% 4.6% Up 60bps (€17.3m) (€14.0m) Up €3.3m €1.0m €99.5m €2.8m Down €1.8m €74.4m Up 34% (€16.4m) (€8.0m) Up €8.4m €83.1m (€22.8m) €66.4m (€0.1m) Up 25% See note 20.4c 28.2c 6.08c 22.5c Down 9% 22.6c 5.79c Up 25% Up 5% 1. Revenue including Glanbia’s share of the revenue of Joint Ventures & Associates was €2.6 billion in 2007, up 22% on 2006. Share of results of Joint Ventures & Associates is an after interest and tax amount. 2. On 3 March 2008 Glanbia announced the sale of Glanbia Meats in a Management Buy Out. This disposal is consistent with the Group’s strategy of focussing on key growth areas of cheese and nutritional ingredients. The exit from Glanbia Meats resulted in a net exceptional charge in the year of €20.4 million. Restructuring costs relating to Yoplait production facilities in Consumer Foods Ireland were €2.4 million during the year. 3. Before exceptional items Revenue +19% Glanbia’s international activities continued to grow successfully and international margins, including Joint Ventures & Associates, increased 140 basis points. Proﬁt before tax pre exceptional +34% Taxation The pre exceptional tax charge for 2007 increased €8.4 million to €16.4 million (2006: €8.0 million), reﬂecting the increased level of international proﬁts which attract higher tax rates, in the Group. The tax effect of the exceptional charges in 2007 resulted in an exceptional tax credit of €0.6 million. The exceptional tax credit in 2006 arose on the recognition of a deferred tax asset relating to tax losses in former UK operations. Exceptional items The net exceptional charge for the year amounted to €22.8 million compared with €0.1 million in 2006. Exceptionals before tax amounted to €23.5 million in 2007 and €12.5 million in 2006. 2007 exceptional items include €20.4 million relating to the Group’s exit from the Pigmeat operations and €2.4 million restructuring costs in the Irish Consumer Foods business. In 2006 the exceptionals before tax amount of €12.5 million included €3.3 million restructuring costs relating to the 2006 closure of the Pigmeat canning operations and €9.2 million relating to the disposal of the Group’s remaining 25% interest and related loan note in The Cheese Company Holdings Limited. The Group completed a strategic review of its Pigmeat operations in 2007 and as a result decided to exit this sector. This involved a settlement with the Group’s insurers in relation to a ﬁre at a pigmeat processing facility in Ireland in August 2007 and the sale of the Pigmeat facilities to a Management Buy Out team, led by Jim Hanley, Chief Executive of Glanbia Meats on 3 March 2008. This transaction gave rise to a net €20.4 million exceptional that includes a provision of €23.0 million and €2.6 million proﬁt on the disposal of the canning operations site. The decision to exit the business released €35.0 million of cash for the Group, which will be reinvested in strategic higher growth projects. Earnings and dividends Earnings per share declined 9% to 20.4 cent (2006: 22.5 cent) due to the exceptional items. Adjusted earnings per share increased 25% to 28.2 cent (2006: 22.6 cent). The Board is recommending a ﬁnal dividend of 3.58 cent per share, compared with a 3.41 cent per share ﬁnal dividend in 2006. This brings a total dividend for the year to 6.08 cent per share (2006: 5.79 cent per share), representing a 5% increase. Subject to shareholder approval, dividends will be paid on Tuesday, 20 May 2008 to shareholders on the register of members as at Friday, 25 April 2008. 27 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Finance review (continued) 2007 divisional results including Joint Ventures & Associates Ireland Revenue €m 510.8 292.6 803.4 Revenue €m 1,403.2 372.1 1,775.3 2007 Operating proﬁt* €m 17.8 12.8 30.6 2007 Operating proﬁt* €m 85.2 5.9 91.1 Operating margin % 3.5 4.4 3.8 Operating margin % 6.1 1.6 5.1 Revenue €m 511.0 264.5 775.5 Revenue €m 1,077.9 262.9 1,340.8 2006 Operating proﬁt* €m 24.5 16.9 41.4 2006 Operating proﬁt* €m 44.2 5.4 49.6 Operating margin % 4.8 6.4 5.3 Operating margin % 4.1 2.1 3.7 • €19.7 million expenditure on acquisitions, net of disposals including deferred consideration on prior year acquisitions • €39.8 million expenditure on strategic development capital projects, including further investment in international joint ventures • €17.3 million on equity dividends Glanbia has an active development programme and has two acquisition teams - one in Europe and one in the USA - who continually analyse a range of potential projects. Our principal focus is on nutritional acquisitions, which add value through complementary ingredients or technologies, in this high growth and higher margin sector. Net debt Net debt at the end of the year was €220.2 million compared with €224.5 million in 2006, a reduction of €4.3 million. The movement in net debt reﬂects the reinvestment of the cash generated by the Group in its growth strategy. The Group targets acquisition and investment opportunities that are value enhancing and the Group’s policy is to fund these transactions from cash ﬂow or borrowings. The Group sets EBITDA (Debt to Earnings before Interest, Taxation, Depreciation and Amortisation) targets that allow ﬂexibility to accommodate acquisition and development opportunities. These targets recognise that the Group’s net debt is subject to seasonal ﬂuctuation above year end debt levels. 2007 divisional results The Group’s Irish operations include Consumer Foods and Agribusiness & Property. International activities include Food Ingredients & Nutritionals and key joint ventures. Food Ingredients Ireland is included in international activities as its products are sold to international customers. The 2007 dairy environment had differing implications across the business portfolio. While revenue was up 3.6% in the Irish operations, margins were reduced, primarily due to the timing of recovery in the market place of higher milk costs in Consumer Foods Ireland. Overall revenue in international operations grew strongly by 32%, due mainly to higher pricing. Operating margins in the Food Ingredients and Nutritionals business expanded due to strong markets, good organic growth, the ﬁrst full year contribution from the 2006 Seltzer acquisition in the USA and Food Ingredients Ireland margins returning to historical levels. While there was good volume and revenue growth in the joint ventures & associates, operating margins declined as margin expansion in Southwest Cheese was offset by a margin reduction in Glanbia Cheese, the UK mozzarella joint venture. Balance sheet and cash ﬂow Strong free cash ﬂow was generated in the year, increasing by €22.7 million to €56.3 million (2006: €33.6 million). Free cashﬂow was, after business sustaining capital investment of €20.8 million (2006: €18.9 million). This cash combined with proceeds from asset disposals and insurance proceeds of €20.5 million was invested as follows during the year: Consumer Foods Agribusiness & Property TOTAL International Food Ingredients & Nutritionals Joint Ventures & Associates TOTAL *Pre exceptional The Group’s debt levels at the end of the year were similar to 2006 and 2005 levels, despite the increased size of the Group and acquisition and development expenditure of €144 million over the two year period. 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 7 Free cash ﬂow Free cash ﬂow + €22.7m EBITDA pre exceptional Working capital movement Net interest and taxation paid Business sustaining capital investment Free cash ﬂow Net ﬁnance costs ratios Net debt: EBITDA (times) EBITDA: Net ﬁnance cost (times) 2007 1.5 8.6 2006 2.0 8.1 2007 €m 149.2 (52.1) (20.0) (20.8) 56.3 2005 2.1 8.2 2006 €m 114.3 (36.6) (25.2) (18.9) 33.6 2004 2.3 7.0 Financial risk management The conduct of Glanbia’s ordinary business operations necessitates the holding and issuing of ﬁnancial instruments and derivative ﬁnancial instruments by the Group. The main risks arising from issuing, holding and managing these ﬁnancial 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. More detailed information on ﬁnancial risk is contained in note 3.1 ‘Financial risk factors’ in the notes to the ﬁnancial statements. Share price and market capitalisation Glanbia’s share price performed strongly during 2007. The closing share price at the year end was €4.59 and the share price high/low during the year was €5.08 and €3.12 respectively. This compares with a year end closing share price of €2.96 in 2006 and a share price high of €3.13 and low of €1.93 during the year. Glanbia’s market capitalisation at the year end was €1.346 billion compared with €0.868 billion at year end 2006. Investor relations Glanbia operates an active domestic and international Investor Relations and Financial Media Relations Programme each year. In 2007 management met with over 170 existing and potential investors In 2007, the Group has continued to improve its debt to EBITDA ratio and sustained a strong interest to EBITDA cover ratio. and visited 15 cities in 12 countries. The Group has a 45% free ﬂoat, which is well balanced between institutional and retail investor ownership and between domestic and international institutional ownership. Conclusion Glanbia has successfully improved all key ﬁnancial performance indicators during 2007. We are also on track to deliver our three year strategic ﬁnancial targets. The hallmark of the 2007 results is the improvement in the ﬁnancial strength of the Group and the enhancement of our ﬁnancial capacity to continue to deliver on our growth strategy. Geoff Meagher Deputy Group Managing Director/Group Finance Director 29 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Risk and risk management The management of risk is key to the achievement of Glanbia’s strategic and ﬁnancial objectives. The Board is ultimately responsible for the Group’s risk management system which is designed to manage, rather than eliminate the risk of failure to achieve business objectives. There is an ongoing process in place for identifying, assessing, managing, monitoring and reporting on the signiﬁcant risks faced by individual group companies and by the Group as a whole. This process has been in place for the year under review up to and including the date of approval of the 2007 Annual Report and Accounts. We have identiﬁed the key areas of risk and these, together with the steps we take to mitigate them, are shown below. Risk Global economic downturn Impact Mitigation A global economic downturn could curtail demand. • Balanced spread of business, with an emphasis on developed economies. • Continue to diversify earnings base to reduce volatility in ﬁnancial results. Food safety Glanbia must maintain the highest standards of food safety. • Our processing sites operate world class quality and food safety systems. • These systems are regularly reviewed to ensure they remain effective and follow best practice. • Full compliance with all regulatory requirements. Legislation and regulation Group operations in processing, distribution, packaging and labelling of food are governed by extensive legislation, regulation, codes of practice and guidance. • The Group conforms to international and local food safety, quality and environmental regulations. Competition Signiﬁcant product innovations, technical advances or the intensiﬁcation of price competition could adversely affect the Group. Environment The Group continues to be committed to sustainable growth in harmony with the environment and the communities in which it operates. • 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. • The inclusion of environmentally friendly objectives 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. • The recycling and the re-using of raw materials and the reducing of discharges to land, air or water. Growth through acquisition 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 source and complete complementary acquisitions and integrate the operations of the acquired businesses. • The Group’s management team has signiﬁcant 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. 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 7 Risk Health and safety Energy costs Loss of a major site Impact Mitigation Ensuring the safety, health and welfare of employees, visitors to Glanbia operations, surrounding communities and the public . • Full compliance with relevant safety, health and welfare legislation. • Processes have been put in place to ensure that workplace conditions, practices and procedures are maintained to the highest possible level of safety. Large scale processing is an energy intensive operation. • Energy efﬁciency programmes throughout the Group. • In order to minimise the impact on energy costs of price volatility, the Group will, where necessary, enter into ﬁxed price arrangements to cover certain future energy requirements. The Group operates from many key sites the loss or signiﬁcant destruction of any one of which would present signiﬁcant operational difﬁculties. • 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 ﬁnancial consequences. Recruitment and retention The ongoing 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. Supply chain The Group’s ability to fulﬁl the demand for its products is dependent on an efﬁcient 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. Financial risk The conduct of ordinary business operations necessitates the holding and issuing of ﬁnancial instruments and derivative ﬁnancial instruments by the Group. The main risks arising from issuing, holding and managing these ﬁnancial instruments typically include liquidity risk, interest rate risk and currency risk. • The Group approach is to centrally manage these risks against comprehensive policy guidelines, details of which are outlined in note 3.1 Financial Risk Factors in the notes to the ﬁnancial statements. • The Board agrees and regularly reviews these guidelines. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 31 Board of Directors Chairman Michael Walsh (aged 65) 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. Group Managing Director John Moloney B.Agr.Sc., MBA, (aged 53) is Group Managing Director since 2001 having been appointed to the Board in 1997. 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 was appointed Deputy Group Managing Director in 2000 and assumed the responsibilities of Chief Operating Ofﬁcer in 2001. Prior to joining the Group John Moloney 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 the Irish Business and Employers Confederation. Executive Directors Geoffrey Meagher CPA, (aged 58) joined the Board as Group Finance Director in 1993 and was appointed Deputy Group Managing Director in 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. Kevin Toland FCMA, (aged 42) was appointed to the Board in 2003. He is CEO and President of Glanbia USA and 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 Liam Herlihy 1,2 (aged 56) is Vice-Chairman of Glanbia plc. He was appointed to the Board in 1997. He is a Director of Irish Co-operative Organisation Society Limited and farms at Headborough, Knockanore, Tallow, Co. Waterford. John Callaghan FCA, FIB, (aged 65) was appointed to the Board in 1998. He is a Director of 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. Henry Corbally 2 (aged 53) was appointed to the Board in 1999. He is Vice-Chairman of the National Dairy Council and a Director of Kilmainhamwood Community Employment Scheme Limited. He farms at Kilmainhamwood, Kells, Co. Meath. 32 Victor Quinlan 2 B.Agr.Sc., (aged 62) is Vice-Chairman of Glanbia plc. He was ﬁrst appointed to the Board in 1996. He is Chairman of Irish Co-op Society Limited and a Director of Malting Company of Ireland Limited. He farms at Baptistgrange, Lisronagh, Clonmel, Co. Tipperary. Nicholas Dunphy (aged 47) was appointed to the Board in May 2007. He farms at Grawn, Kilmacthomas, Co. Waterford. John Fitzgerald 2 (aged 52) was appointed to the Board in 2004. He farms at Ross, Kilmeaden, Co. Waterford. 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 7 Jerry Liston B.A., MBA, (aged 67) was appointed to the Board in 2002. He is Chairman of the Irish Aviation Authority. He was formerly Chief Executive of United Drug plc and past Executive Chairman of the Michael Smurﬁt Graduate School of Business. Matthew Merrick (aged 56) was appointed to the Board in 2005. He is the Chairman of the County Offaly Enterprise Board and a board member of IFAC Accountants. He farms at Shean, Edenderry, Co. Offaly. William Murphy B. Comm, (aged 62) retired as Deputy Group Managing Director of Glanbia plc in 2005. He was appointed to the Board in 1989. He is a Director of IAWS plc and a number of unlisted companies. Michael Parsons (aged 58) was appointed to the Board in 1999. He 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. Eamon Power 2 (aged 53) was appointed to the Board in 1999 and represents the Group on the Tus Forum and the Progressive Genetic Advisory Committee. He is a Master Farmer and farms at Corse, Fethard-on-Sea, Co. Wexford. 1 Completed the Institute of Directors Development Programme (2006) and holds a certiﬁcate of merit in Corporate Governance from the Institute of Directors Centre for Corporate Governance at UCD. 2 Completed the ICOS Diploma in Corporate Direction Edward Fitzpatrick 2 (aged 60) was appointed to the Board in 1999. He is a Director of South Eastern Cattle Breeding Society Limited and Castlegannon Show Limited. He farms at Knockmoylan, Mullinavat, Co. Kilkenny. James Gilsenan 2 (aged 48) was appointed to the Board in 1999. He farms at Drogheda Road, Collon, Co. Louth. Patrick Gleeson (aged 46) was appointed to the Board in 2006. He is a Committee Member of Centenary Thurles Co-operative Society Limited and farms at Loughmore, Templemore, Co. Tipperary. Paul Haran (aged 50) was appointed to the Board in 2005. He serves on the Court of Directors of the Bank of Ireland, chairs the Board of the UCD Michael Smurﬁt Graduate School of Business and holds a number of other directorships. Christopher Hill 2 B.Agr.Sc., (aged 49) was appointed to the Board in 2000. He is a Director of Wicklow Rural Partnership Limited and a member of the Wicklow County Development Board. He farms at Johnstown House, Arklow, Co. Wicklow. Martin Keane (aged 52) was appointed to the Board in 2006. He is a Director of Donaghmore Famine Work House and Agricultural Museum Co-operative Society Limited and farms at Errill, Portlaoise, Co. Laois. Board Committees Audit Committee J Callaghan - Chairman, H Corbally, J Fitzgerald, P Haran, L Herlihy, J Liston, E Power, V Quinlan. Remuneration Committee J Liston - Chairman, J Callaghan, P Haran, L Herlihy, V Quinlan, M Walsh. Nomination Committee M Walsh - Chairman, J Callaghan, P Haran, J Liston. Secretary Michael Horan B. Comm, FCA, Glanbia House, Kilkenny, Ireland. 33 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Business review The Group had an excellent year in 2007. Operating proﬁt pre exceptional rose 35% to €115.8 million and adjusted earnings per share were up 25% to 28.2 cent. These results reﬂect the beneﬁts of strategic investment programmes implemented over recent years and the Group’s spread of businesses, against a backdrop of positive global dairy markets. The driver was the strong performance of the Group's largest division, Food Ingredients and Nutritionals. This division delivered with good volumes, improvements in operational efﬁciency and solid growth in margins. Comprehensive reviews of the development and ﬁnancial and operating performance of the Group during 2007 are set out in the Managing Director’s review on pages 6 to 8, the separate operations reviews for each of the divisions on pages 12 to 23 and the ﬁnance review on pages 26 to 29 including key ﬁnancial performance indicators on pages 26 to 29. The treasury policy and objectives of the Group are set out in note 3.1 to the ﬁnancial statements. Outlook The Group’s vision is to be a world leader in international cheese and nutritional ingredients. Realisation of this vision is through a clear growth strategy, which has transformed the Group in recent years and created a good spread of Irish and international businesses in key markets and sectors. Since 2004, the Group has invested signiﬁcantly to support its growth strategy with €293 million invested in acquisition and development capital expenditure. During the same period the Group’s portfolio of businesses has been reshaped with disposals releasing €200 million for investment into higher growth areas. The main focus has been on growing international operations, with over 90% of the investment allocated to this segment in 2006 and 2007. The Group’s growth strategy is delivering. The Group is conﬁdent of another good performance this year and the Group is on target for double digit growth in 2008. More importantly the Group continues to successfully develop a strategic international presence in cheese and nutritional ingredients. This, together with strong Irish operations, is positive for sustained high growth into the future. Report of the Directors for the year ended 29 December 2007 Introduction The Directors are pleased to present their report to shareholders together with the audited ﬁnancial statements for the year ended 29 December 2007. 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 Company and its subsidiaries (“the Group”) property assets. Results and dividends Revenue increased 19% to €2,206.6 million (2006: €1,853.4 million). This revenue increase was driven by a 30% increase in revenue in the Food Ingredients and Nutritionals division, where a combination of price and volume growth and a full year contribution from Seltzer Companies, Inc., a leading US nutritional solutions company acquired in September 2006, drove a strong performance. Operating proﬁt pre exceptional grew 35% (€30.2 million) to €115.8 million (2006: €85.6 million). Operating margin pre exceptional increased 60 basis points to 5.2% (2006: 4.6%). Basic earnings per share amounted to 20.4 cent compared with 22.5 cent in 2006, a decrease of 9%, while adjusted earnings per share amounted to 28.2 cent compared with 22.6 cent in 2006, an increase of 25%. Net debt at the year end amounted to €220.2 million (2006: €224.5 million). In 2007 free cash ﬂow increased €22.7 million to €56.3 million (2006: €33.6 million). EBITDA grew by €34.9 million to €149.2 million. The Group had capital and strategic acquisition investment of €57.5 million in the year, over 90% of which was spend on expanding international operations. Working capital increased by €52.1 million during the year due to higher global dairy markets and the increased size of the Group overall. An interim dividend of 2.5 cent per share on the ordinary shares amounting to €7.3 million was paid to shareholders on 3 October 2007. The Directors have recommended the payment of a ﬁnal dividend of 3.58 cent per share on the ordinary shares which amounts to €10.5 million. Subject to shareholders approval this dividend will be paid on Tuesday, 20 May 2008 to shareholders on the register of members as at Friday, 25 April, 2008, the record date. Some key performance indicators are set out in the ﬁnance review on pages 26 to 29. The ﬁnancial statements for the year ended 29 December 2007 are set out in detail on pages 45 to 106. 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 7 As at 29 December 2007, Options outstanding under the Company’s 1988 Share Option Scheme and the 2002 Long Term Incentive Plan (“LTIP”) amounted to 2,792,000 ordinary shares (30 December 2006: 2,734,000) made up as follows: Board of Directors Mr Michael Keane retired on 31 May 2007 and Mr Nicholas Dunphy was appointed to the Board on the same day. In accordance with the Articles of Association of the Company, Mr Dunphy will retire at the 2008 Annual General Meeting and, being eligible, offers himself for re-appointment. In accordance with the Articles of Association of the Company, Messrs John Fitzgerald, Geoffrey Meagher and Victor Quinlan retire from the Board by rotation and, being eligible, offer themselves for re-appointment. 2002 LTIP and Share option scheme No of Ordinary Shares Price Range Dates exercisable 2,792,000 €1.55 - €4.25 2008 – 2017 GBP£2.90 2008 In accordance with the provisions of the 2006 Combined Code on Corporate Governance of the Irish and London Stock Exchanges, Messrs Michael Walsh, Liam Herlihy, John Callaghan and William Murphy, being Directors who have each served a period in excess of nine years on the Board will retire at the Annual General Meeting 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 conﬁrm 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 4,900 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. As at 29 December 2007 Share Awards had been granted under the Company’s 2002 LTIP over 134,600 ordinary shares (30 December 2006: 146,900). As at 29 December 2007 Share Awards had been granted under the Company’s 2007 LTIP over 183,500 ordinary shares (30 December 2006: Nil). Share Trust As detailed in note 27 to the ﬁnancial statements at 29 December 2007, 234,190 ordinary shares were held in an employee beneﬁt trust for the purpose of the Group’s employee share schemes. Whilst any shares in the Company are held by the Trustees the Trustees shall refrain from exercising any voting rights which may attach to the shares save that if the beneﬁcial interest in any share has been vested in any beneﬁciary the Trustees shall seek and comply with any direction from such beneﬁciary as to the exercise of voting rights attaching to such share. Substantial Interests As at 4 March 2008, the Company has been advised of the following notiﬁable interests in its ordinary share capital: 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. Shareholder Glanbia Co-operative Society Limited Bank of Ireland Nominees Limited* No of Ordinary Shares % of issued share capital 160,277,308 54.7% 17,134,736 5.8% * Bank of Ireland Nominees Limited and its afﬁliates state that these shares are not beneﬁcially owned by them. Share capital and options The authorised share capital of the Company is 306,000,000 ordinary shares of €0.06 each. The issued share capital as at 29 December 2007 was 293,346,684 ordinary shares of €0.06 each, of which 54.7% was held by Glanbia Co-operative Society Limited (“the Society”), an Irish industrial and provident society. The rights attaching to the ordinary shares of €0.06 each are set out in the Memorandum and Articles of Association of the Company, a copy of which may be obtained from the Company’s website www.glanbia.com. All shares rank pari passu and the principal rights are the right to vote, the right to receive a dividend and the right to capital on a winding up or a return of capital. 35 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Report of the Directors for the year ended 29 December 2007 Authority to purchase own shares/authority to allot relevant securities At the Annual General Meeting in 2007 the Company was authorised by shareholders to purchase up to 10 per cent of the aggregate nominal value of the issued share capital of the Company as at the close of business on 16 May, 2007. The Company did not make use of this authority during 2007. As detailed in note 27 to the ﬁnancial statements at 29 December 2007, 234,190 ordinary shares were held in an employee beneﬁt trust for the purpose of the Group’s employee share schemes. During the year, the Glanbia Employees’ Share Trust purchased 21,687 shares. The authority for the Company to purchase its own shares expires at the conclusion of the Annual General Meeting in 2008 and a resolution to renew it will be proposed at that meeting. As explained in the circular accompanying these ﬁnancial statements, 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 (given at the Annual General Meeting in 2007), in the manner set out therein. 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 43 to the ﬁnancial statements. Appointment and replacement of Directors The Company is a subsidiary of Glanbia Co-operative Society Limited (“the Society”), an Irish industrial and provident society, which owns 54.7% of the share capital of the Company. The Society nominates from its Board of Directors, which is elected on a three-year basis, fourteen of the eighteen non-executive Directors for appointment to the Board of the Company. 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 Group is required to give a description of the principal risks and uncertainties which it faces. These appear on pages 30-31 of the risk and risk management report. A comprehensive analysis on the ﬁnancial 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 ﬂow risk, is contained in note 3.1 to the ﬁnancial statements. 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 2006 Combined Code on Corporate Governance of the Irish and London Stock Exchanges (“the Combined Code”) appears on pages 37 to 45. 36 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 beneﬁts such as weight management and immune enhancement. Subsidiary and associated undertakings A list of the principal subsidiary and associated undertakings is included in note 44 to the ﬁnancial statements. Political donations The Electoral Act, 1997 requires companies to disclose all political donations over €5,079 in aggregate made during the ﬁnancial year. The Directors, on enquiry, have satisﬁed themselves that no such donations in excess of this amount have been made by the Company. Auditors The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in ofﬁce in accordance with Section 160(2) of the Companies Act, 1963. Special business at the Annual General Meeting Notice of the 2008 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. On behalf of the Board M Walsh Chairman J Moloney Group Managing Director Glanbia House Kilkenny 4 March 2008 Directors’ statement of corporate governance 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 7 Glanbia plc (the “Company”) has primary listings on the Irish and London Stock Exchanges. 1. The Directors' report on corporate governance The Directors are committed to maintaining the highest standards of corporate governance which they see as fundamental to discharging their stewardship responsibilities. The Board strives to provide the right leadership, strategic oversight and control environment to produce and sustain the delivery of value to all of the Company's shareholders. The Board applies integrity, principles of good governance and accountability throughout its activities and each Director brings independence of character and judgement to the role. All of the members of the Board are individually and collectively aware of their responsibilities to the Company's stakeholders. The principal governance rules applying to Irish companies listed on the Irish and London Stock Exchanges are currently contained in the Combined Code on Corporate Governance adopted by the Financial Reporting Council in June 2006 (“the Combined Code”). This report describes the Board's approach to corporate governance and explains how it applies the Combined Code. 2. The Board of Directors (“the Board”) 2.1 The composition of the Board The Board consists of the Chairman (Mr Michael Walsh); seventeen other non-executive directors (including Mr John Callaghan, the Senior Independent Director) and three executive directors (Mr John Moloney, the Group Managing Director, Mr Geoffrey Meagher, the Deputy Group Managing Director and Group Finance Director and Mr Kevin Toland, the CEO and President Glanbia USA and Nutritionals). 2.2 Directors’ Independence The Board assesses and reviews the independence of each of the Directors at least annually having regard to the potential relevance and materiality of a Director’s interests. Following this assessment, the Board has determined that throughout the reporting period, Mr John Callaghan, Mr Paul Haran and Mr Jerry Liston were independent. In particular, the Board reviewed the position of Mr Callaghan in the context of the guidance in the Combined Code and determined that, notwithstanding his 10 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. Fourteen of the remaining ﬁfteen non-executive Directors are nominated by the Board of the Society for appointment to the Board of the Company. Additionally, Mr William Murphy who retired as Deputy Group Managing Director in 2005 remains on the Board as a non-executive Director. The Board recognises that these Directors do not meet the criteria for independence as speciﬁed in the Combined Code. The Board, however, considers that they are independent in character and judgment. All of the non-executive Directors bring an independent perspective to their advisory and monitoring roles. 2.3 The Role and Operation of the Board 2.3.1 Board meetings and attendance There were 11 scheduled meetings of the Board during 2007. Details of Directors’ attendance at those meetings are set out in the table on the next page: The Company is a subsidiary of Glanbia Co-operative Society Limited (“the Society”), an Irish industrial and provident society, which owns 54.7% of the share capital of the Company. Many of the members of the Society supply milk and trade with Irish subsidiaries of the Company. 2.3.2 Operation of the Board The Board is responsible for the leadership, direction and control of the Company and its subsidiary companies and is accountable to shareholders for ﬁnancial performance. The Society nominates from its Board of Directors, which is elected on a three-year basis, fourteen of the eighteen non-executive Directors (including the Chairman) for appointment to the Board of the Company. Mr Michael Keane stepped down from the Board on 31 May 2007 following his retirement from the Society. The Society nominated Mr Nicholas Dunphy to replace Mr Keane and Mr Dunphy joined the Board as a non-executive director with effect from 31 May 2007. Biographies of each of the Directors are set out on pages 32 and 33. The Board considers that the Directors bring to the Company and its subsidiaries (“the Group”) the range of skills, knowledge and experience, including international experience, necessary to lead the Group. 2.3.3 Matters reserved for the Board There is a schedule of matters which is dealt with exclusively by the Board. These include approval of annual and strategic business plans, capital expenditure, any change in Group strategy and any acquisition or disposal of Group assets, the recommendation and approval of any dividends and Group treasury and risk management policies. 2.3.4 The roles of executive and non-executive directors The executive Directors are responsible for proposing strategy and for making and implementing operational decisions. Non-executive Directors complement the skills and experience of the executive Directors, bring an independent judgement, and contribute to the formulation of strategy, policy and decision-making through their knowledge and experience of other businesses and sectors. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 37 Directors’ statement of corporate governance (continued) M Walsh L Herlihy V Quinlan J Moloney J Callaghan H Corbally N Dunphy* E Fitzpatrick J Fitzgerald J Gilsenan P Gleeson P Haran C Hill M Keane Ml Keane** J Liston G Meagher M Merrick W Murphy M Parsons E Power K Toland Board B 11 11 11 10 11 11 7 11 11 10 11 11 11 11 4 11 11 11 11 11 11 8 A 11 11 11 11 11 11 7 11 11 11 11 11 11 11 4 11 11 11 11 11 11 11 Audit Nomination Remuneration Committee Committee Committee B A B A A 7 7 1 1 5 7 6 7 5 5 5 5 B 1 1 7 1 1 1 1 7 7 5 5 7 5 5 5 5 5 5 5 5 5 4 5 5 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. * Appointed 31 May 2007 ** Retired 31 May 2007 Eight of the Directors nominated to the Board by the Society have completed the ICOS Diploma in Corporate Direction. 2.3.6 Outside appointments Non-executive Directors may serve on a number of outside Boards, provided they continue to demonstrate the requisite commitment to discharge effectively their duties to the Company. The Nomination Committee keeps the extent of Directors' other interests under review to ensure that the effectiveness of the Board is not compromised. The Board is satisﬁed that the Chairman and each of the non-executive Directors commit sufﬁcient time to the fulﬁlment of their duties as Chairman and Directors of the Company respectively. The Board believes, in principle, in the beneﬁt of executive Directors and members of the executive committee accepting non-executive directorships of other companies in order to widen their experience and knowledge for the beneﬁt of the Company. Accordingly, executive Directors are permitted to accept external non-executive Board appointments, subject to the agreement of the Board, and are allowed to retain any fees received from that appointment. The Group Managing Director, Mr John Moloney, is a Director of the Irish Dairy Board Co-operative Limited for which he received fees of €12,000 which he retained. 2.3.5 Information and training All Directors receive monthly Group ﬁnancial statements and reports and full Board papers are sent to each Director in sufﬁcient time before Board meetings. Any further information required is available to all Directors on request. 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. Directors are also briefed, where appropriate, on changes to legislation, regulation or market practices, as well as receiving brieﬁngs from business groups throughout the year. During the year, Directors received regular presentations on different aspects of the Company’s business and training on, amongst other things, changes to the Combined Code on Corporate Governance, developments in relation to implementation of the Transparency Directive and the Takeover Directive. 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 sufﬁcient resources to undertake their duties. 38 2.3.7 Chairman, Vice-Chairmen, Group Managing Director, Senior Independent Director and Group Secretary Separation of Role of Chairman and Group Managing Director 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. Chairman Mr Michael Walsh has been Chairman of the Board since June 2005. The Chairman is responsible for the efﬁcient 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. The Chairman is available to consult with shareholders throughout the year. The Board is kept informed of the views of shareholders through regular updates from the Chairman, the Group Secretary and the executive Directors, as well as through the inclusion in the Board papers of relevant reports and commentaries of, and exchanges with, shareholders and investor bodies. While Mr Walsh holds a number of other directorships (see details on page 32) and farms at Coolroe, Graiguenamanagh, Co. Kilkenny, the Board considers that these do not interfere with the discharge of his duties to the Group. Vice-Chairmen The Company has two Vice-Chairmen, Mr Liam Herlihy and Mr Victor Quinlan. Group Managing Director The day to day management of the Group has been delegated to the Group Managing Director, Mr John 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. Senior Independent Director Mr John 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. Mr Callaghan is also available to fellow non- executive Directors, either individually or collectively, to discuss any matters of concern in a forum that does not include executive Directors or the management 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 7 In the year under review, the Chairman hosted a meeting of the non-executive Directors, without the executive Directors present. The Senior Independent Director, Mr John Callaghan has, in addition, held a meeting of non-executive Directors without the presence of the Chairman at which, among other things, the performance of the Chairman was discussed. Group Secretary Mr Michael 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. 2.3.8 Board, Committee and Director performance evaluation A formal evaluation of the performance and effectiveness of the Board and of the Audit, Remuneration and Nomination Committees is carried out each year, led by the Chairman. In completing the annual 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. For the year under review, the Chairman has assessed that all Directors continue to make an effective contribution to the Board. The Chairman conﬁrms that each of Mr John Callaghan, Mr Nicholas Dunphy, Mr John Fitzgerald, Mr Liam Herlihy, Mr Geoffrey Meagher, Mr William Murphy and Mr Victor Quinlan, standing for re-appointment at this year's Annual General Meeting, continue to perform effectively and to demonstrate commitment to their roles. Mr John Callaghan, as Senior Independent Director, conﬁrms that Mr Michael Walsh, also standing for re-appointment at this year's Annual General Meeting, continues to perform effectively and demonstrates commitment to his role. 39 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Directors’ statement of corporate governance (continued) 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 102. 2.3.12 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. 2.4 The Board’s committees and the executive committee The Board has established a committee structure to assist it in the discharge of its responsibilities. The committees and their membership are detailed on pages 32 to 34. 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 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 three-year term which may be renewed and are also subject to early removal under the Articles. The Nomination Committee did not use external search consultants or open advertising in the appointment of the new non-executive Director, Mr Nicholas Dunphy, as he was 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 other than those appointed by the Society. 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 Nomination Committee considered the nomination for the re-appointment of the non-executive Directors, Mr Callaghan, Mr Herlihy, Mr Murphy, Mr Quinlan and Mr Walsh respectively, with particular rigour, as they have served as Directors for nine years or more (with each of Mr Callaghan and Mr Walsh excusing themselves from the consideration of their own nomination for re-appointment), and were satisﬁed that their re-appointment as Directors for a further term was warranted having regard to their continuing contribution and valuable experience on the Board, which in the Board's view enhanced their effectiveness and commitment to their roles. The Board also evaluated the performance of the Audit, Nomination and Remuneration Committees and has assessed that they continue to make an effective contribution to the Board. 2.3.9 Retirement of Directors New Directors are subject to election at the ﬁrst annual general meeting following their appointment, and Directors are subject to retirement and re-appointment by shareholders every three years. The re-appointment of non-executive Directors is not automatic. The Board has determined that non-executive Directors who have served for nine years or more will be asked to stand for re-appointment annually provided that the Board remains satisﬁed both with the Director's performance and that nine or more years' continuous service does not compromise the Director's continuing independence. 2.3.10 Terms of appointment The terms and conditions of appointment of non-executive Directors are available for inspection at the Company’s registered ofﬁce during normal business hours and at the annual general meeting of the Company. 2.3.11 Share ownership and dealing In order to maintain investor conﬁdence 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 revised rules, in early 2006, 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 Ofﬁcers, 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. 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 7 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. Mr John Callaghan is Chairman of the Audit Committee and he reports to the Board after each meeting of the Committee. The Chairman of the Nomination Committee reports to the Board after each meeting of the Committee. 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 ﬁnancial statements of the Company, and any formal announcements relating to the Company’s ﬁnancial performance, reviewing signiﬁcant ﬁnancial reporting judgements contained in them; • to review the Company’s internal ﬁnancial 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 ﬁrm; 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 conﬁdence, raise concerns about possible improprieties in matters of ﬁnancial reporting or other matters. In discharging its responsibilities the Audit Committee met ﬁve times during the period. It reviewed the interim and ﬁnal 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. Remuneration Committee The Remuneration Committee determines, on behalf of the Board, the Group’s framework of executive remuneration and the speciﬁc 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 ordinary 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. Jerry Liston is Chairman of the Remuneration Committee and formally reports to the Board after each meeting of the Committee. US Advisory Board The 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 Thomas Corcoran, Glanbia Group Chairman from 2000 to 2005 is Chairman of the US Advisory Board. The membership of the Advisory Board currently comprises Mr John Callaghan, Senior Independent Director, Mr Kevin Toland, Executive Director, Mr Liam Herlihy, Mr Victor Quinlan, Vice-Chairmen, and Messrs Joe McCullough, Peter Rogers and Ms Susan 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 Ofﬁcer 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. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 41 Directors’ statement of corporate governance (continued) 3. 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 signiﬁcant 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 beneﬁts, performance-related annual bonus, participation in the 2002 Long Term Incentive Plan (“the 2002 LTIP”) and participation in a deﬁned beneﬁt pension scheme. Executive Directors also participated in the share option scheme of the Company which expired in August 1998. Basic Salaries and Beneﬁts The basic salaries of executive Directors are reviewed annually having regard to personal performance, competitive market practice or where a change of responsibility occurs. Beneﬁts-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 Plans The 2002 LTIP In 2002 shareholders approved the introduction of the 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 speciﬁed as a percentage of the shares held will be made on the second and ﬁfth anniversaries 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. Beneﬁts under the 2002 LTIP are not pensionable. Pension Beneﬁts Pension beneﬁts for executive Directors are calculated on basic salary only. Beneﬁts, which are agreed on appointment, are designed to provide a percentage of basic salary at retirement for full service. 42 Directors’ Emoluments and Attributable Pension Beneﬁts Details of Directors’ emoluments and attributable pension beneﬁts are set out in note 9 and details of share options are included in note 43 to the ﬁnancial statements. 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 beneﬁts-in-kind. Review of Compensation Arrangements During 2007, the Remuneration Committee, with the assistance of external advisers, Mercer Limited, who are not otherwise connected with the Company, undertook a thorough review of the Group’s compensation arrangements for executive Directors and senior managers. The review took account of the global nature of the Group’s business, the success of the Group and the need to have competitive compensation packages which will attract and retain international managers of the highest calibre and changes in the accounting treatment of long-term incentive schemes and developments in market practice in relation to these schemes. Arising from this review, the Remuneration Committee concluded that the Group should introduce a new Long Term Incentive Plan. Accordingly, the 2007 Long Term Incentive Plan (“the 2007 LTIP”) was approved in August 2007 for selected Senior Managers (other than Directors), details of which are provided below. Since then, the Remuneration Committee concluded that the executive Directors should be eligible to participate in a similar new Long Term Incentive Plan. Accordingly, the proposed 2008 Long Term Incentive Plan (“the 2008 LTIP”) will be put to shareholders for approval at the forthcoming Annual General Meeting. Executive Directors will be eligible to participate in the 2008 LTIP if approved. Further details of the proposed 2008 LTIP are set out in the Circular containing the Notice of the 2008 Annual General Meeting. The 2007 LTIP The 2007 LTIP has been designed so that any rewards will be dependent on the growth in the Company’s EPS (i.e earnings per share) and the Company’s TSR (i.e. total shareholder return) performance (the “EPS condition” and the “TSR Performance Condition”, respectively). The vesting of 50% of the shares which are the subject of an award will be subject to the EPS condition and the remaining 50% shall be subject to the TSR Performance condition. EPS is the adjusted consolidated earnings or proﬁt made by the Company divided by the number of shares outstanding (as shown in the annual report). TSR represents the change in capital value of a listed/quoted company over a period, plus dividends, expressed as a plus or minus percentage of the opening value. Under the EPS condition, there must be an increase in the adjusted consolidated earnings per share of the Company of at least the increase in the Consumer Price Index plus 5% compounded over a three year period. The beneﬁt which a participant can receive under the 2007 LTIP will depend on the annualised percentage increase in the Company’s EPS over the performance period. There will be three pre-deﬁned levels of EPS performance, which will govern the percentage level of vesting that may occur under an award. The 2007 LTIP will provide that at the lowest level, no part of an award may vest unless the Company’s EPS performance over the performance period achieves at least the annualised percentage increase in the Consumer Price Index plus 5% compounded over the performance period. Where the Company’s EPS performance over the performance period equals the annualised percentage increase in the Consumer Price Index plus 5% compounded over the performance period, then 25% of the award shall vest. Where the Company’s EPS performance over the performance period equals or is greater than the annualised percentage increase in the Consumer Price Index plus 10% compounded over the performance period, then 50% of the award shall vest. Where the Company’s EPS performance over the performance period is between the thresholds of the annualised percentage increase in the Consumer Price Index plus 5% and the annualised percentage increase in the Consumer Price Index plus 10% compounded, then a pro rata vesting on a straight line basis shall apply. Under the TSR Performance Condition, the Company’s TSR performance will be compared against the TSR performance of a peer group of food companies. The beneﬁt which a participant can receive under the 2007 LTIP will depend on how well the Company’s TSR performance compares against this peer group over the performance period. There will be three pre-deﬁned levels of TSR performance, which will govern the percentage level of vesting that may occur under an award. The 2007 LTIP provides that at the lowest level, no part of an award may vest unless the Company’s TSR performance over the performance period achieves at least the median TSR performance of the peer group of food companies. Where the Company’s TSR performance equals the median TSR performance of the peer group, then 15% of the award shall vest. Where the Company’s TSR performance is equal to or above the top 25% of TSR performance of the peer group, then 50% of the award shall vest. Where the Company’s TSR performance is between the median and top 25% of TSR performance of the peer group, then a pro rata vesting on a straight line basis shall apply. The ﬁrst awards under the 2007 LTIP were made in August 2007 immediately following the publication of the interim results for 2007. These did not include any awards to the Directors. Details of the award to the Group Secretary are provided in note 43. Share Options Options outstanding under the Company’s 1988 Share Option Scheme and the 2002 LTIP as at 29 December 2007 amounted to 2,792,000 ordinary shares (30 December 2006: 2,734,000) made up as follows: 2002 LTIP and Share option scheme No of Ordinary Price Range Dates Shares 2,792,000 €1.55 - €4.25 GBP£2.90 exercisable 2008 – 2017 2008 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 7 Share Awards As at 29 December 2007 Share Awards had been granted under the Company’s 2002 LTIP over 134,600 ordinary shares (30 December 2006: 146,900). As at 29 December 2007 Share Awards had been granted under the Company’s 2007 LTIP over 183,500 ordinary shares (30 December 2006: Nil). Share Trust As detailed in note 27 to the ﬁnancial statements at 29 December 2007, 234,190 ordinary shares were held in an employee beneﬁt trust for the purpose of the Group’s employee share schemes. 4. Internal Control The Turnbull Guidance sets out best practice on internal control for Irish and UK listed companies to assist them in assessing the application of the Combined Code's principles and compliance with the Combined Code's provisions with regard to internal control. The Group's systems of internal control are designed and operated to support the identiﬁcation, evaluation and management of risks affecting the Group and the business environment in which it operates. These, or their equivalent, have been in place for the year covered in this Annual Report and ﬁnancial 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. 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. Key features of the systems of internal control are: • a Code of Conduct that deﬁnes a set of agreed standards and guidelines for corporate behaviour; • an organisational structure with clearly deﬁned lines of responsibility and delegation of authority; • appropriate terms of reference for Board committees with responsibility for policy areas; • a formal schedule of matters speciﬁcally referred to the Board for its decision; • a comprehensive system of ﬁnancial 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 deﬁned guidelines for capital expenditure, including detailed budgeting, appraisal and post-investment review; • a Group ﬁnancial management manual that clearly sets out the accounting policies and ﬁnancial 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 deﬁned parameters; 43 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Directors’ statement of corporate governance (continued) • 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 ﬁnancial 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. 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. The Board has reviewed the effectiveness of the current system of internal control speciﬁcally for the purpose of this statement. 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 Directors, through the use of appropriate procedures and systems, have also 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 ofﬁce of the Company. 5. Relations with Auditors PricewaterhouseCoopers have been appointed as auditors of the Company. The Company has in place a formal policy on auditor independence and non-audit services, with which the external auditors are required to comply, to ensure that the independence of the auditors is not impaired by the nature of non-audit work. 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 ﬁnancial 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. 6. Relations with Shareholders During the year the Company has continued to promote dialogue with its major 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 7. Annual General Meeting The Notice of the 2007 Annual General Meeting was despatched to shareholders not less than 20 business days before the meeting. Separate resolutions were proposed at the meeting on each substantially separate issue, including a resolution to receive and consider the 2006 ﬁnancial statements and the reports of the Directors and auditors thereon. The level of proxy votes for and against and withheld was announced after each resolution had been passed on a show of hands. It is Group policy for all Directors to attend the annual general meeting. In normal circumstances, the Chairmen of the Audit, Nomination and Remuneration Committees attend the annual general meeting and are available to answer relevant questions 8. Corporate Social Responsibility As the Group grows and develops as a leading international cheese and nutritional ingredients Group, so also does our commitment to conducting our business in a way that is economically, socially and environmentally sustainable. During 2007 we made further progress in our corporate citizenship objectives under the four pillars of Community, Environment, Workplace and Marketplace, more particular details of which are summarised in our corporate social responsibility statement on pages 24 to 25. 9. Accountability and Audit Financial reporting Directors’ responsibilities for preparing the ﬁnancial statements for the Company and the Group are detailed on page 45. 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 ﬁnancial statements. 10.Compliance The Board believes that, except in relation to the composition of the Board, as explained above, the Company has complied throughout the ﬁnancial period with the principles and provisions of the Combined Code. 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 7 Financial statements contents Statement of Directors’ responsibilities The Directors are responsible for preparing the annual report and the ﬁnancial statements in accordance with applicable law and regulations. Independent auditors’ report: to the members of Glanbia plc 46 Consolidated income statement 48 Consolidated statement of recognised income and expense 49 Company law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the Directors have prepared the group and parent company ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The ﬁnancial 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 proﬁt or loss of the Group for that period. In preparing these ﬁnancial 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 ﬁnancial statements comply with IFRSs as adopted by the European Union. • Prepare the ﬁnancial 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 qualiﬁcations as necessary. The Directors conﬁrm that they have complied with the above requirements in preparing the ﬁnancial statements. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the ﬁnancial position of the Company and the Group and to enable them to ensure that the ﬁnancial statements comply with the Companies Acts 1963 to 2006 and, as regards the group ﬁnancial 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 ﬁnancial statements may differ from legislation in other jurisdictions. On behalf of the Board M Walsh Chairman J Moloney Group Managing Director Glanbia House Kilkenny 4 March 2008 Consolidated balance sheet Consolidated cash ﬂow statement Company balance sheet Company statement of recognised income and expense and cash ﬂow statement Notes to the ﬁnancial statements 1 General information 2 Summary of signiﬁcant accounting policies 3 Financial risk management 4 Critical accounting estimates and assumptions 5 Segment information 6 Operating proﬁt 7 Exceptional items 8 Employee beneﬁt expense 9 Directors’ remuneration 10 Finance income and costs 11 Income taxes 12 Earnings per share 13 Dividends 14 Property, plant and equipment – Group 15 Intangible assets 16 Investments in associates 17 Investments in joint ventures 18 Investments 19 Trade and other receivables 20 Inventories 21 Cash and cash equivalents 22 Assets and liabilities classiﬁed as held for sale and included in disposal groups 23 Reconciliation of changes in equity 24 Share capital and share premium 25 Other reserves 26 Retained earnings 27 Own shares (Company and Group) 28 Capital reserves 29 Merger reserve – Group 30 Minority interests 31 Borrowings 32 Deferred income taxes 33 Retirement beneﬁt obligations 34 Provisions for other liabilities and charges 35 Capital grants 36 Trade and other payables 37 Derivative ﬁnancial instruments 38 Contingent liabilities 39 Commitments 40 Cash generated from operations 41 Business combinations 42 Related party transactions 43 Directors’ and Secretary’s interests 44 Principal subsidiary and associated undertakings 50 51 52 53 54 54 63 66 67 70 71 71 72 73 73 74 75 76 77 78 79 80 81 82 82 82 83 84 87 88 88 89 89 89 89 91 93 96 96 96 97 98 98 99 99 100 102 105 45 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Independent auditors’ report: to the members of Glanbia plc We have audited the Group and Parent Company ﬁnancial statements (the “ﬁnancial statements”) of Glanbia plc for the year ended 29 December 2007, which comprise the consolidated income statement, the consolidated and Parent Company balance sheets, the consolidated and Parent Company cash ﬂow statements, the consolidated and Parent Company statement of recognised income and expense and the related notes. These ﬁnancial 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial statements; and • whether at the balance sheet date there existed a ﬁnancial situation which may require the Company to convene an extraordinary general meeting of the Company; such a ﬁnancial 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 speciﬁed 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, reﬂects the Company’s compliance with the nine provisions of the 2007 FRC Combined Code speciﬁed 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 ﬁnancial 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 ﬁnancial 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 ﬁnancial statements. It also includes an assessment of the signiﬁcant estimates and judgments made by the Directors in the preparation of the ﬁnancial 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 sufﬁcient evidence to give reasonable assurance that the ﬁnancial 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 ﬁnancial statements. 46 Independent auditors’ report: to the members of Glanbia plc (continued) 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 7 Opinion In our opinion: • the Group ﬁnancial 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 29 December 2007 and of its proﬁt and of its cash ﬂows for the year then ended; the Parent Company ﬁnancial 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 29 December 2007 and cash ﬂows for the year then ended; the ﬁnancial 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 ﬁnancial 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 29 December 2007 a ﬁnancial 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 4 March 2008 47 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Consolidated income statement for the year ended 29 December 2007 Revenue Cost of sales Gross proﬁt Distribution expenses Administration expenses Operating proﬁt Finance income Finance costs Share of results of joint ventures and associates Proﬁt before taxation Income taxes Pre- Pre- exceptional Exceptional Total exceptional Exceptional Notes 2007 €’000 2007 €’000 2007 €’000 2006 €’000 2006 €’000 Total 2006 €’000 5 2,206,567 (1,882,648) - 2,206,567 (1,882,648) - 1,853,427 (1,596,547) 323,919 - 323,919 256,880 - - - 1,853,427 (1,596,547) 256,880 7 6 10 10 (114,180) (93,905) - (23,463) (114,180) (117,368) (105,724) (65,589) - (12,455) (105,724) (78,044) 115,834 (23,463) 92,371 85,567 (12,455) 73,112 4,813 (22,095) 992 - - - 4,813 (22,095) 4,883 (18,918) 992 2,842 - - - 99,544 (16,458) (23,463) 617 76,081 (15,841) 74,374 (7,970) (12,455) 12,321 11 4,883 (18,918) 2,842 61,919 4,351 Proﬁt for the year 83,086 (22,846) 60,240 66,404 (134) 66,270 Attributable to: Equity holders of the Parent Minority interests Basic earnings per share (cent) Diluted earnings per share (cent) 12 12 59,833 407 60,240 20.42 20.34 65,934 336 66,270 22.51 22.47 On behalf of the Board M Walsh Directors J Moloney G Meagher 48 Consolidated statement of recognised income and expense for the year ended 29 December 2007 Actuarial (loss)/gain - deﬁned beneﬁt schemes Deferred tax on actuarial loss/gain Share of actuarial gain - joint ventures Currency translation differences Fair value adjustments (net of tax) - Group - Joint venture Net (expense)/income recognised directly in equity Proﬁt for the year Total recognised income for the year Attributable to: Equity holders of the Parent Minority interest 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 7 Notes 2007 €’000 33 32 23 23 23 23 (4,539) 1,102 230 (14,878) 10,733 (2,155) (9,507) 60,240 2006 €’000 36,852 (3,923) 230 (9,401) 2,367 367 26,492 66,270 50,733 92,762 50,326 407 92,426 336 50,733 92,762 On behalf of the Board M Walsh Directors J Moloney G Meagher 49 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Consolidated balance sheet as at 29 December 2007 ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in associates Investments in joint ventures Trade and other receivables Deferred tax assets Available for sale ﬁnancial assets Derivative ﬁnancial instruments Current assets Inventories Trade and other receivables Derivative ﬁnancial instruments Cash and cash equivalents Assets in disposal group held for sale Total assets EQUITY Issued capital and reserves attributable to equity holders of the Parent Share capital and share premium Other reserves Retained earnings Minority interests Total equity LIABILITIES Non-current liabilities Borrowings Derivative ﬁnancial instruments Deferred tax liabilities Retirement beneﬁt obligations Provisions for other liabilities and charges Capital grants Current liabilities Trade and other payables Current tax liabilities Borrowings Derivative ﬁnancial instruments Provisions for other liabilities and charges Liabilities in disposal group held for sale Total liabilities Total equity and liabilities On behalf of the Board M Walsh Directors J Moloney G Meagher 50 14 15 16 17 19 32 18 37 20 19 37 21 22 Notes 2007 €’000 298,771 137,565 10,729 50,370 13,929 21,672 30,089 763 2006 €’000 335,152 138,724 10,933 58,668 4,929 23,923 12,527 2,095 563,888 586,951 225,057 202,234 4,990 159,819 592,100 20,304 145,158 164,611 6,776 259,311 575,856 - 612,404 575,856 1,176,292 1,162,807 24 25 26 30 31 37 32 33 34 35 36 31 37 34 98,450 107,909 21,176 227,535 7,040 98,304 113,696 (18,116) 193,884 6,635 234,575 200,519 379,028 3,736 37,587 114,248 13,660 3,535 444,570 3,406 38,611 124,888 20,361 10,660 551,794 642,496 336,663 9,182 966 3,187 22,278 257,893 1,942 39,235 3,688 17,034 372,276 319,792 22 17,647 - 389,923 319,792 941,717 962,288 1,176,292 1,162,807 Consolidated cash ﬂow statement for the year ended 29 December 2007 Cash ﬂows from operating activities Cash generated from operations Interest received Interest paid Tax paid Net cash from operating activities Cash ﬂows from investing activities Acquisition of subsidiary, net of cash acquired Purchase of property, plant and equipment Purchase of available for sale investments Disposal of available for sale investments Insurance proceeds received - exit from Pigmeat Repayment of loan note Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash ﬂows from ﬁnancing activities Proceeds from issue of ordinary shares Sharesave Scheme (Decrease)/increase in borrowings Finance lease principal payments Dividends paid to Company’s shareholders Loans advanced to joint ventures Capital grants received Net cash (used in)/from ﬁnancing activities Net (decrease)/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 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 7 Notes 40 2007 €’000 85,015 3,015 (17,613) (5,401) 2006 €’000 61,023 1,000 (19,967) (6,274) 65,016 35,782 (17,742) (51,662) (2,000) - 12,937 - 13,419 (67,823) (38,085) (3,406) 22,185 - 52,822 8,665 (45,048) (25,642) 24 13 167 - (84,056) (954) (17,334) (9,001) 1,399 190 122 169,851 (1,077) (16,472) (4,929) 123 (109,779) 147,808 (89,811) 157,948 259,311 (9,681) 104,405 (3,042) Cash and cash equivalents at the end of the year 21 159,819 259,311 Reconciliation of net cash ﬂow to movement in net debt Net (decrease)/increase in cash and cash equivalents Cash inﬂow/(outﬂow) from debt ﬁnancing 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 beginning of year Net debt at end of year Net debt comprises: Borrowings (note 31) Cash and cash equivalents (note 21) On behalf of the Board M Walsh Directors J Moloney G Meagher 2007 €’000 2006 €’000 (89,811) 85,889 157,948 (168,774) (3,922) (764) 9,005 (10,826) 3,978 6,506 4,319 (224,494) (342) (224,152) (220,175) (224,494) 2007 €’000 2006 €’000 (379,994) 159,819 (483,805) 259,311 (220,175) (224,494) 51 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Company balance sheet as at 29 December 2007 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 and share premium Retained earnings Capital reserve Total equity LIABILITIES Current liabilities Borrowings Trade and other payables Total liabilities Total equity and liabilities Notes 2007 €’000 2006 €’000 16 18 1,395 455,303 1,395 510,412 456,698 511,807 19 21 24,023 - 24,023 1,881 4,376 6,257 480,721 518,064 24 26 28 453,718 18,354 5,187 453,572 47,924 4,674 477,259 506,170 31 36 1,928 1,534 - 11,894 3,462 11,894 480,721 518,064 On behalf of the Board M Walsh Directors J Moloney G Meagher 52 Company statement of recognised income and expense and cash ﬂow statement for the year ended 29 December 2007 Company statement of recognised income and expense 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 7 (Loss)/proﬁt for the year Total recognised (expense)/income for the year Company cash ﬂow statement Cash ﬂows from operating activities Cash generated from operations Interest received Net cash from operating activities Cash ﬂows from investing activities Dividends received Net cash from investing activities Cash ﬂows from ﬁnancing activities Proceeds from issue of ordinary shares Sharesave Scheme - receipt from Trustees Shares purchased Redemption of shares Decrease in borrowings Dividends paid to Company’s shareholders Net cash used in ﬁnancing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2007 €’000 2006 €’000 (12,236) 16,959 (12,236) 16,959 Notes 2007 €’000 40 (23,600) 1,255 2006 €’000 (4,981) 2,125 (22,345) (2,856) 8,000 10,508 8,000 10,508 24 24 13 167 - (95) 25,303 - (17,334) 190 122 - - (3,397) (16,472) 8,041 (19,557) (6,304) (11,905) 4,376 16,281 (1,928) 4,376 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 ﬁnancial statements and from ﬁling it with the Registrar of Companies. The loss for the year dealt with in the ﬁnancial statements of Glanbia plc, amounts to (€12,236,000) (2006: proﬁt €16,959,000). On behalf of the Board M Walsh Directors J Moloney G Meagher 53 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements for the year ended 29 December 2007 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, Canada, China, 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 ofﬁce is Glanbia House, Kilkenny, Ireland. 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 Company shares are quoted on the Irish and London Stock Exchanges. These consolidated ﬁnancial statements have been approved for issue by the Board of Directors on 4 March 2008. 2. Summary of signiﬁcant accounting polices The principal accounting policies adopted in the preparation of these ﬁnancial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (a) Basis of preparation These consolidated ﬁnancial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRSs), IFRIC interpretations and these parts of the Companies Acts, 1963 to 2006 applicable to companies reporting under IFRS. The consolidated ﬁnancial statements have been prepared under the historical cost convention as modiﬁed by use of fair values for available for sale ﬁnancial assets and derivative ﬁnancial instruments. A summary of the more important Group accounting policies is set out below. The preparation of the ﬁnancial 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 ﬁnancial 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. Amounts are stated in euro thousands (€’000) unless otherwise stated. These ﬁnancial statements are prepared for a 52 week period ending on 29 December 2007, comparatives are for the 52 week period ended 30 December 2006. The balance sheets for 2007 and 2006 have been drawn up as at 29 December 2007 and 30 December 2006 respectively. (b) Consolidation The Group ﬁnancial statements incorporate: (i) The ﬁnancial statements of Glanbia plc (“the Company”) and enterprises controlled by the Company (its subsidiaries). Control is achieve d where the Company has the power to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts 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 over the fair value of the Group’s share of the identiﬁable net assets is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of the identiﬁable 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 signiﬁcant inﬂuence, but not control, through participation in the ﬁnancial 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 proﬁts 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. 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 7 (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 that are subject to risks and returns that are different to those of other geographic segments. (d) Foreign currency translation (i) Functional and presentation currency Items included in the ﬁnancial 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 ﬁnancial 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. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the income statement, except when deferred in equity as qualifying cash ﬂow hedges. 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 ﬂow hedges. Translation differences on non-monetary ﬁnancial assets and liabilities held at fair value through proﬁt or loss are recognised in the income statement as part of the fair value gain or loss. Translation differences on non-monetary ﬁnancial assets such as equities classiﬁed 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 ﬂow 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 as 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. Assets held under ﬁnance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 55 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 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 proﬁt. Repairs and maintenance are charged to the income statement during the ﬁnancial 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 beneﬁts in excess of the originally assessed standard of performance of the existing asset will ﬂow 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 identiﬁable 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. 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 beneﬁt from the business combination in which the goodwill arose. (ii) Research and 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 6 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) Financial assets Available for sale ﬁnancial assets are non-derivatives that are either designated in this category or not classiﬁed in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. They are initially recognised at fair value plus transaction costs 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 classiﬁed 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 ﬁnancial asset is not active the Group establishes fair value using valuation techniques. Where the range of reasonable fair values is signiﬁcant 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. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. (h) Leases Leases of assets where the Group has substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases. A determination is also made as to whether the substance of an arrangement could equate to a ﬁnance lease, considering whether fulﬁlment of the arrangement is dependant upon the use of a speciﬁc asset and the arrangement contains the right to use an asset. If the speciﬁed criteria are met, the arrangement is classiﬁed as a ﬁnance 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. 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 7 Each lease payment is allocated between the liability and ﬁnance charges so as to achieve a constant rate on the ﬁnance balance outstanding. The corresponding rental obligation, net of ﬁnance charges, is included in borrowings, split between current and non-current as appropriate. The interest element of the ﬁnance cost is charged to the income statement over the lease period. The property, plant and equipment acquired under ﬁnance leases is depreciated over the shorter of the useful life of the asset or the lease term. Leases where a signiﬁcant portion of the risks and rewards of ownership are retained by the lessor are classiﬁed 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 ﬁrst-in, ﬁrst-out (“FIFO”) method. The cost of ﬁnished 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 estimated costs of completion and the costs of selling expenses. Costs of inventories include the transfer from equity of any gains/losses on qualifying cash ﬂow hedges purchases of raw materials. (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. Signiﬁcant ﬁnancial difﬁculties of the debtor, probability that the debtor will enter bankruptcy or ﬁnancial 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 ﬂows. 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 classiﬁed 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 proﬁt 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 ﬁnancial 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 proﬁt 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 proﬁt or loss. (m) Employee beneﬁts (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 deﬁned beneﬁt and deﬁned contribution plans. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 57 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 The liability recognised in the balance sheet in respect of deﬁned beneﬁt pension plans is the present value of the deﬁned beneﬁt obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised past-service costs. The deﬁned beneﬁt obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the deﬁned beneﬁt obligation is determined by discounting the estimated future cash outﬂows using interest rates of high-quality corporate bonds that are denominated in the currency in which the beneﬁts 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 speciﬁed 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 deﬁned 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. (iii) Awards under the Long Term Incentive Performance Plan (“The 2007 LTIP”) share plan The fair value of shares awarded under the LTIP 2007 share plan is determined using a Monte Carlo simulation technique. The performance share plan contains inter-alia a TSR-based (and hence market-based) vesting condition, and accordingly, the fair value assigned to the related equity instruments on initial application of IFRS 2 is adjusted so as to reﬂect the anticipated likelihood as at the grant date of achieving the market-based vesting condition. (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. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic beneﬁt will ﬂow to the entity and when speciﬁc criteria have been met for each of the Group’s activities. Revenue from the sale of goods is recognised when signiﬁcant risks and rewards of ownership of the goods are transferred to the buyer, in the ordinary course of the Group’s business which generally arises on delivery, or in accordance with speciﬁc terms and conditions agreed with customers. Service income is recognised on a straight-line basis over the life of the arrangement to which it relates. The timing of recognition of services revenue equals the timing of when 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. (p) Impairment of assets (i) Financial assets The Group assesses at each balance sheet date whether there is objective evidence that a ﬁnancial asset or a group of ﬁnancial assets is impaired. In the case of equity securities classiﬁed as available for sale, a signiﬁcant 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 ﬁnancial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that ﬁnancial asset previously recognised in the proﬁt 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. 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 7 (ii) Non-ﬁnancial assets Assets which have a ﬁnite 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 identiﬁable cash ﬂows (cash generating units). (q) Share capital Ordinary shares are classiﬁed 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. Ordinary shares purchased under the terms of the 2007 LTIP are accounted for as own shares and recorded as a deduction 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 ﬁnancial instruments The activities of the Group expose it primarily to the ﬁnancial risks of changes in foreign currency exchange rates and interest rates. The Group uses derivative ﬁnancial instruments such as foreign exchange contracts and options, interest rate swap contracts and forward rate agreements to hedge these exposures. The Group accounts for ﬁnancial instruments under IAS 32 (Financial Instruments: 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 ﬂows 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 ﬁrm commitment (fair value hedge); (2) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash ﬂow 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 on-going basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash ﬂows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in note 37. Movements on the fair value reserve are shown in note 25. The full fair value of a hedging derivative is classiﬁed as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability, if the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classiﬁed as a current asset or liability. (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. 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 proﬁt or loss over the period to maturity. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 59 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (ii) Cash ﬂow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂow 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 proﬁt 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 ‘ﬁnance 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-ﬁnancial asset (for example, inventory) or a non-ﬁnancial 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) 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. (iv) 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 ﬁnancing arrangements with these banking institutions. Under the terms of amended IAS 39 (Financial Instruments: Recognition and Measurement) ﬁnancial guarantee contracts are required to be recognised at fair value at inception and subsequently measured as a provision under IAS 37 on the Glanbia plc company balance sheet. (t) Earnings per share Earnings per share represents the proﬁt in cent attributable to share holders of the Company, divided by the weighted average number of ordinary 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 signiﬁcant 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 speciﬁc date, are classiﬁed as liabilities. The dividends on these preference shares are recognised in the income statement as a ﬁnance cost. Borrowings are classiﬁed 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. (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 outﬂow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the obligation. The increase in provision due to passage of time is recognised as interest expense. (x) Termination beneﬁts Termination beneﬁts 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 beneﬁts. The Group recognises termination beneﬁts 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 beneﬁts 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 signiﬁcant items within the Group results for the year. Such items may include restructuring, impairment of assets, proﬁt or loss on disposal or termination of operations, litigation settlements and proﬁt 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. 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 7 (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 identiﬁable 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 deﬁnition 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; Standards early adopted by the Group (i) IFRS 7, ‘Financial instruments: Disclosures’, and the complementary amendment to IAS 1 ‘Presentation of ﬁnancial statements – Capital disclosures’, were early adopted in 2007 IFRS 7 introduces new disclosures relating to ﬁnancial instruments. This standard does not have any impact on the classiﬁcation and valuation of the Group’s ﬁnancial instruments. Standards, amendments and interpretations effective in 2007 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 31 December 2006 but are not relevant to the Group’s operations: - - - - IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyper-inﬂationary economies IFRIC 8, Scope of IFRS 2 IFRIC 9, Reassessment of embedded derivatives IFRIC 10, Interim ﬁnancial reporting and impairment 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 3 (Revised), ‘Business combinations’, (effective for annual periods beginning on or after 1 July 2009) The standard continues to apply the acquisition method to business combinations, with some signiﬁcant changes. These changes include a requirement that all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently re-measured through income. Goodwill may be calculated based on the parent’s share of net assets or it may include goodwill related to minority interest. All transaction costs will be expensed. The Group will apply this revised standard from the effective date and is currently assessing the impact on the Group’s ﬁnancial statements. (iii) 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 ﬁnancial 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. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 61 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (iv) IFRIC 11 ‘IFRS 2 – Group and treasury share transactions’, (effective for ﬁnancial periods beginning on or after 1 March 2007) IFRIC 11 provides guidance on whether share-based transactions involving own shares or involving Group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the Parent and Group companies. The Group will apply IFRIC 11 to ﬁnancial periods beginning on or after 1 March 2007 and is currently assessing the impact on the Group’s ﬁnancial statements. (v) IFRIC 12 ‘Service concession arrangements’ (effective for ﬁnancial periods beginning on or after 1 January 2008) IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, ﬁnancing, operation and maintenance of infrastructure for public sector services. As the Group is not a service concession operator IFRIC 12 is not relevant to the Group’s activities. (vi) IFRIC 13 ‘Customer loyalty programmes’ (effective for ﬁnancial periods beginning on or after 1 July 2008) IFRIC 13 clariﬁes that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Group will apply IFRIC 13 to ﬁnancial periods beginning on or after 1 July 2008, however it is not expected to have any material impact on the Group’s ﬁnancial statements. (vii) IFRIC 14 ‘IAS 19 – The limit on a deﬁned beneﬁt asset, minimum funding requirements and their interaction’ ( effective for ﬁnancial periods beginning on or after 1 January 2008) IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from the effective date and is currently assessing the impact on the Group’s ﬁnancial statements. (viii) IAS 1 (Amendment), ‘Presentation of ﬁnancial statements’, (effective for ﬁnancial periods beginning on or after 1 January 2009) The main aim of the amended version of IAS 1 is to aggregate information in the ﬁnancial statements on the basis of shared characteristics. Consequently changes in equity (net assets) of an entity arising from transactions with owners in their capacity as owners will be disclosed separately from other changes in equity. IAS 1 (Amendment) will be implemented for ﬁnancial periods beginning on or after 1 January 2009 and the Group is currently assessing the impact on the Group’s ﬁnancial statements. (ix) IAS 23 (Amendment), ‘Borrowing costs’, (effective for ﬁnancial periods beginning on or after 1 January 2009) The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amendment) for ﬁnancial periods beginning on or after 1 January 2009, however it is not expected to have any material impact on the Group’s ﬁnancial statements. (x) IAS 27 (Revised), ‘Consolidated and separate ﬁnancial statements’, (effective for annual periods beginning on or after 1 July 2009) IAS 27 (revised) requires the effect of all transactions with non-controlling interests to be recorded in equity if there is no change in control. They will no longer result in goodwill or gains and losses. The standard also speciﬁes the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in proﬁt or loss. The Group will apply this revised standard from the effective date and is currently assessing the impact on the Group’s ﬁnancial statements. (xi) IAS 32 and IAS 1 (Amendment) ‘Puttable ﬁnancial instruments and obligations arising on liquidation’, (effective for annual periods beginning on or after 1 January 2009) The amendments require some puttable ﬁnancial instruments and some ﬁnancial instruments that impose on the entity and obligation to deliver to another party a pro-rata share of net assets of the entity only on liquidation to be classiﬁed as equity. The Group will apply the amendments from the effective date and is currently assessing the impact on the Group’s ﬁnancial statements. 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 7 3. Financial risk management 3.1 Financial risk factors The conduct of its ordinary business operations necessitates the holding and issuing of ﬁnancial instruments and derivative ﬁnancial instruments by the Group. The main risks arising from issuing, holding and managing these ﬁnancial 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 ﬁnancial instruments or derivatives thereof. The Group ﬁnances its operations by a mixture of retained proﬁts, 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 ﬁxed and ﬂoating rates of interest, using derivatives where appropriate to generate the desired effective currency proﬁle and interest rate basis. Risk management is carried out by a central treasury department (Group treasury) under policies approved by the Board of Directors. Group treasury identiﬁes, evaluates and hedges ﬁnancial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering speciﬁc areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative ﬁnancial instruments and non-derivative ﬁnancial instruments, and investment of excess liquidity. Market risk (a) Currency risk Although the Group is based in Ireland, it has signiﬁcant investment in overseas operations primarily in the USA. As a result movements in US dollar/euro exchange rates can signiﬁcantly affect the Group’s euro balance sheet and income statement. The Group seeks to match, to a certain 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. Management has set up a policy to require Group companies to manage their foreign exchange risk against their functional currency. The Group companies must manage their exposure on both recognised and expected foreign exchange exposures on a nominal basis. The Group companies are required to hedge their entire foreign exchange risk exposure with Group treasury. Group treasury reviews exposure reports on a regular basis. To manage their foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts, transacted with Group treasury. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. The Group treasury’s risk management practice is to hedge up to 100% of anticipated cash ﬂows (mainly export sales and purchase of inventory) in each major foreign currency for the following ﬁnancial year. The Group does not take out cover unless the prospective sale is highly probable. For segment reporting purposes, each subsidiary designates contracts with Group treasury as fair value hedges or cash ﬂow hedges, as appropriate. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on speciﬁc assets, liabilities or future transactions. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies. At 29 December 2007 and 30 December 2006, if the euro had weakened/strengthened by 5% against the US dollar with all other variables held constant, post-tax proﬁt for the year would not have been materially impacted as a result of foreign exchange gains/losses on translation of US dollar denominated non hedged trade receivables, ﬁnancial assets at fair value through proﬁt or loss or debt securities classiﬁed as available for sale. Group proﬁt is more sensitive to movement in currency/US dollar exchange rates in 2007 than 2006 because of the increased amount of US dollar denominated trade receivables and increased amount of reported US dollar proﬁts. A weakening/strengthening of the euro against the US dollar by 5% as at 29 December 2007 would have resulted in a currency translation gain/loss respectively of approximately €7.5 million, which would be recognised directly in equity. At 29 December 2007 and 30 December 2006, if the currency had weakened/strengthened by 5% against the UK pound with all other variables held constant, post-tax proﬁt for the year would not have been materially impacted as a result of foreign exchange gains/losses on translation of UK pound-denominated non hedged trade receivables, ﬁnancial assets at fair value through proﬁt or loss or debt securities classiﬁed as available for sale. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 63 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 A weakening/strengthening of the euro against the UK pound by 5% as at 29 December 2007 would have resulted in a currency translation gain/loss respectively of approximately €1.55 million, which would be recognised directly in equity. (b) 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 proﬁtability. This is achieved by determining a long-term strategy against a number of policy guidelines, which focus on (a) the amount of ﬂoating 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 proﬁtability. The Group borrows at both ﬁxed and ﬂoating rates of interest and uses interest rate swaps to manage the Group’s exposure to interest rate ﬂuctuations. Borrowings issued at ﬂoating rates expose the Group to cash ﬂow interest rate risk. Borrowings issued at ﬁxed rates expose the Group to fair value interest rate risk. Group policy is to maintain no more than one third of its projected debt exposure on a ﬂoating rate basis over any succeeding 12 month period. The Group, on a continuous basis, maintains a level of ﬁxed rate cover dependent on prevailing ﬁxed market rates, projected debt and market informed interest rate outlook. Based on the Group’s unhedged variable rate debt in all currencies at 29 December 2007, a 1% increase in prevailing market interest rates would have resulted in a €0.704 million loss movement (2006: €1.062 million loss). The Group manages its cash ﬂow interest rate risk by using ﬂoating to ﬁxed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from ﬂoating rates to ﬁxed rates. Under the interest rate swaps, the Group agrees with other parties to exchange at speciﬁed intervals, the difference between ﬁxed contract rates and ﬂoating rate interest amounts calculated by reference to the agreed notional amounts. Occasionally the Group enters into ﬁxed to ﬂoating interest rate swaps to hedge the fair value interest rate risk arising where it has borrowed at ﬁxed rates and is hedged in excess of policy targets. (c) Price risk The Group is exposed to equity securities price risk because of investments held by the Group and classiﬁed on the consolidated balance sheet as available for sale. To manage its exposure to certain commodity markets the Group enters commodity future contracts. Such commodity futures are subject to fair value changes which are recognised in the income statement. To manage its price risk arising from investments in equity securities, the Group does not maintain a signiﬁcant balance with any one entity. Diversiﬁcation of the portfolio must be done in accordance with the limits set by the Group. The impact of a 5% increase or decrease in equity indexes across the eurozone countries would not have any signiﬁcant impact on Group operating proﬁt. (d) Liquidity and cash ﬂow risk The Group’s objective is to maintain a balance between the continuity of funding and ﬂexibility 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 ﬁnance 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 ﬁnance 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 €633.9 million of which €260.9 million was undrawn. The weighted average period to maturity of these facilities was 4.8 years. The table below analyses the Group’s ﬁnancial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash ﬂows. Balances due within 12 months equal their carrying balances as the impact of discounting is not signiﬁcant. At 29 December 2007 Borrowings Derivative ﬁnancial instruments Trade and other payables 64 Less than 1 Between 1 Between 2 year €’000 and 2 years €’000 and 5 years €’000 966 3,187 336,663 904 1,633 - 316,047 2,538 - Over 5 years €’000 65,643 - - 340,816 2,537 318,585 65,643 At 30 December 2006 Borrowings Derivative ﬁnancial instruments Trade and other payables 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 7 Less than 1 Between 1 Between 2 year €’000 and 2 years €’000 and 5 years €’000 39,235 3,688 257,893 1,133 903 - 258,749 2,480 - Over 5 years €’000 188,930 472 - 300,816 2,036 261,229 189,402 The table below analyses the Group’s derivative ﬁnancial instruments which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash ﬂows. Balances due within 12 months equal their carrying balances as the impact of discounting is not signiﬁcant. At 29 December 2007 Less than 1 Between 1 Between 2 year €’000 and 2 years €’000 and 5 years €’000 Over 5 years €’000 Forward foreign exchange contracts - cash ﬂow hedges Inﬂow 2,872 - - - At 30 December 2006 Less than 1 Between 1 Between 2 year €’000 and 2 years €’000 and 5 years €’000 Over 5 years €’000 Forward foreign exchange contracts - cash ﬂow hedges Inﬂow 1,832 - - - (e) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative ﬁnancial instruments and deposits with banks and ﬁnancial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and ﬁnancial institutions, only independently rated parties with a minimum credit rating of ‘A’ are accepted. 3.2 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and beneﬁts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to increase or reduce debt. The Group monitors debt capital on the basis of interest cover and debt to EBITDA ratios. At 29 December 2007, the Group’s debt/EDBITDA ratio was 1.5 (2006: 2.0 times), which is deemed by management to be prudent and in line with industry norms. 3.3 Fair value estimation The fair value of ﬁnancial instruments traded in active markets (such as trading and available for sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for ﬁnancial assets held by the Group is the current bid price. The fair value of ﬁnancial instruments that are not traded in an active market (for example, over-the counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash ﬂows, are used to determine fair value for the remaining ﬁnancial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash ﬂows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to the short-term nature of trade receivables. The fair value of ﬁnancial liabilities for disclosure purposes is estimated by discounting the future contractual cash ﬂows at the current market interest rate that is available to the Group for similar ﬁnancial instruments. 65 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 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 deﬁnition, seldom equal the related actual results. The estimates and assumptions that could have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial 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 Seltzer assets, including goodwill of €54.6 million, were tested for impairment using projected cash ﬂows 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 zero percent has been used to estimate cash ﬂow growth between 5 and 10 years. Based on a reduction in projected EBITDA of 10% or an increase in the discount factor used from a 9% to 10%, the Group is satisﬁed that no impairment is required on goodwill across its remaining cash generating units. (b) Income taxes The Group is subject to income tax in numerous jurisdictions. Signiﬁcant 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 ﬁnal 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. Were the actual ﬁnal outcome of these matters to differ by 10% from management’s estimates, the Group would need to revise its tax liabilities by approximately €1 million. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁt 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 proﬁts, 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. An increase in the Group’s effective tax rate by 1% would reduce proﬁt after tax by €0.99 million. (c) Post-employment beneﬁts The Group operates a number of post employment deﬁned beneﬁt plans. The rates of contributions payable, the pension cost and the Group’s total obligation in respect of deﬁned beneﬁt plans is calculated and determined by independent qualiﬁed actuaries and updated at least annually. The Group also has plan assets totalling €382.5 million giving a net pension liability of €114.2 million for the Group. The size of the obligation and cost of the beneﬁts are sensitive to actuarial assumptions. These include demographic assumptions covering mortality and longevity, and economic assumptions covering price inﬂation, beneﬁt and salary increases together with the discount rate used. The Group has reviewed the impact of a change in the discount rate used and concluded that based on the pension deﬁcit at 29 December 2007, an increase in the discount rates applied of 10 basis points across the various deﬁned beneﬁt plans, would have the impact of decreasing the pension deﬁcit for the Group by €8.9 million. (d) Establishing lives for depreciation of property, plant and equipment and intangible assets Long-lived assets comprising primarily property, plant and equipment and intangible assets, represent a signiﬁcant 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 reﬂect 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 signiﬁcant 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 signiﬁcantly depending on the individual changes in assets and the classes of assets impacted. The Group has reviewed the impact of a change in useful lives on land and buildings and a 1 year reduction in useful lives would have a €0.3 million reduction impact on operating proﬁt. The Group has also reviewed the impact of a change in useful lives in plant and equipment and a one year reduction in useful lives would have a €3.1 million reduction impact on operating proﬁt. (e) Fair value of derivatives and other ﬁnancial instruments The fair value of ﬁnancial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. The Group has used discounted cash ﬂow analysis for various available for sale ﬁnancial assets that are not traded in active markets. The carrying amount of available for sale ﬁnancial assets would not be materially different were the discounted rate used in the discounted cash ﬂow analysis to differ by 10% from management’s estimates. 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 7 5. Segment information Primary reporting format – business segments At 29 December 2007 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 30 December 2006 are as follows: 2006 Total gross segment revenue Inter-segment revenue Revenue Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 511,077 (55) 1,186,890 (108,977) 264,492 - 511,022 1,077,913 264,492 - - - 1,962,459 (109,032) 1,853,427 Operating proﬁt 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 Proﬁt before tax Tax Proﬁt for the year The segment results for the year ended 29 December 2007 are as follows: (14,035) 2,842 61,919 4,351 66,270 2007 Total gross segment revenue Inter-segment revenue Revenue Operating proﬁt pre exceptional items Exceptional items Finance income and costs Share of results of joint ventures and associates Proﬁt before tax Tax Proﬁt for the year Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 510,821 (39) 1,529,310 (126,106) 293,034 (453) 510,782 1,403,204 292,581 17,834 (23,463) 85,194 - 12,806 - (5,629) 85,194 12,806 - - - - - - 2,333,165 (126,598) 2,206,567 115,834 (23,463) 92,371 (17,282) 992 76,081 (15,841) 60,240 Inter-segment transfers or transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 67 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 Other segment items included in the income statement for the year ended 30 December 2006 are as follows: 2006 Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 Depreciation Amortisation of intangibles Capital grants released to income statement Restructuring costs - exceptional items 7,989 2,567 (1,127) (3,277) 15,000 1,607 (12) - 2,426 278 (41) - - - - (9,178) 25,415 4,452 (1,180) (12,455) Other segment items included in the income statement for the year ended 29 December 2007 are as follows: 2007 Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 Depreciation Amortisation of intangibles Capital grants released to income statement Restructuring costs - exceptional items 7,378 2,287 (637) (23,463) 17,418 3,740 (67) - 2,450 789 (32) - - - - - 27,246 6,816 (736) (23,463) The segment assets and liabilities at 30 December 2006 and capital expenditure for the year then ended are as follows: 2006 Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 Assets Associates and joint ventures 149,129 - 488,926 - 140,632 - 314,519 69,601 1,093,206 69,601 Total assets Liabilities 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 The segment assets and liabilities at 29 December 2007 and capital expenditure for the year then ended are as follows: 2007 Assets Associates and joint ventures Total assets Liabilities Food Ingredients Agribusiness Consumer and and Foods Nutritionals €’000 €’000 Property Unallocated €’000 €’000 Group €’000 90,795 - 651,291 - 142,139 - 230,968 61,099 1,115,193 61,099 90,795 651,291 142,139 292,067 1,176,292 (62,092) (257,977) (51,120) (570,528) (941,717) Group capital expenditure and acquisitions 3,980 59,542 5,584 878 69,984 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 7 Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, derivatives designated as hedges of future transactions and receivables. Unallocated amounts include deferred taxation, cash, investments and derivatives held for trading or designated as hedges of borrowings. Segment liabilities comprise operating liabilities. Unallocated amounts include items such as taxation, corporate borrowings and related hedging derivatives. 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 Total assets Ireland Rest of Europe USA/other Investment in associates and joint ventures Unallocated assets 2007 €’000 803,363 251,176 1,152,028 2006 €’000 775,514 214,942 862,971 2,206,567 1,853,427 2007 €’000 597,067 12,058 275,099 2006 €’000 471,259 30,382 277,046 884,224 778,687 61,099 230,969 69,601 314,519 Total assets 1,176,292 1,162,807 Total assets are allocated based on where the assets are located. Capital expenditure Ireland Rest of Europe USA/other 2007 €’000 33,591 1,287 35,106 2006 €’000 31,720 799 87,754 69,984 120,273 Capital expenditure, including acquisitions is allocated based on where the assets are located. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 69 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 6. Operating proﬁt The following items have been included in arriving at operating proﬁt: Depreciation of property, plant and equipment (note 14) - Owned assets - Leased assets under ﬁnance leases Proﬁt on disposal of property, plant and equipment 2007 €’000 24,994 2,252 2006 €’000 23,730 1,685 (3,002) (7,531) Repairs and maintenance expenditure on property, plant and equipment 28,459 25,264 Exit from Pigmeat Amortisation of intangible assets (note 15) - Software costs - Other intangible assets Increase in inventories 20,756 - 3,824 2,992 92,053 3,370 1,082 908 Raw materials and consumables used 1,637,623 1,355,389 Trade receivables - impairment charge for bad and doubtful debts Amortisation of government grants received (note 35) Operating lease rentals payable - Plant and machinery - Other Employee beneﬁt expense (note 8) Auditors’ remuneration Research and development costs Net foreign exchange gains Disposal of loan note - The Cheese Company Holdings Limited Other Total operating expenses 297 696 (736) (4,322) 4,561 4,556 3,317 4,715 196,977 184,434 627 599 7,509 6,275 (611) (2,008) - 9,178 91,065 173,534 2,114,196 1,780,315 70 7. Exceptional items Exit from Pigmeat Restructuring cost The Cheese Company Holdings Limited Exceptional tax credit (note 11) Net exceptional item 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 7 Notes (a) (b) 2007 €’000 (20,756) (2,707) - 2006 €’000 - (3,277) (9,178) (23,463) (12,455) 617 12,321 (22,846) (134) (a) Exit from Pigmeat – included in the exceptional charge relating to the Group’s exit from Pigmeat are the following: insurance proceeds received in excess of the carrying value of the assets plus a provision for the loss on disposal to the Management Buy Out (MBO) team, net charge (pre tax) €23.8 million. A gain on the disposal of property relating to the former processing site at Ruskey of €3.1 million was also realised during the year. (b) Restructuring of Consumer Foods operations. Costs include redundancy and asset impairment charges. 8. Employee beneﬁt expense Wages and salaries Termination costs Social security costs Share option and Sharesave Scheme costs Shares awarded under LTIP 2007 Pension costs - deﬁned contribution plans (note 33) Pension costs - deﬁned beneﬁt plans (note 33) Exceptional item - curtailment gain (note 33) Exceptional item - termination costs (note 7(b)) 2007 €’000 169,554 2,877 17,673 377 210 1,024 4,981 2006 €’000 152,358 1,469 17,093 290 - 1,026 6,435 196,696 178,671 (1,843) 2,124 - 5,763 196,977 184,434 The average number of employees in 2007 was 3,993 (2006: 3,926) and is analysed into the following categories: Consumer Foods Food Ingredients and Nutritionals Agribusiness and Property 2007 2006 1,822 1,476 695 3,993 1,894 1,349 683 3,926 71 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 9. Directors’ remuneration The salary, fees and other beneﬁts for each of the Directors during the year were: Executive J Moloney G Meagher K Toland 2007 2006 Non-executive M Walsh L Herlihy V Quinlan J Callaghan H Corbally N Dunphy (note(a)) J Fitzgerald E Fitzpatrick J Gilsenan P Gleeson (note (b)) P Haran C Hill Ml Keane (note (c)) M Keane (note (b)) J Liston M Merrick J Miller (note (d)) W Murphy M Parsons E Power G Stanley (note (d)) 2007 2006 Total 2007 Total 2006 Performance Pension Salary €’000 Fees €’000 bonus €’000 contribution €’000 Other beneﬁts €’000 439 291 302 1,032 988 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 85 41 41 63 19 12 19 19 19 19 59 19 8 19 63 19 - 59 19 19 - 621 573 581 347 463 1,391 761 140 97 105 342 290 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 34 21 6 61 62 - - - - - - - - - - - - - - - - - - - - - - - 1,032 621 1,391 988 573 761 342 290 61 62 2007 Total €’000 1,194 756 876 2,826 85 41 41 63 19 12 19 19 19 19 59 19 8 19 63 19 - 59 19 19 - 621 3,447 2006 Total €’000 927 569 605 2,101 80 38 38 57 17 - 17 17 17 11 57 17 17 11 57 17 7 57 17 17 7 573 2,674 (a) Mr N Dunphy was appointed as a Director on 31 May 2007. (b) Mr P Gleeson and Mr M Keane were appointed as Directors on 24 May 2006. (c) Mr Ml Keane resigned as a Director on 31 May 2007. (d) Mr J Miller & Mr G Stanley resigned as Directors on 24 May 2006 Details of Directors’ share options are set out in note 43 to the ﬁnancial 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. 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 7 The pension beneﬁts of each of the executive Directors during the year were as follows: Transfer value of increase in accrued pension €’ 000 Annual pension accrued in 2007 in excess of inﬂation €’ 000 Total annual accrued pension at 29 December 2007 €’ 000 - 359 149 508 624 - 16 14 30 40 J Moloney G Meagher K Toland 2007 2006 10. Finance income and costs (a) Finance income Interest income (b) Finance costs Interest expense - Bank borrowings repayable within ﬁve years Interest cost on deferred consideration - - Finance lease costs - - - Fair value adjustment of borrowings attributable to interest rate risk Interest rate swaps, transfer from equity Interest rate swaps, fair value hedges Finance cost of preference shares Total ﬁnance costs 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 32) Pre exceptional tax charge Exceptional tax credit 268 216 79 563 513 2006 €’000 4,883 2006 €’000 (16,265) - (380) 1,169 (4,242) 4,242 (15,476) (3,442) 2007 €’000 4,813 2007 €’000 (19,084) (450) (272) 1,401 676 (676) (18,405) (3,690) (22,095) (18,918) 2007 €’000 7,284 (100) 7,184 6,338 327 6,665 13,849 2,609 2006 €’000 3,080 238 3,318 1,035 (46) 989 4,307 3,663 16,458 (617) 7,970 (12,321) 15,841 (4,351) 73 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (i) The pre exceptional deferred tax charge for 2007 includes €0.787 million for the reduction in the value of the Group’s UK deferred tax asset (see (iv) below) due to the decrease in the UK corporation tax rate from 30% to 28%, with effect from 1 April 2008. (ii) Exit from meat processing: the sale during 2007 of the former processing site at Ruskey resulted in an exceptional current tax charge of €0.481 million. Tax on the insurance settlement agreed following the destruction by ﬁre in August 2007 of processing assets at the Edenderry plant, and the tax effects of the Group’s decision to dispose of the Pigmeat business to its management team, resulted in an exceptional corporation tax charge of €1.734 million and a deferred tax credit of €2.554 million. (iii) Also, in 2007, the restructuring provision in the Consumer Foods division resulted in an exceptional corporation tax credit of €0.240 million and a deferred tax credit of €0.038 million. (iv) In the prior year 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, was recognised in the 2006 ﬁnancial statements. Also, in 2006, a restructuring provision in the Pigmeat division resulted in a corporation tax credit of €0.699 million and a deferred tax charge of €0.489 million. The tax credits in 2007 and 2006, by virtue of nature and size, have been separately disclosed as an exceptional credit in the ﬁnancial statements. The tax on the Group’s proﬁt before tax differs from the theoretical amount that would arise using the corporation tax rate in Ireland, as follows: Proﬁt before tax Tax calculated at Irish rate of 12.5% (2006: 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 proﬁts of joint ventures and associates shown in proﬁt before tax Expenses not deductible for tax purposes and other differences Tax charge 2007 €’000 2006 €’000 76,081 61,919 9,510 (1,176) 7,359 - 57 (124) 215 7,740 (448) 2,489 (11,508) (58) (355) (2,211) 15,841 (4,351) Details of deferred tax charged or credited directly to equity during the year are outlined in note 32. 12. Earnings per share Basic Basic earnings per share is calculated by dividing the net proﬁt 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 27). Proﬁt attributable to equity holders of the Company 2007 €’000 59,833 2006 €’000 65,934 Weighted average number of ordinary shares in issue 293,012,540 292,958,667 Basic earnings per share (cent per share) 20.42 22.51 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 7 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. Weighted average number of ordinary shares in issue Adjustments for share options 2007 €’000 293,012,540 1,110,557 2006 €’000 292,958,667 480,072 Adjusted weighted average number of ordinary shares 294,123,097 293,438,739 Diluted earnings per share (cent per share) 20.34 22.47 At year end, options over 491,000 ordinary shares could potentially dilute basic earnings per share in the future but are anti- dilutive during the year ended 29 December 2007. Adjusted Proﬁt attributable to equity holders of the Company Exceptional items Adjusted earnings per share (cent per share) Diluted adjusted earnings per share (cent per share) 2007 €’000 59,833 22,846 82,679 28.22 28.11 2006 €’000 65,934 134 66,068 22.55 22.52 13. Dividends The dividends paid in 2007 and 2006 were €17.3 million (5.91 cent per share) and €16.5 million (5.62 cent per share) respectively. On 3 October 2007 an interim dividend of 2.50 cent per share on the ordinary shares amounting to €7.33 million was paid to shareholders on the register of members as at 14 September 2007. The Directors have recommended the payment of a ﬁnal dividend of 3.58 cent per share on the ordinary shares which amounts to €10.5 million. Subject to shareholders approval this dividend will be paid on Tuesday, 20 May 2008 to shareholders on the register of members as at Friday, 25 April 2008, the record date. These ﬁnancial statements do not reﬂect this ﬁnal dividend payable. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 75 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 14. Property, plant and equipment – Group Year ended 30 December 2006 Opening net book amount Exchange differences Acquisition of subsidiaries Additions Disposals Reclassiﬁcation Depreciation charge Closing net book amount At 30 December 2006 Cost Accumulated depreciation Land and Plant and Motor buildings €’000 equipment €’000 vehicles €’000 Total €’000 141,634 (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) Net book amount 139,000 195,375 777 335,152 Year ended 29 December 2007 Opening net book amount Exchange differences Acquisition of subsidiaries (note 41) Additions Disposals Reclassiﬁcation Transfer to disposal group held for sale Depreciation charge Closing net book amount At 29 December 2007 Cost Accumulated depreciation 139,000 (3,382) 1,849 9,117 (9,426) - (20,649) (4,922) 195,375 (7,218) 1,455 41,816 (6,801) 266 (16,681) (21,747) 777 (34) 278 392 (117) - - (577) 335,152 (10,634) 3,582 51,325 (16,344) 266 (37,330) (27,246) 111,587 186,465 719 298,771 167,604 (56,017) 523,626 (337,161) 18,463 (17,744) 709,693 (410,922) Net book amount 111,587 186,465 719 298,771 Depreciation expense of €27,245,814 (2006: €25,415,366) has been charged to cost of sales €24,483,735 (2006: €22,647,360), to distribution costs €1,101,849 (2006: €2,053,075) and to administration expenses €1,660,230 (2006: €714,931). Leased assets, comprising plant and equipment, included in the table above, where the Group is a lessee under a ﬁnance lease, comprise as follows: Cost - capitalised ﬁnance leases Accumulated depreciation Net book amount 2007 €’000 43,976 (27,250) 2006 €’000 43,976 (24,998) 16,726 18,978 Operating lease rentals amounting to €9,116,980 (2006: €8,031,578) are included in the income statement. Included in the cost of plant and equipment is an amount of €24,780,022 (2006: €4,652,730) incurred in respect of assets under construction. Insurance proceeds received or receivable as compensation for property, plant and equipment that was damaged or impaired amounted to €21.7 million. Borrowing costs incurred on signiﬁcant capital projects are capitalised. The amount capitalised, using the Group’s incremental cost of borrowing, amounted to nil in 2007 (2006: €517,000). Capitalised borrowing costs will be depreciated to the income statement and will be deducted in determining taxable proﬁt over the life of the underlying asset. 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 7 15. Intangible assets Year ended 30 December 2006 Opening net book amount Exchange differences Additions Acquisition of subsidiaries Amortisation Other Development Goodwill €’000 intangibles €’000 Software €’000 24,592 (1,780) 172 62,148 - 10,168 (254) 300 16,589 (868) 21,378 (355) 6,459 - (3,370) costs €’000 1,825 (135) 2,069 - (214) Total €’000 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 Year ended 29 December 2007 Opening net book amount Exchange differences Additions/adjustments re acquisitions Acquisition of subsidiaries (note 41) Reclassiﬁcation Amortisation 85,132 (6,761) 171 6,125 - - 25,935 (1,820) 91 5,545 - (2,363) 24,112 (287) 1,341 - (266) (3,824) 3,545 (286) 1,804 - - (629) 138,724 (9,154) 3,407 11,670 (266) (6,816) Closing net book amount 84,667 27,388 21,076 4,434 137,565 At 29 December 2007 Cost Accumulated amortisation 84,667 - 31,183 (3,795) 41,887 (20,811) 5,277 (843) 163,014 (25,449) Net book amount 84,667 27,388 21,076 4,434 137,565 Goodwill is summarised by segment as follows: At 30 December 2006 Ireland Rest of Europe USA/other At 29 December 2007 Ireland Rest of Europe USA/other Food Ingredients Agribusiness Consumer and Foods Nutritionals €’000 €’000 and Property €’000 5,650 - - 540 16,852 61,399 5,650 78,791 5,462 - - 540 16,367 61,607 691 - - 691 691 - - Total €’000 6,881 16,852 61,399 85,132 6,693 16,367 61,607 5,462 78,514 691 84,667 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 77 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 The recoverable amount of a cash generating unit is determined based on value in use calculations. These calculations use cash ﬂow projections based on ﬁnancial budgets approved by management covering a three year period. Cash ﬂows beyond the three year period are extrapolated using estimated growth rates which are not in excess of forecast inﬂation. A rate of zero percent has been used to estimate cash ﬂow growth between ﬁve and ten years. Key assumptions include management’s estimates of future proﬁtability, capital expenditure requirements and working capital investment. Capital expenditure requirements are based on the Group’s strategic plans and broadly assume that historic investment patterns will be maintained. Working capital requirements are forecast to increase in line with activity. Discount rates used reﬂect speciﬁc 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. In forecasting terminal values, a multiple of seven times EBITDA is generally assumed. 16. Investments in associates At the beginning of the year Share of proﬁt after tax Exchange differences Additions Disposals At the end of the year 2007 Company €’000 2007 Group €’000 2006 Company €’000 1,395 - - - - 10,933 158 (157) - (205) 1,395 - - - - 2006 Group €’000 11,090 66 (142) 367 (448) 1,395 10,729 1,395 10,933 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: 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 2007 Co-operative Animal Health Limited South Eastern Cattle Breeding Society Limited* Malting Company of Ireland Limited South East Port Services Limited Westgate Biological Limited Assets €’000 Liabilities €’000 Revenues €’000 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 - - 19,038 11,321 21,144 Assets €’000 Liabilities €’000 Revenues €’000 7,968 1,851 4,793 7,417 103 5,916 878 2,102 5,175 112 15,098 1,735 3,773 1,451 - 22,132 14,183 22,057 Interest held % 50 57 33.33 49 41.8 Interest held % 50 57 33.3 49 41.8 Proﬁt/ (loss) €’000 155 (8) 6 82 (169) - 66 Proﬁt/ (loss) €’000 (271) 102 310 165 (148) 158 * In accordance with Group accounting policy, South Eastern Cattle Breeding Society Limited is included in the Group result based on the equity method of accounting, as the Group has signiﬁcant inﬂuence over the entity but not control, due to its co-op structure. Further details in relation to principal associates are outlined in note 44. 78 17. Investments in joint ventures At the beginning of the year Share of proﬁt after tax Other reserve movements Deferred tax provision Write-down of investment Exchange differences Additions At the end of 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 7 2007 €’000 58,668 834 (1,925) (3,312) (380) (5,671) 2,156 2006 €’000 59,832 2,776 568 - - (4,514) 6 50,370 58,668 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 Proﬁt after income tax Proportionate interest in joint venture’s commitments A listing and description of interests in signiﬁcant joint ventures is outlined in note 44. 18. Investments 2007 €’000 2006 €’000 100,418 63,819 113,644 50,965 164,237 164,609 53,356 60,511 61,848 44,093 113,867 105,941 50,370 58,668 350,055 (349,221) 241,727 (238,951) 834 2,776 15,700 14,600 At the beginning of the year Exchange differences Disposals/redemption Fair value adjustment Amounts written-off Additions At the end of the year Available Investments for sale Investments Available for sale in subsidiaries investments in subsidiaries investments 2007 Company €’000 510,412 - (27,251) - (27,858) - 2007 Group €’000 2006 Company €’000 12,527 - (37) 17,512 - 87 510,469 - (57) - - - 2006 Group €’000 29,511 376 (17,811) 102 - 349 455,303 30,089 510,412 12,527 There were no disposals or impairment provisions on available for sale investments in 2007 or 2006. 79 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 Investments include the following: Listed securities - Equity securities – eurozone countries Unlisted securities - One51 plc - Irish Dairy Board - Glanbia Enterprise Fund Limited - Moorepark Technology Available Investments for sale Investments Available for sale in subsidiaries investments in subsidiaries investments 2007 Company €’000 2007 Group €’000 2006 Company €’000 2006 Group €’000 1 526 1 864 - - 1,290 - 18,431 9,644 1,290 198 - - 1,290 - 613 9,558 1,290 202 - - Other Group companies 454,012 - 509,121 455,303 30,089 510,412 12,527 The unlisted equity shares in One51 plc are currently traded on an informal ‘grey’ market. These shares are fair valued by reference to published bid prices. Available for sale ﬁnancial assets 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 ﬂows discounted using a rate based on the market interest rate and the risk premium speciﬁc to the unlisted securities. Available for sale investments are classiﬁed 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. All available for sale ﬁnancial assets are euro denominated. 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 42) Amounts due from subsidiary companies Valued added tax Other receivables 2007 Company €’000 2007 Group €’000 2006 Company €’000 2006 Group €’000 - - 157,415 (7,834) - - 142,336 (10,439) - 39 - - 23,984 - - 149,581 29,189 6,757 13,929 - 9,848 6,859 - 1,881 - - - - - 131,897 16,025 3,301 4,929 - 4,725 8,663 24,023 216,163 1,881 169,540 Less non-current portion: loans to related parties - (13,929) - (4,929) 24,023 202,234 1,881 164,611 In 2007, under a debt purchase agreement with a ﬁnancial institution, the Group has transferred credit risk and retained late payment risk on certain trade receivables, amounting to €27.6 million (2006: €24.5 million). The Group has continued to recognise an asset of €515,000 (2006: €557,000), representing the extent of its continuing involvement, and an associated liability of a similar amount. 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 7 The carrying value of receivables are a reasonable approximation of fair value. 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. The Group’s objective is to minimise credit risk by carrying out credit checks where appropriate by the use of credit insurance in certain situations, and by active credit management. Management does not expect any signiﬁcant losses of receivables that have not been provided for. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: Euro US dollar GBP sterling Other 2007 Company €’000 24,023 - - - 2007 Group €’000 2006 Company €’000 106,173 96,497 13,332 161 1,881 - - - 2006 Group €’000 81,497 74,370 10,056 3,617 24,023 216,163 1,881 169,540 Movements on the Group provision for impairment of trade receivables are as follows: At the beginning of the year Provision for receivables impairment Receivables written off during the year as uncollectable Unused amounts reversed At the end of the year 2007 €’000 10,439 859 (1,909) (1,555) 2006 €’000 11,716 1,821 (1,766) (1,332) 7,834 10,439 As of 29 December 2007, trade receivables of €9.1 million (2006: €11.4 million) were impaired. The amount of the provision was €7.8 million (2006: €10.4 million). Up to 3 months 3 to 6 months Over 6 months 2007 €’000 1,094 60 7,992 2006 €’000 1,056 438 9,923 9,146 11,417 As of 29 December 2007, trade receivables of €23.7 million (2006: €30.6 million) were past due but not impaired. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 81 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 20. Inventories Raw materials Finished goods Consumables 2007 €’000 18,071 195,342 11,644 2006 €’000 18,852 111,045 15,261 225,057 145,158 Included in the above are inventories carried at fair value less costs to sell amounting to €3.1 million (2006: €32.7 million). The amounts written off in respect of these inventories were €1.4 million. 21. Cash and cash equivalents Cash at bank and in hand Short-term bank deposits 2007 Company €’000 2007 Group €’000 2006 Company €’000 2006 Group €’000 - - - 62,478 97,341 4,376 - 63,596 195,715 159,819 4,376 259,311 The fair value of cash and cash equivalents are not materially different to the book values. 22. Assets and liabilities classiﬁed as held for sale and included in disposal groups Disposal group Inventory Trade and other receivables Total assets included in disposal group Disposal group Trade and other payables Liabilities included in disposal group 2007 €’000 9,224 11,080 20,304 17,647 17,647 2006 €’000 - - - - - A strategic review of Pigmeat operations was conducted during the year, following which a decision was made to exit these operations. On 19 December 2007 the Group signed non-binding heads of agreement and, following further negotiation, an agreement was signed on 3 March 2008 to sell the Pigmeat operations to the Management Buy Out (“MBO”) team. Assets and liabilities included in disposal groups are stated at lower of cost and fair value less costs to sell. 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 7 23. Reconciliation of changes in equity Notes Share capital €’000 (note 24) Other Retained Minority reserves €’000 (note 25) earnings €’000 (note 26) interest €’000 (note 30) Total €’000 Restated balance at 31 December 2005 97,964 120,192 (100,737) 6,299 123,718 Actuarial gain - deﬁned beneﬁt schemes Deferred tax on pension gain Share of actuarial gain - joint ventures Currency translation differences Fair value adjustment Net income recognised directly in equity Proﬁt 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 Balance at 30 December 2006 Actuarial loss - deﬁned beneﬁt schemes Deferred tax on pension loss Share of actuarial gain - joint ventures Currency translation differences Fair value adjustments Net expense recognised directly in equity Proﬁt for the year Total recognised income for 2007 Change in minority interest in subsidiaries Shares issued Premium on shares issued Cost of share options Discount on options Shares purchased Dividends paid in 2007 33 32 25 25 24 24 28 24 28 33 32 25 25 30 24 24 28 28 27 - - - - - - - - 7 183 - 122 28 - 340 - - - (9,401) 2,734 (6,667) - 36,852 (3,923) 230 - - 33,159 65,934 (6,667) 99,093 - - 199 - (28) - - - - - - (16,472) 171 (16,472) - - - - - - 336 336 - - - - - - - 36,852 (3,923) 230 (9,401) 2,734 26,492 66,270 92,762 7 183 199 122 - (16,472) (15,961) 98,304 113,696 (18,116) 6,635 200,519 - - - - - - - - - 6 161 - 74 (95) - 146 - - - (14,878) 8,578 (6,300) - (4,539) 1,102 230 - - (3,207) 59,833 (6,300) 56,626 - - - 587 (74) - - - - - - - - (17,334) - - - - - - 407 407 (2) - - - - - - (4,539) 1,102 230 (14,878) 8,578 (9,507) 60,240 50,733 (2) 6 161 587 - (95) (17,334) 513 (17,334) (2) (16,677) Balance at 29 December 2007 98,450 107,909 21,176 7,040 234,575 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 83 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 24. Share capital and share premium Company At 31 December 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme At 30 December 2006 Discount on options Shares purchased Issue of shares - option scheme Share Number of Ordinary premium shares (thousands) shares €’000 Company €’000 293,116 - - 123 17,587 - - 7 436,183 - - 183 293,239 - 17,594 - 436,366 - 108 6 161 Own shares €’000 (538) 122 28 - (388) 74 (95) - Total Company €’000 453,232 122 28 190 453,572 74 (95) 167 At 29 December 2007 293,347 17,600 436,527 (409) 453,718 Group At 31 December 2005 Sharesave Scheme - options exercised Sharesave Scheme - discount on options Issue of shares - option scheme At 30 December 2006 Discount on options Shares purchased Issue of shares - option scheme Share Number of Ordinary premium shares (thousands) shares €’000 Group €’000 293,116 - - 123 293,239 - - 108 17,587 - - 7 17,594 - - 6 80,915 - - 183 81,098 - - 161 Own shares €’000 (538) 122 28 - (388) 74 (95) - Total Group €’000 97,964 122 28 190 98,304 74 (95) 167 At 29 December 2007 293,347 17,600 81,259 (409) 98,450 The total authorised number of ordinary shares is 306 million shares (2006: 306 million shares) with a par value of €0.06 per share (2006: €0.06 per share). All issued shares are fully paid. 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 price in € Number of options per share 2.39 2,734,000 166,000 4.03 (108,000) 1.55 - - 2007 2006 2006 2007 Average exercise Average exercise price in € per share 2.41 2.87 1.55 3.23 Number of options 3,007,000 50,000 (123,000) (200,000) At the end of the year 2.52 2,792,000 2.39 2,734,000 84 Expiry date in � 2008 2008 2012 2013 2014 2014 2016 2017 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 7 Exercise price € 2007 Number 2006 Number Stg£2.90 4.25 1.55 1.90 2.73 2.47 2.87 4.03 10,000 315,000 961,000 160,000 1,030,000 100,000 50,000 166,000 10,000 315,000 1,069,000 160,000 1,030,000 100,000 50,000 - 2,792,000 2,734,000 Total options over 2,467,000 (2006: 2,409,000) ordinary shares were outstanding at 29 December 2007 under the 2002 Long Term Incentive Plan (“LTIP”), at prices ranging between €1.55 and €4.03. 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 134,600 (2006: 146,900) 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 27 to the ﬁnancial statements, the Employee Share Trust held 234,190 (2006: 262,503) ordinary shares at 29 December 2007. The dividend rights in respect of these shares have been waived, save 0.001 pence per share. 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 2002 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. Long Term Incentive Plan 2007 (“The 2007 LTIP”) In August 2007, arising from the review of the Group’s compensation arrangements for executive Directors and senior managers, the Directors approved the introduction of a 2007 LTIP for selected senior managers (other than directors) in order to further align the interests of such senior managers with those of shareholders. Awards outstanding under the Company’s 2007 LTIP as at 29 December 2007 amounted to 183,500 ordinary shares (2006: nil). The 2007 LTIP is tied 50% to achievement of targeted EPS growth and 50% to Total Shareholder Return (TSR). The TSR element is assessed against a group of leading peer companies and the EPS element is measured against pre-set targeted adjusted EPS growth criteria for the Group. The maximum award under the 2007 LTIP is 115% of base salary per annum in the form of conditional shares and the vesting period is three years. Shares awarded under the Group’s 2007 LTIP are equity settled share based payments as deﬁned in IFRS 2 Share Based Payments. The IFRS requires that a recognised valuation methodology be employed to determine the fair value of shares awarded and stipulates that this methodology should be consistent with methodologies used for pricing of ﬁnancial instruments. The expense of €209,840 reported in the Group income statement has been arrived at through applying a Monte Carlo simulation technique to model the combination of market and non-market based performance conditions of the plan. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 85 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 Impact on Group income statement The total expense is analysed as follows: - Granted in 2007 Share price Period Number at date to earliest of award € release date of shares Fair value € 2007 Long Term Incentive Plan 4.03 3 years 183,500 3.85 Shares awarded under the 2007 LTIP are nil based payments. The 2007 awards will expire in 2011. Expense in Group income statement 2007 €’000 €210 2006 €’000 - The fair value of the shares awarded were determined using a Monte Carlo simulation technique taking account of peer group total share return volatilities and correlations together with the following assumptions: Risk free interest rate Expected volatility Dividend yield 2007 4% 25% 2% 2006 - - - Expected volatility was determined by calculating the historical volatility of the Company’s share price over a period equivalent to the expected life of the option. Impact on Group balance sheet The Glanbia Employees’ Share Trust (“The Trust”) was retained during the year to manage the 2007 Long Term Incentive Plan. The Trust purchased 21,687 shares on 7 December 2007 at a cost of €95,472. As at 29 December 2007, the Trust held 234,190 ordinary shares. These shares were accounted for as own shares in the Group balance sheet. The fair value of share options has been calculated using the Trinomial Model. Options over 2,576,000 (2006: 1,394,000) ordinary shares were exercisable at 29 December 2007 at a weighted average price of €2.42 (2006: €2.18). 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 7 25. Other reserves Capital and mergers reserves €’000 Currency Fair value reserve €’000 reserves €’000 Total €’000 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 available for sale investments - gain in year Deferred tax on fair value adjustments Cost of share options Discount on own shares vested - - - - - - - - - 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 Translation differences on foreign currency net investments Revaluation of interest rate swaps - loss in year Foreign exchange contracts - gain in year Transfers to income statement - Foreign exchange contracts - gain in year - Forward commodity contracts - gain in year - Interest rate swaps - gain in year Revaluation of forward commodity contracts - gain in year Revaluation of available for sale investments - gain in year Deferred tax on fair value adjustments Cost of share options Discount on own shares vested - - - - - - - - - 587 (74) (14,878) - - - - - - - - - - - (3,714) 2,237 (2,445) (594) (1,401) 11 17,512 (3,028) - - (14,878) (3,714) 2,237 (2,445) (594) (1,401) 11 17,512 (3,028) 587 (74) Balance at 29 December 2007 116,934 (22,481) 13,456 107,909 Capital and merger reserves Capital and merger reserves reﬂect (i) Sharesave Scheme through which charges relating to granting of both shares and options are recorded, (ii) shares awarded under the 2007 LTIP scheme accounted for as own shares, (iii) 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 reﬂects 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 reﬂects the effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂow hedges. Amounts accumulated in the fair value reserve are recycled to the income statement in the periods when the hedged item affects proﬁt 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. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 87 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 26. Retained earnings Company retained earnings €’000 Group retained earnings €’000 Group goodwill write-off €’000 Group Total €’000 Restated balance at 31 December 2005 47,437 (7,776) (92,961) (100,737) Actuarial gain - deﬁned beneﬁt schemes Deferred tax on pension gain Share of actuarial gain - joint venture Net income recognised directly in equity Proﬁt for the year Total recognised income for 2006 Dividends paid in 2006 - - - - 16,959 36,852 (3,923) 230 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 31 December 2006 47,924 74,845 (92,961) (18,116) Actuarial loss - deﬁned beneﬁt schemes Deferred tax on pension loss Share of actuarial gain - joint venture Net expense recognised directly in equity (Loss)/proﬁt for the year Total recognised income for 2007 Dividends paid in 2007 - - - - (12,236) (4,539) 1,102 230 (3,207) 59,833 (12,236) 56,626 (17,334) (17,334) - - - - - - - (4,539) 1,102 230 (3,207) 59,833 56,626 (17,334) Balance at 29 December 2007 18,354 114,137 (92,961) 21,176 27. Own shares (Company and Group) At the beginning of the year Options exercised - Sharesave Scheme Discount on options Shares purchased At the end of the year 2007 €’000 (388) - 74 (95) (409) 2006 €’000 (538) 122 28 - (388) The amount included above as own shares relates to 234,190 (2006: 262,503) 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 Halifax EES Trustees International Limited; a Jersey based trustee services company. The shares included in the Employee Trust at 29 December 2007 cost €409,339 and had a market value of €1,074,932 at 29 December 2007. The transfer from capital reserve represents the excess of the purchase price over the option price in respect of 50,000 ordinary shares (2006: 101,982 ordinary shares) on which options vested during the year. Shares purchased represents shares purchased under the 2007 LTIP scheme and are deemed to be own shares in accordance with IAS 32. The purpose of the Sharesave Scheme, which was open to Irish and UK employees, was to provide a tax efﬁcient 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 ﬁxed 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. 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 7 2007 Company €’000 2007 Group €’000 2006 Company €’000 4,674 (74) 587 3,273 (74) 587 4,503 (28) 199 5,187 3,786 4,674 2006 Group €’000 3,102 (28) 199 3,273 28. Capital reserves At the beginning of the year Sharesave Scheme - discount on options Cost of share options and share awards At the end of the year 29. 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 2007 €’000 2006 €’000 355,271 (327,085) 84,962 113,148 355,271 (327,085) 84,962 113,148 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). 30. Minority interests At the beginning of the year Share of proﬁt for the year Reduction in minority interest in subsidiaries Increase in minority interest in subsidiaries At the end of the year 31. Borrowings Current Bank overdrafts Cumulative redeemable preference shares Finance lease liabilities Non-current Bank borrowings Cumulative redeemable preference shares Finance lease liabilities Total borrowings 2007 €’000 6,635 407 (2) - 7,040 2007 Company €’000 2007 Group €’000 2006 Company €’000 1,928 - - 1,928 - - 966 966 - - - - 309,548 63,487 5,993 379,028 1,928 379,994 - - - - - - - - - 2006 €’000 6,299 336 (1) 1 6,635 2006 Group €’000 - 38,184 1,051 39,235 437,708 - 6,862 444,570 483,805 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. 89 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years Over 5 years 2007 €’000 904 312,481 65,643 2006 €’000 1,133 254,507 188,930 379,028 444,570 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 to 12 months Between 2 and 5 years Over 5 years 2007 €’000 119,645 - 190,000 70,349 2006 €’000 247,924 38,184 - 197,697 379,994 483,805 The effective interest rates at the balance sheet date, were as follows: EUR GBP USD CAD 2007 2006 2007 2006 2007 2006 2007 2006 Bank overdrafts Bank borrowings 5.47% 4.46% 4.29% 4.41% 6.10% 6.81% 5.60% 5.89% 9.25% 4.97% 10.25% 5.95% 7.25% 5.50% n/a n/a The carrying amounts and fair values of non-current borrowings are as follows: Non-current borrowings 379,028 444,570 372,772 441,310 The carrying amounts of the Group’s total borrowings are denominated in the following currencies: Net carrying 2007 €’000 amount 2006 €’000 Estimated fair values 2006 €’000 2007 €’000 2007 €’000 278,204 6,958 87,145 7,687 2006 €’000 271,362 81,614 130,829 - 379,994 483,805 Euro GBP sterling US dollar Canadian dollars 90 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 ﬁnance charges on ﬁnance leases Present value of ﬁnance lease liabilities The present value of ﬁnance lease liabilities is as follows: 12 months or less Between 1 and 2 years Between 2 and 5 years Over 5 years 32. Deferred income taxes 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 7 2007 €’000 2006 €’000 16,785 244,122 17,501 120,770 260,907 138,271 2007 €’000 1,240 1,143 3,430 2,286 2006 €’000 1,360 1,143 3,430 3,429 8,099 (1,140) 9,362 (1,449) 6,959 7,913 2007 €’000 966 904 2,933 2,156 6,959 2006 €’000 1,051 869 2,821 3,172 7,913 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 ﬁscal 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 Income statement - pre exceptional charge (note 11) Income statement - exceptional credit Acquisition of subsidiary and purchase of intellectual property Deferred tax charged to the fair value reserve (note 25) Deferred tax (credit)/charge relating to the actuarial gain/(loss) in the year Exchange differences At the end of the year 2007 €’000 2006 €’000 (21,672) (23,923) 37,587 38,611 15,915 14,688 2007 €’000 2006 €’000 14,688 2,609 (2,592) 462 3,028 (1,102) (1,178) 18,602 3,663 (11,622) 1,330 695 3,923 (1,903) 15,915 14,688 91 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 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 Deferred tax Fair value development depreciation €’000 gains €’000 costs €’000 At 31 December 2005 Charged/(credited) to income statement Charged against equity (note 25) Acquisition of subsidiaries and intellectual property Exchange differences At 30 December 2006 (Credited)/charged to income statement Charged against equity (note 25) Acquisition of subsidiaries and intellectual property Exchange differences 29,742 5,000 - - (1,881) 32,861 (4,230) - - (1,978) 210 - 695 - - 905 - 3,028 - - Other €’000 4,291 (1,303) - 1,330 151 Total €’000 34,471 3,873 695 1,330 (1,758) 228 176 - - (28) 376 4,469 38,611 209 - - (53) 1,695 - 462 (157) (2,326) 3,028 462 (2,188) At 29 December 2007 26,653 3,933 532 6,469 37,587 Deferred tax assets At 31 December 2005 Charged/(credited) to income statement Charged against equity Exchange differences At 30 December 2006 Charged to income statement Charged against equity Exchange differences At 29 December 2007 Retirement Impairment obligations €’000 of assets €’000 Tax losses €’000 Other €’000 Total €’000 (15,869) 279 3,923 - (11,667) 1,570 (1,102) - (11,199) - - - - - - - - - - (12,111) - (145) (12,256) 773 - 1,010 (10,473) - - - - - - - - - (15,869) (11,832) 3,923 (145) (23,923) 2,343 (1,102) 1,010 (21,672) The deferred tax charged/(credited) to equity during the year is as follows: Fair value reserve in equity - Available for sale investments - Hedging reserve Impact of increase in retirement beneﬁt obligations 2007 €’000 3,503 (475) (1,102) 1,926 2006 €’000 20 675 3,923 4,618 The decrease in the retirement beneﬁt 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 beneﬁt through future taxable proﬁts is probable. Deferred tax assets are recognised for tax losses carry forwards to the extent that realisation of the related tax beneﬁt through the future taxable proﬁts is probable. The Group has unrecognised tax losses of €20.7 million (2006: €25.9 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. 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 7 33. Retirement beneﬁt obligations Pension beneﬁts The Group operates a number of deﬁned beneﬁt and deﬁned contribution schemes which provide retirement and death beneﬁts for the majority of employees. The schemes are funded through separate trustee controlled funds. The contributions paid to the deﬁned beneﬁt schemes are in accordance with the advice of professionally qualiﬁed 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 2007 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 do not include the Company’s ordinary shares. The amounts recognised in the income statement are as follows: Service cost - current Service cost - past Interest cost Expected return on plan assets Curtailment Exceptional item - curtailment gain (note 7(a)) Deﬁned contribution The actual return on plan assets was a loss of €9.3 million (2006: €31.7 million gain). 2007 €’000 2006 €’000 (496,769) 382,521 (501,473) 376,585 (114,248) (124,888) 2007 €’000 2006 €’000 (9,315) - (18,885) 23,219 - (4,981) 1,843 (10,176) (375) (17,266) 20,100 1,282 (6,435) - (3,138) (6,435) (1,024) (1,026) w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 93 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 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 Total expense Actuarial (loss)/gain - 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 Current service cost Past service cost Interest cost Actuarial gains/(losses) - shown in equity - Experience losses - Change in assumptions Contributions by plan participants Curtailments Beneﬁts paid At the end of the year 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 (losses)/gains shown in equity Contributions by plan participants Contributions by employer Curtailments Beneﬁts paid At the end of the year The principal actuarial assumptions used were as follows: 2007 €’000 2006 €’000 (124,888) 2,161 1,230 (3,138) (4,539) 14,926 (165,016) (825) (614) (6,435) 36,852 11,150 (114,248) (124,888) 2007 €’000 2006 €’000 (501,473) 7,910 (18,787) (9,315) - (18,885) (7,160) 35,165 (4,147) 1,843 18,080 (503,845) (2,180) (4,967) (10,176) (375) (17,266) (12,651) 37,928 (4,382) 3,670 12,771 (496,769) (501,473) 2007 €’000 2006 €’000 376,585 (5,751) 20,017 23,219 (32,542) 4,147 14,926 - (18,080) 338,829 1,355 4,353 20,100 11,575 4,382 11,150 (2,388) (12,771) 382,521 376,585 2007 2006 IRL UK IRL UK 5.5% 6.0% 4.7% 5.3%-5.4% 8.5% 5.0% 5.5% 4.0% 8.1% 4.5%-5.3% 5.9%-7.0% 4.2% 2.5%-3.5% 2.25%-3.25% 8.5% 4.7% 7.0% 3.5% 7.5%-8.0% 4.5%-4.62% 4.0%-7.0% 3.75% 2.25%-3.5% 2.25%-3.25% Discount rate Expected return on plan assets - Equities - Bonds - Other Future salary increases Future pension increases 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 7 2007 €’000 2006 €’000 Actuarial losses/(gains) recognised in the statement of recognised income and expense 4,539 (36,852) Cumulative actuarial losses recognised in the statement of recognised income and expense 55,745 51,206 Plan assets are comprised as follows: Equity Bonds Other 2007 €’000 212,063 95,357 75,101 2006 €’000 244,240 92,125 40,220 % 55 25 20 % 65 24 11 382,521 100 376,585 100 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 ﬁxed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property reﬂect long-term real rates of return experienced in the respective markets. Expected contributions to post-employment beneﬁt plans for the year ending 27 December 2008 will be broadly in line with 2007 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 an active member on retiring at age 65: Male Female At the end of the year Present value of deﬁned beneﬁt obligations Fair value of plan assets Deﬁcit Irish mortality UK mortality rates 18.9 21.9 rates 20.8 23.9 2007 €’000 2006 €’000 2005 €’000 2004 €’000 (496,769) 382,521 (501,473) 376,585 (503,845) 338,829 (412,052) 285,376 (114,248) (124,888) (165,016) (126,676) Experience adjustments on plan liabilities (7,160) (12,651) (2,037) (6,341) Experience adjustments on plan assets (32,542) 11,575 28,383 5,911 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 95 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 34. Provisions for other liabilities and charges At 30 December 2006 Charged to the consolidated income statement - Additional provisions Net amounts (credited)/charged to provisions Exchange differences At 29 December 2007 Non-current Current Restructuring €’000 UK pension €’000 Other €’000 Total €’000 7,110 5,336 24,948 37,395 4,427 (5,253) - - (1,026) (465) - 1,035 (174) 4,427 (5,244) (640) 6,284 3,845 25,809 35,938 - 6,284 3,845 - 9,815 15,994 13,660 22,278 6,284 3,845 25,809 35,938 (a) The restructuring provision relates primarily to exit from Pigmeat operations and rationalisation within Consumer Foods operations. This provision is expected to be fully utilised during the ﬁrst half of 2008. (b) The UK pension provision relates to administration and certain costs associated with pension schemes relating to businesses disposed of in prior years. This provision is expected to be fully utilised within three years. (c) Included in ‘Other’ above are provisions in respect of property lease commitments, deferred consideration in respect of recent acquisitions, insurance and certain legal claims pending against the Group. It is expected that €16.0 million of this provision will be utilised in 2008, with the balance being utilised over a further ﬁve year period. 35. Capital grants At 30 December 2006 Receivable for year In acquired subsidiaries Currency translation adjustment Transfer to disposal group held for sale Released to income statement At 29 December 2007 36. Trade and other payables Trade payables Amounts due to associates and joint ventures Amounts due to other related parties (note 42) Amounts due to subsidiary companies PAYE and PRSI Accrued expenses Other payables 2007 €’000 10,660 1,399 45 (19) (7,814) (736) 2006 €’000 14,855 123 - 4 - (4,322) 3,535 10,660 2007 Company €’000 2007 Group €’000 2006 Company €’000 - - - - - 1,534 - 111,785 32,868 930 - 4,016 185,133 1,931 20 - - 10,474 - 1,400 - 2006 Group €’000 96,612 18,669 17 - 3,824 137,419 1,352 1,534 336,663 11,894 257,893 The carrying value of payables are a reasonable approximation of fair value. 96 37. Derivative ﬁnancial instruments Interest rate swaps - cash ﬂow hedges Interest rate swaps - fair value hedges Forward foreign exchange contracts - cash ﬂow hedges Other cash ﬂow hedges Other fair value hedges Total Less non-current portion - Interest rate swaps - cash ﬂow hedges - Interest rate swaps - fair value hedges Current portion 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 7 2007 Assets €‘000 82 1,172 2,980 9 1,510 2007 Liabilities €‘000 (528) (4,738) (108) (39) (1,510) 2006 Assets €‘000 3,593 - 1,843 636 2,799 5,753 (6,923) 8,871 43 720 763 (259) (3,477) 2,095 - (3,736) 2,095 4,990 (3,187) 6,776 2006 Liabilities €‘000 - (4,242) (11) (42) (2,799) (7,094) - (3,406) (3,406) (3,688) Other cash ﬂow hedges and other fair value hedges represent commodity futures. Forward foreign exchange contracts The notional principal amounts of the outstanding foreign exchange contracts at 29 December 2007 are €71.8 million (2006: €58.0 million). Gains and losses recognised in the fair value reserve in equity on forward foreign exchange contracts as of 29 December 2007 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 cashﬂow hedges, at 29 December 2007 were €96.4 million (2006: €248.7 million). The notional principal amounts of the outstanding interest rate swap contracts, qualifying as fair value hedges, at 29 December 2007 were €265.1 million (2006: €272.5 million). At 29 December 2007, the ﬁxed interest rates vary from 3.7900% to 4.3722% (2006: 3.2375% to 4.3300%) and the main ﬂoating rates are set in advance by reference to inter-bank interest rates (4.3% EURIBOR, 4.82875% $LIBOR). Gains and losses recognised in the hedging reserve in equity on interest rate swap contracts as of 29 December 2007 will be continuously released to the income statement until repayment of the bank borrowings. Commodity futures The notional principal amounts of the outstanding commodity futures, qualifying as cash ﬂow hedges and fair value hedges at 29 December 2007 were €1.2 million and €7.6 million (2006: €5.9 million and €48.7 million) respectively. Gains and losses recognised in the fair value reserve on these futures as at 29 December 2007 will be released to the income statement at various dates within one year from the balance sheet date. Financial guarantee contracts In accordance with Group accounting policy, management has reviewed the fair values associated with ﬁnancial guarantee contracts, as deﬁned 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 signiﬁcant. No adjustment has been made to the Glanbia plc company balance sheet to reﬂect fair value of the ﬁnancial guarantee contracts issued in its name. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 97 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 38. Contingent liabilities Company The Company has guaranteed the liabilities of certain subsidiaries in Ireland in respect of any losses or liabilities (as deﬁned in Section 5(c) of the Companies (Amendment) Act, 1986) for the year ended 29 December 2007 and the Directors are of the opinion that no losses will arise thereon. These subsidiaries avail of the exemption from the ﬁling of audited ﬁnancial statements, as permitted by Section 17 of the Companies (Amendment) Act, 1986. Group Bank guarantees, amounting to €7,495,000 (2006: €13,794,000) are outstanding as at 29 December 2007, mainly in respect of payment of EU subsidies. The Group does not expect any material loss to arise from these guarantees. 39. Commitments Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the ﬁnancial statements is as follows: Property, plant and equipment Capital commitments not contracted for amounted to €107.0 million (2006: €76.6 million). 2007 €’000 2006 €’000 19,856 11,787 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 2007 €’000 5,947 14,606 5,868 2006 €’000 4,717 11,418 7,401 26,421 23,536 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 7 40. Cash generated from operations 2007 Company €’000 2007 Group €’000 2006 Company €’000 2006 Group €’000 Proﬁt/(loss) before tax (12,236) 76,081 16,959 61,919 Development costs capitalised Non-cash exceptional - exit from Pigmeat Non-cash - redemption of shares Exceptional loss on The Cheese Company Holdings Limited Share of results of associates and joint ventures Depreciation Amortisation Cost of share options Gain on disposal of investments Pension - credit 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 - 27,858 1,948 - - - - 587 - - - - (1,255) - (8,000) - (1,804) 13,706 - - (992) 27,246 6,816 587 - (1,026) - (3,002) (4,813) 22,095 - (736) - - - - - - - 199 - 57 - (2,125) - (10,508) - (2,069) - - 9,178 (2,842) 25,415 4,452 199 (1,541) (323) - (7,531) (4,883) 18,918 - (4,322) Net proﬁt before changes in working capital 8,902 134,158 4,582 96,570 Change in net working capital - Increase in inventory - Increase in short term receivables - (Decrease)/increase in short term liabilities - Increase/(decrease) in provisions - (22,142) (10,360) - (82,093) (36,615) 68,704 861 - (947) (8,616) - (2,684) (20,208) (11,332) (1,323) Cash generated from operations (23,600) 85,015 (4,981) 61,023 41. Business combinations On 10 September 2007 Glanbia plc acquired a Canadian based nutritional business, Pizzey’s Milling. Glanbia Nutritionals (Canada), Inc. (Pizzey’s Milling), produces and markets nutritional ingredients predominantly derived from ﬂax seed, a primary source of plant based Omega-3 fatty acids. The acquired business contributed revenues of €2.95 million and operating proﬁt of €0.05 million to the Group for the period from 10 September 2007. 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 8,561 7,528 506 16,595 (10,470) 6,125 The goodwill is attributable to the proﬁtability and workforce of the acquired businesses and the beneﬁts associated with the extension of Glanbia’s scale and speciﬁc capabilities to the acquired businesses, synergies and other beneﬁts. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 99 Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 The assets and liabilities arising from the acquisition are as follows: Property, plant and equipment (note 14) Other intangible assets (note 15) Inventories Receivables Payables Net assets acquired Purchase consideration Contingent consideration Cash outﬂow on acquisition Fair value €’000 3,582 5,545 587 943 (187) 10,470 Acquiree’s carrying amount €’000 4,477 313 587 943 (187) 6,133 16,595 (7,528) 9,067 The contingent consideration is dependant on the achievement of a targeted earnings ﬁgure. The fair values assigned to the identiﬁable 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 30 December 2006, the Group acquired the business of Seltzer Companies, Inc., a leading US nutritionals solutions company with strong expertise in the development of customised formulations and the distribution of speciality ingredients for the nutritional supplement, food and pharmaceutical markets. 42. 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 2007 Company €’000 2007 Group €’000 2006 Company €’000 - - - - 3,871 82,543 578 86,992 - - - - - - 11,684 187 4,671 - - - 6,416 11,684 4,858 6,416 2006 Group €’000 3,644 57,549 574 61,767 1,325 5,399 - 6,724 Sales to related parties were carried out on normal commercial terms and conditions. 100 (b) Purchases of goods and services Purchases of goods: - Associates - Joint ventures - Key management Purchases of services: - Joint ventures - Key management - Subsidiaries 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 7 2007 Company €’000 2007 Group €’000 2006 Company €’000 - - - - 12,628 14,221 2,169 29,018 - - - - 2006 Group €’000 10,760 17,326 1,800 29,886 - - 1,702 374,593 4 - - - 1,729 222,781 4 - 1,702 374,597 1,729 222,785 Purchases from related parties were carried out on normal commercial terms and conditions. (c) Key management compensation Salaries and other short-term employee beneﬁts Post-employment beneﬁts (d) Year-end balances arising from sales/purchases of goods/services Receivables from related parties: - Associates - Joint ventures - Key management - Subsidiaries Payables to related parties: - The Society - Associates - Joint ventures - Key management - Subsidiaries 2007 Company €’000 - - - 2007 Group €’000 4,123 582 4,705 2006 Company €’000 - - - 2007 Company €’000 2007 Group €’000 2006 Company €’000 - - - 23,984 42 6,715 88 - 23,984 6,845 - - - - - 930 1,749 31,119 5 - - - - - 10,474 - - - - - - 2006 Group €’000 2,966 487 3,453 2006 Group €’000 237 3,064 14 - 3,315 17 1,068 17,601 - - 33,798 10,474 18,686 101 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (e) Loans to joint ventures Loan to Southwest Cheese Company, LLC Loan to Milk Ventures (UK) Ltd 2007 Company €’000 - - 2007 Group €’000 6,971 6,958 2006 Company €’000 - - 2006 Group €’000 4,929 - On 19 December 2007 the Company signed non-binding heads of agreement with a Management Buy Out team led by Mr. Jim Hanley, Director and Chief Executive of Glanbia Fresh Pork Limited, to acquire the entire Pigmeat business. The transaction was completed on 3 March 2008 for a total consideration of €35.0 million, inclusive of insurance proceeds for the destroyed assets at Edenderry, Co. Offaly. 43. 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: Ordinary shares of €0.06 29/12/2007 31/12/2006 ** 33,708 91,804 21,347 104,593 35,000 7,495 10,390 24,171 50,501 5,842 31,923 7,462 30,029 20,000 15,000 212,327 2,600 230,827 26,344 37,893 23,243 23,708 81,804 21,347 94,593 35,000 3,495 10,390 24,171 50,501 2,842 21,423 7,462 30,029 20,000 15,000 212,327 1,600 230,827 26,344 37,893 23,243 4,593 4,593 (a) Glanbia plc Beneﬁcial Directors M Walsh L Herlihy V Quinlan J Moloney J Callaghan H Corbally N Dunphy J Fitzgerald E Fitzpatrick J Gilsenan P Gleeson P Haran C Hill M Keane J Liston G Meagher M Merrick W Murphy M Parsons E Power K Toland Secretary M Horan * § * * * Executive Director. ** Or at date of appointment if later. § Appointed on 31 May 2007. 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 7 (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 2007 and 2017. Options - Ordinary shares of €0.06 Movements 31/12/2006 during year 29/12/2007 Beneﬁcial Directors J Moloney G Meagher 1988 Share Option Scheme 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 1988 Share Option Scheme 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan K Toland 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 2002 Long Term Incentive Plan 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 at any time up to 2014. [d] Exercisable by Directors between 2010 and 2017. 150,000 290,000 150,000 - 75,000 205,000 75,000 - 164,000 100,000 - - - - 70,000 - - - 48,000 - - 48,000 Exercise price € 4.25 [a] 1.55 [b] [c] 4.03 [d] 2.725 4.25 [a] 1.55 [b] [c] 4.03 [d] 2.725 150,000 290,000 150,000 70,000 75,000 205,000 75,000 48,000 164,000 100,000 48,000 2.725 1.55 [b] [c] 4.03 [d] There were no other changes in the interests of the Directors and Secretary between 29 December 2007 and 22 February 2008. G Meagher, J Moloney and K 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. G 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. J Moloney as a 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. The market price of the ordinary shares as at 29 December 2007 was €4.59 and the range during the year was €3.12 to €5.08. The average price for the year was €3.94. The 1988 Share Option Scheme expired on 31 August 1998. 103 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (c) Directors’ and Secretary’s awards under the 2007 Long Term Incentive Plan Secretary M Horan Initial allocation of Market price Number at shares during in euro on Performance Earliest date Number at 31/12/2006 2007 award date € period of release 29/12/2007 - 11,000 4.03 31/12/06 -02/01/10 March 2010 11,000 Awards under the 2007 Long Term Incentive Plan (“the 2007 LTIP”): This is a long-term share incentive plan under which share awards are granted in the form of a provisional allocation of shares for which no exercise price is payable. The shares are scheduled for release in March 2010 to the extent that the relative Earnings Per Share (EPS) and Total Shareholder Return (TSR) conditions are achieved. The structure of the 2007 LTIP is set out on pages 42 to 43. (d) Glanbia Co-operative Society Limited ‘A’ Ordinary shares of €1 Convertible loan stock units of €0.01269738 ‘C’ shares of €0.01 ‘F’ shares of €0.01 29/12/2007 31/12/2006 29/12/2007 31/12/2006 29/12/2007 31/12/2006 29/12/2007 31/12/2006 ** ** ** ** Beneﬁcial Directors M Walsh L Herlihy V Quinlan J Moloney * H Corbally N Dunphy J Fitzgerald E Fitzpatrick J Gilsenan C Hill M Keane G Meagher * M Merrick W Murphy M Parsons E Power Secretary M Horan 14,374 89,398 9,585 - 5,675 11,633 25,563 24,034 2,844 20,480 6,117 - 1,824 - 7,810 26,300 14,374 89,398 9,585 - 5,675 11,633 25,563 24,034 2,844 20,480 6,117 - 1,824 - 7,810 26,300 154,158 1,209,101 - - 237,665 134,947 397,025 263,957 231,647 - 170,314 - 297,069 - 248,122 258,601 198,691 1,600,438 - - 320,305 176,482 526,823 340,786 289,947 - 224,023 - 395,495 - 304,961 340,976 2,318,428 1,983,609 37,837,394 33,452,288 1,509,000 7,452,304 168,706 234,418 - 7,213,532 7,157,402 4,340,461 84,564 8,500,000 200,000 3,095,071 1,980,360 6,785,305 2,330,185 7,952,304 505,681 260,518 - 8,609,862 7,157,402 4,840,461 84,564 6,500,000 387,464 1,904,610 1,980,360 10,592,198 1,000 1,226 392 - 226 310 376 560 89 283 353 - 173 - 658 493 - - - - - - - - - - - - - - - - - - - - 1,000,000 1,000,000 - - * Executive Director. ** Or at date of appointment if later. There have been no changes in the above interests between 29 December 2007 and 22 February 2008. 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 7 44. Principal subsidiary and associated undertakings (a) Subsidiaries Incorporated and operating in Principal place of business Principal activities Ireland Glanbia Foods Society Limited Ballyragget, Co. Kilkenny and Citywest, Dublin 24 Inch, Co. Wexford and Kilkenny Glanbia Consumer Foods Limited Glanbia Ingredients (Ballyragget) Limited Ballyragget, Co. Kilkenny Virginia, Co. Cavan Glanbia Ingredients (Virginia) Limited Kilkenny Glanbia Nutritionals (Ireland) Limited Kilkenny Glanbia Nutritionals (Europe) Limited Glanbia Nutritionals (Research) Limited Kilkenny Glanbia Nutritionals (Blending) Limited Kilkenny Glanbia Feeds Limited Glanbia Fresh Pork Limited Glanbia Farms Limited Glanbia Estates Limited Avonmore Proteins Limited Glanbia Financial Services Glanbia Investments (Ireland) Limited Glassonby Waterford Foods plc Enniscorthy, Co. Wexford and Portlaoise, Co. Laois Edenderry, Co. Offaly Cavan and Mayo Kilkenny Kilkenny Kilkenny Kilkenny Kilkenny Kilkenny Grassland Fertilizers (Kilkenny) Limited Palmerstown, Co. Kilkenny Palmerstown, Co. Kilkenny D. Walsh & Sons Limited Britain and Northern Ireland Glanbia Feedstuffs Limited Glanbia (UK) Limited Glanbia Holdings Limited Glanbia Investments (UK) Limited Glanbia Nutritionals (UK) Limited Glanbia Foods (NI) Limited Tamworth, Staffordshire Tamworth, Staffordshire Tamworth, Staffordshire Tamworth, Staffordshire Middlesborough Portadown, Co. Armagh Dairying, liquid milk, consumer food products and general trading Fresh dairy products and soups Milk products Milk products Nutritional products Nutritional products Research and development Nutritional products Manufacture of animal feed products Pork and bacon products Pig rearing Property and land dealing Financing Financing Holding company Investment holding Holding company Fertilizers Grain and fertilizers Supply of animal feeds Holding company Holding company Investment holding Sports nutrition products Consumer food products United States Glanbia Inc. Glanbia Foods, Inc. Glanbia Nutritionals, Inc. Seltzer Companies Inc. Canada Delaware Twin Falls, Idaho Monroe, Wisconsin San Diego, California Holding company Milk products Nutritional distribution Nutrient delivery systems Glanbia Nutritionals (Canada), Inc. Angusville, Manitoba Nutrient delivery systems Germany Glanbia Nutritionals Deutschland GmbH Orsingen-Nensingen, Germany Nutrient delivery systems Netherlands Glanbia Foods BV Mexico Moergestel, Netherlands Holding company Group interest % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 73 60 100 100 100 100 100 100 100 100 100 100 100 100 100 Zymalact Mexico S.A. de C.V. Lerma Dairy blending and processed cheese 100 Uruguay Glanbia (Uruguay Exports) S.A. Uruguay Nutritional distribution China Glanbia Nutritionals (Suzhou) Limited Suzhou, China Nutrient delivery systems 100 100 105 w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O Notes to the ﬁnancial statements (continued) for the year ended 29 December 2007 (b) Associates and joint ventures Incorporated in Ireland Dates to which results included Principal place of business Principal activities Co-operative Animal Health Limited * 31 December 2006 Tullow, Co. Carlow Agri chemicals South Eastern Cattle Breeders Society Limited * 31 December 2006 Thurles, Co. Tipperary Cattle breeding Group interest % 50 57 Malting Company of Ireland Limited * 31 October 2007 Togher, Cork Malting 33.33 South East Port Services Limited * 29 December 2007 Kilkenny Port services Nashs Mineral Waters (Marketing) Limited ** 29 December 2007 Newcastle West, Co. Limerick Mineral waters and soft drinks Corman Miloko Ireland Limited ** 31 December 2007 Carrick-on- Suir, Co. Tipperary Dairy spreads Britain and Northern Ireland Glanbia Cheese Limited ** 29 December 2007 Milk Ventures (UK) Limited ** 30 November 2007 Magheralin and Llangefni Stockport Cheese products Holding company Nigeria Nutricima Limited ** 30 November 2007 Nigeria Evaporated and powdered milk United States Southwest Cheese Company, LLC ** 29 December 2007 Clovis, New Mexico Milk products Mexico Conabia de Mexico S.A. de C.V. ** 29 December 2007 Mexico City Dairy ingredients 49 50 45 50 50 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 ﬁled in the Companies Registration Ofﬁce in Ireland. * Associate ** Joint venture 106 Senior management Glanbia Executive Committee The Glanbia Executive Committee chaired by John Moloney, Group Managing Director oversees the development and execution of the Group’s strategy. It also has overall responsibility for achieving business results. John Moloney - See page 32 Geoff Meagher - See page 32 Kevin Toland - See page 32 Siobhan Talbot (B.Comm, FCA) age 44, was appointed Deputy Group Finance Director of Glanbia plc in June 2005. She was formerly Group Secretary and also held a number of senior ﬁnance positions, including Group Operations Controller, since she joined the Group in 1992. Prior to joining the Group she worked with Price Waterhouse Coopers in Dublin and Sydney, Australia. Brian Phelan (B. Comm, FCA) age 41, is Group Human Resources & Operations Development Director of Glanbia plc. Brian was appointed to his Human Resources role in 2004 and his role was expanded in May 2007 to include Operations Development. Prior to this he was Chief Financial Ofﬁcer 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. Jim Bergin (B. Comm, MSc Mngt Practice) age 45, is Chief Executive of Glanbia Ingredients Ireland. 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 and was appointed Chief Executive in March 2005. Colin Gordon (BBS, MBS, FMII) age 46, 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, Managing Director of C&C (Ireland) Ltd. 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 7 CEO’s Ireland Consumer Foods Colin Gordon Agribusiness: Colm Eustace (B. Agr Sc. MBA) age 47, is CEO for Glanbia Agribusiness since November 2005. He joined Agribusiness in 1986 where he has held a number of senior positions. Property: Ger Mullally (B.Agr Sc. MBA) age 50, 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. CEO’s International Global Food Ingredients and Nutritionals Jim Bergin - CEO Food Ingredients Ireland Kevin Toland - CEO and President of Glanbia USA/Global Nutritionals (with responsibility for all USA activities). Food Ingredients USA: 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. Global Nutritionals: Hugh McGuire (M.Sc, Dip Finance) age 37, is CEO of Glanbia Nutritionals - Customised Solutions. 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. Jerry O’Dea (BSC Food Sc., MBA) age 48, is CEO of Glanbia Nutritionals - Ingredient Technologies since February 2008. Prior to this he was President of Glanbia Nutritionals, Inc.,since 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). Wayne Seltzer age 65, is President of Seltzer Companies Inc., which he founded in 1981. He is a graduate of the University of California, Los Angeles and has been with the Group since Glanbia acquired Seltzer in September 2006. Prior to establishing Seltzer Companies he held a senior position at Gillies International. Note: In March 2008 Glanbia sold Glanbia Meats to a Management Buy Out team, led by Jim Hanley, former CEO of the business. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 107 Shareholders Information Dividend payments An interim dividend of 2.50 cent was paid in respect of Ordinary Shares on 3 October 2007. A ﬁnal dividend of 3.58 cent, if approved, will be paid in respect of Ordinary Shares on 20 May 2008. Dividend Withholding Tax (DWT) must be deducted from dividends paid by an Irish resident company, unless a shareholder is entitled to an exemption and has submitted a properly completed exemption form to the Company’s Registrars, Computershare Investor Services (Ireland) Limited. DWT applies to dividends paid by way of cash and is deducted at the standard rate of Income Tax (currently 20%). Non-resident shareholders and certain Irish companies, trusts, pension schemes, investment undertakings and charities may be entitled to claim exemption from DWT and are thereby required to send the relevant form to Computershare Investor Services (Ireland) Limited. Further copies of this form may be obtained from the Company’s Registrars. Shareholders who wish to have their dividend paid direct to a bank account, by electronic funds transfer, should contact the Company’s Registrars to obtain a mandate form. Tax vouchers will be sent to the shareholder’s registered address under this arrangement. Share Price Data Share price as at 29th December Market capitalisation Share price movements during the year: - high - low Shareholdings as at 29th December 2007 Ownership of Ordinary Shares Geographic location Ireland United Kingdom United States Europe Other Holdings 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 Over 100,000 Stock Exchange listings Glanbia plc has primary listings on the Irish and London Stock Exchanges. Financial calendar Announcement of ﬁnal results for 2007 Ex-dividend date Record date for dividend Annual General Meeting Dividend payment date Announcement of interim results for 2008 108 2007 € 4.59 1.346 bn 5.08 3.12 Number of Shares held 241,465,277 51,604,054 147,311 92,688 37,354 2006 € 2.96 868 m 3.13 1.93 % of total 82.32 17.59 0.05 0.03 0.01 293,346,684 100.00 Number of Number of Shareholders 12,194 9,491 1,775 928 87 Shares held 5,145,054 22,166,057 12,576,015 20,516,419 232,943,139 % of total 1.75 7.56 4.29 6.99 79.41 24,475 293,346,684 100.00 5 March 2008 23 April 2008 25 April 2008 14 May 2008 20 May 2008 27 August 2008 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 7 Registrar and Transfer Ofﬁce 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., the Governor & Company of the Bank of Ireland, BNP Paribas S.A., Barclays Bank Ireland PLC, Citibank Group plc, IIB Bank plc, Danske Bank A/S trading as National Irish Bank, 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 Davy Stockbrokers, 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 certiﬁcate or dividend counterfoil. This will allow shareholders to receive communications (interim/annual reports, etc) as soon as they are published and should beneﬁt 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. Website The Group’s website, www.glanbia.com, provides in full the text of the Annual and Interim Reports, trading statements and copies of presentations to analysts and investors. News releases are made available, in the Investor Relations section of the website, immediately after release to the Stock Exchanges. w e i v r e v o s s e n i s u B w e i v e r s s e n i s u B e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l a i c n a n i F n o i t a m r o f n i r e h t O 109 Index Agribusiness & Property Assets and liabilities classiﬁed as held for sale Balance sheet – company Balance sheet - consolidated Board of Directors Borrowings Business combinations Capital grants Capital reserves Cash and cash equivalents Cash ﬂow statement - company Cash ﬂow statement - consolidated Cash generated from operations Chairman’s statement Commitments Consumer Foods Contingent liabilities Corporate social responsibility Critical accounting estimates and assumptions Deferred income taxes Derivative ﬁnancial instruments Directors’ and Secretary’s interests Directors’ Biographies Directors’ remuneration Directors’ statement of corporate governance Dividends Earnings per share Employee beneﬁt expense Exceptional items Executive Committee Finance income and costs Financial risk management Financial statements contents Finance review Food Ingredients & Nutritionals Global footprint General information 14 82 52 50 32 89 99 96 89 82 53 51 99 4 98 12 98 24 66 91 97 102 32 72 37 75 74 71 71 107 73 63 45 26 16 10 54 Income taxes Income statement – consolidated Independent auditors’ report Intangible assets Inventories Investments Investments in associates Investments in joint ventures Joint Ventures & Associates Managing Director’s review Merger reserve – Group Minority interests Notes to the ﬁnancial statements Operating proﬁt Other reserves Our business Our performance Own shares (Company and Group) Principal subsidiary and associated undertakings Property, plant and equipment – Group Provision for other liabilities and charges Reconciliation of changes in equity Related party transactions Retained earnings Retirement beneﬁt obligations Risk and risk management Report of the Directors Segment information Share capital and share premium Shareholders information Statement of recognised income and expense – company Statement of recognised income and expense – consolidated Summary of signiﬁcant accounting policies Trade and other receivables Trade and other payables 73 48 46 77 82 79 78 79 22 6 89 89 54 70 87 2 1 88 105 76 96 83 100 88 93 30 34 67 84 108 53 49 54 80 96 110

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