Hilton Food Group
Annual Report 2015

Plain-text annual report

Annual report and financial statements 2015 plc H i l t o n F o o d G r o u p p l c A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 5 The specialist international retail meat packing business Hilton Food Group plc, the specialist retail meat packing business supplying major international food retailers in thirteen European countries and Australia, announces its results for the 53 weeks ended 3 January 2016. During 2015 Hilton made strong progress in pursuing its growth strategy, including the expansion of the Australian joint venture and the completion of the major UK capacity expansion project. We will continue to look for available opportunities to progressively and profitably expand the scale and scope of our operations as they arise using a business model that has over time proved to be successful, resilient, relevant and internationally transferable. Contents Overview Highlights Where we operate 02 04 Strategic report Chairman’s introduction 08 Chief Executive’s summary 10 11 11 12 13 13 14 15 Strategic objectives Business model Geographical spread Currency translation Culture and people Performance overview Past and future trends Outlook and current trading Performance and financial review 2015 Financial performance Key performance indicators Treasury management Going concern statement Viability statement Forward looking statements 15 16 17 18 20 21 21 21 Risk management and principal risks Corporate and social responsibility report 24 Approval of Strategic report 29 22 Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the financial statements Registered office and advisors 60 60 61 62 63 64 84 Governance Board of Directors Directors’ report Corporate governance statement Report of the Audit Committee Report of the Nomination Committee Report of the Risk Management Committee Directors’ remuneration report Directors’ remuneration policy Annual report on remuneration Statements of Directors’ responsibilities Independent auditors’ report 32 34 36 39 41 42 43 44 49 53 54 01 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Highlights Strong progress 02 Hilton Food Group plc Annual report and financial statements 2015Strategic highlights The investment made to modernise and expand the capacity of our Huntingdon site in the UK, to service increased volumes for Tesco, was completed during 2015. The new production facilities are now fully bedded in, working well and delivering the planned operational efficiencies. The progress of the joint venture with Woolworths in Australia continues to be encouraging. A new dedicated retail packed meat facility, near Melbourne, operated by the joint venture company, commenced production on schedule in September 2015, with the store roll out plan covering Victoria and South Australia now completed. Operating highlights Volume growth of 5.5%, with growth in the UK, Ireland and Holland for Tesco and Albert Heijn with particularly strong Christmas trading, partly offset by continuing pressure on consumer spending in Denmark. Revenue reduced by 0.4% despite the volume gains, reflecting the strengthening of Sterling, which decreased revenue by 7.4%. Operating profit at £29.0m 11.3% ahead of last year (2014: £26.1m) and 20.9% higher on a constant currency basis. Investment expenditure returning to maintenance levels at £13.7m (2014: £43.3m), following completion of the major re-investment programmes undertaken in the UK and Sweden. A free cash inflow of £31.7m (compared to an outflow of £2.1m in 2014) generating net cash balances of £12.7m at the year end, as compared with net debt of £7.7m at end of 2014. Revenue (£m) £1,094.8m -0.4% £981.3m £1,031.0m £1,124.8m £1,099.0m £1,094.8m 2011 2012 2013 2014 2015 Operating profit (£m) £29.0m +11.3% £25.9m £26.0m £25.8m £26.1m £29.0m 2011 2012 2013 2014 2015 Closing net cash/(debt) (£m) A strong ungeared balance sheet providing a firm platform for future expansion. £12.7m £12.7m £4.9m £(5.2)m £(7.7)m £(18.7)m 2011 2012 2013 2013 2014 2015 03 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Where we operate Ireland Location: Drogheda Customer: Tesco Ireland United Kingdom Location: Huntingdon Customer: Tesco UK Sweden Location: Vasteras Customer: ICA Commenced production: 2004 Commenced production 1994 Commenced production: 2004 Netherlands Location: Zaandam Customer: Albert Heijn Denmark Location: Aarhus Customer: Coop Danmark Commenced production: 2000 Commenced production: 2011 Central Europe Location: Tychy, Poland Customers: Ahold Central Europe Rimi Baltics Tesco Central Europe Commenced production: 2006 04 Hilton Food Group plc Annual report and financial statements 2015We are a leading specialist meat packing business supplying major international food retailers Australia Location: Bunbury Customer: Woolworths Commenced joint venture: 2013 Australia Location: Melbourne Customer: Woolworths Commenced production: 2015 05 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Strategic report Chairman’s introduction Chief Executive’s summary Strategic objectives Business model Geographical spread Currency translation Culture and people Performance overview Past and future trends Outlook and current trading Performance and financial review 2015 Financial performance Key performance indicators Treasury management Going concern statement Viability statement Forward looking statements Risk management and principal risks Corporate and social responsibility report Approval of Strategic report 08 10 11 11 12 13 13 14 15 15 16 17 18 20 21 21 21 22 24 29 07 Hilton Food Group plc Annual report and financial statements 2015Chairman’s introduction We have achieved further volume growth despite relatively challenging market conditions in some countries, with strong underlying profit progress. Sir David Naish dl Non-Executive Chairman 08 Hilton Food Group plc Annual report and financial statements 2015Strategic delivery I am pleased to report that continued strong strategic progress was achieved during 2015. A new meat processing facility for Woolworths near Melbourne in Victoria, operated by the joint venture company, commenced production on time in September 2015, with the store roll out plan across Victoria and South Australia now completed. The Board considers that the Group’s progressive dividend policy maintained since flotation remains appropriate, given both the further strategic progress achieved in 2015 and Hilton’s continuing strong level of cash generation. With the proposed final dividend of 1.3p per ordinary share for 2015, total dividends paid in respect of 2015 will have increased by 9.8%, as compared to last year. The major investment program undertaken at the Group’s UK facilities in Huntingdon, involving a significant extension of the site’s processing and packing capacity, the addition of a further production unit and the streamlining and modernisation of the complete facility has been successfully completed, with the new facilities now bedded in and generating improved operational performances more rapidly than previously expected. Group performance and shareholder returns Further volume growth was achieved during 2015, notwithstanding relatively challenging market conditions in some countries. Strong underlying profit progress was achieved despite a material impact on our profitability reported in Sterling from adverse exchange translation movements. The Group’s net income in 2015 at £20.0m was 10.8% ahead of 2014 (£18.1m) and 20.7% higher in constant currency terms. Basic earnings per share at 27.5p were 10% ahead of last year. Hilton continued to generate significant free cash flow during 2015, which enabled the Group to move into a positive £12.7m net cash position by the year end (as compared with net debt of £7.7m at the end of 2014). Over the last two years we have made major new investments to secure the Group’s future growth potential. The principal items of expenditure involved the redevelopment of the Group’s facilities in Huntingdon to enable the planned UK volume increases for Tesco and a re-investment programme at Vasteras in Sweden. Both projects were successfully completed in early 2015, providing additional capacity and delivering considerable improvements in operational efficiency. Our Board The Board is responsible for the long term success of the Group and to achieve this it contains an appropriate mix of skills and depth and a range of practical business experience, which is available to support and guide our management teams across a wide range of countries. After nine years valuable service Chris Marsh has stepped down as a Non-Executive Director and I will be stepping down as Non-Executive Chairman following the forthcoming Annual General Meeting, with Colin Smith assuming this role. We are delighted to welcome Christine Cross and John Worby as new Non-Executive Directors, both of whom will bring a wide range of skills and expertise to our business. I have been privileged to serve on the Board since just before our Company’s flotation in 2007, for the last six years as Non-Executive Chairman. I am pleased to confirm that there is well planned succession in the Group. I will continue to assist the Group on agricultural matters and would like to take this opportunity to thank my colleagues on the Board for their support, counsel and expertise over the six years of my chairmanship. I am confident that under the leadership of Colin Smith and Robert Watson the Group will continue to make excellent progress. Annual General Meeting This year’s AGM will be held at the Old Bridge Hotel, 1 High Street, Huntingdon, Cambridgeshire PE29 3TQ on 25 May 2016 at noon and my colleagues and I very much look forward to seeing those of you who are able to attend. Sir David Naish DL Non-Executive Chairman 30 March 2016 09 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Chief Executive’s summary Hilton’s medium term growth outlook remains encouraging and we expect to make continued progress. Robert Watson obe Chief Executive Officer 10 Hilton Food Group plc Annual report and financial statements 2015Strategic objectives Our strategy is focused on supporting our customers’ brands and their development in their local markets, whilst achieving attractive and sustainable rates of growth in value for our shareholders. This straightforward approach has generated growth over an extended period of time and, with a strong reputation, well invested modern facilities and a robust balance sheet, the Group remains well positioned to achieve continuing progress. Hilton seeks to build long term customer and shareholder value by focusing on: – Growing volumes and extending product ranges supplied and services provided to its existing customers; – Optimising the use of its assets and investing in new technology and capacity expansion as required; – Maintaining a vigilant focus on food safety and integrity and reducing unit costs, while improving product quality and service provision; and – Entering new territories either with new customers or in partnership with our existing customers. We will continue to pursue disciplined geographical expansion, whilst at the same time actively developing, enriching, deepening and expanding the scope of our existing business partnerships, playing a full and proactive role in strongly supporting our customers and the successful development of their brands. Business model Our business model is the means by which we deliver on our strategic objectives. The Hilton business model is proven and sustainable, whilst being relatively simple and straightforward. We operate large scale, extensively automated and robotised meat processing and packing facilities for major international multiple retailers on a dedicated basis. The one exception is in Central Europe, where our facility in Poland supplies more multiple retailers in order to achieve critical mass in terms of volumes supplied and the consequent ability to achieve competitive unit packing costs. Raw material meat is sourced, in close co-operation with our retail partners, from local sources and a wide international base of proven suppliers. It is then processed, packed and delivered to the retailers’ distribution centres or stores. Our plants are highly automated and use advanced robotics for the storage of raw materials and finished products. Developing robotics technology has been extended in recent years both in the production environment and to the sorting of finished products by retailer store order, achieving material supply chain efficiencies for our customers. To ensure our continued competitiveness, we seek to keep ourselves at the forefront of the meat packing industry. We constantly seek to drive further efficiencies, always maintaining a pipeline of clear identifiable cost reduction initiatives and an open minded approach designed to continually challenge the status quo. We consider our modern, very well invested facilities to be a key factor in keeping unit packing costs as low as possible. Over the past twelve years we have invested continuously across all areas of our business, including the sourcing of raw materials, the design of packaging materials, increased efficiency in processing and storage solutions and updating our IT infrastructure. Capital expenditure over this period has totalled over £210m. 11 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Chief Executive’s summary continued The strength of our long term partnerships with our retail customers has been a key driver of our growth since the Group was formed and will continue to underpin the Group’s strategy. Hilton’s business model has proved successful across a range of European countries, appropriately adapted in each case by working in close collaboration with its local customers to meet their specific requirements. Our experience to date continues to indicate that our business model, appropriately adapted, can be successfully transferred to a number of new countries. Geographical spread The Group’s rapid past expansion has been based on its established track record, together with its growing international reputation and experience and the recognised success of the close partnerships it has forged and maintained with successful retail partners. We are an international business and the seven countries in which the Group currently has production facilities, with the dates operations commenced in each country, are set out below: In Europe we have facilities in six countries each run by a local management team enhanced by specialist central leadership, expertise, advice and support. These businesses operate under the terms of five to ten year Long Term Supply Agreements with our retail partners, either on a cost plus or agreed packing rate basis. These contractual arrangements, combined with our customer dedication, serve to maximise achievable volume throughput whilst minimising unit packing costs. In Australia our joint venture company receives a volume related management fee in respect of the facilities it operates on behalf of Woolworths. Under the long term agreements we have in place with our customers the parameters of our revenue are clearly defined. As well as income derived from the supply of retail packed meat products there are also provisions whereby our income can be increased or decreased subject to achievement of certain pre- agreed and pre-defined key performance measures and targets. We are a committed and loyal partner with a continuing record of delivering value through quality products with the highest levels of food safety, traceability and integrity, whilst providing a range of services which enable our customers to evolve and improve their meat supply chain management. Our customer base comprises high quality multiple retailers and our in-depth understanding of our customers’ needs, together with those of their consumers, enables us to play an active role in managing their meat supply chains whilst providing agile solutions to supply chain challenges as they arise. As our customers’ markets change and competition increases, we need to keep a constant focus on the challenges they face so as to be able to put forward flexible solutions, together with continuing increases in efficiency and cost competitiveness. Year 1994 2000 2004 2004 2006 2011 2013 Country United Kingdom Netherlands Ireland Sweden Central Europe Location Huntingdon Zaandam Drogheda Vasteras Tychy, Poland Denmark Australia Aarhus Bunbury and Brisbane (2013), Melbourne (2015) Customers Tesco UK Albert Heijn Tesco Ireland ICA Ahold (2006) Tesco (2007) Rimi (2009) Coop Danmark Woolworths 12 Hilton Food Group plc Annual report and financial statements 2015The facility in Tychy supplies Ahold stores in Czech Republic and Slovakia, Tesco stores in Hungary, Czech Republic, Poland and Slovakia and Rimi stores in Latvia, Lithuania and Estonia. The facility at Zaandam also supplies Albert Heijn stores in Belgium. The joint venture with Woolworths in Australia involves our joint venture company managing Woolworths’ meat processing and packing facilities at Bunbury in Western Australia, Brisbane in Queensland and, from September 2015, a new state of the art meat packing facility near Melbourne, in Victoria. Culture and people To our mind successful businesses are principally about having the right people in the right positions at the right time working together as “one team”, with local management teams empowered, encouraged and advised in specialist areas to enable them to support their local customers. The Group benefits from each of its businesses being part of a larger organisation, which enables them to share best practice solutions, including equipment selection, IT solutions and ways of working along with the collaborative sharing of new learnings, ideas and techniques. Currency translation In 2015 62% of the Group’s turnover was earned in countries outside the United Kingdom, together with 73% of the volumes of meat delivered. Although these percentages remain significant they have declined since last year reflecting the increase achieved in sales and volumes in the UK during 2015 and the decline in the Sterling value of overseas sales. This wide geographical spread increases the Group’s resilience by minimising its reliance on the fortunes of any one individual economy, but makes its results reported in Sterling sensitive to changes in the value of Sterling as compared to the range of overseas currencies in which the Group trades. During 2015 the average exchange rates for the various overseas currencies in which the Group trades have all depreciated significantly against Sterling, compared with the corresponding period in 2014, the Euro by 10.0%, the Danish Krone by 10.0%, the Polish Zloty by 10.0%, the Swedish Krona by 12.4% and the Australian Dollar by 10.2%. We are committed to providing an inclusive working environment where everyone feels valued, respected and able to fulfil their potential. We recognise that people from different backgrounds, countries and experiences can bring benefits to our business. We fully recognise the benefits of gender diversity and details of the gender composition of our staff are set out in our Corporate and social responsibility report. The Group currently employs 2,833 employees in six European countries. Our business model is largely decentralised, with capable, largely self-sufficient management teams running our businesses in each local country. We consider this devolved structure to be a critical success factor, as it achieves very close working relationships with our customers, who benefit from personal, dedicated, flexible and rapid local support. The Board fully understands and appreciates just how much our progress relies on the effort, personal commitment, enthusiasm, enterprise and initiative of our employees. I would like to take this opportunity, on behalf of the Board, to personally thank all of them both for their dedicated efforts during 2015 and their continuing commitment to the Group’s on-going growth and development. 13 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Chief Executive’s summary continued Performance overview Our business comprises three separate operating segments: Central Europe Operating profit of £2.3m (2014: £2.4m) on turnover of £74.1m (2014: £82.2m) Western Europe Operating profit of £32.1m (2014: £27.1m) on turnover of £1,020.7m (2014: £1,016.8m) This operating segment covers the Group’s businesses in the UK, Ireland, Holland, Sweden and Denmark. Volume growth of 5.1% was achieved in 2015, principally reflecting volume growth in the UK, Ireland and Holland, driven mainly by gaining an increased share of our customers’ business in the UK, with the recently expanded meat processing capacity, and the introduction of new product lines in each country. Volumes in Denmark were reduced with consumer spending remaining under continuing pressure and in Sweden volumes remained relatively steady. Turnover grew by only 0.4%, but by 7.7% in constant currency terms. The redevelopment of the Huntingdon site was completed in 2015. This was a complex project involving the re-equipping and re-alignment of the site and the addition of a further production area whilst working around a live production environment with the highest customer service levels needing to be maintained throughout the process. The re-equipping of the Vasteras site in Sweden faced similar challenges. Both projects were executed successfully, with improved operational efficiencies being realised in addition to the capacity expansion. In the UK the operational efficiencies were realised somewhat earlier than predicted and with a lower level of start-up costs. In Central Europe the Group’s meat packing business, based at Tychy in Poland, supplies customers across Central Europe, from Hungary to the Baltics. This multi-customer business supplies Ahold stores in Czech Republic and Slovakia, Tesco stores in Hungary, Czech Republic, Poland and Slovakia and Rimi stores in Latvia, Lithuania and Estonia. Volumes increased by 7.8%, but in very competitive market conditions with consumer down-trading, unfavourable exchange rate movements of 10.0% and lower raw material prices, turnover decreased by 9.7%. Central costs and other Net operating cost £5.4m (2014: £3.4m) This segment includes our share of the management fee earned by our joint venture with Woolworths of £1.2m (2014: £1.3m), start-up and support costs in connection with the joint venture of £1.2m (2014: £0.9m) and central costs of £5.4m (2014: £3.8m). In Australia the Group is involved in a joint venture with Woolworths, under which it earns a fifty per cent share of the agreed management fees charged by the joint venture company to Woolworths for operating certain Woolworths’ meat processing and packing plants, based on the volume of retail packed meat delivered to Woolworths’ stores. The joint venture company is currently responsible for the operation of Woolworths’ Western Australian meat processing centre in Bunbury, its Queensland meat processing centre in Brisbane and the new purpose built retail packing facility near Melbourne in Victoria which started production in September 2015. Start-up costs inevitably peak in the period immediately before a new production facility such as that in Melbourne comes on stream and then subsequently fall away. 14 Hilton Food Group plc Annual report and financial statements 2015Outlook and current trading Hilton’s medium term growth outlook remains encouraging following the successful completion of the UK capacity expansion and site redevelopment project in Huntingdon and the start of production with our Australian joint venture partner at Melbourne. Notwithstanding competitive market conditions, overseas currency fluctuations and pressure on consumer expenditure Hilton is therefore confident of growing its business with continued focus on new product development and range extension. In the early months of 2016 Hilton’s operating performance has been in line with the Board’s expectations. The Group will continue to explore further opportunities for geographical expansion in both domestic and overseas markets and is well placed to capture those opportunities as they arise. Robert Watson obe Chief Executive 30 March 2016 Past and future trends Over recent decades as major retail chains have progressively gained a greater share of the grocery markets in most countries, they have increasingly turned to large scale, centralised meat packing solutions capable of producing private label packed meat products more safely and cost effectively. In doing so, they have rationalised their supply base, achieving lower costs with higher food safety, food integrity, traceability and quality standards. This has allowed supermarket groups to focus on their core business and maximise their return on available retail space whilst addressing consumers’ continuing requirement for quality and value. Grocery retail markets are expected to remain extremely competitive, with continuing pressure on consumer expenditure. The trend towards increased use of centralised meat packing solutions is still continuing, however, albeit at different speeds across the world. This gives rise to a wide range of potential future geographical expansion opportunities for Hilton, but inevitably in a range of different timescales as markets develop and change over time. Within retail markets patterns are continuing to change fairly rapidly, with increased internet based ordering and a growth in the number of “click and collect” facilities. Following pressures on consumer expenditure over a number of years there has been increased use by cost conscious consumers of local convenience stores and discount outlets, to shop more frequently for a reduced overall basket cost per visit and at a wider range of retail outlets. These developments which appear to be structural rather than cyclical will all tend to reinforce the overall trend towards retail packed meat, as this is the meat offering in all these growth areas. 15 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Performance and financial review A robust financial  performance and a strong ungeared balance sheet for potential future expansion. Nigel Majewski Chief Financial Officer 16 Hilton Food Group plc Annual report and financial statements 2015£29.0m operating profit £31.7m free cash flow Group performance Hilton’s financial performance was robust in 2015, despite material headwinds from adverse currency movements, with underlying operating profit 20.9% ahead of last year in constant currency terms. With investment expenditure returning to lower levels, continued strong cash flow generation resulted in a net cash position at the end of the year, compared with a net debt position at the end of 2014.This performance and financial review covers the main highlights of the Group’s financial performance and position in 2015. Basis of preparation The Group is presenting its results for the 53 week period ended 3 January 2016, with comparative information for the 52 week period ended 28 December 2014. The financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). 2015 Financial performance Revenue Volumes grew overall by 5.5% (4.0% on a 52 week basis) with volume increases in the UK, Ireland, Holland and Central Europe, but lower volumes in Denmark. Further details of volume growth by business segment are set out in the Chief Executive’s summary. Revenue fell by 0.4% (1.9% fall on a 52 week basis) to £1,094.8m, as compared to £1,099.0m in 2014, with unfavourable exchange rate movements more than offsetting the volume gains. Operating profit and margin Operating profit, at £29.0m was 11.3% (9.0% on a 52 week basis) above the previous year’s level (2014: £26.1m) and 20.9% higher on a constant currency basis. The operating profit margin in 2015 was 2.6%, as compared with 2.4% in 2014, reflecting the higher operating profit level and the operating profit per kilogram of packed meat sold was 11.9p (11.3p in 2014). Net finance costs Net finance costs, at £1.1m, were slightly above the previous year’s level (2014: £0.9m) with higher borrowings. Interest rates paid have remained at historically low levels, reflecting continuing low LIBOR and other interbank rates, which determine the interest rates on the Group’s principal borrowings. Interest cover in 2015 remained high, but decreased marginally to 28 times, as compared with 30 times in 2014. Taxation The taxation charge for the period was £6.5m (2014: £5.6m). This represented an effective taxation rate of 23.2% compared with 22.4% last year, with a reduced proportion of profits being earned in the lower taxed regimes in which the Group operates. Net income Net income, representing profit for the year attributable to owners of the parent, at £20.0m (2014: £18.1m) was 10.8% (8.4% on a 52 week basis) higher than last year reflecting the increase in operating profit and 20.7% higher in constant currency terms. Earnings per share Basic earnings per share at 27.5p (2014: 25.0p) were 10.0% higher than last year (7.7% on a 52 week basis). Diluted earnings per share were 27.2p (2014: 24.7p). Earnings before interest, taxation, depreciation and amortisation EBITDA increased by 16.2% to £48.4m (2014: £41.7m) reflecting the increase in operating profit together with higher depreciation and amortisation charges. Free cash flow Cash flow remained strong in 2015, with the Group generating a £31.7m free cash inflow before dividends and financing (2014: free cash outflow £2.1m), after incurring capital expenditure of £13.7m. Group borrowings were £40.1m at the end of 2015 and, with net cash balances of £52.8m, this resulted in a closing net cash position of £12.7m, as compared with a net debt level of £7.7m at the end of 2014. At the end of 2015 the Group had undrawn overdraft and loan facilities of £28.3m (2014: £46.5m). A strong ungeared balance sheet gives the Group considerable flexibility for potential future expansion. Dividends The Board aims to maintain a dividend policy that provides a dividend level that grows broadly in line with the underlying earnings of the Group and has recommended a final dividend of 1.3p per ordinary share in respect of 2015. This, together with the first interim dividend of 4.1p per ordinary share paid in November 2015 and the second interim dividend of 9.2p per ordinary share payable in April 2016, represents a 9.8% increase in the full year dividend, as compared with last year. The final dividend, if approved by shareholders, will be paid on 1 July 2016 to shareholders on the register on 3 June 2016 and the shares will be ex dividend on 2 June 2016. 17 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Performance and financial review continued Key performance indicators How we measure our performance against our strategic objectives The Board monitors a range of financial and non-financial key  performance indicators “KPIs” to measure the Group’s performance over time in building shareholder value and achieving the Group’s strategic priorities. The nine headline  “KPI” metrics used by the Board for this purpose, together with our performance over the past two years, is set out below: Financial KPIs* (0.4)% Revenue growth (%) 2014: (2.3)% Definition, method of calculation and analysis Year on year revenue growth expressed as a percentage. The 2015 decrease reflected volume growth of 5.5%, which was more than offset by the impact of unfavourable exchange translation rate movements. 2.6% Operating profit margin  (% turnover) 2014: 2.4% Definition, method of calculation and analysis Operating profit expressed as a percentage of turnover. The increase in 2015 reflected the increased operating profit level. 11.9p/kg Operating profit margin  (pence per kg) 2014: 11.3p/kg Definition, method of calculation and analysis Operating profit per kilogram sold. 18 Hilton Food Group plc Annual report and financial statements 2015£48.4m EBITDA (£m) 2014: £41.7m Definition, method of calculation and analysis Operating profit before depreciation and amortisation. The increase reflected higher underlying operating profits, together with higher depreciation and amortisation charges following the high level of capital expenditure in 2014. £31.7m Free cash flow (£m) 2014: £(2.1)m Definition, method of calculation and analysis Cash inflow before minorities, dividends and financing. The improvement reflected growth in operating cash flows together with the reduction in capital expenditure. Non-financial KPIs* 5.5% Growth in volume of packed meat sales (%) 2014: 3.5%  Definition, method of calculation and analysis Year on year volume growth, expressed as a percentage. 36.2p/kg Employee and labour costs (pence per kilogram) 2014: 39.3p/kg Definition, method of calculation and analysis The decrease reflects efficiency gains, continuing low levels of wage inflation and exchange translation rate movements. n/a Gearing ratio (%) 2014: 18% 99.2% Customer service level (%) 2014: 99.0% Definition, method of calculation and analysis Year end net debt as a percentage of EBITDA. The Group was ungeared at the end of 2015, with a net cash position. Definition, method of calculation and analysis Packs of meat delivered as a % of the orders placed. Little year on year change, with high service levels being maintained throughout the year. In addition, a much wider range of financial and operating KPIs are continuously tracked at business unit level. *2015: 53 weeks, 2014: 52 weeks. 19 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Performance and financial review continued Treasury management Hilton does not engage in any speculative trading in financial instruments and transacts only in relation to its underlying business requirements. The Group’s policy is designed to ensure adequate financial resources are made available as required for the continuing development and growth of its businesses, whilst taking practical steps to reduce exposures to foreign exchange, interest rate fluctuation, credit, pricing and liquidity risks, as described below: Foreign exchange rate movements and country specific risks Whilst the presentational currency of the Group is Sterling, most of its revenues are earned in other currencies, principally the Euro, Swedish Krona, Danish Krone and Australian Dollar. The earnings of the Group’s overseas subsidiaries are translated into Sterling at the average exchange rates for the year and their assets and liabilities at the year end closing rates. Changes in relevant currency parities are monitored on a continuing basis, with the timing of the repatriation of overseas profits by dividend payments and the repayment of any intra-group loans to UK holding companies paying due regard to actual and forecast exchange rate movements. The Group has to date decided not to hedge its foreign exchange rate exposures, but this policy is kept under continuing review and may be reappraised over time as the Group’s geographic spread continues to widen. The Group’s overseas subsidiaries all have natural hedges in place as they, for the most part, buy raw materials, employ people, source services, sell products and arrange funding in their local currencies. As a result the Group’s exposure is in the main limited to its equity investment in each overseas subsidiary and its joint venture. The level of country specific risk currently remains material for many businesses, in terms of the impact of macroeconomic developments, including the impact of austerity programmes and commodity price movements in some countries. The Group sells high quality basic food products, for which there will always be continuing demand, to successful blue chip multiple retailers in developed countries. Hilton has not to date been materially adversely affected by the lengthy recessionary environments seen in some countries, but will keep any future identified country specific risks under continuing review. Interest rate fluctuation risk This risk stems from the fact that the interest rates on the Group’s borrowings are variable, being at set margins over LIBOR and other interbank rates which fluctuate over time. The Board’s policy is to have an interest rate cap on a proportion of this borrowing. The Board will review hedging costs and options should the current low interest rate environment change materially. Customer credit and pricing risks As Hilton’s customers comprise a small number of successful and credit worthy major multiple retailers, the level of credit risk is considered to be insignificant. Historically the incidence of bad debts has been immaterial. Hilton’s pricing is based predominately either on cost plus agreements or agreed packing rates with its customers. Liquidity risk This has for many businesses represented an area of concern over recent years, given the continuing difficult and uncertain economic environment in some countries. Hilton Food Group remains strongly cash generative, has a robust balance sheet and has committed banking facilities for the medium term, sufficient to support its existing business. All bank positions are monitored on a daily basis and capital expenditure above set levels, together with decisions on intra-group dividends, are all approved at Board meetings. All long term debt is arranged centrally and is subject to Board approval. 20 Hilton Food Group plc Annual report and financial statements 2015The Directors’ assessment has been made with reference to the Group’s current position and strategy taking into account the Group’s principal risks and how these are managed, as detailed on pages 22 to 23. The strategy and associated principal risks, which the Directors review at least annually, are incorporated in the three year plan and such related scenario testing as is required. The three year plan makes reasoned assumptions in relation to volume growth based on the position of our customers and expected changes in the macroeconomic environment and retail market conditions, expected changes in raw material meat, packaging and other costs, together with the anticipated level of capital investment required to maintain our facilities at state of the art levels. The achievement of the three year plan is not dependant on any new or expanded financing facilities. Forward looking statements This Strategic report contains forward looking statements that are inevitably subject to risk factors associated with, amongst other things, economic, political and business developments which may occur from time to time across the countries in which the Group operates. It is believed that the expectations reflected in these statements are reasonable based on current knowledge, but all forward looking statements and forecasts are inherently predictive, speculative and involve risk and uncertainty, simply because they relate to events and depend on circumstances that will occur in the future. Nigel Majewski Chief Financial Officer 30 March 2016 Going concern statement The Directors have performed a detailed assessment, including a review of the Group’s budget for the 2016 financial year and its longer term plans, including consideration of the principal risks faced by the Company, as detailed on pages 22 and 23. Following this review, the Directors are satisfied that the Company and the Group have adequate resources to continue to operate and meet its liabilities as they fall due for the foreseeable future, a period considered to be at least 12 months from the date of signing these financial statements. For this reason they continue to adopt the going concern basis for preparing the financial statements. The Group’s bank borrowings are detailed in the financial statements and the principal banking facilities, which support the Group’s existing and contracted new business, are committed, with no renewal required for three years. The Group is in full compliance with all its banking covenants. Future geographical expansion which is not yet contracted, and which is not built into our internal budgets and forecasts, may require additional or extended banking facilities and such future geographical expansion will depend on our ability to negotiate appropriate additional or extended facilities, as and when they are required. The Group’s internal budgets and forward forecasts, which incorporate all reasonably foreseeable changes in trading performance, are regularly reviewed in detail by the Board and show that it will be able to operate within its current banking facilities, taking into account available cash balances, for the foreseeable future. Viability statement In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three years ending in December 2018. A period of three years has been chosen for the purpose of this viability statement as it is aligned with the Group’s three year plan, which is based on the Group’s current customers and does not incorporate the benefits from any potential new contract gains over this period. 21 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Risk management and principal risks Risks and risk management In accordance with provision C.2.1 of the 2014 revision of the UK Corporate Governance Code the Directors confirm that they have carried out a robust assessment of the principal risks facing the Group, including those which could threaten its business model, future performance, solvency or liquidity. As a leading food processor in a fast moving environment it is critical that the Group identifies, assesses and prioritises its risks. This, together with the adoption of appropriate mitigation actions, enables us to monitor, minimise and control both the probability and potential impact of these risks. How we manage risk Responsibility for risk management across the Group, including the appropriate identification of risks and the effective application of actions designed to mitigate those risks, resides with the Board which believes that a successful risk management framework carefully balances risk and reward, and applies reasoned judgement and consideration of potential likelihood and impact in determining its principal risks. The Group takes a proactive approach to risk management with well-developed structures and range of processes for identifying, assessing, prioritising and mitigating its key risks, as the delivery of our strategy depends on our ability to make sound risk informed decisions. Description of risk The Group is dependent on a small number of customers who can exercise significant buying power and influence when it comes to contractual renewal terms at 5 to 10 year intervals. Its potential impact The Group has a relatively narrow, but expanding, customer base, with sales to subsidiary or associated companies of the Tesco and Ahold groups still comprising the larger part of Hilton’s revenue in 2015. The larger retail chains have over many years increased their market share of meat products in many countries, as customers continue to move away from high street butchers towards one stop convenience shopping in supermarkets. This has increased the buying power of the Group’s customers which in turn increases their negotiating power with the Group, which could enable them to seek better terms over time. Risk mitigation measures and strategies adopted The Group is progressively widening its customer base and its maintained high level of investment in state of the art facilities, which together with management’s continuous focus on reducing costs, allow it to operate very efficiently at very high throughputs and price its products competitively. Hilton operates a decentralised, entrepreneurial business structure, which enables it to work very closely and flexibly with its retail partners in each country, in order to achieve high service levels in terms of orders delivered, delivery times, compliance with product specifications and accuracy of documentation, all backed by an uncompromising focus on food safety, product integrity and traceability assurance. Hilton has long term supply agreements in place with its major customers, with pricing either on a cost plus or agreed packing rate basis. Risk management process and risk appetite All types of risk applicable to the business are regularly reviewed and a formal risk assessment is carried out to highlight key risks to the business and to determine actions that can reasonably and cost effectively be taken to mitigate them. The Group’s Risk Register is compiled through a combination of business unit risk registers and Board input. The Board believes that in carrying out the Group’s businesses it is vital to strike the right balance between an appropriate and comprehensive control environment and encouraging the level of entrepreneurial freedom of action required to seek out and develop new business opportunities, but, however skilfully this balance between risk and reward is struck, the business will always be subject to a number of risks and uncertainties, as illustrated below. Not all the risks listed below are within the Group’s control and others may be unknown or currently considered immaterial, but could turn out to be material in the future. The risks set out in the following table, together with our risk mitigation strategies, should be considered in the context of the Group’s risk management and internal control framework, details of which are set out in the Corporate governance statement. It must be recognised that systems of internal control are designed to manage rather than completely eliminate any identified risks. The most significant risks the Group faces The six most significant business risks that the Group faces, are, as might be expected with an unchanged and relatively straightforward business model, the same as in previous years. These risks, which will continue to affect the Group’s businesses, together with the measures we have adopted to mitigate these risks, are outlined in the table below. This is not intended to constitute an exhaustive analysis of all risks faced by the Group, but rather to highlight those which are the most significant, as viewed from the standpoint of the Group as a whole. 22 Hilton Food Group plc Annual report and financial statements 2015Risk mitigation measures and strategies adopted The Group maintains a flexible global meat supply base, which is progressively widening as it expands and is continuously audited to ensure standards are maintained, so as to have in place a wide range of options should supply disruptions occur. Description of risk Outbreaks of disease and feed contamination affecting livestock and media concerns relating to these and instances of product adulteration can impact the Group’s sales. Its potential impact Reports in the public domain concerning the risks of consuming meat can cause consumer demand for meat to drop significantly in the short to medium term. A food scare similar to the Bovine Spongiform Encephalopathy (“BSE”) scare that took place in 1996 or the much more recent concerns with regard to meat substitution can affect public confidence in red meats. Risk mitigation measures and strategies adopted The Group sources its meat from a trusted raw material supply base, all components of which meet stringent national, international and customer standards. The Group is subject to demanding standards which are independently monitored in every country and reliable product traceability and high welfare standards from the farm to the consumer are integral to the Group’s business model. The Group ensures full traceability from source to packed product across all suppliers. Description of risk Description of risk The Group’s growth potential is dependent on the success of its customers and the growth of their packed meat sales. The Group’s business is reliant on a small number of key personnel and its ability to manage growth and change successfully. Its potential impact Its potential impact The Group is critically dependent on the skills and experience of a small number of senior managers and specialists and as the business develops and expands, the Group’s success will inevitably depend on its ability to attract and retain the necessary calibre of personnel for key positions, both for managing and growing its existing businesses and setting up new ones. Risk mitigation measures and strategies adopted To continue to manage growth successfully, the Group will carefully manage its skill resources and continue to invest in on-the-job training and career development, together with the cost effective management of quality information and control systems, whilst recruiting high quality new employees, as required, to facilitate the Group’s ongoing growth. The continuing growth of Hilton’s business, together with its growing reputation, is facilitating the recruitment of more top class specialists with the key skill sets required both to support our existing individual country business units and manage the Group’s future geographical expansion. Description of risk The Group’s business is dependent on maintaining a wide and flexible global meat supply base operating at standards that can continuously achieve the specifications set by Hilton and its customers. Its potential impact The Group is reliant on its suppliers to provide sufficient volume of products, to the agreed specifications, in the very short lead times required by its customers, with efficient supply chain management being a key business attribute. The Group sources certain of its meat requirements globally. Tariffs, quotas or trade barriers imposed by countries where the Group procures meat, or which they may impose in the future, together with the progress of World Trade Organisation talks and other global trade developments, could materially affect the Group’s international procurement ability but has not done so in recent years. The Group’s products carry the brand labels of the customer to whom packed meat is supplied and it is accordingly dependent on its customers’ success in maintaining or improving consumer perception of their own brand names and packed meat offerings. Risk mitigation measures and strategies adopted The Group plays a very pro-active role in enhancing its customers’ brand values, through providing high quality, competitively priced products, high service levels, continuing product and packaging innovation and category management support. It recognises that quality and traceability assurance are integral to its customers’ brands and works closely with its customers to ensure rigorous quality assurance standards are met. It is continuously measured by its customers across a very wide range of parameters, including delivery time, product specification, product traceability and accuracy of documentation and targets demanding service levels across all these parameters. The Group works closely with its customers to identify continuing improvement opportunities across the supply chain, including enhancing product presentation, extending shelf life and reducing wastage at every stage in the supply chain. Description of risk The progress of the Group’s business is dependent on the macroeconomic environment and levels of consumer spending in the countries in which it operates. Its potential impact No business is immune to difficult economic climates and the consequent pressure on levels of consumer spending, such as those seen over recent years across Europe. Risk mitigation measures and strategies adopted With a sound business model, strong retail partners and a single minded focus on minimising unit packing costs, whilst maintaining high levels of product quality and integrity, the Group has made continued progress over recent difficult economic periods. It expects to be able to continue to make progress, even if the current pressures on consumer spending, as expected, persist in some countries. 23 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Corporate and social responsibility report Hilton Food Group recognises its social, ethical and environmental responsibilities arising from its operations and to the welfare of employees, customers, suppliers and the communities in which we operate. The Group is committed to working in an ethical, open and honest manner to produce products of the highest quality responsibly and sustainably. The philosophies which underpin our policies for the environment, regulatory compliance, health and safety, product quality and integrity and ethical conduct are summarised below. Complete food assurance from farm to fork It is essential that consumers have complete confidence in the meat products they purchase. Hilton has a pivotal role in managing a supply chain which starts on the farm. Oversight of farm and abattoir standards ensures that the meat products we produce are of the highest quality. We recognise that correct product label information is key to gaining consumer trust and that the label correctly describes the provenance of the meat including its species and country of origin. Hilton strives, in partnership with our retail customers, to successfully deliver safe, consistently high quality, convenient and ready to use retail packs of beef, lamb, pork and added value meat products to ensure the highest level of consumer satisfaction. Our products are governed by EU legislation and food safety standards throughout the meat supply chain. Additionally our retail partners, who support the Global Food Safety Initiative, demand the best animal welfare standards, food factory standards and quality systems to enhance their levels of brand integrity. A short and transparent supply chain with full traceability Hilton is committed to ensuring that the supply chain in which we play a significant part is as short as possible. Farm reared animals are slaughtered at abattoirs from whom Hilton sources its meats and our food products are delivered directly to our retail customers for sale in their stores. Our quality systems provide full traceability of all the meat that we use. Flexible local and global meat sourcing As specialist retail meat packers, Hilton can source its primal meat requirements from the most advanced abattoir plants to exacting specifications, ensuring quality and cost effectiveness. Most of our meat is sourced locally within the EU and also from other regions such as New Zealand and South America. Science and technology play a large part in the consistent achievement of meat quality and influence Hilton’s procurement of meat from large and small suppliers. Together with our retail partners we ensure that consumers have the best choice and can select on the basis of provenance, quality and price. Farm standards Good quality meat can only be produced from animals reared and handled to the best animal welfare standards. Freedom from stress is a fundamental requirement not only for ethical and sustainable reasons, but also to achieve consistent meat quality for consumers. Farmers design animal nutrition plans to achieve efficient weight gain and meet consumer preferences on flavour and fat content. It is recognised that the cleanliness of animals presented for slaughter has a direct impact on the reduction of pathogen risks associated with fresh meat. Abattoir standards Abattoir standards contribute significantly to the achievement of consistent meat quality and Hilton works closely with our retail partners to set best in class specifications ensuring humane and effective stunning and control of microbial contamination. Also pH and temperature drop is controlled according to best scientific practice. Meat is matured and boned according to clear and enforced primal specifications that are agreed between Hilton, its retail customers and abattoir suppliers. Hilton develops long term trading partnerships with our suppliers by facilitating achievement of our retail customer requirements through auditing by third party experts and development of sustainable corrective action plans where any non-conformances are identified. We support our suppliers in applying abattoir standards covering factory structure, animal welfare standards, control of contamination through cleaning and disinfection, temperature controls, carcass dressing, boning and packing standards and traceability. Auditing as a means of challenging standards is now expected by consumers together with well established procedures throughout the food chain. 24 Hilton Food Group plc Annual report and financial statements 2015Hilton continually develops and refines testing methods, data collection and reporting particularly in the key area of fresh meat. Samples collected from each delivery are assessed for compliance to microbiological standards and compliance to agreed quality specifications including increasing use of DNA testing. Results are used to assess the performance of suppliers and achieve continuous improvement. Retail packing at Hilton The key factors in ensuring that our retail partners receive products that consistently achieve agreed shelf lives and meet customer expectations are top quality meat from our suppliers, temperature control and high class standards of hygiene. We are proud of our modern specialised meat processing and packing facilities which use state of the art production equipment, including a high degree of automation and use of robotic equipment which minimises handling. Our well trained production operatives are responsible for the quality of Hilton’s retail partners’ products and they are supported by highly qualified and experienced quality assurance and technical teams at each site. Hilton maintains annual third party accreditation through FSSC (Food Safety System Certification) using ISO 22000 and ISO/TS 22002-1 or the latest BRC (British Retail Consortium) Global Standard for Food Safety and we constantly challenge ourselves through cross auditing of hygiene and quality system standards by technical and quality managers from other Hilton sites and additionally our retail customer make frequent visits to our sites, some of which are unannounced. This level of attention is a valuable part of our partnership with our retail customers and gives consumers confidence that Hilton can consistently meet their expectations. Temperature control throughout our storage and production departments is fundamental to the quality of our products and this is centrally controlled with alarm alerts if there is any deviation from specified temperature requirements. Specialised highly trained hygiene teams deep clean our factories every day using the latest technology and these clearly specified procedures are verified using not only trained auditors but also the latest monitoring equipment. All staff and visitors can only enter Hilton production facilities wearing specified personal protective clothing and by passing through barrier protected hand washing and sanitising facilities. The effectiveness of these entrance procedures is routinely verified using hand swabbing checks. Graduate recruitment is fundamental to Hilton’s future. Our training programme includes completion of a Masters Degree in Food Science following which our trained graduates are placed into key management roles. We maintain strong links with academia and technological advances including Campden BRI, Danish Meat Research Institute, British Meat Processors Association and Teagasc Ireland and through attendance at the annual International Conference of Meat Science and Technology. Partnerships for growth We forge partnerships across all aspects of our supply chain to enable us to strengthen our position as one of the leading global Business to Business food companies. Our core competency has always been building strong and productive partnerships with our retail customers in each geographical zone we are active in to supply high quality products at the right price to meet their demands. However, in an ever-changing business environment, the requirements of a true partnership go beyond the supply and demand approach. Our focus is to provide a unique, unrivalled service to our customers to support their market growth aspirations. We work closely with each of our customers to identify, both global and local, market trends which will help us create the next generation of products that will meet the everyday needs of their consumers. We have recently established two culinary innovation centres fully equipped with state of the art culinary equipment and staffed by some of the leading industry chefs and food technologists. The ambience of our culinary innovation centres has been designed to create an open and stimulating environment in which creativity can flourish. There is nothing like good food to bring people together. So it is in our culinary innovation centres that we discuss and share concepts with our customers. Cooking, tasting and then making those all-important final tweaks to create the perfect concept. Our skilled chefs and technologists then set to work on the scale-up process taking the concepts from the kitchen pan to industrial products that can be consistently produced, on an industrial scale, maintaining organoleptic quality, product integrity and operational efficiency throughout the supply chain to meet all of our customers’ expectations. With these facilities we deliver exciting, innovative and delicious product range extensions, seasonal product ranges and market leading innovative new products. We also recognise that, in the culinary sense, the world is getting smaller. Through increased travel, celebrity chefs, the internet, etc. the everyday consumers have an insatiable appetite for novel, out-of-the-box culinary experiences. Whether they are from traditional local cuisine or exotic fusions of flavour where the dynamic European cuisine meets the spicy, exotic and mouth-watering cuisines of Asia. Rather than develop and maintain this very specific flavour expertise in- house we are establishing partnerships with key suppliers whose core capability is the development of innovative ingredients. By working closely in partnership with our suppliers we can combine our extensive, in-depth understanding of food production on an industrial scale with their expertise to develop a delicious portfolio of innovative products designed to match consumer expectations. In parallel to our ingredient partnerships we also realise the value of building stronger alliances with key suppliers of the processing equipment that is required to deliver the large volumes of products that leave our manufacturing sites every day. Technology is changing at an ever increasing rate across the food industry resulting in new and exciting equipment entering the market which can improve the efficiency of operations and deliver new and innovative products whilst continuing to enhance the stability and security of the products offered to the consumer. 25 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Corporate and social responsibility report continued Rather than waiting for new technologies to arrive on the market we are working in close partnership with key equipment suppliers to develop equipment that specifically meets the needs of our operations. To facilitate this we are creating a number of product focused centres of excellence which are the custodians of our internal technology know-how where we focus development programmes carried out in conjunction with our key partners. As well as being technology custodians the centres of excellence are responsible for the rapid roll out of successful innovations and developments across our businesses to ensure we consistently deliver operational excellence at each of our manufacturing sites. Hilton is also closely aligned with our customers in our desire to minimise the environmental impact of our operations. We are therefore developing partnerships with our key suppliers of packaging materials as part of our sustainability agenda. On average over 1.25 million plastic trays leave our sites every day and we are conscious of the potential impact this may have on the environment. We are therefore working with our key suppliers in three work streams. Firstly we are striving to maximise the use of recyclable trays across the Group and to date we have currently moved 16% of our production to recyclable trays. The second work stream is focusing on the use of re-cycled plastic in our product trays which results in significantly lower energy consumption in their manufacture. Finally we are continuously setting the industry standard for lighter product trays which therefore require less plastic. These are jointly developed and tested with our key suppliers to ensure that although lighter they are still robust enough to maintain the required functionality and stability attributes. Awards and innovation Hilton takes great pride in its products and we are delighted when the quality and innovation of these products is recognised. During 2015 we received a number of national food and taste awards. New products launched included a habanero 3 chilli burger, smoked garlic & basil and paprika & honey sausages and a sous vide range as well as cook in the bag packaging and gluten free products. Environment The Group takes all practicable steps to manage carefully its impact on the natural environment. Improvements to our environmental performance can make a difference to society and we are committed to assessing the impacts of our operations on land, water, air and biodiversity, and to managing our waste, in all its forms, by reusing or recycling it, where practicable. In the context of the total carbon footprint of retail packed meat the proportion which can be influenced by Group’s packing activity is very small indeed as the Group is not involved in the breeding, growing and slaughtering of animals and the packaging formats used for its products are selected by our customers. The Group is nevertheless committed, working closely with its customers, to minimising its environmental impact. Regulatory compliance The Group is in full compliance with all environmental regulations, permits and consent limits which apply to each of its packing plants in each country of operation and views such compliance as a high priority, looking to make continuing improvements with respect to the environment in all its operations whilst ensuring that we manage our environmental performance in accordance with evolving legal and regulatory requirements and international standards. Carbon footprint and greenhouse gases The Group has complied with all the mandatory reporting requirements under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. The Group’s scope 1 and scope 2 carbon footprint has been calculated using data gathered through standardised reporting channels and Defra conversion factors. An appropriate ratio to express the Group’s annual emissions in relation to its activities by way of product volumes produced is given below. Scope 1 Scope 2 Total 2015 2014 2013 Tonnes of CO2e 2014 7,977 21,187 29,164 2015 4,100 21,392 25,492 Tonnes of CO2e per tonne of product 0.11 0.13 0.13 Energy usage Our processing and packing operations consume electricity, gas, water and industrial gases at all our sites and our management teams work to identify areas for further efficiency gains in terms of energy usage. The Group invests heavily in maintaining state of the art high speed packing facilities which progressively reduce energy costs per unit packed. Over time the development of packing technology means that any given volume of meat can be packed with fewer high speed lines. Performance on water usage is shown below: 2015 2014 2013 Cm3 of water use per tonne of product 1.40 1.46 2.04 Waste and packaging It is estimated that 15 million tonnes of food is wasted each year in the UK of which 9 million tonnes is avoidable and we agree this is economically, socially and environmentally unacceptable. Although Hilton’s meat products are perishable having limited shelf life we continuously strive, working with our retail partners to ensure that waste is minimised and products are available for purchase and consumption for as long as possible before the end of their shelf life. A degree of wastage is unavoidable in our businesses, as we have to ensure that our products continually meet stringent standards for quality and presentation. We work actively to reduce our usage of materials and the reduction of product and packaging waste has a very high priority across the Group. The yield losses incurred in processing and packing meat and packaging wastage are continuously monitored throughout each day across the entire product range, at every Hilton site. Performance on meat yields, being the percentage by which the weight of meat purchased as raw material compares with that incorporated in finished packed meat products, is minimised by, where possible, using off-cuts in mince, burgers and other part processed meat products and by ensuring that meat purchased meets tight specifications. Through the extensive use of state of the art packaging technology our products benefit from an extended shelf life thereby reducing food waste. This benefit offsets the environmental impact of the packaging materials and energy used in its manufacture. Hilton is committed with its retail partners to adopt best practices in reducing packaging through use of lightweight and recyclable materials from sustainable sources. 26 Hilton Food Group plc Annual report and financial statements 2015Our people We recognise that driving our future growth and development will continue to depend on our ability to attract, grow, train and retain the very best managers and staff and to build progressively stronger teams at each location. We believe that a key to our future success lies in the promotion of properly trained, knowledgeable and capable management from within our organisation together with the ongoing motivation of our teams in each country. The Group provides equal opportunity for employment, training and career development and promotion regardless of age, sex, colour, race, religion, ethnic origin or other minority groupings. The Group encourages the employment of disabled people when suitable vacancies are available and wherever possible retrains employees who become disabled to enable them to do work consistent with their aptitudes and abilities. Where practicable a flexible approach is adopted to assist employees to manage a successful work life balance. Directors 7 Senior managers 15 Employees 1,032 50 1,801 Total 7 Total 65 Total 2,833 Male Female Hilton operates to high standards of employment practice with policies to ensure that training, career development and promotion opportunities are available to all employees. The Group’s recruitment practices involve, where possible, internal promotions. Where there is not a suitable internal candidate, selection of suitable individuals for vacant positions is made using a combination of industry knowledge and contacts and the use of external recruitment agencies. All new senior employees including Directors are given tailored induction programmes. The Group’s succession planning is designed to highlight any forthcoming vacancies well in advance. Employees are able to participate directly in the success of the business by contributing to the Group’s Sharesave scheme. The Group has ethnically diverse workforces who at each location receive the same terms and conditions for comparable jobs. Given the geographical spread of the Group’s operations it is both inappropriate and impractical to apply standard employee consultation and communication procedures across the Group. Each subsidiary is accordingly responsible for achieving and maintaining appropriate consultation and communication with its employees which include at all production sites joint management and employee committee meetings on health and safety and meetings with employees and union representatives to discuss issues affecting them. Workplace Health and safety One of Hilton’s top priorities is to achieve continual improvements in health and safety. The Group requires all its subsidiaries to achieve high health and safety standards within their individual operations. All subsidiaries conduct regular formal health and safety reviews. Managers and employees review policies, processes and procedures in order to ensure that risks are properly assessed, with appropriate actions taken in order to protect the safety of employees. At Board level Philip Heffer, Chief Operating Officer, has been assigned responsibility for health and safety and environmental matters across the Group’s operational sites. We monitor and review all incidents and accidents in the workplace so that we can take appropriate action to improve working conditions whilst remaining focused on reducing both the absolute number of accidents and the number of serious accidents. Formal reporting procedures are in place at every site so that the Group can monitor safety performance at a local level. There is a full time safety officer at each site who monitors the key measures for safety performance which include the number of serious and non-serious accidents and the number of working days lost through injury, together with short and long term sickness levels, key statistics in relation to which for 2015 are shown as follows: Average number of employees 2,912 2,447 2,243 Serious accidents 36 33 32 2015 2014 2013 Recorded accidents per 100,000 hours worked 5.2 5.2 6.4 Sickness rate (%) 3.5% 4.5% 4.9% 27 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Corporate and social responsibility report continued Community Supporting our local communities Hilton’s policy is to recruit locally based employees wherever possible in order to benefit the communities within which our plants are located. Hilton aims to play a positive role in all the communities in which it operates and we encourage employees to become involved with and support the local communities around our sites. We recognise the social impacts of our business and believe in consultation with local communities about our activities and about the safety and environmental impact of our operations. During 2015, Hilton made charitable donations amounting to £35,000 (2014: £30,000) comprising small but regular donations made to local institutions and sponsorship of personal charitable initiatives and cultural events. The Group seeks to be a good neighbour in all its locations. We are committed to social responsibility and believe that the success of our businesses will reflect the quality of the relationships we build with our communities and legitimate public interest groups. The Group, in common with most commercial undertakings, employs external consultants, but, as their services could be contracted for with other similar parties, there are, in the opinion of the Board, no persons with contractual or other arrangements with the Group which are essential to its businesses. Trading relationships with partners and suppliers Strong and fair long term relationships with partners and suppliers are very important for Hilton. The Group’s approach to corporate social responsibility is reflected in the way we behave with our suppliers which is open, consistent and honest. In the UK the Group follows the Better Payment Practice Code which requires a company to agree the terms of payment with its suppliers, to ensure its suppliers are aware of those terms and to abide by them. The Group policy is also to apply the requirements of the Code in each of its subsidiaries. Ethical standards Hilton is committed to integrity. Ethical standards are very important in relation to the way we conduct our businesses and all the Group’s employees are expected to behave ethically in their work and adhere to the Group’s ethical standards. As an international group of companies we are fully aware of the broad spread of our responsibilities in all the countries in which we operate from protecting the environment to safeguarding the health and safety of our employees, respecting human rights, ensuring honesty, integrity and fairness in all our business dealings and operating our businesses in a safe and responsible manner. A whistle-blowing policy is in place in accordance with which staff can in confidence raise any concerns about any actual or potential improprieties in relation to matters of financial reporting or any other aspect of the Group’s businesses. The Group has also implemented an anti-bribery and anti-corruption policy to comply with the Bribery Act 2010. 28 Hilton Food Group plc Annual report and financial statements 2015Approval of Strategic report Strategic report Pages 6 to 28 of this Annual report comprises a Strategic report which has been drawn up and presented in accordance with applicable English company law, in particular Chapter 4A of the Companies Act 2006, and the liabilities of directors in connection with this report shall be subject to the limitations and restrictions provided by such law. It should be noted that the Strategic report has been prepared for the Group as a whole, and therefore gives greater emphasis to the Company and its subsidiaries when viewed as a composite whole. Approved by order of the Board of Directors Neil George Company Secretary 30 March 2016 29 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Governance Board of Directors Directors’ report Corporate governance statement Report of the Audit Committee Report of the Nomination Committee Report of the Risk Management Committee Directors’ remuneration report Directors’ remuneration policy Annual report on remuneration Statements of Directors’ responsibilities Independent auditors’ report 32 34 36 39 41 42 43 44 49 53 54 31 Hilton Food Group plc Annual report and financial statements 2015Board of Directors Executive Directors Robert Watson obe Chief Executive Robert joined Hilton as Chief Executive in 2002 and has overseen the successful growth of the Group to date. Prior to this, he worked for the Foyle Food Group, based in Northern Ireland of which he was a founder in 1977. Robert was previously a board member of the Livestock Meat Commission and Food For Britain. Nigel Majewski Chief Financial Officer Nigel was appointed CFO of Hilton in 2006 following 11 years in senior finance roles with PepsiCo. Prior to that Nigel gained extensive meat industry experience in senior finance roles with Bernard Matthews plc and has also worked for Royal Dutch Shell and Whitbread. He is a qualified Chartered Accountant and has a first class honours degree in accountancy. Nigel is Chairman of the Risk Management Committee. Philip Heffer Chief Operating Officer Philip joined the Hilton Food Group at its inception in 1994, as Managing Director of the Group’s UK subsidiary Hilton Foods UK Limited. In his current role he is responsible for Hilton’s business with its major customers in the UK, Ireland, Continental Europe and Australia. Prior to this, Philip held senior positions within the RWM Food Group. He attended Smithfield College and became an associate member of the Institute of Meat in 1984. Theo Bergman Executive Director Theo joined Hilton in 2000 as Managing Director of the Group’s Dutch facility, Hilton Meats Zaandam and in 2003, he was appointed to the Group’s Executive Board as European operations director responsible for the start up of operations in Europe and the relationship with Ahold. His current role is to oversee various special projects. Prior to joining Hilton, Theo held senior logistics and general management positions with Ahold between 1987 and 2000. 32 Hilton Food Group plc Annual report and financial statements 2015Non-Executive Directors Sir David Naish DL Non-Executive Chairman Sir David joined the Hilton Food Group in 2007 as a Non-Executive Director after retiring from the Chairmanship of Arla Foods UK plc and was elected Chairman in 2010. He is a past President of the National Farmers Union and is currently Chairman of his family farming business as well as a Director of Wilson Insurance Broking Group Limited and Caunton Engineering Limited and is also a Non-Executive Director of Produce Investments plc. Sir David is Chairman of the Nomination Committee. John Worby Non-Executive Director appointed 22 March 2016 John Worby is a Chartered Accountant with a wealth of experience in public companies and the food sector. He was Group Finance Director at Genus plc retiring in 2013 and previously was Group Finance Director and Deputy Chairman of Uniq plc. John currently holds Non-Executive Directorships at Fidessa Group plc and Carr’s Group plc and formerly was a Non-Executive Director at Cranswick plc and Connect Group plc. John is also a member of the Financial Reporting Review Panel. Colin Smith obe Non-Executive Director Colin joined the Hilton Food Group in 2010 as a Non-Executive Director and has extensive experience in the food and distribution industry. A Chartered Accountant, he was at Safeway plc for 20 years in senior finance roles including Finance Director and for the last six years as Chief Executive. Colin has held a number of board and advisory roles in the industry including the Chairmanship of Assured Food Standards and board advisor to Natures Way Foods. He was previously a Non-Executive Director of McBride plc and Chairman of Poundland Holdings Limited for 10 years until 2012 and thereafter a Non-Executive Director for a further two years before retiring in 2014. He is currently Chairman of the social enterprise The Challenge Network. Colin is Chairman of the Audit Committee and is the Senior Independent Director. Christine Cross Non-Executive Director appointed 22 March 2016 Christine Cross was originally a food scientist before devoting the 14 years to 2003 with Tesco in senior roles focusing on own brand, non-food and global sourcing. She has since worked globally with a wide range of food and non-food retailing businesses and currently holds Non-Executive Directorships with Sonae SGPS SA (Portugal), Brambles Limited (Australia), Kathmandu Holdings Limited (New Zealand) and several private companies as well as numerous advisory roles. Former Non-Executive Director positions were held until recently with Next plc and Woolworths Limited (Australia). Christine is Chair of the Remuneration Committee. Chris Marsh Non-Executive Director until his retirement on 27 March 2016 Chris joined the Hilton Food Group in 2007 as a Non-Executive Director. Chris is a corporate broker by background, he joined Phillips and Drew in 1968 and headed the Small Cap Corporate broking team at UBS from 1993 until his retirement in 1998. From 1999 to 2004 he was a member of a small corporate finance advisory team at the Benfield Group. Chris is currently Non-Executive Chairman of Webb Capital plc and formerly of Downing Income VCT plc. Chris was the Senior Independent Director and Chairman of the Remuneration Committee. Sir David Naish, Colin Smith, John Worby, Christine Cross and Chris Marsh are all members of the Remuneration, Audit and Nomination Committees. Colin Smith, John Worby, Christine Cross and Chris Marsh are considered to be independent. 33 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ report The Directors present their report together with the audited financial statements for the 53 weeks ended 3 January 2016. Reference to other relevant information incorporated into this report is below. Strategic report The Strategic report on pages 6 to 28 sets out the development and performance of the Group’s business during the financial year, the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group. The Group’s financial instruments risk management objectives and policy are discussed in the treasury risk management policies section of the Performance and financial review on page 16. This Strategic report also includes the Corporate and social responsibility report on pages 24 to 28 which contains details of the Group’s employment practices and greenhouse gas emissions. Corporate governance and other statutory disclosures The Corporate governance statement, Board Committee reports and Directors’ remuneration report on pages 36 to 52 includes information required by DTR 7.2. Directors and their interests The Directors of the Company in office throughout 2015, together with their biographical details, are as set out on pages 32 and 33. All the Directors served for the whole of the year under review unless stated. Chris Marsh retired on 27 March 2016 and John Worby and Christine Cross were appointed on 22 March 2016. Details of Directors’ interests in shares are provided in the Directors’ remuneration report on page 50. Directors are subject to reappointment at the Company’s AGM following the year in which they are appointed. In accordance with the Company’s Articles of Association one third of the Board is subject to re-election at each AGM. Accordingly, John Worby and Christine Cross who were appointed recently together with Robert Watson retire in accordance with the Articles of Association at the forthcoming Annual General Meeting and, being eligible, each offers him or herself for re-election. Substantial shareholdings As at the date of this report, the Company is aware or has been notified of the following interests of 3% or more of the voting rights of the Company: There are no disclosures required to be made under LR 9.8.4. Principal activities The Group’s activities comprise specialist retail meat packing for international food retailers. Results and dividends The profit before income tax is £28.0m (2014: £25.2m). Aberforth Partners Fidelity Mgt & Research AXA Investment Mgrs G. Heffer R. Heffer Montenaro Asset Mgt Number of ordinary shares 8,624,482 7,087,473 5,186,046 4,174,500 4,174,500 2,434,496 Percentage of issued share capital Nature of holding 11.80% Indirect 9.70% Indirect 7.09% Indirect Direct 5.71% 5.71% Direct 3.33% Indirect A first interim dividend of 4.1p per ordinary share was paid in November 2015 and a second interim dividend of 9.2p will be paid on 1 April 2016. The Directors recommend the payment of a final dividend for the period which, together with the second interim dividend, is not reflected in these accounts, of 1.3p per ordinary share totalling £0.95m, which, together with the two interim dividends, represents 14.6p per ordinary share for the year. Subject to approval at the Annual General Meeting, the final dividend will be paid on 1 July 2016 to members on the register at the close of business on 3 June 2016. Shares will be ex dividend on 2 June 2016. Additionally Directors’ interests in shares total 10.49% and details are given on page 50. Political donations No donations for political purposes were made during the year (2014: £nil). 34 Hilton Food Group plc Annual report and financial statements 2015Share capital and control The following information is given pursuant to Section 992 of the Companies Act 2006: – the Company has one class of share being ordinary shares of 10p each which have no special rights. The holders of ordinary shares rank equally and are entitled to receive dividends and return of capital as declared and to vote at general meetings. With minor exceptions, there are no restrictions on transfers of ordinary shares. Directors’ statement as to disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ report are listed on pages 32 and 33. Having made enquiries of fellow Directors and the Company’s auditors, each of these Directors confirm that: – to the best of each Director’s knowledge and belief, there is no information relevant to the audit of which the Company’s auditors are unaware; and – there are no restrictions on voting rights of ordinary shares. – each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Independent auditors PricewaterhouseCoopers LLP have expressed their willingness to continue in office and a resolution proposing their reappointment will be submitted at the Annual General Meeting. Annual General Meeting The Notice convening the Annual General Meeting can be found in the separate Notice of Annual General Meeting accompanying this Annual report and financial statements, and can also be found on the Company’s website at www.hiltonfoodgroupplc.com/investors/agm. By order of the Board Neil George Company Secretary 30 March 2016 – rights over ordinary shares issued under employee share schemes are exercisable directly by the employees. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of its shares or on voting rights. – the Company may appoint or remove a Director by an ordinary resolution of the shareholders. Additionally the Board may appoint a Director who must retire from office at the following Annual General Meeting and if eligible then stand for re-election. – the Company’s Articles may be amended by a special resolution of the shareholders. – the Directors have general powers to manage the business and affairs of the Company. Additionally the following specific authorities were passed as resolutions at the Company’s Annual General Meeting held on 12 May 2015: – Directors have authority to purchase up to 10% of its own shares subject to certain conditions. – Directors have authority, within limits, to exercise the powers of the Company to allot shares and limited authority to disapply shareholder pre-emption rights. Both these authorities expire on the earlier of the date of the next Annual General Meeting or 12 August 2016. – the Company has significant long term supply agreements with customers which the customer may terminate in the event that ownership of the Company, following a takeover, passes to a third party which is not reasonably acceptable to that customer. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. 35 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015 Corporate governance statement The UK Corporate Governance Code The Board has prepared this report with reference to the UK Corporate Governance Code issued by the Financial Reporting Council in September 2014 which applies to accounting periods beginning on or after 1 October 2014. The provisions of this Code can be obtained from www.frc.org.uk/corporate/ukcgcode.cfm. This statement including the Board Committee reports and the Directors’ remuneration report on pages 39 to 52 detail how the Board applies the principles of good governance and best practice as set out in this UK Corporate Governance Code. The Directors consider that the Company has during 2015 complied with the ten requirements of this Code, taking into account the provisions for smaller companies. The Board Membership At the date of this report the Board consists of four Executive Directors and four Non-Executive Directors whose names, responsibilities, brief biographies and membership of Board Committees are set out on pages 32 and 33. The Directors bring strong judgement and expertise to the Board’s deliberations and the Board is of sufficient size and diversity to achieve the balance of skills and experience appropriate for the requirements of the business. Non-Executive Directors The Non-Executive Directors include the Non-Executive Chairman and the Senior Independent Director. With the exception of the Non-Executive Chairman, who is presumed under the Code not to be independent following his appointment, the Board considers the Non-Executive Directors to be independent. The Non-Executive Directors do not participate in any of the Group’s pension arrangements or in any of the Group’s bonus or share option schemes. There is a clear written division of responsibilities between the Non-Executive Chairman and the Chief Executive which has been agreed by the Board. The Non-Executive Directors met once during the year to scrutinise the performance of the Executive management. A further meeting was held without the Non-Executive Chairman present to assess his performance. Senior Independent Director Colin Smith, the Senior Independent Director, is available to shareholders as an alternative to the Non-Executive Chairman, Chief Executive and Finance Director. He ensures that he is available to meet shareholders, as required, and reports any relevant findings to the Board. Rotation of Directors The Company’s Articles of Association provide that one third of the Directors retire by rotation at each Annual General Meeting and that all new Directors are subject to re-appointment by shareholders at the first opportunity following their appointment. Accordingly, John Worby and Christine Cross who were appointed recently together with Robert Watson retire in accordance with the Articles of Association at the forthcoming Annual General Meeting and, being eligible, each offers him or herself for re-election. Directors’ conflicts of interest Under the Companies Act 2006, the Group’s Directors have an obligation to avoid any situation where they have a conflict of interests. The Group has in place procedures that require all Directors to notify the Group of any conflicts of interest and, for any such conflicts of interest to be authorised by non-interested Directors, provided the Company’s Articles allow for this. During the current financial year the Group were not advised of nor did the Group identify any such conflicts of interest. Information and support provided to Board members Members of the Board and its Committees are given appropriate documentation in advance of each Board and Committee meeting. For regular Board meetings these include a detailed period report on current and forecast trading, with comparisons against both budget and prior years. For all meetings appropriate explanatory papers are circulated well in advance on matters which the Board or Committee will be required to approve or provide responses. The Board operates both formally through Board and Committee meetings and informally through regular contact between Directors. To assist them in carrying out their responsibilities the Directors have, in addition to full and timely access to all relevant information from management in advance of Board meetings, the right to obtain independent professional advice at the Company’s expense and the advice and services of the Company Secretary to enable them to perform their duties as Directors. The Company Secretary is responsible to the Board, through the Chairman, for all governance matters. The appointment and removal of the Company Secretary is determined by the Board as a whole. Board responsibilities The Board is collectively responsible for promoting the success of the Group, within a framework of prudent and effective controls that enable risk to be assessed and appropriately managed. It is responsible for setting and approving the strategy and key policies of the Group and monitoring the progress towards achieving these objectives. The Board aims to enhance shareholder value by providing entrepreneurial leadership for the Group, whilst simultaneously ensuring the appropriate framework of checks and balances are maintained in place. 36 Hilton Food Group plc Annual report and financial statements 2015The Board has specific powers reserved to it contained in a schedule of matters reserved for decision by the Board which include: – acquisitions and disposals; – major trading agreements; – major capital expenditure projects; – dividends; – treasury and risk management policies; – approval of budgets, half yearly and annual accounts and interim management statements; and – the giving of any guarantees or letters of comfort. The Board meets not less than eight times a year to direct and control the strategy and operating performance of the Group. The Board also has responsibility for setting policy and monitoring from time to time such matters as financial and risk control, health and safety policy, environmental issues and management succession and planning. The Board has delegated to the Chief Executive and the Executive Directors responsibility for the execution of the agreed strategy and budget and the day-to-day management of the Group’s operations. Day-to-day decisions in relation to procurement and supply chain management, factory operations and customer liaison are delegated to the senior management teams at each operational site. Board Committees The Board has delegated certain responsibilities to the following Board Committees: – Nomination Committee; – Audit Committee; – Remuneration Committee; and – Risk Management Committee. Each Board Committee operates under clearly defined terms of reference and report regularly to the Board. These terms of reference are reviewed on a regular basis with any revisions proposed to the Board for its approval. The Board ensures that each Committee has sufficient resources to undertake their duties including access to the Company Secretary and external advisors as appropriate. Reports for each Board Committee are included on pages 39 to 52. Attendance at Board meetings The following table sets out the Board meeting attendance by Board members, including the maximum number of meetings which could have been attended. Attendance at Board Committee meetings is set out in each Committee report. Robert Watson Philip Heffer Theo Bergman Nigel Majewski Sir David Naish Chris Marsh Colin Smith Number of meetings 10 10 10 10 10 10 10 Number attended 10 10 7 10 10 10 9 Performance evaluation The Non-Executive Chairman leads a formal annual performance evaluation of the Board and its standing Committees and meets with the Non-Executive Directors at least once a year to convey his conclusions. During 2015 an internal evaluation process involved each Director completing a detailed written questionnaire including the opportunity to comment on any issue not directly covered by the questionnaire. The responses were analysed and considered by the Board who have concluded that the Directors, the Board and its standing Committees continue to perform effectively. The Non-Executive Directors met once during the year without the Non-Executive Chairman present in order to evaluate his performance. An external evaluation process was last conducted in 2011/12. Shareholder communications The Board promotes open communication with shareholders. The Chief Executive and Chief Financial Officer meet regularly and have dialogue with institutional shareholders both to discuss the Group’s performance and prospects and to develop an understanding of their views which are relayed back to the Board. The Board’s current assessment of the Group’s position and prospects are set out in the Strategic report on pages 6 to 28. Twice a year general presentations are given to analysts covering the annual and half year results and other reports and forecasts, together with relevant articles in the financial press, are circulated to the Board. The other Executive Directors are available to meet the Company’s major shareholders if required and the Senior Independent Director is available to listen to the views of shareholders, should they have concerns which have not been previously resolved or which it was inappropriate to voice at prior meetings. All shareholders have the opportunity to ask questions at the Company’s Annual General Meeting, which all Directors and the Chairmen of every Board Committee attend. In addition the Group’s website containing published information and press releases can be found at www.hiltonfoodgroupplc.com. 37 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Corporate governance statement continued Risk management and internal control The Board of Directors has overall responsibility for the Group’s systems of internal control including financial, operational and compliance controls and risk management which operate to safeguard the shareholders’ investments and the Group’s assets and for reviewing their continuing effectiveness. Such an internal control system can only provide reasonable and not absolute assurance against material misstatement or loss as it is designed to manage rather than eliminate risk and failure to meet business objectives. The Group’s planning and financial reporting procedures include detailed budgets and a three year strategic plan which are approved by the Board. Periodic management accounts report performance compared to the budget and additionally forecasts are updated through the year. These management accounts together with half-yearly and annual accounts produced by the Group’s subsidiary companies are reviewed together with the methodology used for consolidating these into the periodical, half-yearly and annual accounts. All financial information published by the Group is approved by the Board and Audit Committee. The Chief Financial Officer and Group Financial Controller are responsible for overseeing the Group’s internal controls. The management of the Group’s businesses have identified the key business risks within their operations, considered their financial implications and assessed the effectiveness of the control processes in place to mitigate these risks. The Board has reviewed a summary of these findings and this, together with its direct involvement in the strategies of the business, investment appraisal and budgeting processes, has enabled the Board to report on the effectiveness of the Group’s internal control systems. By order of the Board Neil George Company Secretary 30 March 2016 The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity which is summarised in the Risk management section on pages 22 to 23. The Group operates within a clearly defined organisational structure with established responsibilities, authorities and reporting lines to the Board. The organisational structure is designed to plan, execute, monitor and control the Group’s objectives effectively and ensure internal control becomes integral to all the Group’s operations. The Board confirms that the Group’s internal risk based control systems have been fully operative up to the date of the Annual report being approved, key ongoing processes and features of which are set out below: – appropriate mechanisms to identify and evaluate business risk; – a Group internal audit function which is involved in the review and testing of the internal control systems and of key risks across the Group in accordance with an annual programme agreed with the Audit Committee; – a strong control environment; – an information and communication process; and – a monitoring system and regular Board reviews for effectiveness. 38 Hilton Food Group plc Annual report and financial statements 2015Report of the Audit Committee Chairman’s introduction I am pleased to report on the activities of the Audit Committee for the 53 weeks ended 3 January 2016. Role of the Committee The Audit Committee is established by the Board of Directors. Terms of reference formalise the roles, tasks and responsibilities of the Committee to comply with the UK Corporate Governance Code and to achieve best practice. The Committee terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Committee meets at least three times per year. Membership of the Committee Members of the Committee are appointed by the Board on the recommendation of the Nomination Committee and comprise the Chairman of the Committee and at least two members who are the Chairman of the Board and the Independent Non-Executive Directors. At least one member has recent and relevant financial experience and between them have a wide experience of industry and commerce. Other individuals such as the Chief Executive, Chief Financial Officer, Internal Auditor and the external auditors may be invited to attend meetings. The external auditors and the Internal Auditor have the opportunity for direct access to the Committee without the Executive Directors being present. Responsibilities of the Committee The main responsibilities of the Audit Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – 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 internal control and risk management systems; – to monitor and review the effectiveness of the Company’s internal audit function; – to consider and make recommendations to the Board, to be put to 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 UK 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; – to meet with the external auditors and the head of internal audit at least once a year without management being present; and – to report to the Board on how it has discharged its responsibilities. Attendance at meetings of the Audit Committee Colin Smith Sir David Naish Chris Marsh Nigel Majewski Number of meetings 4 4 4 4 Number attended 4 4 4 4 How the Committee has discharged its responsibilities During 2015 the Committee met four times at appropriate intervals in the financial reporting and audit cycles. The work of the Committee during the year focused on the key areas set out below. Monitoring the integrity of the financial statements including significant judgements The Group’s accounting policies were reviewed which included an assessment of the Group’s cost plus contracts in relation to IFRIC 4 to determine whether they contain a lease. The Committee was satisfied that these cost plus contracts typically contain benchmarking clauses allowing customers to obtain competitive pricing or to source from a competitor, that product inputs are traded in active markets and that product selling prices are updated frequently resulting in pricing that is, in substance, a market price. On this basis the Committee concluded that the criteria for determining whether the Group’s cost plus contracts contain a lease are not met. It was considered that there were no other critical accounting estimates or judgements involved in the application of the Group’s accounting policies. The external auditors identified complex supplier arrangements as an area of audit focus and the Committee fully considered this issue. An overview of Hilton’s business relationships with its retailer partners is contained in the ‘Business model’ section of the Chief Executive’s summary on page 11 and information on the accounting policies adopted relating to revenue recognition are set out in note 2 on page 65. As Hilton’s contracts with its customers include pre-agreed and pre-defined revenue parameters, performance measures and targets there were no significant estimates or judgements involved in the application of these accounting policies. The Committee reviewed half and full year financial reports including the application of accounting policies, estimates and judgements in their preparation, the clarity and completeness of the disclosures and also held discussions with management and the external auditors. The Annual report and financial statements were, taken as a whole, considered to be fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company’s performance, business model and strategy. The Committee considered going concern and the Group’s longer term viability and concluded that the Group should be considered as a going concern. Thereafter the Committee recommended that the Board approve these financial reports for publication and that the letter of representation to the external auditors be signed. 39 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Report of the Audit Committee continued Non-audit services and fees Hilton has implemented a policy on the use of external auditors for non-audit services designed to preserve the independence of the external auditors. This policy categorises non-audit services into (i) continuing services which the Committee permits external auditors to undertake subject to a price cap, (ii) irregular or significant services requiring Committee approval on a case by case basis and (iii) non-permitted services. The level of non-audit fees was reviewed which in 2015 at £107,000 represents 43% of audit fees which is below the proposed EU cap of 70%. Further details of these costs can be found in note 6 on page 72. The Committee considers that this low level of non-audit fees does not affect the independence of the external auditors. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharges its responsibilities. I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. On behalf of the Audit Committee Colin Smith obe Chairman 30 March 2016 Risk management and internal controls During the year the Internal Auditor reported to the Committee on the internal audit work performed and on key focus areas for future work. The Group’s Risk Register was also updated. The Committee concluded that the internal audit function remains effective. A review of whistle-blowing showed that no concerns had been raised about possible wrongdoing in financial reporting or other matters. External audit The Committee oversees the relationship with, and the performance of, the external auditors. Meetings were held before the audit to agree their audit plan and after their audit work to discuss their key audit findings. The current external auditors, PricewaterhouseCoopers LLP, were appointed in 2007. Their lead partner is rotated every five years to ensure continued objectivity and independence. Hilton is not subject to the provision in the UK Corporate Governance Code that the external audit contract should be put out to tender at least every ten years. The EU Audit Regulation and Directive covering mandatory audit firm rotation and tendering is expected to be implemented in the UK during 2016 which could require formal audit re-tendering for the 2017 financial year. PricewaterhouseCoopers LLP annually confirm their compliance with UK regulatory and professional requirements including ethical standards and that their objectivity is not compromised. Their audit work is subject to independent partner and quality control reviews. Potential independence threats through the provision of non-audit services are mitigated through various safeguards. The Committee continues to be satisfied with the performance of PricewaterhouseCoopers LLP and have therefore recommended to the Board that they should continue as the Group’s auditors at the forthcoming Annual General Meeting. 40 Hilton Food Group plc Annual report and financial statements 2015Report of the Nomination Committee Chairman’s introduction I am pleased to report on the activities of the Nomination Committee for the 53 weeks ended 3 January 2016. Role of the Committee The Nomination Committee is established by the Board of Directors. Terms of reference formalise the roles, tasks and responsibilities of the Committee to comply with the UK Corporate Governance Code and to achieve best practice. The Committee terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Nomination Committee leads the process for Board appointments. The Committee meets on an as required basis. Membership of the Committee Members of the Committee comprise all the Non-Executive Directors. Responsibilities of the Committee The main responsibilities of the Nomination Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – to review the structure, size and composition of the Board including skills, knowledge, experience and diversity (including gender) and make recommendations to the Board with regard to any changes; – to give consideration to succession planning for Directors and other senior executives and identify appropriate candidates for the approval of the Board; – to oversee new appointments to the Board; – to review the results of the Board performance evaluation relating to the composition of the Board; and – to review the time requirements of Non-Executive Directors. Attendance at meetings of the Nomination Committee Sir David Naish Chris Marsh Colin Smith Number of meetings 1 1 1 Number attended 1 1 1 How the Committee has discharged its responsibilities During 2015 the Committee met once in a continuing stable environment. The Committee considered the composition of the Board noting that two Non-Executive Directors were nearing the completion of nine year terms with Hilton. The Committee considered and recommended the appointments of John Worby and Christine Cross as Non-Executive Directors to replace Chris Marsh and myself during 2016. Hilton continues to develop management structures to promote its talent pipeline as part of a succession planning process covering the Directors and senior management positions. Hilton prefers where possible to recruit these positions from internal candidates. Accordingly processes are being developed to assess the current management population against criteria for larger management roles they could potentially fill in the future and put in place individual development plans. The Chairman has discussions with each Director to review and agree their training and development needs. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharges its responsibilities. I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. On behalf of the Nomination Committee Sir David Naish DL Chairman 30 March 2016 41 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Report of the Risk Management Committee Chairman’s introduction I am pleased to report on the activities of the Risk Management Committee for the 53 weeks ended 3 January 2016. Role of the Committee The Risk Management Committee is established by the Board of Directors. Terms of reference formalise the roles, tasks and responsibilities of the Committee to comply with the UK Corporate Governance Code and to achieve best practice. It seeks to focus and co-ordinate risk management activities throughout the Group in order to facilitate the identification, evaluation and management of key business risks. The Committee meets at least six times per year. Membership of the Committee Members of the Committee are appointed by the Board and comprise the Finance Director, subsidiary company operations managers, the Group Internal Auditor, the Group IT manager and other personnel throughout the Group as required. Responsibilities of the Committee The main responsibilities of the Risk Management Committee are: – to raise the level of management awareness of and accountability for risks faced by the business; – to embed risk management into the Group culture; – to provide a mechanism for risk management issues to be discussed and disseminated; – to oversee and advise the Board on the current risk exposures of the Group and future risk strategy; and – to provide advice on the co-ordination of risk management strategies across the Group ensuring they receive the appropriate level of sponsorship and support. Attendance at meetings of the Risk Management Committee and how it has discharged its responsibilities During 2015 the Committee met eleven times (of which Nigel Majewski attended nine meetings) and focused on the key areas set out below. – monitoring, identification and evaluation of potential risks to all the Hilton businesses; – independent buildings risk assessments and emergency power solutions; – developing business continuity management systems with disaster recovery exercises conducted at various sites each year; and – the further development of a sister site support network across the Group in the event of any business interruption to a particular operating unit. Functionality includes identification of spare capacity and establishment of central labelling equipment to significantly shorten reaction times making possible rapid support across the Group. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharge its responsibilities. I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. On behalf of the Risk Management Committee Nigel Majewski Chairman 30 March 2016 42 Hilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report Chairman’s introduction I am pleased, as Non-Executive Chairman of the Board, to present the Directors’ remuneration report for the 53 weeks ended 3 January 2016. As explained below since the end of 2015 the previous Chairman of the Remuneration Committee Chris Marsh retired and the new Chair Christine Cross appointed as a Non-Executive Director of Hilton. As Christine has not yet attended any Remuneration Committee meetings and therefore not yet cognisant on Hilton remuneration matters I am presenting this Remuneration report for this year only. This report sets out the Company’s policy on Directors’ remuneration as well as information on remuneration paid to Directors for the 53 weeks ended 3 January 2016. The report complies with the requirements of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and has been prepared in line with the recommendations of the Code and the UK Listing Authority Listing Rules (the ‘Listing Rules’). Responsibilities of the Committee The main responsibilities of the Remuneration Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – setting the remuneration policy for all Executive Directors and the Company’s Non-Executive Chairman; – approving the design of, and determining the targets for, any performance-related pay schemes operated by the Company and to approve the aggregate annual payments made under such schemes; – reviewing the design of all share incentive plans for approval by the Board and shareholders; and – recommending and monitoring the level and structure of remuneration for senior management. Attendance at meetings of the Remuneration Committee Good strategic progress was achieved in 2015 and strong underlying profit progress was made despite a material impact on our profitability reported in Sterling from adverse exchange translation movements. Chris Marsh Sir David Naish Colin Smith Number of meetings 3 3 3 Number attended 3 3 3 Role of the Committee Remuneration policy is delegated by the Board to the Remuneration Committee established by the Board of Directors. Terms of reference formalise the roles, tasks and responsibilities of the Committee to comply with the UK Corporate Governance Code and to achieve best practice. The Committee’s terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Committee meets at least twice per year. Membership of the Committee Members of the Committee are appointed by the Board on the recommendation of the Nomination Committee and in consultation with the Chairman of the Remuneration Committee. In 2015 the Committee comprised the Non-Executive Directors (Chris Marsh and Colin Smith) and the Non-Executive Chairman of the Board (Sir David Naish) who was considered to be independent on appointment. Chris Marsh stepped down from the Board in March 2016 and Sir David Naish will step down in May after the AGM. Following their appointment to the Board on 22 March 2016 John Worby and Christine Cross joined the Remuneration Committee and Christine Cross was appointed as its Chairman. Other individuals such as the Chief Executive and external advisors may be invited by the Committee to attend meetings as and when required. Directors’ remuneration major decisions and substantial changes The Committee made the following major decisions during the year: Basic salaries In the year the Committee undertook a review of Company and individual performance, changes in responsibility and levels of increase in the sector for the broader UK employee population. Theo Bergman has stepped down from the role of Chief Operating Officer for Continental Europe thereby increasing the responsibilities of the other Executive Directors, in particular Philip Heffer who has taken over the Chief Operating Officer role for the whole Group. In considering the appropriate salary for each Executive Director we have set this in context of comparable rates in the market. The Committee agreed basic salary increases of 10% for Robert Watson and 6% for Philip Heffer and Nigel Majewski effective from 1 January 2016. Theo Bergman’s salary is unchanged. Annual bonus for Executive Directors A 2015 non-financial metric award of 20.0% of salary was granted out of a maximum of 20% of salary reflecting the significant strategic progress and the strong 20.9% underlying increase in operating profit at constant currency rates achieved by the Company during 2015. Under the financial metric 55.54% of salary is payable out of a maximum of 105% of salary reflecting the increase in actual net income in 2015 over the 2014 net income. The 2016 Executive Director bonus scheme financial element will have a threshold award of 20% for achieving the 2015 actual net income level rising to 105% for performance of at least 118% of 2016 budgeted net income. A further non-financial element of up to 20% of salary will remain available based on individual achievement against personal and strategic targets aggregating to a 125% of salary maximum bonus opportunity for the Executive Directors. Following a change in his circumstances Theo Bergman will not participate in the 2016 bonus scheme. 43 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report continued Long term incentive schemes During 2015 a grant of nil cost options under the Long Term Incentive Plan was approved with vesting subject to an EPS performance condition. Threshold performance is EPS growth of 6% per annum where 10% of the options will vest rising to EPS growth of at least 18% per annum where 100% of the options will vest. There was a further invitation under Hilton’s Sharesave Scheme during the year. Statement of voting at Annual General Meeting This Directors’ remuneration report (other than the Directors’ remuneration policy) is subject to a non-binding resolution at each AGM. The Directors’ remuneration policy is subject to a binding resolution every three years or sooner where any changes are made. The resolution to approve the 2014 Directors’ remuneration report was unanimously passed on a show of hands at the AGM held in the year. The proxy vote was as follows: External advisors The Committee has appointed New Bridge Street (part of Aon plc) to provide advice on remuneration matters and are satisfied that such advice is objective and independent. The amount paid for these services during the year amounted to £3,799 and no other services to the Company are provided. New Bridge Street is a member of the Remuneration Consultants Group and is a signatory to its code of conduct. Resolution type Votes for % Votes against % Votes withheld Approve Directors’ remuneration report Advisory 48,108,978 97.3% 1,337,377 2.7% 12,578 Share scheme dilution limits The Company applies established good governance restrictions over the issue of new shares under all its share schemes of 10% in 10 years and 5% in 10 years for discretionary schemes. As at 3 January 2016 the headroom available under these limits was 3.3% and 0% respectively. No changes are proposed to the Directors remuneration policy. An advisory resolution on the Directors’ remuneration report (other than the Directors’ remuneration policy) will be proposed at Hilton’s 2016 AGM. Directors’ remuneration policy The Committee considers that the Group’s remuneration policies should encourage a strong performance culture and emphasise long term shareholder value creation in order to be aligned with its shareholders’ interests. The policy set out below was passed by a binding shareholder vote at the Company’s 2014 Annual General Meeting effective from the date of that meeting. The policy will be subject to further binding votes every three years or sooner where any changes are made. No changes are proposed and the policy is reproduced below for completeness and transparency. The following table summarises all elements of pay which make up the total remuneration opportunity for Directors, and details how each element is operated and links to the Company’s strategy. Element Basic salary Purpose and link to strategy To recruit and reward executives of a suitable calibre for the role and duties required Benefits To provide market competitive benefits to ensure the retention of employees Operation Normally reviewed annually by the Committee with effect from 1 January, taking account of Company performance, individual performance, changes in responsibility and levels of increase for the broader UK employee population (or their local market where relevant). Reference is also made to median levels within relevant FTSE and industry comparators. The Committee considers the impact of any basic salary increase on the total remuneration package. The Company typically provides: – Company car and fuel; – Private healthcare; and – Other ancillary benefits, including relocation expenses (as required). Maximum opportunity There is no prescribed maximum annual increase. The Committee is guided by the general increase for the broader UK employee population (or their local market where relevant) but on occasions may need to recognise, for example, development in roles assigned, changes in levels of responsibility, and/or specific retention issues. Value of benefits is based on the cost to the Company and is not pre-determined. 44 Hilton Food Group plc Annual report and financial statements 2015 Element Pension Purpose and link to strategy To provide adequate retirement benefits Annual bonus To encourage and reward delivery of the Company’s operational objectives Long term incentives To encourage and reward delivery of the Company’s strategic objectives and provide alignment with its shareholders’ interests through the use of share option schemes All employee share schemes To encourage employee share ownership and thereby increase their alignment with shareholders Maximum opportunity Up to 15% of basic salary for Robert Watson, Philip Heffer and Nigel Majewski and for Theo Bergman up to 24% of basic salary, holiday allowance and bonus (in compliance with a legacy arrangement). Up to 125% of basic salary. 100% of salary for all Executive Directors, but in exceptional circumstances such as recruitment or retention, the limit may be increased to 200% of salary. The same ESOS maximum opportunity as for LTIP above. Maximum savings up to the UK statutory limit. Operation Employer contributions are made to money purchase pension schemes at the rates set out in Executive Directors’ service contracts. In certain circumstances a salary supplement may be paid in lieu of such pension contributions. The annual bonus scheme for Executive Directors is based on performance against the following metrics: – Financial element based on achieving financial targets including the Group net income level adjusted for exceptional items; and – Non-financial element based on individual Executive Director achievement against personal and strategic targets. There are no deferred elements. Any bonus paid is subject to claw-back in circumstances of exceptional misstatement or misconduct. Under its Long Term Incentive Plan (LTIP) Hilton makes an annual award of conditional shares or nil cost options. Awards are granted subject to continued employment and satisfaction of challenging performance conditions measured over three years to be satisfied by the issue of new shares or transfer of existing shares. An Employee Benefit Trust has been set up in connection with this plan. Awards granted under the current policy are subject to the achievement of EPS performance targets determined at the date of grant with up to 25% vesting at threshold performance. Awards are subject to claw-back for three years following vesting in circumstances of material misstatement, error or misconduct. There are no plans to grant further options under Hilton’s Executive Share Option Scheme (ESOS) in the foreseeable future although the ability to do so is retained as an alternative to LTIP awards. Any grants would be subject to performance conditions determined prior to grant. All employees are eligible to join Hilton’s Sharesave Scheme (HMRC approved for the UK and Ireland) and make regular savings for a three year period following which they have six months to exercise the options granted. No performance conditions attach to options granted under the Scheme. 45 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report continued Element Non-Executive Director fees Purpose and link to strategy To attract and retain a high-calibre Non-Executive Chairman and Non-Executive Directors by offering a market competitive fee level Operation The Non-Executive Directors receive the fees set out in their letters of appointment. A base fee is augmented for Committee Chairmanship or membership to take into account the additional time commitment and responsibilities associated with those committees. Maximum opportunity As for the Executive Directors, there is no prescribed maximum annual increase. The Committee is guided by the general increase for the broader UK employee population but on occasions may need to recognise, for example, change in responsibility, and/or time commitments. Non-Executive Director remuneration is determined by the Non-Executive Chairman and the Executive Directors. The Non-Executive Chairman’s remuneration is determined by the Remuneration Committee. Notes 1. The remuneration policy for the Executive Directors is designed with regard to the policy for employees across the Group as a whole. For example, the Committee takes into account the general base salary increase for the broader UK employee population when determining the annual salary review for the Executive Directors. There are some differences in the structure of the remuneration policy for the Executive Directors and other senior employees, which the Remuneration Committee believes are necessary to reflect the different levels of responsibility of employees across the Company. The key differences in remuneration policy between the Executive Directors and employees across the Group are the increased emphasis on performance related pay and the inclusion of a share based long term incentive plan for Executive Directors. There is a lower aggregate incentive quantum at below executive level with levels driven by market comparatives and the impact of the role. Long term incentives are not provided outside of the most senior executives as they are reserved for those viewed as having the greatest potential to influence Group levels of performance. 2. The choice of the annual bonus financial element based on net income metric aligns the bonus for a given year to the overall financial performance for that year. Threshold performance is at the previous year net income thereafter on a sliding scale with the maximum bonus paid at a stretching margin above current year budgeted net income. 3. The long term incentive EPS metric was chosen as it aligns the incentive with long term returns to shareholders. 4. Long term incentive and sharesave schemes are operated in accordance with their respective Scheme and other rules under which the Committee has some discretion relating to their administration which is consistent with market practice. Under the LTIP such discretion covers: – treatment of awards in the event of good leavers (including determination of good leaver status), death and intervening events (including variations in capital and change of control) which address vesting date, exercise period and reduction in number of vesting options; – in exceptional circumstances such as recruitment or retention the grant limit may be increased to 200% of salary; – minor alterations to benefit the plan administration, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment; and – where an event has occurred such that it would be appropriate to amend the performance condition so long as the altered performance condition is not materially less difficult to satisfy. 46 Hilton Food Group plc Annual report and financial statements 2015Other policy information Element Non-UK based Directors and foreign currency translation Description Directors may be employed who are based outside of the UK and therefore subject to the employment laws and accepted practice for that country which may be different to those in the UK. The Committee will ensure that any future overseas based Directors are remunerated on an equivalent basis as in the UK albeit that it may be necessary to satisfy local statutory requirements. Remuneration to Theo Bergman is paid in Euro which, for disclosure purposes, is translated into Sterling at the average exchange rate for the relevant year. The Directors’ current shareholdings total 10.49% of the Company’s shares. Therefore the Committee has not set a share ownership guideline as the Committee considers these shareholdings to be significant and sufficient to align their interests to the longer term performance of the Company. The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment. For the appointment of a new Chairman or Non-Executive Director, the fee arrangement would be set in accordance with the approved remuneration policy in force at that time. The salary for a new Executive Director may be set below the normal market rate, with phased increases over the first few years as the Executive Director gains experience in their new role. The Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of the Company and its shareholders. Such payments would reflect and be limited to remuneration relinquished when leaving the former employer and would reflect (as far as possible) the nature and time horizons attaching to that remuneration and the impact of any performance conditions. Shareholders will be informed of any such payments at the time of appointment. For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role will be allowed to pay out according to its terms. In addition, any other ongoing remuneration obligations existing prior to appointment may continue. For external and internal Executive Director appointments, the Committee may agree that the Company will meet certain relocation expenses where appropriate. Payments for loss of office are made in accordance with the terms of the Directors’ service contracts as below. In accordance with its terms of reference the Committee ensures that contractual terms on termination, and any payments made, are fair to the individual, and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised. The Committee is always interested in shareholder views and is committed to an open dialogue. All feedback is considered when making policy decisions. The Committee will seek to engage with major shareholders on any proposed significant changes to its remuneration policies. The Committee takes into account the general employment reward packages of employees across the Group when setting policy for Executive Director remuneration. Employees have not previously been actively consulted on Director remuneration policies but this may be considered in future where appropriate. Share ownership Approach to recruitment Payment for loss of office Consideration of shareholder views Consideration of employment conditions elsewhere in the Group 47 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report continued Director service contract and other relevant information Provision Term Executive Directors All appointed on 24 April 2007 with no fixed term Non-Executive Directors Sir David Naish 3 years from 27 March 2013 extended to 25 May 2016 Colin Smith 3 years from 1 October 2013 John Worby and Christine Cross 3 years from 22 March 2016 Every 3 years 6 months for both the Company and the Director None None Re-election at AGM Every 3 years Notice period Termination payment / payments in lieu of notice 12 months for both the Company and the Director Up to 12 months’ salary in lieu of notice. If a claim is made against the Company in relation to a termination (e.g. for unfair dismissal), the Committee retains the right to make an appropriate payment in settlement of such claims as considered in the best interests of the Company. Additional payments in connection with any statutory entitlements (e.g. in relation to redundancy) may be made as required. On termination no bonus is payable and outstanding share awards will lapse unless the Committee determines good leaver circumstances apply. Remuneration entitlements Change of control External appointments In good leaver circumstances and subject to performance conditions a pro-rata bonus may be payable at the Company’s discretion. Outstanding share awards may vest subject to time pro-rating and the performance conditions being satisfied. There are no enhanced terms in relation to a change of control External appointments can be held and earnings retained from such appointments with the Company’s permission There are no enhanced terms in relation to a change of control N/A Inspection Executive Director service agreements and Non-Executive Director appointment letters are available for inspection at the Companies registered office. Legacy arrangements For the avoidance of doubt, in approving this policy report, authority is given to the Company to honour any commitments entered into with current or former Directors (such as the payment of a pension or the unwinding of legacy share schemes) that have been disclosed to shareholders in previous remuneration reports. Details of any payments to former Directors will be set out in the Annual report on remuneration as they arise. Remuneration paid to Theo Bergman is subject to Dutch laws and accepted practices. The Dutch Minimum Wages and the Minimum Holiday Allowance Act provides that an employer is obliged to pay a holiday allowance equal to a certain percentage, currently 8%, of the employee’s basic salary. In the UK such holiday allowance is generally included within the employee basic salary. Additionally the terms of the Dutch industry specific pension scheme, to which Mr Bergman has belonged since before the acquisition by Hilton of the Dutch business, currently stipulate that the pension percentage contribution is applied to basic salary, holiday allowance and bonus although this may be subject to change in the future. 48 Hilton Food Group plc Annual report and financial statements 2015Annual report on remuneration This section is subject to audit. Single total figure table of remuneration The remuneration of individual Directors is set out below. 53 weeks to 3 January 2016 Executive Directors Robert Watson Philip Heffer Theo Bergman Nigel Majewski Non-Executive Directors Sir David Naish Chris Marsh Colin Smith Total 52 weeks to 28 December 2014 Executive Directors Robert Watson Philip Heffer Theo Bergman Nigel Majewski Non-Executive Directors Sir David Naish Chris Marsh Colin Smith Total Notes 1. Salary and fees Salary and fees £’000 Benefits £’000 Annual bonus £’000 Long term incentive £’000 Pension £’000 Total £’000 387 310 320 310 90 50 50 1,517 47 45 19 29 – – – 140 292 234 223 234 – – – 983 – – – – – – – – 58 46 115 40 – – – 259 784 635 677 613 90 50 50 2,899 Salary and fees £’000 Benefits £’000 Annual bonus £’000 Long term incentive £’000 Pension £’000 Total £’000 376 301 343 301 90 50 50 1,511 43 40 21 29 – – – 133 150 120 127 120 – – – 517 – – – – – – – – 57 45 110 40 – – – 252 626 506 601 490 90 50 50 2,413 2015 salaries reflect a 3% increase on 2014. The salary disclosed in respect of Theo Bergman includes an 8% holiday allowance. 2. Annual bonus Under the 2015 annual bonus financial element formula, threshold performance was 2014 net income £18.1m, achievement of which earned a 20% of salary bonus. Thereafter the bonus was calculated on a sliding scale including a 38% of salary bonus for achieving the 2015 budgeted net income level of £19.1m up to a maximum 105% of salary bonus for achieving the stretch target of 115% of 2015 budgeted net income being £22.6m. A non-financial element bonus of up to 20% was available aggregating to a 125% maximum bonus opportunity. Actual 2015 net income was £20.0m exceeding that achieved in 2014 being 104.7% of 2015 budgeted net income resulting in a financial element bonus of 55.54% of salary. The Committee considered that good strategic progress had been made with very strong underlying profit progress and accordingly awarded a 20% of salary non-financial metric bonus out of a potential 20% of salary. Therefore a total bonus of 75.54% of salary (excluding Theo Bergman’s holiday allowance) is payable for the year to each Executive Director. In 2014 net income exceeded the threshold achieving 92.0% of 2014 budgeted net income which resulted in a financial element bonus of 24.2% of salary. A 15.8% of salary bonus was paid to each Executive Director in respect of the non-financial metric in view of excellent strategic progress. Accordingly a total bonus of 40.0% of salary was paid during the year. 3. Long term incentive Long term incentives comprise the number of share options under the Company’s share plans where the achievement of performance targets ended in the year multiplied by the difference between the share price on the date of vesting and the exercise price. For 2015 there are incentive awards options under the Long Term Incentive Plan due to vest during 2016 subject to performance conditions covering the three years 2013-2015. The earnings per share performance metric for that period fell short of the threshold 5% compound annual growth target and accordingly it is expected that there will be 0% vesting. In 2014 there were incentive awards options under the Long Term Incentive Plan due to vest during 2015 subject to performance conditions covering the three years 2012-2014. The earnings per share performance metric for that period fell short of the threshold 6% compound annual growth target and accordingly there was 0% vesting. 4. Pension Payments were made during 2015 and 2014 to money purchase pension schemes or in lieu as a salary supplement at rates of up to 15% of basic salary for Robert Watson, Philip Heffer and Nigel Majewski and up to 24% of basic salary, holiday allowance and bonus for Theo Bergman (in compliance with a legacy arrangement). 5. Payments to past directors No payments were made to former directors in 2015 or 2014. 6. Payments for loss of office No payments for loss of office were made in 2015 or 2014. 49 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report continued Director shareholding and share interests Details of Director shareholdings and changes in outstanding share awards were as follows: Director Robert Watson Philip Heffer Theo Bergman Nigel Majewski Sir David Naish Chris Marsh Colin Smith Type Shares Share options Share options Share options Total share options Nil cost options Nil cost options Nil cost options Nil cost options Total nil cost options Shares Share options Share options Share options Share options Share options Total share options Nil cost options Nil cost options Nil cost options Nil cost options Total nil cost options Shares Share options Total share options Nil cost options Nil cost options Nil cost options Nil cost options Total nil cost options Shares Share options Share options Share options Total share options Nil cost options Nil cost options Nil cost options Nil cost options Total nil cost options Shares Shares Shares At 28 December 2014 3,016,380 130,610 1,955 – 132,565 141,585 102,228 71,046 – 314,859 4,181,030 120,301 144,206 104,488 1,955 – 370,950 113,268 81,830 56,836 – 251,934 328,333 113,610 113,610 119,437 88,374 60,828 – 268,639 91,760 104,488 1,955 – 106,443 113,268 81,830 56,836 – 251,934 60,000 30,000 50,000 Granted (note 5) Lapsed – – – – – 2,142 – 2,142 (141,585) – – – – – 86,359 – 86,359 (141,585) – – – – 2,142 2,142 – – – 69,088 69,088 – – – – – 67,260 67,260 – – 2,142 2,142 – – – 69,088 69,088 – – – – – – (113,268) – – – (113,268) – – (119,437) – – – (119,437) – – – – (113,268) – – – (113,268) At 3 January 2016 2,926,380 130,610 1,955 2,142 134,707 – 102,228 71,046 86,359 259,633 4,181,030 120,301 144,206 104,488 1,955 2,142 373,092 – 81,830 56,836 69,088 207,754 328,333 113,610 113,610 – 88,374 60,828 67,260 216,462 91,760 104,488 1,955 2,142 108,585 – 81,830 56,836 69,088 207,754 60,000 30,000 50,000 Exercise price (pence) Earliest exercise date 246.00 460.25 420.00 nil nil nil nil 199.50 174.75 246.00 460.25 420.00 nil nil nil nil 10.05.13 01.04.17 01.06.18 26.06.15 08.05.16 28.04.17 20.04.18 12.05.11 01.05.12 10.05.13 01.04.17 01.06.18 26.06.15 08.05.16 28.04.17 20.04.18 Latest exercise date Notes 1 2 4 4 10.05.20 01.10.17 01.12.18 26.06.22 08.05.23 28.04.24 20.04.25 3(a) 3(b) 3(c) 3(d) 12.05.18 01.05.19 10.05.20 01.10.17 01.12.18 26.06.22 08.05.23 28.04.24 20.04.25 246.00 10.05.13 10.05.20 nil nil nil nil 26.06.15 08.05.16 28.04.17 20.04.18 26.06.22 08.05.23 28.04.24 20.04.25 246.00 460.25 420.00 nil nil nil nil 10.05.13 01.04.17 01.06.18 26.06.15 08.05.16 28.04.17 20.04.18 10.05.20 01.10.17 01.12.18 26.06.22 08.05.23 28.04.24 20.04.25 1 2 2 2 4 4 3(a) 3(b) 3(c) 3(d) 1 2 3(a) 3(b) 3(c) 3(d) 1 2 4 4 3(a) 3(b) 3(c) 3(d) 1 1 1 Notes 1. There is no requirement for Directors to hold shares in the Company. All shares are beneficially owned with the exception of 1,280,917 shares held by various family trusts of which Robert Watson is a trustee. Additionally 750,000 shares held by Robert Watson have been pledged as security on a personal loan. Since the year end Robert Watson and Nigel Majewski have exercised 130,610 and 104,488 share options respectively. There have been no other changes in the interests of Directors between 3 January 2016 and the date of this report. 2. Executive Share Option Scheme awards which have vested. 3. Nil cost options granted under the Long Term Incentive Plan which are subject to a performance condition of compound growth in the Group’s earnings per share over three financial years commencing with the year in which the awards were granted. a) Awards vest on a sliding scale between 25% for 6% EPS compound annual growth and 100% for at least 14.5% EPS compound annual growth. b) Awards vest on a sliding scale between 25% for 5% EPS compound annual growth and 100% for at least 10% EPS compound annual growth. c) Awards vest on a sliding scale between 25% for 8% EPS compound annual growth and 100% for at least 13% EPS compound annual growth. d) Awards vest on a sliding scale between 10% for 6% EPS compound annual growth and 100% for at least 18% EPS compound annual growth. 4. Share options granted under Hilton’s all employee Sharesave Scheme. 5. Face value of the nil cost option awards granted in the year were Robert Watson £387,106, Philip Heffer £309,685, Theo Bergman £301,491 and Nigel Majewski £309,685 based on the actual share price at date of grant of 448.25 pence on 17 April 2015. 50 Hilton Food Group plc Annual report and financial statements 2015Further information Statement of implementation of remuneration policy in the 2016 financial year Base salaries For 2016 Executive Director salaries have increased by 10% for Robert Watson and 6% for Philip Heffer and Nigel Majewski. These increases reflect comparable market rates and the additional responsibilities taken on referred to earlier in this report. Theo Bergman’s salary is unchanged. Robert Watson Philip Heffer Theo Bergman Nigel Majewski 2015 £’000 387 310 320 310 2016 £’000 426 328 320 328 Note The base salary for Theo Bergman for both years include holiday allowance and are translated at the 2015 average exchange rate. Annual bonus The maximum annual bonus in 2016 will be 125% of salary for Robert Watson, Philip Heffer and Nigel Majewski. This bonus will be payable subject to stretching targets around net income (up to 105% of salary) and personal and strategic targets (up to 20% of salary). As financial targets are set with reference to the budget, they are therefore considered commercially sensitive. The Committee will disclose targets on a retrospective basis. In view of Theo Bergman’s changed circumstances he will not be entitled to a 2016 bonus. 2016 long term incentive awards The Committee will make a decision on whether to make a 2016 grant of nil cost award, their timing and the EPS targets to be set following the Annual report approval date. Details of new grant and performance conditions will be published via a Regulatory Information Service. TSR performance graph The graph below shows the Total Shareholder Return performance (TSR) (share price movements plus reinvested dividends) of the Company compared against the FTSE Small Cap Index covering the seven years 2009 to 2015. The FTSE Small Cap Index is, in the opinion of the Directors, the most appropriate index against which the TSR of the Company should be measured. Total Shareholder Return Hilton Food Group – Total Return Index FTSE All Small – Total Return Index 500 400 300 200 100 0 2009 2010 2011 2012 2013 2014 2015 51 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Directors’ remuneration report continued Chief Executive Officer remuneration seven year trend Total remuneration (£’000) Annual bonus (as a percentage of the maximum) Long term incentive vesting (as a percentage of the maximum) 2009 584 85% n/a 2010 2011 2012 730 644 53% 63% 100% 100% 593 10% 100% 2013 610 42% n/a 2014 626 32% 0% 2015 784 60% 0% Note There were no long term incentive awards that were due to vest dependent on a performance period ending in 2009 or 2013. Chief Executive Officer remuneration percentage change 2015 percentage increase over 2014 Salary Benefits Annual bonus CEO 3.0% 9.3% 94.1% Company average 2% n/a n/a Note The majority of employees do not receive benefits or annual bonus and so there is no meaningful data. An alternative comparator group is senior management for whom the percentage changes for salary, benefits and annual bonus were 2%, 2% and 65% respectively. Relative importance of spend on pay The following table sets out for the comparison total spend on pay with dividends. Staff costs (note 8 to the financial statements) Dividends payable 2015 £’000 73,639 10,662 2014 £’000 74,570 9,649 % change -1% 11% Note Dividends payable comprises any interim dividends paid in respect of the year plus the final dividend proposed for the year but not yet paid. On behalf of the Board Sir David Naish DL Non-Executive Chairman of the Board 30 March 2016 52 Hilton Food Group plc Annual report and financial statements 2015Statements of Directors’ responsibilities Directors’ responsibilities for the preparation of the Annual report and financial statements The Directors are responsible for preparing the Annual report and the financial statements in accordance with applicable law and regulations. Responsibility statement of the Directors in respect of the Annual report and financial statements Each of the current Directors whose names and functions are set out on pages 32 and 33, confirm that to the best of their knowledge and belief: – the Group and parent company financial statements, prepared in accordance with applicable UK law and in conformity with IFRS, as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company; and – the management reports, which comprise the Strategic report and the Directors’ report, include a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties they face. This responsibility statement was approved by the Board of Directors on 30 March 2016 and is signed on its behalf by: Robert Watson obe Chief Executive Nigel Majewski Chief Financial Officer 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 (IFRS) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and 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 accounting estimates that are reasonable and prudent; – state whether applicable IFRS as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and – prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and which 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 and the Directors’ remuneration report comply with the Companies Act 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 Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors consider that the Annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy. 53 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Independent auditors’ report to the members of Hilton Food Group plc Report on the financial statements Our opinion In our opinion: – Hilton Food Group plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 3 January 2016 and of the Group’s profit and the Group’s and the Company’s cash flows for the 53 week period (the “period”) then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; – the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. What we have audited The financial statements, included within the Annual Report and Financial Statements (the “Annual Report”), comprise: – the consolidated balance sheet and Company balance sheet as at 3 January 2016; – the consolidated income statement and the consolidated statement of comprehensive income for the period then ended; – the consolidated cash flow statement and Company cash flow statement for the period then ended; – the consolidated statement of changes in equity and the Company statement of changes in equity for the period then ended; and – the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Our audit approach Overview Materiality – Overall Group materiality: £1,419,000 which represents 5% of profit before tax. Audit scope – The Group comprises a holding Company, six trading subsidiaries and four intermediary holding companies. All of these components were subject to audits of their complete financial information. – The Group also holds a 50% investment in an Australian joint venture. This was not significant to the Group and was not therefore subject to audit procedures. Area of focus – Customer supply arrangements. The scope of our audit and our area of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as an “area of focus” in the table below. We have also set out how we tailored our audit to address this specific area in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. 54 Hilton Food Group plc Annual report and financial statements 2015Area of focus How our audit addressed the area of focus Customer supply arrangements The Group has entered into a number of rebate and incentive arrangements with its customers. Rebates and incentives are calculated based on agreed contracted rates and volumes of sales to customers over the term of the contracts. As the arrangements are based on contracted rates and known sales volumes there is little judgement or estimation required around the recognition of these amounts accurately and in the appropriate accounting period. However, owing to the number of agreements in place and the range of contractual terms included within those agreements there is an increased risk that the application of those terms might be calculated inaccurately, omitted from the calculation or included in the incorrect accounting period. Significant audit effort was therefore required to obtain sufficient evidence that there was no material misstatement in this regard. Furthermore, the Group occasionally agrees variations to these arrangements with its customers during the term of the contract. This can result in a change in agreed rates applied in the calculation of the rebate and incentive amounts. We therefore focused our work on the appropriate reflection of these variations in the Directors’ calculations, including assessing whether all variations with a material impact had been included in the calculation. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group is structured as a parent Company with ten subsidiary undertakings: – six trading subsidiaries located in the United Kingdom, the Republic of Ireland, the Netherlands, Poland, Denmark and Sweden, all of these entities are required to have statutory audits under local legislation; and – four intermediary holding companies, all located in the United Kingdom and all requiring statutory audits. All of these entities are audited by PwC network firms with the exception of the subsidiary located in Netherlands. In addition to these eleven entities the Group has a 50% interest in a joint venture Company located in Australia. We did not consider this Company to be significant to the Group and it was not therefore subject to audit procedures. We obtained and read copies of open customer supply agreements in order to understand the impact of these arrangements on the financial statements. We held discussions with the Directors and inspected minutes of Board discussions and determined, based on that evidence and the fact that we did not identify any omitted agreements through our audit procedures in other areas, that the list of contracts management had provided was complete. We selected a sample of rebate and incentive accruals and agreed them to the contracts. Based on these procedures we determined that the amounts had been recognised in the correct period and calculated appropriately based on the correct contracted rates in the agreement and sales amounts in the accounting ledgers (which we had audited). We tested that variations in contracts and/or rates had been reflected in the accrual calculations and determined, based on these procedures, that they had been correctly reflected. We also selected rebate and incentive payments made after the period end and checked that, where appropriate, they were accrued in the financial statements and found that they were. The key procedures we adopted in respect of working with all component auditors were: – Issuing formal Group reporting instructions, which set out our requirements for the component auditors, together with our assessment of audit risks in the Group; – Planning discussions were held with all component auditors in order to agree those requirements, discuss the Group audit risks and to identify any component specific risks; – High level analysis of the financial information of the component by the Group engagement team; – Attending, with Group management, the component clearance meeting held between the component auditors and local management; and – Obtaining signed audit opinions that the component financial information was properly prepared in accordance with IFRSs as adopted by the European Union. 55 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015 Independent auditors’ report continued to the members of Hilton Food Group plc Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial period for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: Overall Group materiality £1,419,000 (2014: £1,259,000). How we determined it 5% of profit before tax. Rationale for benchmark applied We have applied this benchmark, a generally accepted auditing practice, in the absence of indicators that an alternative benchmark would be appropriate. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £100,000 (2014: £100,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the Directors’ statement, set out on page 21, in relation to going concern. We have nothing to report having performed our review. – information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Company acquired in the course of performing our audit; or – otherwise misleading. We have no exceptions to report. – the statement given by the Directors on page 53, in accordance with provision C.1.1 of the UK Corporate Governance Code (the “Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. We have no exceptions to report. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. – the section of the Annual Report on page 40, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern. The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: – the Directors’ confirmation on page 21 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. We have nothing material to add or to draw attention to. – the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. We have nothing material to add or to draw attention to. 56 Hilton Food Group plc Annual report and financial statements 2015 – the Directors’ explanation on page 21 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or – the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate governance statement relating to ten further provisions of the Code. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statements of Directors’ responsibilities set out on page 53, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, 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. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: – whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; – the reasonableness of significant accounting estimates made by the Directors; and – the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Kevin MacAllister (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Belfast 30 March 2016 The maintenance and integrity of the Hilton Food Group plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 57 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201558 Hilton Food Group plc Annual report and financial statements 2015Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the financial statements Registered office and advisors 60 60 61 62 63 64 84 59 Hilton Food Group plc Annual report and financial statements 2015Consolidated income statement Continuing operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Share of profit in joint venture Operating profit Finance income Finance costs Finance costs – net Profit before income tax Income tax expense Profit for the year Attributable to: Owners of the parent Non-controlling interests Earnings per share attributable to owners of the parent during the year Basic (pence) Diluted (pence) Consolidated statement of comprehensive income Profit for the year Other comprehensive income Currency translation differences Other comprehensive income for the year net of tax Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests The notes on pages 64 to 83 are an integral part of these consolidated financial statements. 2015 53 weeks £’000 2014 52 weeks £’000 1,094,822 (957,067) 137,755 (10,091) (99,887) 1,222 28,999 97 (1,148) (1,051) 27,948 (6,489) 21,459 20,017 1,442 21,459 27.5 27.2 1,098,990 (966,809) 132,181 (10,541) (96,462) 884 26,062 102 (976) (874) 25,188 (5,638) 19,550 18,071 1,479 19,550 25.0 24.7 Notes 5 9 9 9 10 11 11 2015 53 weeks £’000 21,459 (2,739) (2,739) 18,720 2014 52 weeks £’000 19,550 (4,761) (4,761) 14,789 17,552 1,168 18,720 13,625 1,164 14,789 60 Hilton Food Group plc Annual report and financial statements 2015Consolidated balance sheet Assets Non-current assets Property, plant and equipment Intangible assets Investments Deferred income tax assets Current assets Inventories Trade and other receivables Current income tax assets Cash and cash equivalents Total assets Equity Equity attributable to owners of the parent Ordinary shares Share premium Employee share schemes reserve Foreign currency translation reserve Retained earnings Reverse acquisition reserve Merger reserve Non-controlling interests Total equity Liabilities Non-current liabilities Borrowings Deferred income tax liabilities Current liabilities Borrowings Trade and other payables Current income tax liabilities Total liabilities Total equity and liabilities Notes 2015 £’000 13 14 15 21 16 17 18 22 19 21 19 20 67,230 10,073 2,396 1,000 80,699 18,272 96,095 – 52,806 167,173 247,872 7,286 8,191 901 (4,489) 82,829 94,718 (31,700) 919 63,937 4,938 68,875 28,405 1,654 30,059 11,728 136,537 673 148,938 178,997 247,872 Group 2014 £’000 72,642 12,547 1,234 771 87,194 22,029 115,609 1,532 35,586 174,756 261,950 7,259 7,235 441 (2,024) 72,717 85,628 (31,700) 919 54,847 4,786 59,633 32,573 1,875 34,448 10,687 157,182 – 167,869 202,317 261,950 2015 £’000 – – 102,985 – 102,985 – 470 11 150 631 103,616 7,286 8,191 – – 17,120 32,597 – 71,019 103,616 – 103,616 – – – – – – – – 103,616 Company 2014 £’000 – – 102,985 – 102,985 – 53 30 333 416 103,401 7,259 7,235 – – 13,470 27,964 – 71,019 98,983 – 98,983 – – – – 4,418 – 4,418 4,418 103,401 The notes on pages 64 to 83 are an integral part of these consolidated financial statements. The financial statements on pages 58 to 83 were approved by the Board on 30 March 2016 and were signed on its behalf by: R. Watson obe Director Hilton Food Group plc – Registered number: 06165540 N. Majewski Director 61 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Consolidated statement of changes in equity Group Balance at 30 December 2013 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 28 December 2014 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 3 January 2016 Company Balance at 30 December 2013 Profit for the year Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 28 December 2014 Profit for the year Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 3 January 2016 Attributable to owners of the parent Notes Share capital £’000 7,216 – Share premium £’000 5,885 – Employee share schemes reserve £’000 857 – Foreign currency translation Retained reserve earnings £’000 £’000 2,422 63,989 – 18,071 Reverse acquisition reserve £’000 (31,700) – Merger reserve £’000 Total £’000 919 49,588 – 18,071 Non- controlling Total interests equity £’000 £’000 4,670 54,258 1,479 19,550 – – 43 – – – 43 7,259 – – – 27 – – – 27 7,286 – – 794 406 150 – 1,350 7,235 – – – 516 408 32 – 956 8,191 7,216 – 5,885 – – 43 – 794 – – – 43 7,259 – – 27 – – – 27 7,286 406 150 – 1,350 7,235 – – 516 408 32 – 956 8,191 12 12 12 12 – – – (4,446) – (4,446) 18,071 – – – – – – (4,446) (315) (4,761) – 13,625 837 – 1,164 14,789 837 – (151) (265) – (416) 441 – – – – – – (9,343) (9,343) (2,024) 72,717 – – – – (31,700) – – – – 255 (115) (9,343) (8,366) 919 54,847 255 – (115) – (10,391) (1,048) (1,048) (9,414) 4,786 59,633 – – – – – 20,017 (2,465) – (2,465) 20,017 – – – – – – – – – – 20,017 1,442 21,459 (2,465) (274) (2,739) 17,552 543 1,168 18,720 543 – 342 118 – 460 901 – – – – – – (9,905) (9,905) (4,489) 82,829 – – – – (31,700) – – – – 750 150 (9,905) (8,462) 919 63,937 750 – 150 – (10,921) (1,016) (1,016) (9,478) 4,938 68,875 – – – – – – – – – – – – – – – – – – – – – 11,922 10,891 10,891 – – – – – (9,343) – – (9,343) – 13,470 – 13,555 – 13,555 – – – – – – – – – (9,905) (9,905) 17,120 – – – – – – – – – – – – – – – – – 71,019 96,042 10,891 – – – 10,891 837 – – – – 406 150 (9,343) (7,950) 71,019 98,983 – 13,555 – 13,555 543 – – – – – 408 32 (9,905) (8,922) 71,019 103,616 The notes on pages 64 to 83 are an integral part of these consolidated financial statements. 62 Hilton Food Group plc Annual report and financial statements 2015Consolidated cash flow statement Cash flows from operating activities Cash generated from operations Interest paid Income tax (paid)/received Net cash generated from/(used in) operating activities Cash flows from investing activities Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of intangible assets Interest received Dividends received Net cash (used in)/generated from investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Repayment of inter-company loan Issue of ordinary shares Dividends paid to owners of the parent Dividends paid to non-controlling interests Net cash (used in)/generated from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange losses on cash and cash equivalents Cash and cash equivalents at end of the year 2015 53 weeks £’000 50,960 (1,148) (4,553) 45,259 (13,676) 77 (54) 97 – (13,556) 3,336 (6,157) – 543 (9,905) (1,016) (13,199) 18,504 35,586 (1,284) 52,806 Group 2014 52 weeks £’000 47,626 (976) (5,530) 41,120 (31,830) 129 (11,599) 102 – (43,198) 36,193 (21,923) – 837 (9,343) (1,048) 4,716 2,638 34,642 (1,694) 35,586 2015 53 weeks £’000 Company 2014 52 weeks £’000 – (72) 54 (18) – – – – 13,600 13,600 – – (4,403) 543 (9,905) – (13,765) (183) 333 – 150 – (171) 87 (84) – – – – 11,000 11,000 – – (2,266) 837 (9,343) – (10,772) 144 189 – 333 Notes 24 18 The notes on pages 64 to 83 are an integral part of these consolidated financial statements. 63 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Notes to the financial statements 1 General information Hilton Food Group plc (“the Company”) and its subsidiaries (together “the Group”) is a specialist retail meat packing business supplying major international food retailers in thirteen European countries and Australia. The Company’s subsidiaries are listed in note 15. The Company is a public limited company incorporated and domiciled in the UK. The address of the registered office is 2–8 The Interchange, Latham Road, Huntingdon, Cambridgeshire PE29 6YE. The registered number of the Company is 06165540. The Company maintains a Premium Listing on the London Stock Exchange. The financial year represents the 53 weeks to 3 January 2016 (prior financial year 52 weeks to 28 December 2014). These consolidated financial statements were approved for issue on 30 March 2016. The Company has taken advantage of the exemption in Section 408 Companies Act 2006 not to publish its individual income statement, statement of comprehensive income and related notes. Profit for the year dealt with in the income statement of Hilton Food Group plc amounted to £13,555,000 (2014: £10,891,000). 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated. Basis of preparation The consolidated financial statements of Hilton Food Group plc have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on the going concern basis. The reasons why the Directors consider this basis to be appropriate are set out in the Performance and financial review on page 21. The financial statements are presented in Sterling and all values are rounded to the nearest thousand (£’000) except when otherwise indicated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. Basis of consolidation These consolidated financial statements comprise the financial statements of Hilton Food Group plc (“the Company”), its subsidiaries and its share of profit in joint ventures, together, (“the Group”) drawn up to 3 January 2016. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. A subsidiary is an entity controlled, either directly or indirectly, by the Company, where control is the power to govern the financial and operating policies of the entity. All inter-company balances and transactions, including unrealised profits arising from inter-group transactions, are eliminated on consolidation. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Joint ventures are all entities which the Group exercises joint control and has an interest in the net assets of that entity. Investments in joint ventures are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s share of post-acquisition profit or loss is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. 64 Hilton Food Group plc Annual report and financial statements 2015International Financial Reporting Standards (a) New standards, amendments and interpretations effective in 2015 None (b) New standards, amendments and interpretations issued but not yet effective, are subject to EU endorsement and not early adopted Amendment to IAS 1 ‘Presentation of financial statements’ on disclosure initiative (1 January 2016) Amendment to IAS 7 ‘Statement of cash flows’ on disclosure initiative (1 January 2016) (*) Amendment to IAS 16 ‘Property, plant and equipment’ and IAS 38 ‘Intangible assets’ on clarification of acceptable methods of depreciation and amortisation (1 January 2017) Amendment to IAS 16 ‘Property, plant and equipment’ and IAS 41 ‘Biological assets’ regarding bearer plants (1 January 2016) (*) Amendment to IAS 16 ‘Property, plant and equipment’ on depreciation (1 January 2016) (*) Amendment to IAS 19 ‘Employee benefits’ on defined benefit plans (1 February 2015) Amendment to IAS 27 ‘Separate financial statements’ (1 January 2016) Amendment to IFRS 10 ‘Consolidated financial statements’ and IAS 28 ‘Investments in associates’ on sale or contribution of assets (1 January 2016) (*) IFRS 9 ‘Financial instruments’ and amendment to IFRS 9 ‘Financial instruments’ on general hedge accounting (1 January 2018) (*) Amendment to IFRS 10 ‘Consolidated financial statements’ and IAS 28 ‘Investments in associates’ on investment entities applying the consolidation exemption (1 January 2016) (*) Amendment to IFRS 11 ‘Joint arrangements’ on acquisition of an interest in a joint operation (1 January 2016) IFRS 14 ‘Regulatory deferral accounts’ (1 January 2016) (*) IFRS 15 ‘Revenue from customers with contracts’ (1 January 2018) (*) IFRS 16 ‘Leases’ (1 January 2019) (*) (*) Not yet endorsed by the EU Other than IFRS 16 none of these IFRSs, IFRIC interpretations or amendments are expected to have a material impact on the Group or the Company. There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group or Company. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue may be increased and/or decreased by reference to a range of pre-agreed and pre-defined performance measures. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and the criteria set out in the following paragraph have been met. The Group sells meat in the wholesale market. Sales of goods are recognised when a Group entity has delivered products to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery does not occur until the products have been shipped to the location specified by the customer, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of operating segments, has been identified as the Group’s Executive Directors. 65 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 20152 Summary of significant accounting policies (continued) Foreign currency translation (a) 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 Sterling, which is the Company’s functional and the Group’s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and – all resulting currency translation differences are recognised in other comprehensive income and disclosed as a separate component of equity in a foreign currency translation reserve. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity 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 assets and liabilities of the foreign entity and translated at the closing rate. Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment in value. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated using the straight line method to allocate the cost of property, plant and equipment to their residual values over their estimated useful economic lives, as follows: Leasehold buildings and improvements Plant and machinery Fixtures and fittings Motor vehicles Annual rate 4%–14% 14%–33% 14%–33% 25% Land is not depreciated. Assets in the course of construction are not depreciated until commissioned. The residual value and useful economic lives of property, plant and equipment are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying value is written down to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. These impairment losses are recognised in the income statement. Following the recognition of an impairment loss, the depreciation charge applicable to the asset is adjusted prospectively in order to systematically allocate the revised carrying amount, net of any residual value, over the remaining useful economic life. 66 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continuedIntangible assets (a) Goodwill Goodwill on acquisitions of subsidiaries and purchase of non-controlling interests is included in ‘intangible assets’, tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill represents the excess of the cost of the acquisition or purchase over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or non-controlling interest at the date of acquisition. (b) Computer software Acquired software licences are stated at cost less accumulated amortisation and are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight line basis over their useful economic lives of three to seven years. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. (c) Product licences The costs of acquiring product licences are capitalised and amortised on a straight line basis over their expected useful economic lives of five to ten years. Investments Investments in subsidiary undertakings and joint ventures are carried at cost less provision for impairment. Impairment of non-financial assets Assets that have an indefinite useful economic life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell, and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Financial assets (a) Classification The Group classifies all of its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the balance sheet. (b) Recognition and measurement Loans and receivables are recognised initially at fair value and subsequently carried at amortised cost using the effective interest method. (c) Impairment of financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is either determined on the first in first out basis or by the ‘retail method’ depending on the subsidiary. The ‘retail method’ computes cost on the basis of selling price less the appropriate trading margin. Cost comprises material costs, direct wages and other direct production costs together with a proportion of production overheads relevant to the stage of completion of work in progress and finished goods and excludes borrowing costs. Net realisable value represents the estimated selling price less costs to completion and appropriate selling and distribution costs. Provision is made, where necessary, for slow moving, obsolete and defective inventories. Trade and other receivables Trade receivables represent amounts due from customers for goods sold or services performed in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. 67 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 20152 Summary of significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. Bank overdrafts are shown on the balance sheet within borrowings in current liabilities. Share capital and reserves Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. The share premium and employee share schemes reserve represents the premium on new shares issued in connection with and the fair value of share options outstanding under the Group’s share schemes respectively. The foreign currency translation reserve represents the cumulative currency differences arising on the translation of the Group’s overseas subsidiaries. The merger and reverse acquisition reserves arose during 2007 following the restructuring of the Group. Trade and other payables Trade payables represent obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year. If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings All 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. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. 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. Borrowing costs directly attributable to an acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. All other borrowing costs are recognised in the income statement in the period in which they are incurred. Leases Assets acquired under a lease which transfers substantially all of the risks and rewards of ownership to the Group, are capitalised as property, plant and equipment at the lower of their fair value and the present value of the minimum lease payments and are depreciated over the shorter of their useful economic lives and their lease term with any impairment being recognised in accumulated depreciation. Amounts payable under such leases (finance leases), net of transaction costs, are classified as current and non-current liabilities based on the lease payment dates. Lease payments are treated as consisting of capital and interest elements and the interest is charged to the income statement in proportion to the reducing capital element outstanding. Leases where the lessor retains substantially all of the risks and rewards of ownership are classified as operating leases. The annual rentals under operating leases are charged to the income statement as incurred on a straight line basis over the period of the lease. Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge represents the expected tax payable or recoverable on the taxable profit for the year using tax laws enacted or substantively enacted at the balance sheet date. Deferred income tax is recognised, using the liability method, on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the 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. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 68 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continuedDeferred income 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 except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. 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 tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Pensions and other post-employment benefits The Group operates defined contribution schemes for certain employees in the UK, Ireland, the Netherlands and Denmark and contributes to a state administered money purchase scheme in Poland. The Group pays contributions to publicly or privately administered pension insurance plans and has no further payment obligations once the contributions have been made. The contributions are recognised as an employee benefit expense when they are due. In the Netherlands and Sweden the Group contributes to industry-wide pension schemes for its employees. Although having some defined benefit features, the Group’s liability to these schemes is limited to the fixed contributions which are recognised as an expense when they are due. Accordingly the Group has accounted for these schemes as defined contribution schemes. Share-based payments The Group operates a number of equity settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of options is recognised as an expense with a corresponding adjustment to equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non- market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest based on non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. All adjustments to equity are recognised as a separate component of equity in an employee share scheme reserve. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders. 3 Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk including price risk, foreign exchange risk and cash flow interest rate risk, credit risk and liquidity risk. The Group has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Group by monitoring the foregoing risks. (a) Market risk (i) Price risk The Group is not exposed to equity securities price risk as it holds no listed or other equity investments. The Group is exposed to commodity price risk which is significantly mitigated through its customer agreements which are on a cost plus or agreed packing rate basis. (ii) Foreign exchange risk The Group is exposed to foreign exchange risk in the normal course of business in its overseas operations, principally on transactions in Euros, Swedish Krona, Danish Krone and Polish Zloty, although such risk is mitigated as natural hedges exist in each operation through matching local currency cash flows. The Group regularly monitors foreign exchange exposure and to date has deemed it not appropriate to hedge its foreign exchange position. (iii) Cash flow interest rate risk The Group’s interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group seeks to manage exposure to interest rate risk through interest rate caps over the majority of its long term borrowings. (iv) Sensitivity analysis Group Annual effect of a change in Group-wide interest rates by 0.5% Annual effect of a change in exchange rates to the GBP £ by 10% Income statement £’000 146 -146 1,871 -1,531 2015 Equity £’000 146 -146 6,317 -5,168 Income statement £’000 92 -92 2,056 -1,682 2014 Equity £’000 92 -92 6,202 -5,074 69 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 20153 Financial risk management (continued) (b) Credit risk The Group is exposed to credit risk in respect of credit exposures to its retail customer partners and banking arrangements. The Group, whose only customers comprise blue chip international supermarket retailers, has implemented policies that require appropriate credit checks on potential customers before sales are made and in relation to its banking partners. The Group’s maximum exposure to credit risk is £143.7m (2014: £146.8m) as stated in note 27. (c) Liquidity risk The Group monitors regular cash forecasts to ensure that it has sufficient cash to meet operational needs whilst maintaining sufficient headroom on its undrawn committed borrowing facilities and without breaching its banking covenants. The Group held significant cash and cash equivalents of £52.8m (2014: £35.6m) and maintains a mix of long term and short term debt finance. The Group’s financial liabilities measured as the contractual undiscounted cash flows mature as follows: Less than one year Between one and two years Between two and five years Over five years Borrowings £’000 12,155 11,948 15,024 – Finance leases £’000 317 326 1,025 1,286 2015 Trade and other payables £’000 132,970 – – – Borrowings £’000 11,468 7,092 24,409 – Finance leases £’000 329 337 1,062 1,732 2014 Trade and other payables £’000 152,702 – – – 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 reduce debt. The Group monitors capital on the basis of a gearing ratio. This ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown on the consolidated balance sheet) less cash and cash equivalents. EBITDA is calculated as operating profit before significant interest, tax, depreciation and amortisation. There was gearing of nil as at the year end (2014: 18%). Fair value estimation The carrying value of trade receivables (less impairment provisions) and trade payables are assumed to approximate their fair values. 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. The Directors consider that there is a single level of fair value measurement hierarchy for disclosure purposes. 4 Critical accounting estimates and judgements 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. Some of Hilton’s long term supply contracts are on a cost plus basis. IFRIC 4 requires that such arrangements are reviewed to determine whether they contain a lease. These cost plus agreements typically contain benchmarking clauses which allow our customers to obtain competitive pricing or to source its supply from a competitor. Additionally product inputs and packaging are traded in active markets which are monitored by our customers and furthermore product selling prices are updated on a frequent basis thereby resulting in pricing that is, in substance, a market price. On this basis the criteria in IFRIC 4 for determining whether these agreements contain a lease are not met. During 2015 and 2014 there were no critical accounting estimates or other judgements in relation to the application of the Group’s accounting policies. 70 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued5 Segment information Management have determined the operating segments based on the reports reviewed by the Executive Directors that are used to make strategic decisions. The Executive Directors have considered the business from both a geographic and product perspective. From a geographic perspective, the Executive Directors consider that the Group has seven operating segments: i) United Kingdom; ii) Netherlands; iii) Republic of Ireland; iv) Sweden; v) Denmark, vi) Central Europe including Poland, Czech Republic, Hungary, Slovakia, Latvia, Lithuania and Estonia and vii) Central costs and other including the share of profit from the joint venture in Australia. The United Kingdom, Netherlands, Republic of Ireland, Sweden and Denmark have been aggregated into one reportable segment ‘Western Europe’ as they have similar economic characteristics as identified in IFRS 8. Central Europe and Central costs and other comprise the other reportable segments. From a product perspective the Executive Directors consider that the Group has only one identifiable product, wholesaling of meat. The Executive Directors consider that no further segmentation is appropriate, as all of the Group’s operations are subject to similar risks and returns and exhibit similar long term financial performance. The segment information provided to the Executive Directors for the reportable segments is as follows: Total segment revenue Inter-segment revenue Revenue from external customers Operating profit/(loss) /segment result Finance income Finance costs Income tax expense Profit/(loss) for the year Depreciation and amortisation Additions to non-current assets Segment assets Current income tax assets Deferred income tax assets Total assets Segment liabilities Borrowings Current income tax liabilities Deferred income tax liabilities Total liabilities Western Europe £’000 1,020,844 (187) 1,020,657 32,107 20 (1,066) (6,959) 24,102 18,205 12,905 Central Europe £’000 74,165 – 74,165 2,255 76 – (455) 1,876 1,036 547 Central costs and other £’000 2015 Total £’000 – 1,095,009 – (187) – 1,094,822 Western Europe £’000 1,018,368 (1,534) 1,016,834 (5,363) 1 (82) 925 (4,519) 28,999 97 (1,148) (6,489) 21,459 27,115 20 (667) (5,902) 20,566 122 278 19,363 13,730 14,354 42,492 Central Europe £’000 82,156 – 82,156 2,426 81 – (502) 2,005 1,186 824 Central costs and other £’000 2014 Total £’000 – 1,100,524 – (1,534) – 1,098,990 (3,479) 1 (309) 766 (3,021) 26,062 102 (976) (5,638) 19,550 96 113 15,636 43,429 224,739 17,836 4,297 165,283 9,411 1,976 240,231 15,949 3,467 190,316 7,521 1,163 246,872 – 1,000 247,872 176,670 – 673 1,654 178,997 259,647 1,532 771 261,950 199,000 1,442 – 1,875 202,317 Sales between segments are carried out at arm’s length. Revenue from external customers reported to the Executive Directors is measured in a manner consistent with that in the income statement. The Executive Directors assess the performance of each operating segment based on its operating profit. Operating profit is measured in a manner consistent with that in the income statement. The amounts provided to the Executive Directors with respect to total assets and liabilities are measured in a manner consistent with that of the financial statements. The assets are allocated based on the operations of the segment and their physical location. The liabilities are allocated based on the operations of the segment. The Group interest bearing reorganisation loan is not considered to be a segment liability. 71 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 20155 Segment information (continued) The Group has four principal customers (comprising groups of entities known to be under common control), Tesco, Ahold, Coop Danmark and ICA Gruppen. These customers are located in the United Kingdom, Netherlands, Republic of Ireland, Sweden, Denmark and Central Europe including Poland, Czech Republic, Hungary, Slovakia, Latvia, Lithuania and Estonia. Analysis of revenues from external customers and non-current assets are as follows: Revenues from external customers Non-current assets excluding deferred tax assets Analysis by geographical area United Kingdom – country of domicile Netherlands Sweden Republic of Ireland Denmark Central Europe Analysis by principal customer Customer 1 Customer 2 Customer 3 Customer 4 Other 2015 £’000 39,784 9,445 13,752 3,999 9,757 2,962 79,699 2014 £’000 40,200 10,645 13,828 4,351 13,821 3,578 86,423 2015 £’000 2014 £’000 441,673 257,398 182,621 55,880 83,174 74,076 1,094,822 513,401 284,560 197,608 81,634 17,619 1,094,822 391,139 266,049 197,603 60,289 101,754 82,156 1,098,990 472,883 299,779 212,698 99,996 13,634 1,098,990 6 Auditors’ remuneration Services provided by the Company’s auditor and its associates During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors and its associates: Group Fees payable to the Company’s auditors for the audit of the parent company and consolidated financial statements Fees payable to the Company’s auditors and its associates for other services: – The audit of the Company’s subsidiaries pursuant to legislation – Other services pursuant to legislation – Services relating to taxation – All other services Total fees payable to the Company’s auditors and its associates Fees payable to other auditors in respect of services provided to subsidiary undertakings 7 Expenses by nature Group Changes in inventories of finished goods and goods for resale Raw materials and consumables used Employee benefit expense (note 8) Depreciation and amortisation – owned assets Depreciation and amortisation – leased assets Repairs and maintenance expenditure on property, plant and equipment Trade receivables – impairment Hire of plant and machinery Transportation expenses Operating lease payments Foreign exchange (gains)/losses Other expenses Total cost of sales, distribution costs and administrative expenses 2015 £’000 2014 £’000 121 125 47 104 3 400 51 129 138 43 59 9 378 53 2015 £’000 1,009 893,813 73,639 19,213 150 11,178 70 888 10,052 6,756 (217) 50,494 1,067,045 2014 £’000 407 903,841 74,570 15,470 166 10,894 35 801 10,476 7,070 59 50,023 1,073,812 72 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued8 Employee benefit expense Group Staff costs during the year Wages and salaries Social security costs Share options granted to Directors and employees Other pension costs Group Average number of persons employed (including Executive Directors) during the year by activity Production Administration Group Key management compensation (including Directors) Salaries and short term employee benefits, including termination benefits Post-employment benefits Share-based payments Group Directors’ emoluments Aggregate emoluments Company contribution to money purchase pension scheme 2015 £’000 62,383 7,797 750 2,709 73,639 2015 Number 2,325 587 2,912 2015 £’000 3,396 325 525 4,246 2015 £’000 2,640 259 2,899 2014 £’000 62,450 8,830 255 3,035 74,570 2014 Number 2,271 581 2,852 2014 £’000 3,403 328 179 3,910 2014 £’000 2,161 252 2,413 Further details of Directors’ emoluments and share interests are given in the Directors’ remuneration report. There are no other employees of the Company other than the Directors. Employee expense of the Company amounted to £nil (2014: £nil). 9 Finance income and costs Group Finance income Interest income on short term bank deposits Interest on income taxes Finance income Finance costs Bank borrowings Finance leases Exchange (losses)/gains on foreign currency borrowings Other interest expense Finance costs Finance costs – net 2015 £’000 2014 £’000 90 7 97 (920) (161) (3) (64) (1,148) (1,051) 97 5 102 (765) (189) 22 (44) (976) (874) 73 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201510 Income tax expense Group Current income tax Current tax on profits for the year Adjustments to tax in respect of previous years Total current tax Deferred income tax Origination and reversal of temporary differences Adjustments to tax in respect of previous years Total deferred tax Income tax expense 2015 £’000 6,787 (18) 6,769 (389) 109 (280) 6,489 2014 £’000 4,795 47 4,842 704 92 796 5,638 Deferred tax credited directly to equity during the year in respect of employee share schemes amounted to £118,000 (2014: £265,000 charge). The tax on the Group’s profit before income tax differs from the theoretical amount that would arise using the standard rate of UK Corporation Tax of 20.25% (2014: 21.5%) applied to profits of the consolidated entities as follows: Profit before income tax Tax calculated at the standard rate of UK Corporation Tax 20.25% (2014: 21.5%) Expenses not deductible/(income not taxable) for tax purposes Adjustments to tax in respect of previous years Profits taxed at rates other than 20.25% (2014: 21.5%) Other Income tax expense There is no tax impact relating to components of other comprehensive income. 2015 £’000 27,948 5,659 371 91 375 (7) 6,489 2014 £’000 25,188 5,415 (37) 139 133 (12) 5,638 11 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options for which 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. Group Profit attributable to owners of the parent Weighted average number of ordinary shares in issue Adjustment for share options Adjusted weighted average number of ordinary shares Basic and diluted earnings per share (£’000) (thousands) (thousands) (thousands) (pence) Basic 20,017 72,748 – 72,748 27.5 2015 Diluted 20,017 72,748 970 73,718 27.2 12 Dividends Group and Company Final dividend in respect of 2014 paid 9.5p per ordinary share (2014: 9.1p) Interim dividend in respect of 2015 paid 4.1p per ordinary share (2014: 3.8p) Total dividends paid Basic 18,071 72,379 – 72,379 25.0 2015 £’000 6,919 2,986 9,905 2014 Diluted 18,071 72,379 714 73,093 24.7 2014 £’000 6,590 2,753 9,343 The Directors declared a second interim dividend of 9.2p which is to be paid on 1 April 2016 and propose a final dividend of 1.3p per share payable on 1 July 2016 to shareholders who are on the register at 3 June 2016. These dividends totalling £7.7m have not been recognised as a liability in these consolidated financial statements. 74 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued13 Property, plant and equipment Group Cost At 30 December 2013 Exchange adjustments Additions Reclassification Disposals At 28 December 2014 Accumulated depreciation At 30 December 2013 Exchange adjustments Charge for the year Reclassification Disposals At 28 December 2014 Net book amount At 30 December 2013 At 28 December 2014 Cost At 29 December 2014 Exchange adjustments Additions Reclassification Disposals At 3 January 2016 Accumulated depreciation At 29 December 2014 Exchange adjustments Charge for the year Reclassification Disposals At 3 January 2016 Net book amount At 3 January 2016 Land and buildings (including leasehold improvements) £’000 Plant and machinery £’000 Fixtures and fittings £’000 Motor vehicles £’000 26,162 (909) 13,176 (754) – 37,675 16,328 (535) 1,966 (492) – 17,267 9,834 20,408 37,675 (724) 3,521 – (1,464) 39,008 17,267 (460) 3,737 – (1,464) 19,080 153,085 (9,319) 17,473 3,344 (4,368) 160,215 106,567 (6,364) 11,391 2,582 (4,265) 109,911 46,518 50,304 160,215 (5,167) 9,391 (235) (561) 163,643 109,911 (3,573) 12,219 (72) (406) 118,079 11,151 (636) 1,165 (2,672) (454) 8,554 8,805 (476) 1,006 (2,090) (443) 6,802 2,346 1,752 8,554 (250) 755 53 (88) 9,024 6,802 (188) 860 21 (91) 7,404 19,928 45,564 1,620 311 (3) 16 82 (109) 297 133 (1) 74 – (87) 119 178 178 297 (1) 9 – (7) 298 119 – 68 – (7) 180 118 Total £’000 190,709 (10,867) 31,830 – (4,931) 206,741 131,833 (7,376) 14,437 – (4,795) 134,099 58,876 72,642 206,741 (6,142) 13,676 (182) (2,120) 211,973 134,099 (4,221) 16,884 (51) (1,968) 144,743 67,230 Land and buildings are held under short leaseholds. Details of bank borrowings secured on assets of the Group are given in note 19. Depreciation charges are included within administrative expenses in the income statement. The cost and net book amount of property plant and equipment in the course of its construction included above comprise plant and machinery £1,654,000 (2014: £1,209,000). Property, plant and equipment include the following amounts where the Group is a lessee under a finance lease: Cost – capitalised finance leases Accumulated depreciation Net book amount 2015 £’000 3,011 (1,794) 1,217 2014 £’000 3,195 (1,742) 1,453 Included in assets held under finance leases are land and buildings with a net book amount of £1,217,000 (2014: £1,453,000). 75 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201514 Intangible assets Group Cost At 30 December 2013 Exchange adjustments Additions At 28 December 2014 Accumulated amortisation At 30 December 2013 Exchange adjustments Charge for the year At 28 December 2014 Net book amount At 30 December 2013 At 28 December 2014 Cost At 29 December 2014 Exchange adjustments Additions Reclassifications Disposals At 3 January 2016 Accumulated amortisation At 29 December 2014 Exchange adjustments Charge for the year Reclassifications Disposals At 3 January 2016 Net book amount At 3 January 2016 Product licences £’000 Computer software £’000 Goodwill £’000 Total £’000 8,833 (977) 11,449 19,305 7,789 (525) 892 8,156 1,044 11,149 19,305 (560) – – – 18,745 8,156 (408) 2,142 – – 9,890 4,441 (475) 150 4,116 3,661 (414) 307 3,554 780 562 4,116 (137) 54 182 (123) 4,092 3,554 (109) 337 51 (123) 3,710 836 – – 836 – – – – 836 836 836 – – – – 836 – – – – – – 14,110 (1,452) 11,599 24,257 11,450 (939) 1,199 11,710 2,660 12,547 24,257 (697) 54 182 (123) 23,673 11,710 (517) 2,479 51 (123) 13,600 8,855 382 836 10,073 Amortisation charges are included within administrative expenses in the income statement. 76 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued15 Investments Investments in subsidiaries Investments in subsidiary undertakings are recorded at cost, which is the fair value of consideration paid. Company At 29 December 2014 and 3 January 2016 The subsidiary undertakings of the Group are: Subsidiary undertakings Hilton Foods UK Limited Hilton Meats Zaandam BV Hilton Foods (Ireland) Limited HFG Sverige AB Hilton Foods Danmark A/S Hilton Foods Ltd Sp zoo Hilton Food Solutions Limited Hilton Foods Limited Hilton Meats Holland Limited Hilton Food Group (Europe) Limited Hilton Foods Asia Pacific Limited Hilton Food.com Limited Country of incorporation or registration Northern Ireland Netherlands Republic of Ireland Sweden Denmark Poland England & Wales Northern Ireland Northern Ireland Northern Ireland England & Wales Northern Ireland Nature of business Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Meat trading Holding company Holding company Holding company Holding company Dormant 2015 £’000 102,985 2014 £’000 102,985 (%) Proportion of ordinary shares held by Parent – – – – – – – 100 – – – – Group 100 80 100 100 100 100 55 – 80 100 100 100 All subsidiary undertakings are included in the consolidation. The Company’s voting rights in its subsidiary undertakings are the same as its effective interest in its subsidiary undertakings. Investments in joint ventures The Group uses the equity method of accounting for its interest in joint ventures. The aggregate movement in the Group’s investments in joint ventures is as follows: Group At 29 December 2014 Profit for the period Effect of movements in foreign exchange At 3 January 2016 2015 £’000 1,234 1,222 (60) 2,396 2014 £’000 405 884 (55) 1,234 Where relevant, management accounts for the joint venture have been used to include the results up to 3 January 2016. The Group’s share of the net assets, income and expenses of the joint venture are detailed below: Net assets Income Expenses Taxation Profit after tax The joint venture of the Group is: Joint venture Woolworths Meat Co. Pty Ltd Country of incorporation or registration Australia Nature of business Specialist meat packing 2015 £’000 2,396 1,711 (1) (488) 1,222 2014 £’000 1,234 1,744 (481) (379) 884 (%) Proportion of ordinary shares held by Parent – Group 50 77 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201516 Inventories Group Raw materials and consumables Finished goods and goods for resale 2015 £’000 15,192 3,080 18,272 2014 £’000 17,846 4,183 22,029 The cost of inventories recognised as an expense and included in cost of sales amounted to £894,822,000 (2014: £904,248,000). The Group charged £289,000 in respect of inventory write-downs (2014: £201,000). The amount charged has been included in cost of sales in the income statement. 17 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Amounts owed by Group undertakings Amounts owed by related parties (see note 26) Other receivables Prepayments 2015 £’000 85,869 (165) 85,704 – 605 4,628 5,158 96,095 Group 2014 £’000 105,345 (213) 105,132 – 33 6,028 4,416 115,609 The carrying amounts of trade and other receivables are denominated in the following currencies: Currency UK Pound Euro Swedish Krona Danish Krone Polish Zloty Australian Dollar 2015 £’000 16,262 46,866 19,033 9,464 3,865 605 96,095 Group 2014 £’000 32,683 48,299 20,636 11,092 2,866 33 115,609 2015 £’000 – – – 470 – – – 470 2015 £’000 470 – – – – – 470 Company 2014 £’000 – – – 53 – – – 53 Company 2014 £’000 53 – – – – – 53 The fair values of trade and other receivables are the same as their carrying value. The maximum exposure to credit risk is the fair value of each class of receivable mentioned above. Trade receivables impaired and the amount of the impairment provision was £165,000 (2014: £213,000). The individually impaired receivables mainly relate to invoices which are in dispute. It was assessed that a portion of the receivables is expected to be recovered. The trade receivables that were impaired were all overdue by more than six months. There were no other trade receivables which were overdue. The other classes within trade and other receivables do not contain impaired assets. The trade receivables which are not impaired or overdue are all less than 30 days old. Movements on the provision for impairment of trade receivables are as follows: Group At 29 December 2014 Provision for receivables impairment Receivables written off during the year as uncollectable Exchange differences At 3 January 2016 2015 £’000 213 136 (181) (3) 165 2014 £’000 48 375 (207) (3) 213 78 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued18 Cash and cash equivalents Cash at bank and on hand 19 Borrowings Group Current Bank borrowings Finance lease liabilities Non-current Bank borrowings Finance lease liabilities Total borrowings 2015 £’000 52,806 Group 2014 £’000 35,586 2015 £’000 150 2015 £’000 11,562 166 11,728 26,428 1,977 28,405 40,133 Company 2014 £’000 333 2014 £’000 10,531 156 10,687 30,304 2,269 32,573 43,260 Due to the frequent re-pricing dates of the Group’s loans, the fair value of current and non-current borrowings is approximate to their carrying amount. The carrying amounts of the Group’s borrowings are denominated in the following currencies: Currency UK Pound Euro Swedish Krona 2015 £’000 25,080 2,144 12,909 40,133 2014 £’000 30,737 2,425 10,098 43,260 Borrowings are repayable in quarterly instalments by 2019. Interest on borrowings in Sterling is charged at LIBOR plus 1.6% subject to interest rate caps over £12m of borrowings where LIBOR is capped at 2.5%. Interest on borrowings in Swedish Krona is charged at STIBOR plus 1.6% subject to interest rate caps over SEK 75m of borrowings where STIBOR is capped at 3%. Bank borrowings totalling £37,989,000 (2014: £40,835,000) are secured by fixed and floating charges over the assets of the individual Group borrowers and through joint and several guarantees from each active Group undertaking. The Group has undrawn overdraft and loan borrowing facilities of £28.3m (2014: £46.5m) which expire after one year. The undiscounted contractual maturity profile of the Group’s borrowings is described in note 3. The minimum lease payments and present value of finance lease liabilities is as follows: Group No later than one year Later than one year and no later than five years Later than five years Future finance charges on finance leases Present value of finance lease liabilities Minimum lease payments Present value 2015 £’000 317 1,351 1,282 2,950 (807) 2,143 2014 £’000 329 1,398 1,732 3,459 (1,034) 2,425 2015 £’000 166 1,977 – 2,143 – 2,143 2014 £’000 156 2,269 – 2,425 – 2,425 Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default. The fair value of the Group’s finance lease liabilities is £2,843,000 (2014: £3,315,000). The fair values are based on cash flows discounted using the European Central Bank benchmark main refinancing operations fixed interest rate of 0.05% (2014: 0.05%). 79 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201520 Trade and other payables Trade payables Amounts owed to Group undertakings Social security and other taxes Accruals and deferred income 2015 £’000 114,072 – 3,567 18,898 136,537 Group 2014 £’000 133,284 – 4,480 19,418 157,182 2015 £’000 – – – – – Company 2014 £’000 – 4,403 – 15 4,418 The fair value of trade and other payables are the same as their carrying value. 21 Deferred income tax Group At 31 December 2012 Exchange differences Income statement credit Adjustment in respect of employee share schemes At 29 December 2013 Exchange differences Income statement (charge)/credit Adjustment in respect of employee share schemes At 28 December 2014 The following is the reconciliation of the deferred tax balances in the balance sheet: Group Deferred tax liabilities Deferred tax assets Accelerated capital allowances £’000 (686) 103 (808) – (1,391) 52 178 – (1,161) Other timing differences £’000 540 – 12 (265) 287 – 102 118 507 2015 £’000 (1,654) 1,000 (654) Total £’000 (146) 103 (796) (265) (1,104) 52 280 118 (654) 2014 £’000 (1,875) 771 (1,104) Other timing differences principally relate to share-based payments. The deferred income tax liability above includes £150,000 (2014: £150,000) which is estimated to reverse within 12 months. The deferred income tax asset above is not expected to reverse within 12 months. 22 Ordinary shares Issued and fully paid ordinary shares of 10p each At 29 December 2014 Issue of new shares relating to employee incentive schemes At 3 January 2016 Number of shares (thousands) 72,588 274 72,862 2015 £’000 7,259 27 7,286 Group 2014 £’000 7,216 43 7,259 2015 £’000 7,259 27 7,286 Company 2014 £’000 7,216 43 7,259 All ordinary shares of 10p each have equal rights in respect of voting, receipt of dividends and repayment of capital. 80 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued23 Share-based payment Executive share option scheme Under the Group’s executive share option scheme share options are granted to Executive Directors and to selected senior employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options are exercisable starting three years from the grant date subject to the Group achieving its target growth in earnings per share over the period plus 3%. The options have a contractual option term of 10 years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. All employee sharesave scheme These schemes are open to all eligible employees of the Group (including the Executive Directors) who make regular savings over a three year period. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options are exercisable starting three years from the grant date and must be exercised within six months thereafter. No performance conditions are attached to the options granted under the scheme. Long Term Incentive Plan (LTIP) Under the Group’s Long Term Incentive Plan nil cost share options are granted to Executive Directors and to selected senior employees. The options are exercisable starting three years from the grant date subject to the Group achieving a minimum earnings per share compound growth target. Awards will vest on a sliding scale with 10%-25% of the maximum award applied at the minimum EPS growth target of 5%-8% per year with the full award vesting where EPS growth is at least 10%-18% per year. The options have a contractual option term of 10 years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related exercise prices are as follows: At 30 December 2013 Granted Exercised Lapsed At 28 December 2014 Granted Exercised Lapsed At 3 January 2016 Executive share option Options (’000) 1,601 – (431) – 1,170 – (274) – 896 Exercise price (pence) 210.54 – 194.18 – 216.56 – 198.28 – 222.16 Options (’000) – 472 – (41) 431 348 – (191) 588 Sharesave Exercise price (pence) – 464 – 464.94 463.54 420.00 – 460.27 438.83 Share options outstanding at the end of the year have the following expiry date and exercise prices: Expiry date October 2017 December 2017 December 2018 May 2018 May 2019 May 2020 June 2022 May 2023 April 2024 April 2025 Type of scheme Sharesave Sharesave Sharesave Executive share option Executive share option Executive share option Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan Status Not exercisable Not exercisable Not exercisable Exercisable Exercisable Exercisable Lapsed Not exercisable Not exercisable Not exercisable Exercise price (pence) 460.25 480.00 420.00 199.50 174.75 246.00 nil cost nil cost nil cost nil cost Long Term Incentive Options (’000) 1,906 507 – (24) 2,389 577 – (1,278) 1,688 Exercise price (pence) – – – – – – – – – Number options 2015 (‘000) 254 14 320 134 212 550 – 657 457 574 2014 (‘000) 359 72 – 249 321 600 1,147 759 483 – The fair value of options granted during 2015 determined using the Black-Scholes valuation model ranged from 68p to 390p per option. The significant inputs into the model were the exercise price shown above, volatility of 27% based on a comparison of similar listed companies, dividend yield of 3%, an expected option life of four years, and an annual risk-free interest rate ranging from 0.87% to 0.68%. See note 8 for the total expense recognised in the income statement for share options granted to Directors and employees. 81 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 201524 Cash generated from operations Group Profit before income tax Finance costs – net Operating profit Adjustments for non-cash items: Share of post tax profits of joint venture Depreciation of property, plant and equipment Amortisation of intangible assets Loss on disposal of non-current assets Adjustment in respect of employee share schemes Changes in working capital: Inventories Trade and other receivables Prepaid expenses Trade and other payables Accrued expenses Cash generated from operations The parent company has no operating cash flows. 2015 £’000 27,948 1,051 28,999 (1,222) 16,884 2,479 75 750 3,126 16,283 (744) (15,150) (520) 50,960 2014 £’000 25,188 874 26,062 (884) 14,437 1,199 7 255 424 (112) 592 3,947 1,699 47,626 25 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment 2015 £’000 688 Group 2014 £’000 2,547 2015 £’000 – Company 2014 £’000 – (b) Operating lease commitments The Group leases various properties under non-cancellable operating lease arrangements. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Group No later than one year Later than one year and no later than five years Later than five years expiring 2021 to 2026 Land and buildings Plant and equipment 2015 £’000 5,658 12,518 15,718 33,894 2014 £’000 6,019 15,043 19,229 40,291 2015 £’000 1,001 1,828 45 2,874 2014 £’000 802 2,025 36 2,863 82 Hilton Food Group plc Annual report and financial statements 2015Notes to the financial statements continued26 Related party transactions and ultimate controlling party The Directors do not consider there to be one ultimate controlling party. The companies noted below are all deemed to be related parties by way of common Directors. Sales made on an arm’s length basis on normal credit terms to related parties during the year were as follows: Group Woolworths Limited and subsidiaries–recharge of joint venture costs Amounts owing from related parties at the year end were as follows: Group Woolworths Limited and subsidiaries The Company’s related party transactions with other Group companies during the year were as follows: Company Hilton Foods Limited – dividend received Hilton Foods Limited – interest expense Hilton Foods UK Limited – payment for group relief 2015 £’000 1,581 2014 £’000 1,245 Owed from related parties 2015 £’000 605 2015 £’000 13,600 56 30 2014 £’000 33 2014 £’000 11,000 140 53 At the year end £439,000 was owed by Hilton Foods Limited (2014: £4,403,000 owed to Hilton Foods Limited) and £31,000 (2014: £53,000) was owed by Hilton Foods UK Limited. Details of key management compensation are given in note 8. 27 Financial instruments by category The accounting policies for financial instruments have been applied to the line items below: Group Assets as per balance sheet Trade and other receivables Cash and cash equivalents Group Liabilities as per balance sheet Trade and other payables Borrowings Loans and receivables 2015 £’000 2014 £’000 90,937 52,806 143,743 111,193 35,586 146,779 Other financial liabilities at amortised cost 2015 £’000 2014 £’000 132,970 40,133 173,103 152,702 43,260 195,962 In addition to the above, amounts owed to the Company by Group undertakings of £31,000 (2014: £53,000) are classified as ‘loans and receivables’ and amounts owed to the Company by Group undertakings of £439,000 (2014: £4,403,000 owed by the Company) are classified as ‘other financial liabilities at amortised cost’. 83 OverviewStrategic reportGovernanceFinancial statementsHilton Food Group plc Annual report and financial statements 2015Registered office and advisors Registered office 2-8 The Interchange Latham Road Huntingdon Cambridgeshire PE29 6YE Advisors Corporate brokers Panmure Gordon (UK) Limited One New Change London EC4M 9AF Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT Legal advisor Taylor Wessing LLP 5 New Street Square London EC4A 3TW Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Waterfront Plaza 8 Laganbank Road Belfast BT1 3LR Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Financial Public Relations Citigate Dewe Rogerson Limited 3 London Wall Buildings London EC2M 5SY Bankers Ulster Bank Limited Donegall Square East Belfast BT1 5UB 84 Hilton Food Group plc Annual report and financial statements 2015H i l t o n F o o d G r o u p p l c A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 5 Hilton Food Group plc 2-8 The Interchange Latham Road Huntingdon Cambridgeshire PE29 6YE www.hiltonfoodgroupplc.com 

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