Genus plc | Annual Report 2017 PIONEERING ANIMAL GENETIC IMPROVEMENT Genus plc | Annual Report 2017 A WORLD LEADER IN ANIMAL GENETIC IMPROVEMENT GENUS HELPS FARMERS TO PRODUCE HIGH-QUALITY MEAT AND MILK MORE EFFICIENTLY AND SUSTAINABLY, WHICH INCREASES THE AVAILABILITY OF SAFE, AFFORDABLE ANIMAL PROTEIN FOR CONSUMERS. STRATEGIC REPORT STRATEGIC REPORT 02 2017 Highlights 04 Business Model 08 Market Overview 10 Strategic Framework 12 Principal Risks and Uncertainties 14 Chairman’s Statement 16 Chief Executive’s Review 18 Strategy in Action 24 Divisional Reviews 30 Financial Review 34 People and Culture 36 Responsible Business CORPORATE GOVERNANCE 40 Chairman’s Letter BUSINESS MODEL 42 Board of Directors and Company For more information Secretary See pages 4-7 44 Genus Executive Leadership Team 46 The Board’s Year in Review 50 Corporate Governance Statement 55 Nomination Committee Report 57 Audit Committee Report 60 Directors’ Remuneration Report 62 Annual Report on Remuneration 82 Other Statutory Disclosures 84 Directors’ Responsibilities Statement FINANCIAL STATEMENTS 85 Independent Auditor’s Report 91 Group Income Statement 92 Group Statement of Comprehensive Income 93 Group Statement of Changes in Equity 94 Group Balance Sheet STRATEGY IN ACTION 95 Group Statement of Cash Flows For more information 96 Notes to the Group Financial See pages 18-23 Statements 149 Parent Company Balance Sheet 150 Parent Company Statement of Changes in Equity 151 Notes to the Parent Company Financial Statements ADDITIONAL INFORMATION 159 Five Year Record – Consolidated Results 160 Glossary 162 Notice of Annual General Meeting 173 Advisers PEOPLE AND CULTURE For more information See pages 34-35 IN 2017, GENUS ACHIEVED AN IMPROVING FINANCIAL PERFORMANCE THROUGH THE YEAR AND MADE STRONG STRATEGIC PROGRESS KARIM BITAR, CEO Genus plc | Annual Report 2017 01 2017 Highlights A YEAR OF SUCCESSFUL DEVELOPMENT WITH STRONG STRATEGIC PROGRESS AND SOLID FINANCIAL PERFORMANCE FINANCIAL HIGHLIGHTS1 £459.1m £56.4m £40.7m • Revenue of £459.1m increased 18% • Adjusted profit before tax up 13% • Statutory profit before tax down (6% in constant currency) with to £56.4m (down 1% in constant 33% to £40.7m, primarily due to strong porcine revenues, up 20% (7% currency) with strong performance lower pension related exceptional in constant currency), particularly in in Genus PIC, particularly China, credits of £5.7m compared with a Asia and from royalties, and a return offset by planned increased R&D £44.2m credit in the prior year, to growth in bovine revenues which investments and lower Genus partially offset by a smaller reduction increased 13% (2% in constant ABS results in the value of biological assets of currency) £1.1m (2016: £17.1m decrease) GROUP REVENUE ADJUSTED PROFIT BEFORE TAX STATUTORY PROFIT BEFORE TAX (£M) (£M) (£M) 2017 459.1 2017 56.4 2017 40.7 2016 388.3 2016 49.7 2016 60.9 2015 398.5 2015 46.6 2015 57.8 2014 372.2 2014 39.3 2014 38.2 2013 345.3 2013 42.5 2013 33.4 0 459 0.0 9.4 18.8 28.2 37.6 47.0 56.4 0.0 60.9 OPERATIONAL HIGHLIGHTS3 CONTINUED OPERATING PROFIT GROWTH OF 7% IMPROVED SECOND HALF PERFORMANCE IN ABS IN PIC ON VOLUMES UP 4%, WITH PARTICULAR AS A RESULT OF ACTIONS TAKEN TO STRENGTHEN STRENGTH IN ASIA EXECUTION AND IMPROVE EFFICIENCY • Secured three new Top 20 porcine customers in • Volume growth of 8% in H2 resulting in volume growth North America of 1% overall in the year (2016: 6% lower) • Signed three new royalty agreements with key Chinese • Full year operating profit 13% lower (30% lower in H1) porcine customers, raising our total number of Chinese royalty customers to eight4 • Appointed new Chief Operating Officer (‘COO’) of Genus ABS Dairy in January 2017 • Acquired Hermitage’s porcine genetics and entered into a strategic distribution and production partnership in March • IVB continued to grow its presence with large accounts 2017, with encouraging early results in the US and in its newly established Mexican business, which is already performing well • Acquired the remaining 49% stake in IVB for £11.4m in March 2017 to further accelerate integration and growth 1 For definitions of adjusted profit, free cash flow, cash conversion and return on invested capital, see Financial Review on pages 30 to 33. Results discussed throughout the Annual Report are on an adjusted basis unless otherwise stated. 2 For definition of adjusted earnings per share, see note 12 on page 108. 3 Based on adjusted results. 4 Includes one new royalty agreement signed post period end in July 2017. 5 The PRRSv programme refers to our development-phase gene editing programme to confer resistance to pigs to Porcine Reproductive and Respiratory Syndrome virus. 02 Genus plc | Annual Report 2017 STRATEGIC REPORT 69.4p £25.4m 19.9% • Adjusted basic earnings per share2 • Strong free cash flow of £25.4m • After tax return on invested capital up 14% to 69.4p (unchanged in (2016: £15.7m), with solid cash improved to 19.9% (2016: 19.1%) constant currency) and statutory conversion of 84% (2016: 88%) and basic earnings per share down good cash inflows from joint • Recommended dividend increased 34% to 53.8p, reflecting the lower ventures (‘JVs’) of £8.3m (2016: by 10% to 23.6p, well covered by exceptional pension credit £3.4m) adjusted earnings at 2.9 times (2016: 2.8 times) • Net debt to EBITDA of 1.5x (2016: 1.4x) after acquisitions and investments of £30.0m (2016: £7.2m) ADJUSTED BASIC EARNINGS PER SHARE FREE CASH FLOW DIVIDEND PER SHARE (PENCE) (£M) (PENCE) 2017 69.4 2017 25.4 2017 23.6 2016 60.7 2016 15.7 2016 21.4 2015 56.8 2015 22.6 2015 19.5 2014 46.5 2014 26.2 2014 17.7 2013 49.1 2013 17.2 2013 16.1 0.00000011.56666723.13333334.70000046.26666757.83333369.400000 0.0 26.2 0.0 23.6 This Strategic Report was approved by RESEARCH AND DEVELOPMENT INVESTMENT INCREASED the Board of Directors on 6 September AS PLANNED BY 27% (12% IN CONSTANT CURRENCY) AS 2017 and signed on its behalf by: Karim Bitar KEY INITIATIVES IN GENOMIC SELECTION, GENDER SKEW Chief Executive AND GENE EDITING MADE SIGNIFICANT PROGRESS Stephen Wilson Group Finance Director • Genus Sexed Semen (‘GSS’) technology successfully scaled up and manufacturing sexed semen in the US and India. Sexcel, the marketing brand of GSS, launched with customers globally on 1 September 2017 and sales have now commenced • Successfully obtained a permanent injunction against Sexing Technologies (‘ST’). ST commenced new patent infringement litigation in June 2017 which will be vigorously defended • Launched new dairy genetic improvement programme in September 2016, De Novo, in partnership with leading breeder De-Su with promising early results in scale and quality of genetics produced • PRRSv resistance development programme progressing as planned: launched a gene editing venture with new experimental facilities, optimised the molecular scissors for carrying out edits, obtained an Investigational New Animal Drug (‘INAD’) regulatory application from the US Food and Drug Administration (‘FDA’) and created the first gene edited pregnancies for the programme5 Genus plc | Annual Report 2017 03 Business Model PRODUCINGSUPERIOR BREEDING LIVESTOCK THROUGH GENETIC IMPROVEMENT WHAT WE DO Genus is a world-leading animal genetics company. We continuously develop better bovine and porcine breeding livestock with desirable characteristics, helping farmers to produce better quality meat and milk more efficiently and sustainably. Examples of desirable characteristics include feed efficiency, disease resistance, protein and fat content, and fertility. HOW WE DO IT We analyse animals’ DNA and look for We also own technology that enables £101.7M markers that are linked to desirable us to screen and process semen for characteristics. We then select animals desirable traits, such as gender, and with the strongest genetic profile and license technology to make precise, breed them to produce even stronger desirable gene edits to animals’ DNA, £72.6M offspring, which we then sell to our which we are employing on product £66.2M customers in the form of live breeding development programmes. £57.0M animals, semen or embryos. For more information See pages 6-7 £40.5M 2013 2014 2015 2016 2017 M+ ● R&D1 ● Capex2 ● Acquisitions & Investments £100 INVESTED IN 2017 1 Includes GSS capitalised development expenses. 2 Includes biological asset increases due to purchases. 04 Genus plc | Annual Report 2017 STRATEGIC REPORT OUR BUSINESS SERVING PORK, BEEF AND DAIRY FARMERS WITH SUPERIOR GENETICS PORK DAIRY AND BEEF Our porcine genetics business PIC sells Our bovine genetics business ABS primarily sells bull semen genetically superior sows, boars and semen, and embryos, which are delivered through artificial to breed pigs with desirable characteristics insemination to breed dairy and beef cattle with desirable for pork production. characteristics for milk and beef production. ABS’s subsidiary IVB offers comprehensive IVF services. SALES PRESENCE IN SALES PRESENCE IN 1 3 K COUNTRIES35+ 2,000+CUSTOMERS GLOBALLY 70+ COUNTRIES 50CUSTOMERS+ M CATTLE INSEMINATIONS 2 M 17 + 139MPEs AND EMBRYO TRANSFERS REVENUE £250m £196m £446M OPERATING PROFIT £95m £21m £116M Note: Excludes Genus R&D revenues & costs. ● Porcine ● Bovine 1 Including through franchises, distributors and joint ventures. 2 MPEs refers to market pig equivalents, a standardised measure of slaughter animals produced by our customers that contain our genetics. 3 Including through distributors. Genus plc | Annual Report 2017 05 Business Model continued HOW WE DRIVE AND DELIVER GENETIC IMPROVEMENT 1 PRODUCE