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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Genus Plc | LSE:GNS | London | Ordinary Share | GB0002074580 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 10.00 | 0.57% | 1,762.00 | 1,762.00 | 1,770.00 | 1,762.00 | 1,750.00 | 1,760.00 | 998 | 08:37:47 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Coml Physical, Biologcl Resh | 689.7M | 33.3M | 0.5043 | 34.94 | 1.16B |
TIDMGNS
RNS Number : 9187Z
Genus PLC
06 September 2018
For Immediate Release 6 September 2018
Genus plc
('Genus', the 'Company' or the 'Group')
PRELIMINARY RESULTS FOR THE YEARED 30 JUNE 2018
STRONG STRATEGIC AND FINANCIAL PROGRESS
Genus, a leading global animal genetics company, announces its preliminary results for the year ended 30 June 2018.
Hot Features
Premium
Actual currency Constant
currency
**
Year ended 30 June 2018 2017 Movement Movement
Adjusted results* GBPm GBPm % %
Revenue 470.3 459.1 2 6
Operating profit inc JVs
exc gene editing 68.1 63.6 7 12
Operating profit inc JVs 63.1 60.1 5 10
Profit before tax 58.5 56.4 4 9
Basic earnings per share
(pence) 75.9 69.4 9 15
---------------------------- ------ ------ --------- -------------
Statutory results
Revenue 470.3 459.1 2
Operating profit 8.2 38.2 (79)
Profit before tax 7.8 40.7 (81)
Profit after tax 41.6 34.3 21
Basic earnings per share
(pence) 69.7 53.8 30
Dividend per share (pence) 26.0 23.6 10
* Adjusted results are before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. Adjusted results are the alternative performance measures used by the Board to monitor underlying performance at a Group and operating segment level. They are consistently applied throughout. See note 1 to these accounts for further information.
** Constant currency percentage movements are calculated by restating the results for the year ended 30 June 2018 at the average exchange rates applied to adjusted operating profit for the year ended 30 June 2017.
2018 Highlights
-- 2018 was another year of positive financial progress as Genus continued to execute its strategy successfully
Financial Highlights
-- Revenue of GBP470.3m increased 2% (6% in constant currency) with strong bovine revenues, up 8% (11% in constant currency), primarily from strong sexed semen sales, while porcine revenues were 1% lower (up 3% in constant currency)
-- Adjusted profit before tax up 4% to GBP58.5m (up 9% in constant currency), with a strong performance in Genus ABS, up 29% in constant currency, and continued growth of 5% in PIC in constant currency. Adjusted operating profit including joint ventures improved 10% in constant currency, or 12% before increased gene editing spending
-- Record adjusted basic earnings per share up 9% to 75.9p (up 15% in constant currency)
-- Statutory profit before tax down 81% to GBP7.8m, due principally to a reduction in the non-cash fair value of biological assets, however, statutory profit after tax increased by 21% to GBP41.6m as a result of non-cash deferred tax credits related to biological assets arising from US tax reforms
-- Statutory basic earnings per share up 30% to 69.7p, reflecting the biological asset reduction and non-cash deferred tax credits mentioned above
-- Solid free cash flow(1) of GBP24.3m (2017: GBP25.4m), achieved alongside significant capital investments for long-term growth, with strong cash conversion(2) of 101% (2017: 84%), while cash inflows from joint ventures were lower at GBP2.8m (2017: GBP8.3m) following a very strong prior year
-- Net debt to EBITDA of 1.4x (2017: 1.5x), with net debt at 30 June 2018 of GBP108.5m (2017: GBP111.6m) after acquisitions and investments of GBP1.8m (2017: GBP30.0m)
-- Reflecting the Board's continuing confidence in the Group's prospects, it is recommending a final dividend of 17.9p per share, to give a total dividend of 26.0p per share, up 10% and well covered by adjusted earnings at 2.9 times (2017: 2.9 times)
Operational Highlights(3)
-- Continued operating profit growth of 5% in PIC on volumes up 8% and royalty revenues up 10%
o Strong profit growth in Europe of almost 50% and Latin America of 17%
o Achieved encouraging first year results from the Hermitage acquisition and partnership
o Strong volume growth of 19% in Asia, though profit growth tempered, as expected, by lower pig prices in China
o Entered into a strategic relationship with Møllevang, a leading Danish porcine genetics company, on 2 July 2018 to distribute elite genetics in the important Danish market
-- ABS achieved profit growth of 29%, with revenue and volume growth in all regions, following the launch of Sexcel(R), ABS's proprietary, innovative sexed genetics product(4)
o Overall volumes up 5%, with sexed volumes up 25% on strong demand for Sexcel with sales ahead of expectations
o Beef volumes up 8% with successful launch of proprietary NuEra(R) beef genetics and increased use of beef genetics in dairy herds
o IVB continued to grow its presence with large accounts achieving 20% volumes increase
o Third-party IntelliGen(R) contracts secured in Europe and India
-- Research and Development investment increased by 13% as planned as key initiatives in gene editing, biosystems engineering and genomic selection made significant progress
o Pregnancies established to expand the population of gene edited pigs from matings of the first batches of founder generation animals born under the PRRSv development programme(5) . First patents issued and continued positive regulatory engagement
o IntelliGen technology successfully commercialised globally to support ABS Sexcel and third-party customers wanting to use a 21st Century sexing technology
o Achieved a leadership position in the dairy Holstein breed with 37 of the top 100 genomic bulls in the US$ Net Merit rankings, driven by the success of De Novo
Commenting, Karim Bitar, Chief Executive said:
"Genus performed strongly in 2018, achieving our financial objectives and making good strategic progress. ABS growth was particularly strong, alongside another good year for PIC.
"The successful launch of Sexcel, our innovative proprietary 21st century sexed semen product in September 2017, was a real highlight after many years of pioneering development. It was very pleasing to hear from dairy farmers how the product performance is exceeding their expectations. The commencement of the strategic partnership with Møllevang in July 2018 will further strengthen and bring new opportunities to our PIC business.
"In the short term, the external environment for many of our customers is challenging due to trade disputes and the recent spread of African Swine Fever to China. Notwithstanding this, we see continuing opportunities for growth. Reflecting the Board's continuing confidence in the Group's prospects we are recommending a 10% increase in the dividend."
An analyst meeting will be held at 8.30am today at Buchanan's offices (107 Cheapside, London EC2V 6DN).
A live webcast will be available to those unable to attend this meeting in person. If you would like to connect to the webcast, please log onto the following web address approximately 10 minutes before 8.30am: http://webcasting.buchanan.uk.com/broadcast/5b6c001249f1e90e1690296f
This announcement is available on the Genus website, www.genusplc.com.
For further information please contact:-
Genus plc Tel: 01256 345970 Karim Bitar, Chief Executive Stephen Wilson, Group Finance Director Buchanan Tel: 0207 466 5000 Charles Ryland/Chris Lane/Sophie Wills
1 Free cash flow is before debt repayments, acquisitions, investments and dividends.
(2) Cash conversion is the cash generated by operations GBP58.3m (2017: GBP46.3m) divided by adjusted operating profit from continuing operations GBP57.7m (2017: GBP55.1m).
(3) Based on adjusted results including joint venture income, less non-controlling interest in constant currency.
(4) Sexcel is the ABS brand of sexed genetics produced with its proprietary 21(st) Century IntelliGen technology.
(5) The PRRSv programme refers to our development-phase gene editing programme to confer resistance to pigs to Porcine Reproductive and Respiratory Syndrome virus.
About Genus
Genus creates advances to animal breeding and genetic improvement by applying biotechnology and sells added value products for livestock farming and food producers. Its technology is applicable across livestock species and is currently commercialised by Genus in the dairy, beef and pork food production sectors.
Genus's worldwide sales are made in over seventy-five countries under the trademarks 'ABS' (dairy and beef cattle) and 'PIC' (pigs) and comprise semen, embryos and breeding animals with superior genetics to those animals currently in farms. Genus's customers' animals produce offspring with greater production efficiency, and quality, and use these to supply the global dairy and meat supply chains.
The Group's competitive edge has been created from the ownership and control of proprietary lines of breeding animals, the biotechnology used to improve them and its global supply chain, technical service and sales and distribution network.
With headquarters in Basingstoke, United Kingdom, Genus companies operate in over twenty-five countries on six continents, with research laboratories located in Madison, Wisconsin, USA.
Chief Executive's Review
2018 was another strong year for Genus, as the Group made substantial positive progress implementing its strategy and achieved a good financial performance. The launch of Sexcel, our innovative and proprietary bovine sexed genetics product, and the start of sales of our IntelliGen technology to third parties, were particular highlights of the year.
Group Performance
The Group performed positively, with results in line with our expectations. Revenue and adjusted profit before tax rose by 6% and 9% respectively, in constant currency terms. Our medium-term target is to generate double-digit compound growth in adjusted operating profit, in constant currency and excluding gene editing costs. Our growth in this key measure was 12% in 2018.
Currency movements presented a modest headwind. Revenue in actual currency rose by 2% and adjusted profit before tax was 4% higher.
Genus PIC delivered another robust performance, with adjusted operating profit including joint ventures increasing by 5% in constant currency. PIC benefited from growth in Europe, both organically and through last year's acquisition and partnership with Hermitage, and higher profits in Latin America. Profits in Asia were stable, as growth in genetic sales was offset by reduced farm margins in China, after exceptionally high pig prices in the prior year. Performance in North America showed modest growth, despite the impact of PRRSv infections in the second half of the year at some of the Group's farms, which have now been eradicated.
Genus ABS rebounded strongly in 2018, following the successful launch of Sexcel in September 2017 and actions taken last year to sharpen execution. ABS Dairy had a strong year, while ABS Beef made encouraging progress in its strategic initiatives. Overall, Genus ABS increased adjusted operating profits including non-controlling interest by 29% in constant currency, with growth being strongest in Europe and Asia while profits in North America reduced, as we invested in our key account sales force.
As planned we continued to increase Group investment in R&D, which is delivering strong rates of genetic gain and generating a robust product pipeline. In total, R&D investment rose by 13% in constant currency. This included further growth in the gene editing expense, as we continue to advance the PRRSv resistance programme.
Strategic Progress
Genus successfully implemented a number of important strategic developments during the year. In porcine, we formed a strategic partnership with Møllevang, one of Denmark's leading pig-breeding companies. This became effective on 2 July 2018 and will see us combine our complementary supply chains, sales and marketing infrastructure and genetics. We will strengthen the PIC product offering by increasing genetic diversity along with offering customers globally superior genetics and service. Lastly, producers in Denmark will have access to PIC products and global technical services team, and will benefit from PIC's leadership in genetic improvement.
In Dairy, our majority owned De Novo Genetics joint venture delivered 54% of our Holstein bulls which came into production this year, up from 23% in 2017, enabling us to create our industry leading pipeline of young bulls. Sexcel was successfully launched, with sales ahead of our expectations. Sexcel is delivering a great on-farm experience, with materially better conception rates than alternative products. We have also secured third-party technology licensing and supply deals in Norway and India, under the IntelliGen brand. We continue to vigorously defend our position in the US courts against STGenetics ('ST'). We have filed Inter-Partes Reviews at the US Patent and Trademark Office, seeking to revoke six patents ST has asserted against us, and have also filed a Motion to Dismiss and Counterclaims in the Federal Court.
Our PRRSv resistance programme made further progress, with the first batches of elite gene edited piglets born during the year. Along with future batches of successfully edited piglets, they will be the founders of our gene edited herd, which we will monitor and assess for technical and regulatory purposes. In addition, US and European patent grants have strengthened our ability to protect our intellectual property.
We commenced some important investments during the year in the Group's infrastructure which will position us well for the long-term. Genus One is a programme to replace our multiple existing dated business systems over the next three years with a single global modern enterprise system. In addition, in June 2018 we were able to secure land in Wisconsin to meet our requirements for long-term bull housing, which will be built out over the next several years.
People
Genus depends on the skills, talents and dedication of its people and I want to thank all of my colleagues around the world for their contribution to another successful year.
Toward the end of 2017, we ran our third global employee engagement survey, achieving a record response rate. The survey showed that our people are highly engaged, with a strong understanding of our vision, strategy, values and our role in pioneering animal genetic improvement. The survey also helped us identify a number of areas for continuous improvement in our communication and people management.
Outlook
The Group's established business model, global market position and product strength, together with our proven strategy based on delivering value to customers through innovation, position Genus well to achieve its medium term growth objective. In the short term, Genus's customers face a more challenging external environment due to growing barriers to international trade and the recent spread of African Swine Fever to China. Notwithstanding this uncertainty, Genus anticipates further financial and strategic progress in 2019.
Karim Bitar
Chief Executive
5 September 2018
Financial and Operating Review
Financial Review
In the year ended 30 June 2018, Genus achieved a good financial performance which was in line with our objectives. Constant currency revenue growth was 6% (2% in actual currency) and adjusted operating profit growth including joint ventures was 10% (5% in actual currency), after increased investment in R&D. Excluding the growth in gene editing costs, adjusted operating profit increased by 12% in constant currency. Adjusted profit before tax and adjusted earnings per share were also up 9% and 15% respectively (4% and 9% in actual currency).
On a statutory basis, profit before tax was 81% lower, primarily due to a lower non-cash IAS 41 valuation of our bovine biological assets. However, statutory earnings per share were 30% higher, boosted by a GBP32.5m non-cash reduction in Genus's deferred tax liabilities, following tax reforms in the US. These deferred tax liabilities primarily relate to the Group's biological assets. We continue to use adjusted results as our primary measures of financial performance, as they better reflect our underlying progress.
The effect of exchange rate movements on the translation of our overseas profits was to reduce the Group's adjusted profit before tax for the year by GBP3.0m or 5% compared with 2017. Unless stated otherwise, the financial and operating reviews quote constant currency adjusted growth rates.
Actual currency Constant
currency
2018 2017 Movement Movement
Adjusted Profit Before GBPm GBPm % %
Tax*
Genus PIC 94.8 94.8 - 5
Genus ABS 26.1 21.3 23 29
R&D (46.8) (43.8) (7) (13)
Central costs (11.0) (12.2) 10 6
----------- ----------- ------------- ----------
Adjusted operating profit
inc JV 63.1 60.1 5 10
Net finance costs (4.6) (3.7) (24) (24)
----------- ----------- ------------- ----------
Adjusted profit before
tax 58.5 56.4 4 9
=========== =========== ============= ==========
* Includes share of adjusted pre-tax profits of joint ventures and removes share of adjusted profits of non-controlling interests.
Revenue
Revenue increased by 2% in actual currency and 6% in constant currency to GBP470.3m (2017: GBP459.1m). In Genus PIC, revenue growth of 3% in constant currency (1% down in actual currency) was supported by strong royalty revenue growth of 10%, with growth in all regions and Asia up 31% and Europe up 32%, while by-product revenues were lower as market pig prices reduced in China following exceptionally high pig prices in the prior year and we exited certain non-strategic farms. In Genus ABS, revenues grew 11% in constant currency (8% in actual currency) with all regions making a positive contribution. This included double-digit growth in Europe, Asia and IVB, and sexed product revenue growth of 27%, following strong uptake of Sexcel, our high-fertility sexed genetic product launched early in the year.
Adjusted Operating Profit Including Joint Ventures
Adjusted operating profit including joint ventures was GBP63.1m (2017: GBP60.1m), up 5% in actual currency and 10% in constant currency. Within this, Genus's share of adjusted joint venture operating profits was lower at GBP6.2m (2017: GBP7.1m) and, following the acquisition of the remaining 49% of IVB in March 2017, amounts attributable to non-controlling interests reduced to GBP0.8m (2017: GBP2.1m). Our gene editing investment, which is focused on creating resistance in pigs against PRRSv, a devastating disease for the industry, increased to GBP5.0m (2017: GBP3.5m). Excluding this investment, adjusted operating profit increased by 12% in constant currency.
Genus PIC had another solid year, with adjusted operating profit including joint ventures up 5%. Volume growth of 8% included double digit growth in Latin America, Europe and Asia. The European business transformation is continuing to drive strong results and the recently completed strategic relationship with Møllevang, one of Denmark's leading pig-breeding companies, will continue this momentum.
Genus ABS had a strong year. Adjusted operating profit less non-controlling interest increased 29%, with volume growth of 5%. The launch of Sexcel in September 2017 helped to fuel strong sexed volume growth of 25%, along with higher prices and at lower production costs than its predecessor. Double-digit growth in Europe was driven by strong performances in Italy, France and Ireland and also in our beef-on-dairy offering, where the differentiated value of our beef genetics supported prices. Asia also performed strongly, up 36%, with all countries growing. North American volumes were up 2% and we invested to strengthen the focus on key account management. IVB also continued to grow, with embryo volumes up 20%.
R&D costs increased by 13%, as planned, primarily from a 46% increase in gene editing as we develop our first batches of gene edited elite pigs. Bovine product development also increased by 18%, with the start of amortisation of previously capitalised IntelliGen development costs and the continued development of the platform.
Net Finance Costs
Net finance costs increased to GBP4.6m (2017: GBP3.7m) due to higher average borrowings and lower interest income following the investments made in the prior year, including the acquisitions of Hermitage for GBP15.2m and the remaining 49% of IVB for GBP11.4m.
Exceptional Items
There was a GBP5.9m net exceptional expense in 2018 (2017: GBP2.5m), which included GBP5.0m for legal fees related to Genus ABS's litigation with ST, GBP1.2m for acquisition and integration related expenses, primarily relating to Møllevang and Hermitage, and other items totalling a credit of GBP0.3m. The prior year contained an exceptional credit of GBP5.7m in respect of the arrangements for National Milk Records plc ('NMR') exiting the Milk Pension Fund in June 2017.
Statutory Profit Before Tax
The table below reconciles adjusted profit before tax to statutory profit before tax:
2018 2017
GBPm GBPm
Adjusted Profit Before Tax 58.5 56.4
Operating profit attributable to non-controlling
interest 0.8 2.1
Net IAS 41 valuation movement on biological
assets in JVs and associates (0.5) 0.5
Tax on JVs and associates (1.5) (1.4)
Adjusting items:
Net IAS 41 valuation movement on biological
assets (28.7) (1.1)
Amortisation of acquired intangible assets (9.5) (8.7)
Share-based payment expense (5.4) (4.6)
Exceptional items (5.9) (2.5)
------- ------
Statutory Profit Before Tax 7.8 40.7
======= ======
Our statutory profit before tax was GBP7.8m (2017: GBP40.7m), with the decline primarily due to a non-cash fair value reduction of GBP28.7m (2017: GBP1.1m) in the net IAS 41 biological asset movement. Within this, there was a GBP5.3m (2017: GBP27.4m) uplift in porcine biological assets offset by a GBP34.0m (2017: GBP28.5m) reduction in bovine biological assets, due to the continuing trend towards sales of genomic semen and current estimates of the proportion of the semen sales price attributable to the biological asset value. Also impacting statutory profit was amortisation of acquired intangible assets of GBP9.5m (2017: GBP8.7m) and share-based payment expense of GBP5.4m (2017: GBP4.6m). These items tend to be non-cash, can be volatile and do not correlate to the underlying trading performance in the period.
Taxation
The effective rate of tax for the year, based on adjusted profit before tax, was 20.5% (2017: 25.0%) benefiting from a GBP2.4m credit from the reduction of deferred tax liabilities in the US following the enactment of US tax reforms. Excluding this one-off credit, the underlying tax rate on adjusted profits would have been 24.6%, reflecting a higher mix of profits in lower tax jurisdictions compared with the prior year. The effective rate remains higher than the UK corporate tax rate due to the mix of overseas profits, particularly the proportion of profits generated in the US and Latin America, and the impact of withholding taxes on the repatriation of funds to the UK. These effects are partly mitigated by the availability of manufacturing relief, R&D credits and agricultural reliefs in certain jurisdictions.
The tax rate on statutory profits was a credit of 347% (2017: 18.5% charge), reflecting a large non-cash deferred tax credit of GBP32.5m as a result of US tax reform. This primarily arose on applying the new US tax rates to the deferred tax liabilities associated with the fair value uplift under IAS 41 on the Group's biological assets.
Earnings Per Share
Adjusted basic earnings per share increased by 9% to 75.9 pence (2017: 69.4 pence) and were up 15% in constant currency. Basic earnings per share on a statutory basis were 69.7 pence (2017: 53.8 pence), up 30%, with the non-cash fair value accounting reduction in bovine biological assets more than offset by non-cash deferred tax credits arising from the US tax reforms.
Biological Assets
A feature of the Group's net assets is its substantial investment in biological assets, which under IAS 41 are stated at fair value. At 30 June 2018, the carrying value of biological assets was GBP363.0m (2017: GBP375.3m), as set out in the table below:
2018 2017
GBPm GBPm
Non-current assets 305.8 309.3
Current assets 37.0 43.8
Inventory 20.2 22.2
------ ------
363.0 375.3
====== ======
Represented by:
Porcine 238.8 215.6
Dairy and beef 124.2 159.7
------ ------
363.0 375.3
====== ======
The movement in the overall balance sheet carrying value of biological assets, excluding the effect of exchange rate translation decreases of GBP8.8m, includes:
-- a GBP27.6m increase in the carrying value of porcine biological assets, due principally to accounting for the genetics acquired under the strategic relationship with Møllevang, as all material conditions for completion of the transaction under the terms of the subscription agreement were fulfilled at the balance sheet date; and
-- a GBP31.1m reduction in the bovine biological assets value, due to the continuing trend towards sales of genomic semen, resulting in shorter productive lives of bulls, and current estimates, based on market data, of the proportion of the semen sales price attributable to the biological asset value.
The historical cost of these assets, less depreciation, was GBP51.0m at 30 June 2018 (2017: GBP51.5m), which is the basis used for the adjusted results. The historical cost depreciation of these assets included in adjusted results was GBP6.4m (2017: GBP7.0m).
Retirement Benefit Obligations
The Group's retirement benefit obligations at 30 June 2018, calculated in accordance with IAS 19 and IFRIC 14, were GBP33.9m (2017: GBP40.9m) before tax and GBP27.9m (2017: GBP32.4m) net of related deferred tax. The largest element of this liability relates to the multi-employer Milk Pension Fund, where we account for this scheme on the basis of Genus being responsible for 86% of the scheme since the exit of NMR (2017: 85%).
During the year, contributions payable in respect of the Group's defined benefit schemes amounted to GBP7.3m (2017: GBP7.2m).
Cash Flow
Free cash flow was solid at GBP24.3m (2017: GBP25.4m), driven by strong cash generated by operations of GBP58.3m (2017: GBP46.3m), representing conversion of adjusted operating profit of GBP57.7m (2017: GBP55.1m) into cash of 101% (2017: 84%). Cash inflows from joint ventures were lower at GBP2.8m (2017: GBP8.3m) following a very strong prior year.
Capital expenditure cash flows of GBP22.5m (2017: GBP18.9m) included continued investment in IntelliGen machines as we ramped up production capacity, an initial payment for the purchase of land to house future North America production facilities for the ABS business and the first stage of the Genus One new enterprise system.
The cash outflow from investments was GBP1.8m, primarily relating to deferred consideration for previously acquired businesses. This compares to GBP30.0m in 2017 from the acquisition of De Novo Genetics, Hermitage Genetics and the purchase of the remaining 49% of IVB. The total cash inflow for the year after these investments and dividends was GBP7.6m (2017: outflow GBP18.1m).
2018 2017
Cash flow (before debt repayments) GBPm GBPm
Cash generated by operations 58.3 46.3
Interest and tax paid (15.1) (11.7)
Capital expenditure (22.5) (18.9)
Cash received from JVs 2.8 8.3
Other 0.8 1.4
------- -------
Free cash flow 24.3 25.4
Acquisitions and investments (1.8) (30.0)
Dividends (14.9) (13.5)
------- -------
Net cash flow 7.6 (18.1)
======= =======
Net Debt
Net debt decreased from GBP111.6m to GBP108.5m at 30 June 2018, with increased capital investment in the business being more than offset by strong cash generation. During the year, we exercised an accordion feature in our credit facilities to increase them by GBP20.0m, in anticipation of payments to Møllevang in July 2018. At the end of June 2018, there was substantial headroom of GBP99.3m under the extended facilities of GBP220.0m.
The Group's financial position and borrowing ratios remain strong, with interest cover remaining at 25 times (2017: 37 times). EBITDA as calculated under our financing facilities includes cash received from joint ventures and historical cost depreciation of biological assets. The ratio of net debt to EBITDA on this basis improved to 1.4 times (2017: 1.5 times) with net debt slightly lower and an increased EBITDA.
Return on Invested Capital
We measure our return on invested capital on the basis of adjusted operating profit including joint ventures after tax, divided by the operating net assets of the business, stated on the basis of historical cost, excluding net debt and pension liability. This removes the impact of IAS 41 fair value accounting, the related deferred tax and goodwill. The return on invested capital increased to 23.9% after tax (2017: 19.9%), reflecting the increase in adjusted profit and lower tax rate in the year.
Dividend
Reflecting the Board's continuing confidence in the Group's prospects, it is recommending to shareholders a final dividend of 17.9 pence per ordinary share, resulting in a total dividend for the year of 26.0 pence per ordinary share, an increase of 10% for the year. Dividend cover from adjusted earnings remains consistently strong at 2.9 times (2017: 2.9 times).
It is proposed that the final dividend will be paid on 30 November 2018 to the shareholders on the register at the close of business on 16 November 2018.
Stephen Wilson
Group Finance Director
5 September 2018
Review of Operations
Genus PIC - Operating Review
Actual currency Constant
currency
2018 2017 Movement Movement
GBPm GBPm % %
Revenue 247.7 249.5 (1) 3
Adjusted operating profit
exc JV 88.7 87.7 1 6
Adjusted operating profit
inc JV 94.8 94.8 - 5
Adjusted operating margin
exc JV 35.8% 35.2% 0.6pts 1.0pts
Market
Sustained global economic growth in the year under review supported strong demand for pork and expansion of international trade, with global consumption increasing by 2%. With this positive backdrop, producers started the year in an expansionary mode in key markets such as the US, Europe and China. However, over the course of the year, record pork production along with variable input costs, trade disruptions, and disease risks resulted in heightened price volatility and uncertainty.
In response to the expansion of major producers, pig prices in China declined sharply throughout the year, although over more recent months a recovery has begun. Meanwhile, in the United States, pig inventories surpassed 73 million head for the first time, as new processing facilities were brought on-line. Prices in the US ended June 2018 5% lower than in the prior year and have fallen substantially further since then. EU production also grew due to increasing productivity and a 1.4% increase in its breeding herd, causing prices to soften 15% through 2018. Brazil was poised for a comeback after a volatile FY17, but increasing feed costs eroded margins and a transportation strike temporarily halted processing at abattoirs.
Political global trade disruptions also added increasing uncertainty for PIC's customers. Russia imposed an embargo on Brazilian pork in the autumn of 2017. In 2018, both China and Mexico enacted tariff schedules for US pork products, in response to US-imposed steel and aluminium import taxes. This resulted in significant falls in US pig futures prices, and along with growing production already in the pipeline, puts US producers in a situation of significant uncertainty for the coming year. In addition, African Swine Fever has been detected in China for the first time in August 2018, which could have substantial effects on the pig industry there and on global trade if eradication efforts are not successful.
The porcine genetics market saw significant change, with Danbred, a top-three global competitor, breaking up into competing groups of breeders. Following this, PIC announced it had agreed to enter into a strategic relationship with Møllevang from July 2018.
Performance
Genus PIC achieved another good performance, with operating profit including joint ventures of GBP94.8m, up 5% in constant currency. Volumes grew by 8% and revenue was 3% higher, primarily due to 10% higher royalty revenues, partially offset by lower slaughter prices in China on by-product animals and the exit from some non-strategic farms in Europe and Latin America.
In North America, revenue grew 1% in constant currency, driven by royalty growth of 3%. Health breaks in PIC multiplication farms and customer farms, along with PIC's continued investments in expanding the supply chain and upgrading company-owned facilities, restricted North America's profit growth to 1% during the period.
Latin American profits improved by 17%, volumes improved 10% and revenues in constant currency was up 11%, with growth in all regions. A key contributor to this growth was royalty revenue, which increased by 15%. Profit performance from PIC's joint venture in Brazil was up by 14% in constant currency.
Europe achieved impressive growth, with volumes up 15%, royalty revenues up 32% and constant currency profits up 48%, driven by customer wins and strategic pricing initiatives. The integration of the Hermitage key accounts and distribution partnership also contributed positively to growth in Europe which was in line with our expectations. The integration of PIC's strategic relationship with Møllevang and further synergies from the partnership with Hermitage will contribute to further growth for PIC Europe going forward.
Asia's profits were 1% higher in constant currency compared with 2017, with strong growth in most countries, driven by volume growth of 19% and royalty revenue growth of 31% in the region. However, China experienced weakening market prices for by-product pigs and biosecurity challenges in the supply chain. This resulted in China's profits being 15% lower against a strong prior year, despite growth being achieved in royalties (+29%), volumes (+44%) and breeding stock profits (+24%). PIC's strategy to focus on key large-scale customers in emerging markets, while mitigating operational risks, continues to position PIC in the Asia region for good long-term prospects.
Overall, PIC delivered good results, despite varying global market conditions and continued investment to enhance product supply and differentiation. PIC's long-term global business model and strategic relationships such as those with Hermitage and Møllevang, will enable PIC to continue to better serve customers, mitigate market risks and support future growth through challenging markets.
Genus ABS - Operating Review
Actual currency Constant
currency
2018 2017 Movement Movement
GBPm GBPm % %
Revenue 210.6 195.9 8 11
Adjusted operating profit 26.2 22.3 17 23
Adjusted operating profit less
non-controlling interest 26.1 21.3 23 29
Adjusted operating margin 12.4% 11.4% 1.0pts 1.2pts
Market
Following robust growth in milk output in the first half of the year, challenging weather conditions in key exporting countries caused growth to slow in the second half, which in the US and Europe, was contrary to market expectations. Increased feed prices also capped growth in milk volumes. China's dairy market continues to grow and influence the global demand for dairy products, with imports increasing in 2018.
Global dairy markets entered the financial year reflecting optimism as nearly all dairy indices had recovered from the previous down cycle. Dairy prices remained strong through the early part of this financial year but fell off as the year progressed, with the US and EU down 8% and 15% respectively since November 2017. Growing tension around trade and tariffs has increased the level of uncertainty for farmers particularly in the US. US beef production continues to be affected by drought conditions in some areas, forcing animals to be placed into feed lots early and potentially affecting consistency of supply into the latter part of 2018. In addition, feed cost increases will not encourage producers to raise heavy animals, which may constrain supply.
Influenced by local market conditions, prices for cattle remain diverse, being up in Brazil, Europe and China, but down in the US, Australia and New Zealand. This volatility is likely to remain affected by seasonality of supply, changing feed prices and the availability of other sources of protein in markets such as Brazil. In addition, the impact of tariffs on the global beef trade is increasing uncertainty for producers.
Continuing consolidation of the global dairy industry and of high-quality breeding herds has also pushed bovine genetics suppliers to consolidate, with it being increasingly important for them to own and control their genetics, as ABS has done through De Novo.
Performance
Performance was strong with operating profits for ABS increasing by 29% in constant currency, on a 5% volume increase and an 11% increase in revenue. Sexed volumes were up 25%, reflecting the successful launch of Sexcel, and sales of inventory produced under the contract with ST, which terminated in August 2017. Increased usage of sexed genetics also led to increased use of beef genetics in dairy herds, supporting an 8% increase in global beef volumes.
In Europe, profits were up 12% in constant currency, with volumes increasing 4% in generally favourable markets for producers. The trend of dairy customers using sexed genetics, coupled with beef genetics for a portion of the herd, continued. As a result, beef volumes increased by 7%, beef selling prices increased by 9%, due to focus on the value of differentiated beef genetics, and sexed semen volumes grew 24%, with strong customer acceptance of Sexcel.
In North America, profits decreased by 17% in constant currency. Volumes were up by 2%, with sexed volumes up 29%, and revenue grew by 5%, but this was offset by planned investment to strengthen the focus on key account management. Beef volumes were up 19% over the prior year, reflecting stable beef market conditions and the use of beef genetics on dairy herds, supported by proprietary NuEra genetics selected for cross-bred beef on dairy performance.
In Latin America, profits were up 4% in constant currency, with conventional dairy volumes increasing 4% and sexed semen 8%. Beef volumes were up 5%, despite challenging market conditions and lower domestic beef consumption in Brazil. NuEra genetics, selected for cross-bred performance of North American sires with tropical cows, proved popular with customers.
In Asia, volumes were up 8% and profits up 36%, with growth across all major countries. Profits were up 242% in Russia, 81% in Australia and 29% in Japan. Asia also successfully launched Sexcel from our Brahma stud in India, to provide elite sexed genetics into the Indian market for the first time, leading to more than 100% profit growth.
IVB grew embryo volumes by 20% and revenues by 24%, however investments to establish new laboratories held back profit growth to 8% including non-controlling interest. IVB was fully integrated into the regional structure of ABS at the end of the period.
Overall, ABS delivered a much improved performance and, with the increasing customer adoption of Sexcel and a leading genetic portfolio, anticipates continued progress.
Research and Development - Operating Review
Actual currency Constant
currency
2018 2017 Movement Movement
GBPm GBPm % %
Porcine product development 17.0 16.6 2 8
Bovine product development 17.2 15.3 12 18
Gene editing 5.0 3.5 43 46
Other research and
development 7.6 8.4 (10) (2)
----- ----- --------- ----------
Net expenditure in
R&D less non-controlling
interest 46.8 43.8 7 13
===== ===== ========= ==========
Performance
As planned, R&D investment increased by 13% in constant currency to GBP46.8m, primarily due to the launch of IntelliGen and the development of gene editing initiatives. The Group's R&D investments are expected to continue to increase in 2019 as we continue to execute our strategy of delivering proprietary differentiated products that customers value.
Within porcine product development, the continued implementation of single-step genomic evaluation across all porcine pure line populations, crossbred products and traits resulted in further strong genetic gain. Genus has continued to drive the rate of genetic gain 35% faster compared with the period before the implementation began. During the year, Hermitage was transitioned to PIC genetics and integrated into Genus's programme. The 8% spending growth was a result of expanding genetic testing and product validation and investment to identify unique new traits such as meat tenderness.
Bovine product development expense increased by 18%, primarily due to the start of amortisation of previously capitalised IntelliGen development costs and continued development of the platform. This included work to further increase the performance of the IntelliGen instruments, refine biological processes and ensure continuous improvement in processing and cost performance. In addition, to further expand the IntelliGen footprint globally, Genus continues to drive business development opportunities in technology transfer and external customer service.
The dairy product development effort has continued to benefit from the integration of De Novo Genetics, a majority owned company created in September 2016 with De-Su Holsteins. As a result, Genus substantially improved the quality of its industry leading dairy bull portfolio, while also improving the focus of the operation and reducing costs. Genus continues to grow its genomic database and Real World Data collection and is exploring new proprietary traits. In beef, there was continued investment in building proprietary differentiated customer products that maximise value in the beef supply chain, through genetic improvement in Genus's beef nucleus herd.
Gene editing expenditure increased by 46% in the year, primarily associated with the porcine PRRSv resistance project and, to a lesser extent, work on investigating bovine respiratory disease. In porcine, Genus worked with RenOVAte Biosciences, its co-founded gene editing company, to produce the first-generation gene edited pigs in elite purelines. The population size is now being expanded through matings of these animals, with pregnancies established for the next generation. Genus also advanced its regulatory engagement with the FDA and had patents issued in the US and Europe. Gene editing costs will continue to grow as the number of animals carrying the edit is increased and initial regulatory submissions are prepared.
Industry leading research continued in developing genomic selection approaches to drive genetic improvement and differentiation even faster, along with investments in intellectual property ('IP') creation and protection.
Principal Risks and Uncertainties
Genus supplies biological products to agricultural customers and is exposed to a wide range of risks and uncertainties. Some of these risks relate to the current business operations in our global agricultural markets, while others relate to future commercial exploitation of our leading-edge R&D programmes.
We have identified ten principal risks, which we periodically evaluate based on an assessment of the likelihood of occurrence and magnitude of potential impact, together with the effectiveness of our risk mitigation controls. The table below outlines the principal risks and uncertainties facing Genus and how we manage them.
The Directors confirm that they have undertaken a robust assessment of the principal risks and uncertainties facing the Group.
Strategic Risks
------------------------------------------------------------ --------------------------- ---------------------------
Risk Description How we manage risk Risk change in 2018
------------------------------------------------------------ --------------------------- ---------------------------
Developing products with competitive advantage
----------------------------------------------------------------------------------------- ---------------------------
Dedicated teams align our Reduced.
* Development programmes fail to produce best genetics product development to No change in porcine
for customers. customer but decreased in bovine,
requirements. We use due to increased access
large-scale to elite dairy genetics
* Increased competition to secure elite genetics. data and advanced genomic through the acquisition
analysis to ensure we meet of De Novo.
our breeding goals. We
frequently
measure our performance
against competitors in
customers'
systems, to ensure the
value
added by our genetics
remains
competitive.
------------------------------------------------------------ --------------------------- ---------------------------
Continuing to successfully develop IntelliGen
technology
----------------------------------------------------------------------------------------- ---------------------------
Our continued development Reduced.
* Failure to manage the technical, production and of the technology and its We successfully launched
financial risks associated with the rapid development deployment to new markets Sexcel produced with
of the IntelliGen business. is supported by dedicated IntelliGen technology
internal resources and and customer acceptance
agreements has been strong. We
* The industry response to the introduction of with external partners and continue to increase
competition into the sexed semen market. suppliers. Further patent IntelliGen's global
infringement proceedings deployment and have
initiated by ST in the US secured third-party
in 2017 are being customers.
vigorously
defended.
------------------------------------------------------------ --------------------------- ---------------------------
Developing and commercialising gene editing
technologies
----------------------------------------------------------------------------------------- ---------------------------
We stay aware of new No change.
* Failure to develop successfully and commercialise technology Key initiatives continue
gene editing technologies due to technical, IP, opportunities through a to progress through
market, regulatory or financial barriers. wide network of academic the R&D life cycle
and industry contacts. Our and we maintain the
R&D Portfolio Management high level of investment
* Competitors secure 'game-changing' technology. Team ('R&D PMT') oversees needed to bring the
our own research, ensures end products to market.
we correctly prioritise
our R&D investments and
assesses the adequacy of
resources and the relevant
IP landscapes. We have
formal
collaboration agreements
with key partners, to
ensure
responsible exploration
and development of
technologies
and the protection of IP.
The Board is updated
regularly
on key development
projects.
------------------------------------------------------------ --------------------------- ---------------------------
Capturing value through acquisitions
----------------------------------------------------------------------------------------- ---------------------------
We have a rigorous No change.
* Failure to identify appropriate investment acquisition The acquisition process
opportunities or to perform sound due diligence. analysis and due diligence continues to provide
process, with the Board valuable and timely
reviewing and signing off access to investment
* Failure to successfully integrate an acquired all material projects. We opportunities. Our
business. also have a structured experiences with
post-acquisition post-acquisition
integration planning and integration provide
execution process. a platform for integrating
newly acquired businesses.
------------------------------------------------------------ --------------------------- ---------------------------
Growing in emerging markets
----------------------------------------------------------------------------------------- ---------------------------
We have a robust Increased.
* Failure to appropriately develop our business in organisation, Financial market volatility
China and other emerging markets. blending local and in certain emerging
expatriate markets is increasing.
executives, supported by In China, trade disputes
the global species teams. with the US and the
This allows us to grow our appearance of African
business in key markets, Swine Fever increase
while managing risks and uncertainty for the
ensuring we comply with pig industry.
our global standards.
------------------------------------------------------------ --------------------------- ---------------------------
Operational Risks
------------------------------------------------------------ --------------------------- ---------------------------
Risk Description How we manage risk Risk change in 2018
------------------------------------------------------------ --------------------------- ---------------------------
Protecting IP
----------------------------------------------------------------------------------------- ---------------------------
We have a global, No change.
* Failure to protect our IP could mean Genus-developed cross-functional
genetic material, methods, systems and technology process to identify and
become freely available to third parties. protect our IP. Our
customer
contracts and our
selection
of multipliers and joint
venture partners include
appropriate measures to
protect our IP. We
maintain
IP landscape watches and
where necessary conduct
robust 'freedom to
operate'
searches to identify
third-party
rights to technology.
------------------------------------------------------------ --------------------------- ---------------------------
Ensuring biosecurity and continuity of supply
----------------------------------------------------------------------------------------- ---------------------------
We have stringent Increased.
* Loss of key livestock, owing to disease outbreak. biosecurity
standards, with We experienced disease
independent outbreak in parts
* Loss of ability to move animals or semen freely reviews throughout the of the PIC supply
(including across borders) due to disease outbreak, year chain in the US in
environmental incident or international trade to ensure compliance and 2018. We continue
sanctions and disputes. investigate biosecurity to strengthen our
incidents, to ensure bio-security measures
learning to further reduce
* Lower demand for our products, due to industry-wide across the organisation. this inherent risk.
disease outbreaks. We regularly review the In addition, risks
geographical diversity of to global trade have
our production facilities, increased compared
to avoid over-reliance on with the prior year.
single sites.
------------------------------------------------------------ --------------------------- ---------------------------
Hiring and retaining talented people
----------------------------------------------------------------------------------------- ---------------------------
We have a robust talent Reduced.
* Failure to attract, recruit, develop and retain the and succession planning
global talent needed to deliver our R&D programmes process, including annual We have been largely
and growth plans in our chosen markets. assessments of our global successful in recruiting
talent pool and active and retaining the
leadership appropriate skills
development programmes. to meet our business
The Group's reward and growth plans.
remuneration
policies are reviewed
regularly,
to ensure their
competitiveness.
We work closely with a
number
of specialist recruitment
agencies to identify
candidates
with the skills we need.
------------------------------------------------------------ --------------------------- ---------------------------
Financial risks
------------------------------------------------------------ --------------------------- ---------------------------
Risk Description How we manage risk Risk change in 2018
------------------------------------------------------------ --------------------------- ---------------------------
Managing agricultural market and commodity prices
volatility
----------------------------------------------------------------------------------------- ---------------------------
We continuously monitor Increased.
* Fluctuations in agricultural markets affect customer markets and seek to
profitability and therefore demand for our products balance Agricultural commodities
and services. our costs and resources are being targeted
in response to market with tariffs in escalating
demand. global trade disputes.
* Increase in our operating costs, due to commodity We actively monitor and This is increasing
pricing volatility. update our hedging price volatility and
strategy uncertainty for our
to manage our exposure. customers in several
Our porcine royalty model markets around the
and extensive use of world.
third-party
multipliers mitigates the
impact of cyclical price
and/or cost changes in pig
production.
------------------------------------------------------------ --------------------------- ---------------------------
Funding pensions
----------------------------------------------------------------------------------------- ---------------------------
We are the principal No change.
* Exposure to costs associated with failure of employer
third-party members of joint and several liabilities for the Milk Pension Fund The triennial 2018
pension scheme. ('MPF') and chair the fund valuation is
group currently in progress.
of participating
* Exposure to costs as a result of external factors employers.
(such as mortality rates, interest rates or The fund is closed to
investment values) affecting the size of the pension future
deficit. service and has an agreed
deficit recovery plan,
based
on the 2015 actuarial
valuation.
In agreement with the
employers,
the trustees implemented
an investment de-risking
strategy and have started
a liability management
exercise.
We also monitor the
strength
of other employers in the
fund and have retained
external
consultants to provide
expert
advice.
------------------------------------------------------------ --------------------------- ---------------------------
Group Income Statement Genus plc
For the year ended 30 June 2018
2018 2017
Note GBPm GBPm
REVENUE 2 470.3 459.1
ADJUSTED OPERATING PROFIT 2 57.7 55.1
Adjusting items:
* Net IAS 41 valuation movement on biological assets 9 (28.7) (1.1)
* Amortisation of acquired intangible assets 8 (9.5) (8.7)
* Share-based payment expense (5.4) (4.6)
(43.6) (14.4)
* Exceptional items: 3
- Litigation (5.0) (5.3)
- Acquisition and integration (1.2) (0.6)
- Other (including restructuring) 0.3 (2.3)
- Pension related - 5.7
Total exceptional items (5.9) (2.5)
Total adjusting items (49.5) (16.9)
OPERATING PROFIT 8.2 38.2
Share of post-tax profit of joint ventures
and associates retained 4.2 6.2
Finance costs 4 (4.8) (4.5)
Finance income 4 0.2 0.8
PROFIT BEFORE TAX 7.8 40.7
Taxation 5 33.8 (6.4)
PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 41.6 34.3
ATTRIBUTABLE TO:
Owners of the Company 42.7 32.8
Non-controlling interest (1.1) 1.5
41.6 34.3
EARNINGS PER SHARE FROM CONTINUING OPERATIONS 6
Basic earnings per share 69.7p 53.8p
Diluted earnings per share 68.7p 53.0p
ALTERNATIVE MEASURE OF PERFORMANCE
Adjusted operating profit from continuing
operations 57.7 55.1
Adjusted operating profit attributable
to non-controlling interest (0.8) (2.1)
Pre-tax share of profits from joint
ventures and associates excluding net
IAS 41 valuation movement 6.2 7.1
ADJUSTED OPERATING PROFIT INCLUDING JOINT
VENTURES AND ASSOCIATES 63.1 60.1
Net finance costs 4 (4.6) (3.7)
ADJUSTED PROFIT BEFORE TAX FROM CONTINUING
OPERATIONS 58.5 56.4
ADJUSTED EARNINGS PER SHARE FROM CONTINUING
OPERATIONS 6
Basic adjusted earnings per share 75.9p 69.4p
Diluted adjusted earnings per share 74.9p 68.4p
Group Statement of Comprehensive Income Genus plc
For the year ended 30 June 2018
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
PROFIT FOR THE YEAR 41.6 34.3
Items that may be reclassified
subsequently to profit or loss
Foreign exchange translation
differences (22.4) 7.7
Fair value movement on net investment
hedges 1.3 (2.7)
Fair value movement on cash
flow hedges 1.1 2.1
Tax relating to components of
other comprehensive income 2.2 (4.6)
(17.8) 2.5
Items that may not be reclassified
subsequently to profit or loss
Actuarial gain on retirement
benefit obligations 43.4 1.2
Movement on pension asset recognition
restriction (2.5) 0.3
Recognition of additional pension
liability (39.4) (4.3)
Tax relating to components of
other comprehensive income (0.3) 0.4
1.2 (2.4)
------ -----
OTHER COMPREHENSIVE (EXPENSE)/INCOME
FOR THE YEAR (16.6) 0.1
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR 25.0 34.4
ATTRIBUTABLE TO:
Owners of the Company 26.1 33.8
Non-controlling interest (1.1) 0.6
25.0 34.4
Group Statement of Changes in Equity Genus plc
For the year ended 30 June 2018
Called
up Share Trans-lation Non-
share premium Own reserve Hedging Retained controlling Total
Note capital account shares GBPm reserve earnings Total interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
BALANCE AT 30 JUNE
2016 6.1 112.3 (0.1) 37.5 (0.6) 219.3 374.5 (6.4) 368.1
Foreign exchange
translation
differences, net
of tax - - - 3.9 - - 3.9 (0.9) 3.0
Fair value movement
on net
investment hedges,
net of tax - - - (2.2) - - (2.2) - (2.2)
Fair value movement
on cash flow hedges,
net of tax - - - - 1.7 - 1.7 - 1.7
Actuarial gain on
retirement
benefit obligations,
net of tax - - - - - 1.0 1.0 - 1.0
Movement on pension
asset recognition
restriction, net
of tax - - - - - 0.3 0.3 - 0.3
Recognition of
additional
pension
liability,
net of tax - - - - - (3.7) (3.7) - (3.7)
Other comprehensive
(expense)/income
for the year - - - 1.7 1.7 (2.4) 1.0 (0.9) 0.1
Profit for the
year - - - - - 32.8 32.8 1.5 34.3
Total comprehensive
income for the year - - - 1.7 1.7 30.4 33.8 0.6 34.4
Recognition of
share-based
payments, net of
tax - - - - - 4.0 4.0 - 4.0
Adjustment arising
from change in
non-controlling
interest and written
put option - - - - - - - 8.6 8.6
Dividends 7 - - - - - (13.5) (13.5) - (13.5)
Issue of
ordinary
shares - 0.5 - - - - 0.5 - 0.5
BALANCE AT 30 JUNE
2017 6.1 112.8 (0.1) 39.2 1.1 240.2 399.3 2.8 402.1
Foreign exchange
translation
differences, net
of tax - - - (19.7) - - (19.7) - (19.7)
Fair value movement
on net
investment hedges,
net of tax - - - 1.0 - - 1.0 - 1.0
Fair value movement
on cash flow hedges,
net of tax - - - - 0.9 - 0.9 - 0.9
Actuarial gain on
retirement
benefit obligations,
net of tax - - - - - 36.0 36.0 - 36.0
Movement on pension
asset recognition
restriction, net
of tax - - - - - (2.1) (2.1) - (2.1)
Recognition of
additional
pension liability,
net of tax - - - - - (32.7) (32.7) - (32.7)
Other comprehensive
(expense)/income
for the year - - - (18.7) 0.9 1.2 (16.6) - (16.6)
Profit/(loss)
for
the year - - - - - 42.7 42.7 (1.1) 41.6
Total comprehensive
(expense)/income
for the year - - - (18.7) 0.9 43.9 26.1 (1.1) 25.0
Recognition of
share-based
payments, net of
tax - - - - - 6.0 6.0 - 6.0
Adjustment arising
from change in
non-controlling
interest - - - - - - - 0.8 0.8
Dividends 7 - - - - - (14.9) (14.9) - (14.9)
Issue of
ordinary
shares 0.1 - - - - - 0.1 - 0.1
BALANCE AT 30 JUNE
2018 6.2 112.8 (0.1) 20.5 2.0 275.2 416.6 2.5 419.1
Group Balance Sheet Genus plc
As at 30 June 2018
2018 2017
Note GBPm GBPm
ASSETS
Goodwill 8 102.0 104.7
Other intangible assets 8 78.7 88.3
Biological assets 9 305.8 309.3
Property, plant and equipment 76.9 67.5
Interests in joint ventures and associates 19.9 22.7
Other investments 5.9 5.5
Derivative financial asset 0.3 0.1
Deferred tax assets 4.3 3.8
TOTAL NON-CURRENT ASSETS 593.8 601.9
Inventories 34.2 33.1
Biological assets 9 37.0 43.8
Trade and other receivables 10 91.0 88.8
Cash and cash equivalents 29.1 26.5
Income tax receivable 1.4 1.9
Derivative financial asset 2.5 1.3
Asset held for sale 0.2 0.3
TOTAL CURRENT ASSETS 195.4 195.7
TOTAL ASSETS 789.2 797.6
LIABILITIES
Trade and other payables (83.7) (76.4)
Interest-bearing loans and borrowings (13.4) (7.7)
Provisions (2.8) (2.7)
Deferred consideration (19.3) -
Obligations under finance leases (1.4) (1.4)
Current tax liabilities (4.4) (5.2)
Derivative financial liabilities (0.3) (0.6)
TOTAL CURRENT LIABILITIES (125.3) (94.0)
Interest-bearing loans and borrowings (120.7) (127.2)
Retirement benefit obligations 11 (33.9) (40.9)
Provisions (4.5) (3.7)
Deferred consideration (4.2) -
Non-current income tax liability (0.9) -
Deferred tax liabilities (74.8) (124.2)
Derivative financial liabilities (3.7) (3.7)
Obligations under finance leases (2.1) (1.8)
TOTAL NON-CURRENT LIABILITIES (244.8) (301.5)
TOTAL LIABILITIES (370.1) (395.5)
NET ASSETS 419.1 402.1
EQUITY
Called up share capital 6.2 6.1
Share premium account 112.8 112.8
Own shares (0.1) (0.1)
Translation reserve 20.5 39.2
Hedging reserve 2.0 1.1
Retained earnings 275.2 240.2
Equity attributable to owners of
the Company 416.6 399.3
Non-controlling interest 5.7 6.1
Put option over non-controlling interest 15 (3.2) (3.3)
Total non-controlling interest 2.5 2.8
Total equity 419.1 402.1
Group Statement of Cash Flows Genus plc
For the year ended 30 June 2018
2018 2017
Note GBPm GBPm
NET CASH FLOW FROM OPERATING ACTIVITIES 12 43.2 34.6
CASH FLOWS FROM INVESTING ACTIVITIES
Dividends received from joint ventures
and associates 2.8 3.8
Joint venture loan repayment - 3.0
Acquisition of subsidiaries, net of
cash acquired - (17.5)
Increase in investment in subsidiaries - (12.0)
Acquisition of investment - (0.3)
Acquisition of investment in joint
venture - (0.2)
Payment of deferred consideration (1.8) -
Disposal of joint venture - 1.5
Purchase of property, plant and equipment (17.8) (13.4)
Purchase of intangible assets (4.7) (5.5)
Proceeds from sale of property, plant
and equipment 0.4 1.4
Proceeds from sale of assets held
for sale 0.3 -
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (20.8) (39.2)
CASH FLOWS FROM FINANCING ACTIVITIES
Drawdown of borrowings 64.4 68.1
Repayment of borrowings (66.5) (55.7)
Payment of finance lease liabilities (2.2) (2.0)
Equity dividends paid (14.9) (13.5)
Dividend to non-controlling interest - (0.1)
Issue of ordinary shares 0.1 0.5
Debt issue costs - (0.4)
NET CASH OUTFLOW FROM FINANCING ACTIVITIES (19.1) (3.1)
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 3.3 (7.7)
Cash and cash equivalents at start
of the year 26.5 34.0
Net increase/(decrease) in cash and
cash equivalents 3.3 (7.7)
Effect of exchange rate fluctuations
on cash and cash equivalents (0.7) 0.2
TOTAL CASH AND CASH EQUIVALENTS AT
30 JUNE 29.1 26.5
Notes to the Preliminary Results Genus plc
For the year ended 30 June 2018
1. REPORTING ENTITY
Status of audit
The financial information given does not constitute the Company's statutory accounts for the year ended 30 June 2018 or the year ended 30 June 2017, but is derived from those accounts. Statutory accounts for the year ended 30 June 2017 have been delivered to the Registrar of Companies and those for the year ended 30 June 2018 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their reports, and did not contain statements under s. 498(2) or (3) Companies Act 2006.
Basis of preparation
The financial information for the year ended 30 June 2018 together with the comparative year has been computed in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The Group Financial Statements are presented in Sterling, which is the Company's functional and presentation currency. All financial information presented in Sterling has been rounded to the nearest million at one decimal point.
The principal exchange rates were as follows:
Average Closing
--------------------- -----------------------
2018 2017 2016 2018 2017 2016
US Dollar/GBP 1.35 1.27 1.47 1.32 1.30 1.34
Euro/GBP 1.13 1.16 1.33 1.13 1.14 1.20
Brazilian Real/GBP 4.51 4.11 5.47 5.12 4.30 4.28
Mexican Peso/GBP 25.37 24.61 25.38 26.30 23.51 24.66
While the financial information included in this preliminary announcement has been computed in accordance with IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in October 2018. These financial statements have also been prepared in accordance with the accounting policies set out in the 2017 Annual Report and Financial Statements, as amended by the following new accounting standards.
New standards and interpretations
In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board that are mandatorily effective for an accounting period that begins after 1 January 2017. Their addition has not had any material impact on the disclosures or the amounts reported in the Group Financial Statements.
-- Amendments to IAS 7 - 'Disclosure Initiative' -- Amendments to IAS 12 - 'Recognition of Deferred tax Assets for Unrealised Losses' -- Annual Improvements to IFRSs 2014 -2016
New standards and interpretations not yet adopted
At the date of the annual report, the following standards and interpretations which have not been applied in the report were in issue but not yet effective (and in some cases had not yet been adopted by the EU).
-- IFRS 9 - Financial Instruments -- IFRS 15 - Revenue from Contracts with Customers -- IFRS 16 - Leases
-- Amendments to IFRS 2 - Classification and Measurement of Share-based Payments Transactions
-- IFRIC 22 - Foreign Currency Transactions and Advance Consideration -- IFRIC 23 - Uncertainty over Income Tax Treatments
IFRS 15 'Revenue from Contracts with Customers' is effective for periods beginning on or after 1 January 2018 and therefore will be effective in the Group financial statements for the year ending 30 June 2019. The standard establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for performance obligations only when they are satisfied and the control of goods or services is transferred. In doing so, the standard applies a five-step approach to the timing of revenue recognition and applies to all contracts with customers, except those in the scope of other standards. It replaces the separate models for goods, services and construction contracts under the current accounting standards.
The Group has reviewed the impact of IFRS 15 on a sample of the contracts that it enters into with its customers. Following this review, we determined that there are no material impacts to the revenue recognised in the results for the year ended 30 June 2018. Consequently, no restatement will be made to the comparatives presented in this report and no adjustment is required to the reserves.
IFRS 9 'Financial Instruments' replaces IAS 39 'Financial Instruments: Recognition and Measurement'. The standard is effective for periods beginning on or after 1 January 2018 and therefore will be effective in the Group financial statements for the year ending 30 June 2019.
The standard introduces changes to three key areas:
-- new requirements for the classification and measurement of financial instruments; -- a new impairment model based on expected credit losses for recognising provisions; and
-- simplified hedge accounting through closer alignment with an entity's risk management methodology.
The Group has completed an initial assessment of the impact of IFRS 9 and has concluded that adoption will not have a material impact on either the Consolidated Income Statement or the Consolidated Balance Sheet. The Group will apply all aspects of the new standard at the transition date of 1 July 2018, by adjusting opening retained earnings in the balance sheet, however a restatement of the comparative periods is not expected.
IFRS 16 'Leases' is effective for periods beginning on or after 1 January 2019 and therefore will be effective in the Group financial statements for the year ending 30 June 2020.
The Group will transition to IFRS 16 on 1 June 2019. The standard introduces a comprehensive model for identifying lease arrangements and accounting treatments for both lessors and lessees and will replace the current lease accounting requirements including IAS 17 Leases and the related interpretations.
For lessees, IFRS 16 removes distinctions between operating leases and finance leases. These are replaced by a model where a right of use asset and a corresponding liability are recognised for all leases except for short-term leases and low value assets. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.
From the undiscounted lease commitments, we anticipate that implementing the new standard will have a significant impact on the Group's reported assets and liabilities. In addition, the implementation of the standard will affect the Consolidated Income Statement and classification of cash flows. A reliable estimate of the financial impact on the Group's consolidated results depends on a number of unresolved areas, including; choice of transition option, approach to determining discount rates, estimates of lease-term for leases with options to break and renew and conclusion of data collection. In addition, the financial impact depends on the facts and circumstances at the time of transition. For these reasons, it is not yet practicable to determine a reliable estimate of the financial impact on the Group.
The Group is currently assessing the impact of the other new pronouncements on its results, financial position and cash flows. It is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
Going concern
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future and for a period of at least twelve months from the date of this report. Accordingly, the Directors continue to adopt and consider appropriate the going concern basis in preparing the Annual Report and Accounts.
Alternative performance measures
In reporting nancial information, the Group presents alternative performance measures, ('APMs'), which are not de ned or speci ed under the requirements of IFRS.
The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how we plan our business performance and report on it in our internal management reporting to the Board and the executive leadership team. Some of these measures are also used to set remuneration targets.
The key APMs that the Group uses include: adjusted operating profit, adjusted profit before tax from continuing operations, adjusted earnings per share, net debt and adjusted EBITDA (as calculated under our financing facilities and includes cash received from joint ventures and historical cost depreciation of biological assets).
The Group reports some nancial measures, on both a reported and constant currency basis. The constant currency basis, which is an APM, retranslates the current year's results at the average actual periodic exchange rates used in the previous nancial year. This measure eliminates the effects of exchange rate uctuations on the year-on-year reported results.
The Group makes certain adjustments to the statutory pro t measures in order to derive many of these APMs. The Group's policy is to exclude items that is considers to be signi cant in nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the Group's year-on-year trading performance. On this basis, the following were included within adjusted items for the year ended 30 June 2018:
-- net IAS 41 valuation movements on biological assets - movements can be materially volatile and do not directly correlate to the underlying trading performance in the period. Furthermore, the movement is non-cash related and many assumptions used in the valuation model are based on projections rather than current trading;
-- amortisation of acquired intangible assets - excluding this improves the comparability between acquired and organically grown operations, as the latter cannot recognise internally generated intangible assets. Adjusting for amortisation provides a more consistent basis for comparison between the two;
-- share based payments - this expense is considered to be relatively volatile and not fully reflective of the current period trading, as the performance criteria are based on EPS performance over a three-year period and include estimates of future performance; and
-- exceptional items - these are items which due to either their size or their nature are excluded to improve the understanding of the Group's underlying performance. See note 3 for further details.
The reconciliation between operating profit from continuing operations and adjusted operating profit from continuing operations is shown on the face of the Group Income Statement. All other reconciliations are included within the Financial Review section.
This preliminary announcement was approved by the Board on 5 September 2018.
2. SEGMENTAL INFORMATION
IFRS 8 'Operating Segments' requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Group Chief Executive and the Board to allocate resources to the segments and to assess their performance. From 1 July 2017, the Group's operating and reporting structure has comprised three operating segments: Genus PIC, Genus ABS and Research and Development. These segments are the basis on which the Group reports its segmental information. The principal activities of each segment are as follows:
-- Genus PIC - our global porcine sales business; -- Genus ABS - our global bovine sales business; and -- Research and Development - our global spend on research and development.
A segmental analysis of revenue, operating profit, depreciation, amortisation, non-current asset additions and segment assets and liabilities is provided below. We do not include our adjusting items in the segments, as we believe these do not reflect the underlying progress of the segments. The accounting policies of the reportable segments are the same as the Group's accounting policies, as described in the Financial Statements.
Revenue 2018 2017
GBPm GBPm
Genus PIC 247.7 249.5
Genus ABS 210.6 195.9
Research and Development
-------------------------------------- ------------ ------------
Porcine Product Development 9.8 10.7
Bovine Product Development 2.2 3.0
Gene Editing - -
Other Research and Development - -
-------------------------------------- ------------ ------------
12.0 13.7
------------ ------------
470.3 459.1
------------ ------------
Operating profit by segment is set out below and reconciled to the Group's adjusted operating profit. A reconciliation of adjusted operating profit to profit for the year is shown on the Group Income Statement.
Adjusted operating profit 2018 2017
GBPm GBPm
Genus PIC 88.7 87.7
Genus ABS 26.2 22.3
Research and Development
----------------------------------------- ------------- -------------
Porcine Product Development (17.0) (16.6)
Bovine Product Development (16.6) (14.2)
Gene Editing (5.0) (3.5)
Other Research and Development (7.6) (8.4)
----------------------------------------- ------------- -------------
(46.2) (42.7)
------------- -------------
Adjusted segment operating profit 68.7 67.3
Central (11.0) (12.2)
------------- -------------
Adjusted operating profit 57.7 55.1
------------- -------------
Our business is not highly seasonal and our customer base is diversified, with no individual customer generating more than 2% of revenue.
Other segment information
Depreciation Amortisation Additions to
non-current assets
2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Genus PIC 0.8 0.8 7.0 6.0 2.9 1.1
Genus ABS 2.3 2.1 2.1 2.1 9.7 3.4
Research and Development
----------------------------------------------------- ------- ------- ------- ------- ---------- ----------
Research 0.3 0.3 1.1 0.9 - 2.5
Porcine Product Development 2.0 1.9 - - 0.8 2.6
Bovine Product Development 2.1 1.4 3.6 2.2 8.9 5.6
----------------------------------------------------- ------- ------- ------- ------- ---------- ----------
4.4 3.6 4.7 3.1 9.7 10.7
Segment total 7.5 6.5 13.8 11.2 22.3 15.2
Central 2.9 2.3 - - 5.5 5.0
Total 10.4 8.8 13.8 11.2 27.8 20.2
Segment assets Segment liabilities
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Genus PIC 235.9 258.3 (48.3) (60.1)
Genus ABS 160.6 132.8 (41.2) (41.1)
Research and Development
----------------------------------------------------- ------- ------- ---------- ---------
Research 12.5 5.9 (1.3) (1.4)
Porcine Product Development 209.5 182.4 (76.5) (72.0)
Bovine Product Development 152.8 202.7 (31.1) (52.6)
----------------------------------------------------- ------- ------- ---------- ---------
374.8 391.0 (108.9) (126.0)
Segment total 771.3 782.1 (198.4) (227.2)
Central 17.9 15.5 (171.7) (168.3)
Total 789.2 797.6 (370.1) (395.5)
In the current year, IntelliGen assets are included within Genus ABS, however in the prior year these assets were included within Bovine Product Development as the technology had not yet commercialised globally.
Exceptional items of GBP5.9m expense (2017: GBP2.5m expense), relate to Genus ABS (GBP5.0m expense), Genus PIC (GBP0.4m expense) and our central segment (GBP0.5m expense). Note 3 provides details of these exceptional items.
We consider share-based payment expenses on a Group-wide basis and do not allocate them to reportable segments.
Geographical information
The Group's revenue by geographical segment is analysed below. This analysis is stated on the basis of where the legal entity is incorporated, which is the country in which the revenue will be reported.
Revenue
2018 2017
GBPm GBPm
North America 208.6 214.5
Latin America 75.1 71.4
Rest of Europe, Middle East and Africa 51.1 48.5
UK 76.7 70.0
Asia 58.8 54.7
470.3 459.1
------------ -----------------------------
Non-current assets (excluding deferred taxation and financial instruments)
2018 2017
GBPm GBPm
North America 450.2 440.1
Latin America 37.4 46.4
Rest of Europe, Middle East and Africa 41.7 37.3
UK 41.0 61.0
Asia 18.9 13.2
589.2 598.0
----- -----
Revenue by type
2018 2017
GBPm GBPm
Sale of animals, semen, embryos and associated
products and services 341.1 335.7
Royalties - animal and semen 121.8 116.1
Consulting services 7.4 7.3
470.3 459.1
Interest income (see note 4) 0.2 0.8
470.5 459.9
3. EXCEPTIONAL ITEMS
2018 2017
Operating (expense)/income: GBPm GBPm
Litigation (5.0) (5.3)
Acquisition and integration (1.2) (0.6)
Other (including restructuring) 0.3 (2.3)
Pension related - 5.7
(5.9) (2.5)
Litigation
Litigation includes legal fees of GBP5.0m (2017: GBP5.3m) related to the actions between ABS Global, Inc. ('ABS') and Inguran, LLC (aka Sexing Technologies or STGenetics ('ST')).
On 14 July 2014, ABS launched a legal action against ST in the US District Court for the Western District of Wisconsin alleging, among other matters, that ST: (i) has a monopoly in the processing of sexed bovine semen in the US; and (ii) unlawfully maintains this monopoly through anticompetitive conduct. The legal action aimed to remove these barriers and allow free and fair competition in the sexed bovine semen processing market ('ABS Action'). In parallel with the ABS Action, ABS also filed Inter-Partes Review applications ('IPR') before the US Patent Office challenging the validity of several of ST's group patents, which ST later claimed were infringed by ABS.
On 11 January and 15 April 2016, the Patent Trial and Appeal Board ('PTAB') ruled that US Patent No. 7,195,920 (the "920 patent') and US Patent No. 7,820,425 (the "425 patent') were unpatentable. ST appealed these decisions, and the appeal was heard by a federal court of appeals on 5 December 2017. On 23 May 2018, the federal court of appeals confirmed that the '920 and '425 patents were unpatentable. On 14 July 2015 and 2 October 2017, PTAB declined to revoke US Patent No. 8,206,987 (the "987 patent') and US Patent No. 8,198,092 (the "092 patent') respectively. ABS has appealed the '092 patent decision and the validity of the '987 patent will be considered as part of the ABS Action appeal.
On 31 March 2017, the Court entered a judgment in the ABS Action which confirmed: (i) the Company and ABS had proved that ST had wilfully maintained a monopoly in the market for sexed bovine semen processing in the US since July 2012, and awarded a permanent injunction against ST which, among other matters, relieved ABS of certain research, marketing and other non-compete restrictions contained in the 2012 semen sorting agreement between the parties; (ii) ST's '987 and '092 patents were valid and infringed; and (iii) that ABS had materially breached the confidentiality obligations under the 2012 semen sorting agreement. The Court also confirmed that: (i) the Company and ABS should pay ST an up-front amount of $750,000 and an on-going royalty of $1.25 per straw on commercialisation of the Genus Sexed Semen technology for the use of ST's '987 patent in the US; (ii) the Company and ABS should pay ST an up-front payment of $500,000 and an on-going royalty of $0.50 per straw for the use of ST's '092 patent in the US; (iii) ABS should pay XY, LLC damages of $750,000 for the use of certain XY trade secrets; and (iv) ABS had breached the confidentiality obligations under the 2012 semen sorting agreement.
ABS and the Company appealed the '987 patent and the breach of contract decisions and the appeal hearing was heard on 20 February 2018. The parties await the Court of Appeal's decision. Damages of $1,250,000 were paid by ABS to ST shortly after the Court's decision in the ABS Action, and ABS has subsequently amended its technology such that it does not infringe the '092 patent claims. ABS has informed ST that it does not intend to pay the $0.50 royalty going forward. Claims for legal costs (and post judgement interest) already incurred in connection with the ABS Action have been filed by both parties. ABS has sought approximately $5.4m in legal fees and costs already charged to the income statement and ST has sought approximately $280,000 in legal costs (excluding fees). Both parties await the Court's decision.
On 7 June 2017, ST, XY LLC and Cytonome/ST, LLC filed proceedings against ABS, the Company and Premium Genetics (UK) Limited ('PG') in the United States District Court for the Western District of Wisconsin ("New Litigation"). The New Litigation alleges that ABS and the Company infringe seven further patents and asserts trade secret and breach of contract claims. ABS and the Company have filed an Answer and Counterclaim confirming that they do not infringe any valid patent, and alleging among other things that: (i) ST has breached its 2012 semen sorting agreement with ABS by failing to produce sorted semen that complies with the contractual specifications; and (ii) ST has obtained certain patents through inequitable conduct. In addition, ABS has filed six IPRs seeking to revoke the additional patents raised in the New Litigation. PTAB instituted hearings in relation to two IPRs, refused to institute hearings on two other IPRs, and the parties await a decision on another IPR. In relation to the final IPR, relating to U.S. Patent No. 7,208,265 ("265 patent'), ST requested an adverse judgment. ST has subsequently dismissed its '265 patent infringement claim from the New Litigation and ABS has also dismissed its anti-trust and unfair competition counter claims. ABS filed Motions for Rehearing in relation to the IPRs that were not instituted.
The hearing date for the New Litigation has been set for 1 April 2019, and the Company and ABS intend to pursue vigorously their counterclaims and defend the patent infringement and other claims.
Acquisitions and integration
During the year, GBP1.2m of expenses were incurred, with GBP0.8m of expenses in relation to acquisitions and integration, principally of Møllevang.
Other (including restructuring)
Included within 'Other' there is a credit of GBP0.3m which principally relates to an insurance receipt from a legacy environmental claim.
Pension related
During the prior year, National Milk Records plc ('NMR') withdrew from the MPF under a Flexible Apportionment Arrangement between NMR, Genus and the Trustees of the MPF. In return for the right to withdraw from the MPF, NMR made a one-off, lump sum cash payment of GBP10.1m to the MPF, equivalent to the undiscounted value of all NMR's future payments under the existing MPF recovery plan, which extends to March 2026. NMR also made a payment to Genus of GBP4.7m, with GBP1.4m being satisfied by the issue of NMR shares.
As a result of the NMR withdrawal, Genus recognised in the prior year GBP5.7m as an exceptional credit in the year ended 30 June 2017, with GBP4.5m (GBP4.7m payment, net of fees) being received directly from NMR, and GBP1.2m from the MPF pension scheme reflecting the impact of NMR paying undiscounted amounts into the scheme.
4. NET FINANCE COSTS
2018 2017
GBPm GBPm
Interest payable on bank loans and overdrafts (3.0) (2.7)
Amortisation of debt issue costs (0.4) (0.4)
Other interest payable (0.2) (0.1)
Net interest cost in respect of pension scheme
liabilities (1.0) (1.2)
Net interest cost on derivative financial
instruments (0.2) (0.1)
Total interest expense (4.8) (4.5)
Interest income on bank deposits 0.2 0.8
Total interest income 0.2 0.8
Net finance costs (4.6) (3.7)
5. INCOME TAX EXPENSE
2018 2017
Income tax expense GBPm GBPm
Current tax expense
Current period 11.7 9.9
Adjustment for prior periods 0.9 0.4
Total current tax expense in the Group Income Statement 12.6 10.3
Deferred tax expense
Origination and reversal of temporary differences (45.3) (2.6)
Adjustment for prior periods (1.1) (1.3)
Total deferred tax credit in the Group Income Statement (46.4) (3.9)
Total income tax (credit)/expense excluding
share of income tax of equity accounted
investees (33.8) 6.4
Share of income tax of equity accounted
investees 1.5 1.4
Total income tax (credit)/expense in the
Group Income Statement (32.3) 7.8
6. EARNINGS PER SHARE
Basic earnings per share is the profit generated for the financial year attributable to equity shareholders divided by the weighted average number of shares in issue during the year.
Basic earnings per share from continuing 2018 2017
operations
Basic earnings per share 69.7p 53.8p
The calculation of basic earnings per share from continuing operations for the year ended 30 June 2018 is based on the net profit attributable to owners of the Company from continuing operations of GBP42.7m (2017: GBP32.8m) and a weighted average number of ordinary shares outstanding of 61,234,000 (2017: 60,944,000), which is calculated as follows:
Weighted average number of ordinary shares (basic)
2018 2017
000s 000s
Issued ordinary shares at the start of the
year 61,162 61,013
Effect of own shares held (180) (163)
Shares issued on exercise of stock options 20 47
Shares issued in relation to Employee Benefit
Trust 232 47
Weighted average number of ordinary shares
in year 61,234 60,944
Diluted earnings per share from continuing 2018 2017
operations
Diluted earnings per share 68.7p 53.0p
The calculation of diluted earnings per share from continuing operations for the year ended 30 June 2018 is based on the net profit attributable to owners of the Company from continuing operations of GBP42.7m (2017: GBP32.8m) and a weighted average number of ordinary shares outstanding, after adjusting for the effects of all potential dilutive ordinary shares, of 62,120,000 (2017: 61,833,000), which is calculated as follows:
Weighted average number of ordinary shares (diluted)
2018 2017
000s 000s
Weighted average number of ordinary shares
(basic) 61,234 60,944
Dilutive effect of share options 886 889
Weighted average number of ordinary shares
for the purposes of diluted earnings per
share 62,120 61,833
Adjusted earnings per share from continuing 2018 2017
operations
Adjusted earnings per share 75.9p 69.4p
Diluted adjusted earnings per share 74.9p 68.4p
Adjusted earnings per share is calculated on profit before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items, after charging taxation associated with those profits, of GBP46.5m (2017: GBP42.3m), which is calculated as follows:
2018 2017
GBPm GBPm
Profit before tax from continuing operations 7.8 40.7
Add/(deduct):
Net IAS 41 valuation movement on biological
assets 28.7 1.1
Amortisation of acquired intangible assets 9.5 8.7
Share-based payment expense 5.4 4.6
Exceptional items (see note 3) 5.9 2.5
Net IAS 41 valuation movement on biological
assets in joint ventures 0.5 (0.5)
Tax on joint ventures and associates 1.5 1.4
Attributable to non-controlling interest (0.8) (2.1)
Adjusted profit before tax 58.5 56.4
Adjusted tax charge (12.0) (14.1)
Adjusted profit after tax 46.5 42.3
Effective tax rate on adjusted profit 20.5% 25.0%
7. DIVIDS
Amounts recognised as distributions to equity holders in the year
2018 2017
GBPm GBPm
Final dividend
Final dividend for the year ended 30 June 2017
of 16.2 pence per share 9.9 -
Final dividend for the year ended 30 June 2016
of 14.7 pence per share - 9.0
Interim dividend
Interim dividend for the year ended 30 June
2018 of 8.1 pence per share 5.0 -
Interim dividend for the year ended 30 June
2017 of 7.4 pence per share - 4.5
14.9 13.5
The Directors have proposed a final dividend of 17.9 pence per share for 2018. This is subject to shareholders' approval at the Annual General Meeting and we have therefore not included it as a liability in these financial statements.
8. INTANGIBLE ASSETS
Separately Software
Brand, identified Including
multiplier acquired Assets Patents,
contracts intangible Under licence
Technology and customer assets Construction and Total Goodwill
relationships IntelliGen other
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
Balance at 1
July
2016 46.6 72.7 119.3 6.9 17.8 2.6 146.6 86.0
Additions - - - 0.9 3.1 1.5 5.5 -
Acquisition 6.7 7.4 14.1 - - - 14.1 16.2
Reclassified
from
tangible
fixed
assets - - - 1.0 - - 1.0 -
Effect of
movements
in exchange
rates 0.1 2.2 2.3 - 0.4 - 2.7 2.5
Balance at 30
June 2017 53.4 82.3 135.7 8.8 21.3 4.1 169.9 104.7
Additions - - - 3.6 1.1 - 4.7 -
Reclassified
from
tangible
fixed
assets - - - 1.9 - - 1.9 -
Transfer
between
classes (1.3) - (1.3) 1.3 - - - -
Disposals - - - - - (0.2) (0.2) -
Effect of
movements
in
exchange
rates (0.4) (1.8) (2.2) (0.2) (0.2) - (2.6) (2.7)
Balance at 30
June 2018 51.7 80.5 132.2 15.4 22.2 3.9 173.7 102.0
Amortisation
and
impairment
losses
Balance at 1
July
2016 22.1 40.9 63.0 5.4 - 0.2 68.6 -
Reclassified
from
tangible
fixed
assets - - - 0.7 - - 0.7 -
Amortisation
for
the year 2.7 6.0 8.7 1.3 0.4 0.8 11.2 -
Effect of
movements
in exchange
rates - 1.0 1.0 0.1 - - 1.1 -
Balance at 30
June 2017 24.8 47.9 72.7 7.5 0.4 1.0 81.6 -
Reclassified
from
tangible
fixed
assets - - - 0.4 - - 0.4 -
Amortisation
for
the year 3.0 6.5 9.5 1.4 2.1 0.8 13.8 -
Effect of
movements
in
exchange
rates (0.1) (0.7) (0.8) - - - (0.8) -
Balance at 30
June 2018 27.7 53.7 81.4 9.3 2.5 1.8 95.0 -
Carrying
amounts
At 30 June
2018 24.0 26.8 50.8 6.1 19.7 2.1 78.7 102.0
At 30 June
2017 28.6 34.4 63.0 1.3 20.9 3.1 88.3 104.7
At 30 June
2016 24.5 31.8 56.3 1.5 17.8 2.4 78.0 86.0
Included within the Software class of assets is GBP3.4m of costs capitalised in relation to software assets that are in the course of construction. Of this, GBP2.6m relates to the on-going development of Genus One, a unified enterprise-wide business system.
9. BIOLOGICAL ASSETS
Fair value of biological assets Bovine Porcine Total
GBPm GBPm GBPm
Non-current biological assets 146.3 118.3 264.6
Current biological assets - 66.4 66.4
Balance at 30 June 2016 146.3 184.7 331.0
Increases due to purchases 11.9 176.0 187.9
Decreases attributable to sales - (197.8) (197.8)
Decrease due to harvest (40.7) (19.3) (60.0)
Changes in fair value less estimated sale
costs 10.3 66.0 76.3
Acquisition 5.4 - 5.4
Effect of movements in exchange rates 4.3 6.0 10.3
Balance at 30 June 2017 137.5 215.6 353.1
Non-current biological assets 137.5 171.8 309.3
Current biological assets - 43.8 43.8
Balance at 30 June 2017 137.5 215.6 353.1
Increases due to purchases 9.1 117.3 126.4
Decreases attributable to sales - (194.7) (194.7)
Decrease due to harvest (35.5) (20.0) (55.5)
Changes in fair value less estimated sale
costs (4.2) 99.9 95.7
Acquisition (see note 14) - 25.1 25.1
Effect of movements in exchange rates (2.9) (4.4) (7.3)
Balance at 30 June 2018 104.0 238.8 342.8
Non-current biological assets 104.0 201.8 305.8
Current biological assets - 37.0 37.0
Balance at 30 June 2018 104.0 238.8 342.8
Bovine biological assets include GBP6.7m (2017: GBP6.9m) representing the fair value of bulls owned by third parties but managed by the Group, net of expected future payments to such third parties, which are therefore treated as assets held under finance leases.
There were no movements in the carrying value of the bovine biological assets in respect of sales or other changes during the year.
The current market-determined post-tax rate used to discount expected future net cash flows from the sale of bull semen is the Group's weighted risk adjusted cost of capital. This has been assessed as 8.7% (2017: 8.0%).
Decreases due to harvest represent the semen extracted from the biological assets. Inventories of such semen are shown as biological asset harvest.
Included in increases due to purchases is the aggregate increase arising during the year on initial recognition of biological assets in respect of multiplier purchases, other than parent gilts, of GBP47.7m (2017: GBP87.0m).
Decreases attributable to sales during the year of GBP194.7m (2017: GBP197.8m) include GBP71.9m (2017: GBP66.6m) in respect of the reduction in fair value of the retained interest in the genetics of animals, other than parent gilts, transferred under royalty contracts.
Also included is GBP88.2m (2017: GBP111.0m) relating to the fair value of the retained interest in the genetics in respect of animals, other than parent gilts, sold to customers under royalty contracts in the year.
Total revenue in the year, including parent gilts, includes GBP157.2m (2017: GBP159.5m) in respect of these contracts, comprising GBP48.9m (2017: GBP54.0m) on initial transfer of animals to customers and GBP108.3m (2017: GBP105.5m) in respect of royalties received.
For pure line porcine herds, the net cash flows from the expected output of the herds are discounted at the Group's required rate of return, adjusted for the greater risk implicit in including output from future generations. This adjusted rate has been assessed as 11.0% (2017: 11.0%). The number of future generations which have been taken into account is seven (2017: seven) and their estimated useful lifespan is 1.4 years (2017: 1.4 years).
Year ended 30 June 2018
Bovine Porcine Total
GBPm GBPm GBPm
Net IAS 41 valuation movement on biological
assets*
Changes in fair value of biological assets (4.2) 99.9 95.7
Inventory transferred to cost of sales at
fair value (29.8) (20.0) (49.8)
Biological assets transferred to cost of
sales at fair value - (75.1) (75.1)
(34.0) 4.8 (29.2)
Fair value movement in related financial
derivative - 0.5 0.5
(34.0) 5.3 (28.7)
Year ended 30 June 2017
Bovine Porcine Total
GBPm GBPm GBPm
Net IAS 41 valuation movement on biological
assets*
Changes in fair value of biological assets+ 10.3 66.0 76.3
Inventory transferred to cost of sales at
fair value (38.8) (19.3) (58.1)
Biological assets transferred to cost of
sales at fair value - (18.8) (18.8)
(28.5) 27.9 (0.6)
Fair value movement in related financial
derivative - (0.5) (0.5)
(28.5) 27.4 (1.1)
*This represents the difference between operating profit prepared under IAS 41 and operating profit prepared under historical cost accounting, which forms part of the reconciliation to adjusted operating profit.
+includes GBP2.1m write down in bovine assets.
10. TRADE AND OTHER RECEIVABLES
2018 2017
GBPm GBPm
Trade receivables 73.9 73.7
Other debtors 5.3 5.4
Prepayments and accrued income 10.3 7.8
Other taxes and social security 1.5 1.9
91.0 88.8
Trade receivables
The average credit period our customers take on the sales of goods is 58 days (2017: 59 days). We do not charge interest on receivables for the first 30 days from the date of the invoice. We provide for all receivables based on knowledge of the customer and historical experience, and estimate irrecoverable amounts by reference to past default experience.
No customer represents more than 5% of the total balance of trade receivables (2017: nil).
At 30 June 2018, GBP55.4m (2017: GBP56.4m) of trade receivables were not yet due for payment.
11. RETIREMENT BENEFIT OBLIGATIONS
The Group operates a number of defined contribution and defined benefit pension schemes covering many of its employees. The principal funds are the Milk Pension Fund and Dalgety Pension Fund in the UK, which are defined benefit schemes. The assets of these funds are held separately from the assets of the Group and are administered by trustees and managed professionally. These schemes are closed to new members.
The financial positions of the defined benefit schemes, as recorded in accordance with IAS 19 and IFRIC 14, are aggregated for disclosure purposes. The liability split by principal scheme is set out below.
2018 2017
GBPm GBPm
The Milk Pension Fund - Genus's share 24.2 30.4
The Dalgety Pension Fund - -
Other retirement benefit obligations and
other unfunded schemes 9.7 10.5
Overall net pension liability 33.9 40.9
Overall, we expect to pay GBP7.5m (2018: GBP7.3m) in contributions to defined benefit plans in the
2019 financial year.
Summary of movements in Group deficit during the year
2018 2017
GBPm GBPm
Deficit in schemes at the start of
the year (40.9) (44.5)
Administration expenses (0.4) (0.6)
Exceptional gain on NMR withdrawal
from MPF - 1.2
Contributions paid into the plans 7.3 7.2
Net pension finance cost (1.0) (1.2)
Actuarial gain recognised during the
year 43.4 1.2
Movement in restriction of assets (2.5) 0.3
Recognition of additional liability (39.4) (4.3)
Reclassified from accruals (0.5) -
Exchange rate adjustment 0.1 (0.2)
Deficit in schemes at the end of the
year (33.9) (40.9)
The expense/(income) is recognised in the following line items in the Income Statement
2018 2017
GBPm GBPm
Administrative expenses 0.4 0.6
Exceptional gain on NMR withdrawal from MPF - (1.2)
Net finance charge 1.0 1.2
1.4 0.6
Actuarial assumptions and sensitivity analysis
Principal actuarial assumptions at the reporting date (expressed as weighted averages):
2018 2017
Discount rate 2.90% 2.65%
Consumer Price Index (CPI) 1.95% 2.05%
Retail Price Index (RPI) 3.05% 3.15%
The mortality assumptions used are consistent with those recommended by the schemes' actuaries and reflect the latest available tables, adjusted for the experience of the scheme where appropriate. For 2018, the mortality tables used are 97% of the S2NA tables, with birth year and 2017 CMI projections with a smoothing parameter of Sk = 7.5, subject to a long-term rate of improvement of 1.25% for males and females (2017: the mortality tables used are 97% of the S2NA tables, with birth year and 2014 CMI projections, subject to a long-term rate of improvement of 1.25% for males and females).
12. NOTES TO THE CASH FLOW STATEMENT
2018 2017
GBPm GBPm
Profit for the year 41.6 34.3
Adjustment for:
Net IAS 41 valuation movement on biological
assets 28.7 1.1
Amortisation of acquired intangible assets 9.5 8.7
Share-based payment expense 5.4 4.6
Share of profit of joint ventures and associates (4.2) (6.2)
Finance costs (net) 4.6 3.7
Income tax expense (33.8) 6.4
Exceptional items 5.9 2.5
Adjusted operating profit from continuing
operations 57.7 55.1
Depreciation of property, plant and equipment 10.4 8.8
(Profit)/loss on disposal of plant and equipment (0.1) 0.2
Amortisation of intangible assets 4.3 2.5
Adjusted earnings before interest, tax,
depreciation and amortisation 72.3 66.6
Exceptional item cash (4.9) (5.4)
Other movements in biological assets and
harvested produce (1.9) (5.7)
Increase in provisions 1.7 0.1
Additional pension contributions in excess
of pension charge (6.9) (6.6)
Other (2.0) (0.9)
Operating cash flows before movement in
working capital 58.3 48.1
(Increase)/decrease in inventories (4.2) 1.4
Increase in receivables (5.7) (9.0)
Increase in payables 9.9 5.8
Cash generated by operations 58.3 46.3
Interest received 0.2 0.8
Interest and other finance costs paid (3.9) (3.1)
Cash flow from derivative financial instruments 0.2 0.6
Income taxes paid (11.6) (10.0)
Net cash from operating activities 43.2 34.6
Analysis of net debt
At 1 July Net cash Foreign Non-cash At 30 June
2017 flows exchange movements 2018
GBPm GBPm GBPm GBPm GBPm
Cash and cash equivalents 26.5 3.3 (0.7) - 29.1
Interest-bearing loans -
current (7.7) (2.6) 0.1 (3.2) (13.4)
Obligation under finance
leases -
current (1.4) 2.2 - (2.2) (1.4)
(9.1) (0.4) 0.1 (5.4) (14.8)
Interest-bearing loans -
non-current (127.2) 4.7 1.8 - (120.7)
Obligation under finance
lease - non-
current (1.8) - - (0.3) (2.1)
(129.0) 4.7 1.8 (0.3) (122.8)
Net debt (111.6) 7.6 1.2 (5.7) (108.5)
Included within non-cash movements is GBP5.3m in relation to other unsecured borrowings and new finance leases.
13. CONTINGENCIES AND BANK GUARANTEES
Contingent liabilities are potential future cash outflows, where the likelihood of payments is considered more than remote but is not considered probable or cannot be measured reliably.
The retirement benefit obligations referred to in note 11 include obligations relating to the Milk Pension Fund defined benefit scheme. Genus, together with other participating employers, is joint and severally liable for the scheme's obligations. Genus has accounted for its section and its share of any orphan assets and liabilities, collectively representing approximately 86% (2017: 85%) of the MPF. As a result of the joint and several liability, Genus has a contingent liability for the scheme's obligations that it has not accounted for.
The Group's future tax charge and effective tax rate could be affected by factors such as countries reforming their tax legislation to implement the OECD's BEPS recommendations and by European Commission initiatives including state aid investigations.
At 30 June 2018, we have entered into bank guarantees totalling GBP1.0m.
14. DEFERRED CONSIDERATION
During the year, we recognised the value of Møllevang Genetics and made deferred consideration payments totalling GBP1.8m in respect of our previous acquisitions of De Novo Genetics and Hermitage Genetics.
Avlscenter Møllevang A/S ('Møllevang')
On 14 November 2017, Genus PIC announced that commencing 2 July 2018, it had entered into a strategic relationship with Møllevang, a leading independent Danish porcine genetics company. After 2 July 2018, Møllevang became an elite porcine genetics production partner for PIC in Denmark and will continue to distribute elite genetics to the Danish market and certain other countries.
As all material conditions for completion of the transaction with Møllevang under the terms of the subscription agreement were fulfilled at the balance sheet date, we have recognised the value of the genetics acquired in biological assets and a related total deferred consideration of GBP23.5m was recorded in current and non-current liabilities.
The preliminary amounts recognised in respect of the identifiable assets acquired, are set out in the table below.
GBPm
Biological assets acquired (see note 9) 25.1
Satisfied by:
Cash consideration 1.6
Deferred consideration - Current 19.3
Deferred consideration - Non-current 4.2
25.1
15. NON-CONTROLLING INTEREST
2018 2017
GBPm GBPm
Non-controlling interest 5.7 6.1
Put option over non-controlling
interest (3.2) (3.3)
Total non-controlling interest 2.5 2.8
Summarised financial information in respect of each of the Group's subsidiaries that has a material non-controlling interest is set out below. The summarised financial information below represents amounts before intra-Group eliminations.
2018 2017
De Novo Genetics GBPm GBPm
Biological assets 10.7 10.2
Current assets 0.7 1.4
Non-current assets 3.1 2.4
Current liabilities (4.2) (2.1)
Net assets 10.3 11.9
Equity attributable to owners
of the Company (5.2) (6.1)
Non-controlling interest for
De Novo Genetics 5.1 5.8
Other non-controlling interest 0.6 0.3
Non-controlling interest 5.7 6.1
No dividends were paid to non-controlling interests (2017: GBP0.1m).
16. POST BALANCE SHEET EVENTS
On 2 July 2018, Genus PIC and Møllevang, a leading independent Danish porcine genetics company, signed an exclusive distribution agreement for Denmark, entered into a sireline nucleus agreement and Genus PIC purchased 49% of Møllevang. In accordance with the subscription agreement, Genus PIC paid GBP19.3m on 2 July 2018. Møllevang will be an elite porcine genetics production partner for PIC in Denmark and will continue to distribute elite genetics to the Danish market and certain other countries.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR LLFEDATIEIIT
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September 06, 2018 02:00 ET (06:00 GMT)
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