AnalysingBega Cheese Limited (ASX code BGA):

A. Industry Analysis

1. What would be the performance for the industry in next year, in next 5 years, and in the long run? And why do you think so?

2. Who are the main players in this industry? What are their positions in the industry?

B. Company Analysis

3. What are the competitive advantages of this company?

4. What are the strengths, weakness, opportunities and threats to the company?

5. What would be the performance for this company in next year, in next 5 years, and in the long run? And why do you think so? Focus on sales growth and profitability.

6. How did the company perform in the last 3 years? What were the revenues, expenses, and cash flows from operations?

7. Do the managers have any incentives to manipulate earnings?

8. Do you discover any evidence of earnings manipulations in the financial statements?

9. Do you think there is need to make adjustment to the accounting figures? If yes, explain how you will make the adjustments.

BEGA CHEESE LIMITED ANNUAL REPORT 2015 CONTENTS KEY HIGHLIGHTS 3 EXECUTIVE CHAIRMAN'S REVIEW 4 MILK SUSTAINABILITY AND GROWTH PROGRAM 6 FEATURE ON INTERNATIONAL FOODSERVICE 8 CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES 10 DIRECTORS' REPORT 16 AUDITOR'S INDEPENDENCE DECLARATION 30 CORPORATE GOVERNANCE STATEMENT 31 FINANCIAL STATEMENTS 37 NOTES TO THE FINANCIAL STATEMENTS 42 DIRECTORS' DECLARATION 76 INDEPENDENT AUDITOR'S REPORT 77 SHAREHOLDER INFORMATION 79 CORPORATE DIRECTORY 81 BEGA CHEESE LIMITED 2015 | ANNUAL REPORT 1 2 KEY HIGHLIGHTS REVENUE ($'000) TOTAL DIVIDEND PER SHARE (CENTS) 1,069,392 8.5 1,112,630 8.5 EBITDA ($'000) PRODUCTION VOLUME (TONNES)** 122,506 216,007 70,132 224,986 41,978 55,705 PROFIT AFTER TAX ($'000) MILK SUSTAINABILITY AND GROWTH ($'000) 66,055 10,569 29,764 13,727 12,408 22,017 2014 BASIC EARNINGS PER SHARE (CENTS) 43.4 2014* 2015 2015* *Normalised refers to excluding the impact of significant events occurring during the year. **Prior year production numbers have been restated in line with current year definitions. 19.6 8.1 14.4 The images included in the Annual Report include a selection of Bega Cheese Group's products, staff, sites, suppliers and their farms. BEGA CHEESE LIMITED 2015 | KEY HIGHLIGHTS 3 EXECUTIVE CHAIRMAN'S REVIEW From a strategic perspective FY2015 delivered a number of important outcomes, including the continued growth of our value-added products, approximately 6% growth in milk supply and important developments in our newly created bio-nutrients platform. While FY2015 had its challenges in terms of global commodity prices and a highly competitive milk sourcing environment, it remains the case that strong growth and demand in our key product platforms confirms the Group's strategy of investment in higher value dairy products. The growth in revenue to $1,112.6 million in spite of major decreases in global commodity dairy prices is an excellent demonstration of the value added dairy products the Group is producing, particularly in the nutritionals and consumer packaged goods platforms of the business. Continued investment in our business platforms is vital to the long term success of Bega Cheese Group. The Group was very pleased to announce in FY2015 an important bio-nutrient investment at our Lagoon Street facility in Bega. The new facility will use state-of-the-art technology to extract high value whey proteins from our existing product streams. The investment of approximately $22 million, which will commence in FY2016, has been supported by the Federal Government through its Manufacturing Transition Program with a grant of $5 million to be received in FY2016 to FY2018. Significant reductions in global commodity prices were reflected in the revenues received for commodity products, which includes skim milk powders. While there has been some change in product mix, on a like for like volume there has been a decline in revenue from commodities of $29 million in FY2015 as a result of a reduction in dairy commodity prices being approximately 35% down when compared to FY2014. The quality of the revenue stream and importance of the Group's strategy to progressively change our product mix to higher value added dairy products is demonstrated in strong revenue increases in our nutritionals and consumer packaged goods businesses. Against the backdrop of a significant decrease in global dairy commodity prices it is pleasing to report that combined revenue in the nutritionals and consumer packaged goods platforms increased by $72.2 million. The Group will continue to explore genuine value adding opportunities for its products and progressively reduce its exposure to both global dairy commodities and retail products that could be identified as being commoditised either now or in the future. As in FY2014, our financial year reporting for FY2015 will focus on our normalised result which does not include the impact of our Milk Sustainability and Growth Program or the outcome of the sale of our investment in Warrnambool Cheese and Butter Company Holdings Limited (WCB) in FY2014. While the statutory profit after tax for the Group was $12.4 million, down 81% when compared to FY2014, it is a more appropriate assessment of financial performance for FY2015 to review the normalised outcome. The normalised profit after tax of $22.0 million was down 26% on the previous year which, as previously mentioned, was largely as a result of the Group's exposure to commodity products such as skim milk powder. The financial impact of the significant decrease in global commodity prices saw normalised earnings per share (EPS) decrease to 14.4 cents per share. While the financial performance for FY2015 has not been as strong as the previous year, the fundamentals of the business remain very sound, including a strong balance sheet supporting a full year dividend outcome of 8.5 cents per share, in line with FY2014. 4 The business continues to execute strategy in a timely and consistent manner, responding to market changes and long term demand signals. A key step forward in FY2015 was the increasing to full scale production of our recently completed infant formula and growing up milk powders blending and canning plant at Derrimut. The first half of FY2015 saw the challenges of volume build and I am pleased to report that the facility has now moved to a third shift and is making an important contribution to our nutritionals platform. Creating a business environment that encourages investment and innovation while also promoting international trade always needs to be a high priority for Government. I acknowledge the many initiatives of the Federal Government including the Manufacturing Transition Program and the focus on progressing trade agreements with Australia's global trading partners. Of particular importance to the dairy industry was the outcome of the Free Trade Agreement with China and I congratulate the Minister for Trade and Investment Andrew Robb and his team for their tireless work on that agreement and in the trade portfolio in general. Bega Cheese Group's success has been built on the foundations of long term relationships with its customers, suppliers and shareholders. FY2015 has seen those relationships strengthen further. We continue to have very constructive value creating relationships with long-term corporate customers such as ALDI, Coles, Fonterra, Ingredia, Lacto Japan, Mead Johnson Nutrition, Meg-milk Snow, Mondelez, Woolworths and many others. In FY2015 we were pleased to execute long term supply contracts with Bellamy's for infant formula supply and Chongqing General Trading Group for the supply of Bega branded UHT milk. When we think about our customers and their requirements and a strategy which will provide an efficient, sustainable supply chain we always begin by considering the long term sustainability of our milk supply and the market expectation of the manner in which our products are sourced and manufactured. The strategic investment in our Milk Sustainability and Growth Program has been very successful with over 93% of our milk supply committing to participate in an environmental and animal husbandry audit and a 3 year improvement program. Of the 93% that joined our sustainability program, 55% went on to participate in our growth program, which saw on farm growth projects with a value of in excess of $50 million initiated in the past year. Bega Cheese Group's investment will yield a sustainable and growing milk supply base capable of responding to market opportunities and expectations in Australia and internationally. Bega Cheese Group's success has been built on the foundations of long term relationships with its customers, suppliers and shareholders. Barry Irvin Executive Chairman Successful strategies must include developing and looking after people, with effective succession planning to ensure knowledge and experience is enhanced by fresh ideas and reflections. The Group continues to invest in staff development and training and we are seeing great outcomes across the entire business from that investment. We also remain alert to opportunities to recruit high quality skilled individuals with global knowledge and experience. New skills and approaches have also been added to the Board with the appointment of Raelene Murphy as our newest Director. Raelene's experience in business strategy, financial management and governance make her an ideal replacement for Joy Linton who has relocated to London. Joy has made a great contribution to the Group's strategy and governance approach since joining the Board immediately after listing in 2011. We thank Joy for her service to the organisation and wish her all the best with her new executive role with Bupa UK. Bega Cheese Group is very aware of the important role it plays in the regional communities we operate in. While it is always the case that we ensure we are strong supporters of charities and organisations that care for those in need in our communities, this year we were proud to also participate in an important ANZAC Centenary Project in Bega. 2015 is an important year for our nation. The foundations that many of this country's values were built on comes from the legend of the ANZAC, the battles at Gallipoli and the sacrifices made by our soldiers in World War I. The Bega Cheese ANZAC Living Memorial Project saw Bega Cheese staff and dairy farmer suppliers who had relatives involved in World War I document their stories for future generations. The project went beyond documentation of stories as many of our farmers embraced the opportunity to create lasting living environmental memorials by planting native vegetation shelter belts as part of their sustainability programs, dedicating them to the ANZACs. A culture of constant review and close observance to changes in the environment is important in all businesses and particularly important in dairy. While we have seen a challenging year impacted by increases in global dairy production, Russian sanctions, significant decreases in dairy commodity prices, a relatively strong Australian dollar for the early part of FY2015 and a highly competitive milk procurement environment, we remain confident that the Group's strategy of investing in the key platforms of nutritionals, consumer packaged goods, core dairy ingredients and bio-nutrients is the right one. As we look to FY2016 and beyond I remain positive regarding the outlook for the Bega Cheese Group business. As previously mentioned our key business platforms continue to grow, the Australian currency has weakened improving our competitive position and while commodity prices continue to be low, the outlook for demand remains strong and we expect some improvement in commodity prices during the 2016 calendar year. In the past year the Group has successfully invested in a sustainable and growing milk supply, increased its capability and capacity in infant formula manufacture, built on its success in consumer packaged goods and taken important steps forward in the creation of a bio-nutrient platform. The Group continues to maintain a strong balance sheet which supports ongoing investment in our key business platforms and is positioned well for value creating acquisition and rationalisation opportunities. In years of challenge you look to your team to perform and ensure the business remains focussed and on strategy. All the above initiatives will be important contributors to the financial performance and strategic positioning of Bega Cheese Group in the coming years. The achievements outlined above would not have been possible without the dedication and efforts of CEO Aidan Coleman, his Executive Team, management and the staff of Bega Cheese and I acknowledge and thank them all for their significant contribution. On a personal note, I would like to thank the Board, staff, suppliers and shareholders for their ongoing personal and professional support. Barry Irvin Executive Chairman 27 August 2015 BEGA CHEESE LIMITED 2015 | EXECUTIVE CHAIRMAN'S REVIEW 5 MILK SUSTAINABILITY AND GROWTH PROGRAM The Milk Sustainability and Growth Program is designed to encourage investment in farm sustainability and milk growth. Participating suppliers committed their milk supply to Bega Cheese Group for a three year period via a supply agreement. The intent of this initiative was to enable suppliers to be better positioned for the future and to provide Bega Cheese Group with an improved security of milk supply. A Committee of the Board was formed to oversee the roll-out and monitoring of the project and met regularly to approve sustainability applications and review milk growth projects. The Committee operated under a formal charter, established guidelines and eligibility criteria to manage the wide range of circumstances that suppliers faced (relating to sustainability and growth issues) whilst maintaining the overall business goals. The program implementation commenced on farm in May 2014 and applications closed in February 2015 with considerable activity taking place over that period. The project is now in a monitoring and review phase to ensure it meets the desired program outcomes. As a result of this initiative the following outcomes were achieved across the Group's milk supply up to June 2015: 6 93% of the direct farm milk supply is now participating in the sustainability program and have signed supply agreements 55% of the milk supply is participating in the milk growth program 469 milk growth projects will be initiated across the three years of the program 29% projected milk increase from participating suppliers over the three years of the program Over $50 million invested in on farm initiatives, including an estimated $33 million farmer co-commitment to these projects. SUSTAINABILIT Y PROGRAM The main component of this program is the undertaking of the Bega Environmental Management System (BEMS) sustainability assessments. This is a facilitated self-assessment of each supplier's sustainability against 15 key indicators. The assessments are conducted by a trained Bega Cheese Group officer. Once completed, the supplier receives a summary report of the BEMS sustainability assessment with areas highlighted that require attention (for both regulatory and best practice compliance), and possible improvement projects to consider. General responses from milk suppliers with respect to the assessment process have been positive, with the assessment increasing their understanding and awareness of sustainability issues. The wealth of data that has been collected will help Bega Cheese Group focus education and service delivery activities to ensure suppliers continue to improve their on farm sustainability. Eddy and Sharon Kenna with their daughter (pictured above) from the Western District of Victoria identified via the assessment that wet weather effluent storage needed to be upgraded and expanded. They have now invested in a new 40 ML storage dam with associated irrigation infrastructure to utilise the nutrients for summer crop production. The main areas of milk growth investment will include: MILK GROWTH PROGRAM Under this component of the program, Bega Cheese Group supported on farm investment where existing suppliers have identified milk growth projects that would achieve at least a 20% increase in milk production at the end of the three year program period. Suppliers had to be participating in the sustainability program to be eligible for this support. The Committee was impressed with the quality and scale of projects that were presented. It was clear that suppliers had a desire for growth and were aware of the structural issues in their businesses that had been preventing this. The investment by Bega Cheese Group enabled suppliers to tap into that previously locked-up growth potential to provide a positive outcome for the suppliers and Bega Cheese Group. airy shed expansions to milk more D cows more efficiently Increased or improved irrigation infrastructure to facilitate increase in the milking herd Land purchases for farm expansion Feeding infrastructure such as feed pads Milking cattle purchases to increase herd sizes. A growing and sustainable milk supply with strong commitment from the Group and its dairy farmer suppliers will assist Bega Cheese Group in meeting its long-term business growth objectives and clearly demonstrates the importance placed upon its milk supply - a great outcome for both supplier and the Group. Bega Cheese Group will continue to grow and looks forward to supporting its milk suppliers as they grow sustainably into the future. BEGA CHEESE LIMITED 2015 | MILK SUSTAINABILITY AND GROWTH PROGRAM 7 FEATURE ON INTERNATIONAL FOODSERVICE Foodservice, or \"out of home eating\" covers a broad range of outlets and occasions. This feature focusses on the commercial foodservice area for Bega Cheese Group, which includes products for catering and food outlets such as hotels, restaurants, cafes and bakeries. With greater than 50% of food expenditure being spent out of home in many Asian countries, foodservice is not a new phenomenon. Local open air food stalls, shopping mall eateries and food markets are common in urban centres across South East and North Asia. The popularity of foods such as pizza, burgers and bakery items such as cheesecake and desserts drive dairy consumption, which is a key recipe ingredient in these products. Western style foodservice outlets have come through a period of rapid expansion in Asia, offering market penetration opportunities for certain types of dairy products unavailable through other channels. While forecast economic growth has slowed in parts of Asia, the longer term prospects for continued growth in foodservice remain strong, underpinned by: Rises in discretionary income Shifts from rural to urban dwelling Continued population growth Consumer popularity of western food and innovation in outlet offerings. International foodservice accounts for 5% of Group sales and has risen by over 50% in the last three years to $60 million in FY2015. Bega Cheese Group is well positioned to continue its foodservice growth momentum, with its success due to a number of factors, including: 1. A strong path to market through its distributor network, established in 28 countries in Asia and the Middle East during a period of over 50 years. This enables Bega to access the best growth markets but also rapidly roll out new product innovation through an established selling network. 2. Manufacturing capability and scale in heavy consumption product segments such as mozzarella (pizzas, bakery), cream cheese (cheesecakes and desserts), processed cheese (burgers, sandwiches, bakery) and dairy powders (bakery). 3. Bega brand and product reputation, which has been exported to over 50 countries. Cream cheese and processed cheese products are bought by some of the world's largest quick service restaurant and bakery chains. The product recipes are unique and are well known for their consistent high quality. 4. Initiatives such as in-market 'Chef-Led' selling and expansion of the product offering, accelerating sales growth in key markets such as China and increasing market penetration, insights and innovation. Bega Cheese Group continues to build sales and distribution capability, broadening its product portfolio and manufacturing partnerships. 8 BEGA CHEESE LIMITED 2015 | FEATURE ON INTERNATIONAL FOODSERVICE 9 CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES BUSINESS OVERVIEW In a challenging year for dairy it was important to ensure that the business maintained focus on our long term strategy of maximising the value of our products through consistent investment in, and development of our core business platforms of nutritionals, consumer packaged goods, and core dairy ingredients. The strategy of creating more value from existing product streams will be further enhanced by the establishment of our fourth business platform, bio-nutrients. The beginning of the financial year saw a highly competitive milk procurement environment, as participants looked to actively firm up short and medium-term milk supply. This resulted in very strong opening committed milk prices across Australia, which were maintained for the duration of FY2015 despite significant reductions in dairy commodity prices. Bega Cheese Group began FY2015 in a strong position in relation to milk supply, with the Milk Sustainability and Growth Program, launched in FY2014, providing an innovative connection with milk suppliers and investment in increasing sustainable milk supply into the future. Under this program, Bega Cheese Group made $25 million available to our dairy farmer suppliers for participating in the Sustainability and Growth Program and agreeing to supply Bega Cheese Group for a period of three years. The majority of the funds associated with the program were committed and paid in FY2014/FY2015. Notwithstanding the fact that the vast majority of milk supply was committed for three years, Bega Cheese Group had to meet the competition in relation to the milk price it paid in FY2015. Bega Cheese Group is pleased that its milk suppliers received a highly competitive farm gate milk price in addition to the support they received under the Milk Sustainability and Growth Program positioning both the farmer suppliers and the Company well for the future. Having successfully responded to competition for milk at the beginning of FY2015 Bega Cheese Group was anticipating a general recovery in dairy commodity markets in 2H FY2015. Unfortunately this recovery did not occur. In FY2015 global dairy commodities contracted significantly from the high prices of the 10 prior year. The key challenge of FY2015 for the Australian dairy industry quickly became that of managing strong opening committed milk prices to milk suppliers against the backdrop of a continued contraction in dairy commodity values throughout FY2015. Bega Cheese Group began FY2015 in a strong position in relation to milk supply, with the Milk Sustainability and Growth Program, launched in FY2014, providing an innovative connection with milk suppliers and investment in increasing sustainable milk supply into the future. In facing this challenge we focussed our operations on optimising financial returns by directing milk through our network of dairy manufacturing sites across Victoria and New South Wales to extract the best value from milk solids sold into dairy commodity markets whilst still maintaining supply of a range of products to core customers. However, with a proportion of Bega Cheese Group's portfolio currently comprising dairy commodities, particularly skim milk powder, Bega Cheese Group was not entirely immune from the collapse in global dairy commodity markets in FY2015. The committed milk price to farmers and the returns available from dairy commodities had a direct adverse impact on the financial performance of the Group in FY2015. Bega Cheese Group focussed on optimising financial returns by directing milk to extract the best value from milk solids. Aidan Coleman Chief Executive Officer FINANCIAL PERFORMANCE This review refers to the continuing operations of the business, before the financial impact on profit of the Milk Sustainability and Growth Program in the prior and current year and the benefits of the sale of shares in Warrnambool Cheese and Butter Factory Holdings Limited (WCB) in the prior year. We will refer to this as the \"normalised\" result. The table to the right shows the effect of the significant events on financial performance. CONSOLIDATED Per Financial Statements $'000 WCB outcome $'000 Milk Sustainability and Growth outcome $'000 Normalised outcome $'000 1,112,630 Period Ending 30 June 2015 Revenue 1,112,630 - - Cost of sales (991,538) - 13,727 (977,811) Gross profit 121,092 - 13,727 134,819 Other income and expenses (79,114) - - (79,114) EBITDA 41,978 - 13,727 55,705 Depreciation, amortisation and impairment (22,214) - - (22,214) EBIT 19,764 - 13,727 33,491 Finance costs (3,330) - - (3,330) 16,434 - 13,727 30,161 Income tax expense (4,026) - (4,118) (8,144) Profit for the year 12,408 - 9,609 22,017 Profit before income tax Gross profit margin Basic earnings per share - cents 11% 12% 8.1 14.4 Period Ending 30 June 2014* 1,069,392 - - 1,069,392 Cost of sales Revenue (942,455) - 10,569 (931,886) Gross profit 126,937 - 10,569 137,506 (4,431) (62,943) - (67,374) EBITDA 122,506 (62,943) 10,569 70,132 Depreciation, amortisation and impairment (22,904) - - (22,904) EBIT 99,602 (62,943) 10,569 47,228 (6,022) 918 - (5,104) Profit before income tax 93,580 (62,025) 10,569 42,124 Income tax expense (27,525) 18,336 (3,171) (12,360) Profit for the year 66,055 (43,689) 7,398 29,764 Other income and expenses Finance costs, net Gross profit margin 12% 13% Basic earnings per share - cents 43.4 19.6 *Amounts for FY2014 have been restated to be consistent with the reclassification set out in the financial statements, which has no effect on profit for the year. BEGA CHEESE LIMITED 2015 | CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES 11 CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES The normalised EPS for FY2015 was 14.4 cents, which represented a decline of 27% from the prior year. The Board has announced a final year-end dividend of 4.5 cents per share, bringing the full year dividend to 8.5 cents per share which maintains the prior year dividend despite the global volatility of dairy commodity prices and the consequential impact on Bega Cheese Group's financial performance in FY2015. The strategy of moving away from dairy commodities to produce a broad range of more stable consumer and foodservice products has provided Bega Cheese Group resilience to offset much of the global commodity decline in FY2015. Of the Group's total sales revenue in FY2015, approximately 60% was generated from consumer packaged goods while a further 13% was from nutritional products. The business generated a 4% year-on-year growth in sales revenue to achieve record sales for the fourth consecutive year. Revenue grew by $43.2 million to $1,112.6 million. We consider this to be a very strong outcome given the significant decline in the values of dairy commodity products in FY2015. Highlights of the Group's continuing development of value added dairy products include: The investment in the infant nutritionals powder blending and canning operation at Derrimut, Melbourne. Having successfully addressed some commissioning issues early in FY2015 this plant is now operating effectively on a 24/7 basis to meet increased demand and the Board has approved further capital to expand capacity. The expansion of our international consumer channel and foodservice business driven by growth in South East Asia and China. These businesses now exceed $100 million in sales revenue and are a core focus for growth due to market size, price realisation and the strength of the Bega brand internationally. Bega Cheese's innovative 'Chef-Led' selling program continues to be instrumental in developing our Asian foodservice success. Contract packing of consumer cheese products continues to grow as we have developed the customer base and invested in new technology across the cheese cut-packprocessed factories to ensure we remain globally competitive as we expand in the growing Asian markets. While the Asian cream cheese business suffered from market oversupply and depressed pricing earlier in FY2015 we successfully reasserted our leadership position in this export market over the year and this category is now performing strongly. The resulting normalised EBITDA from continuing activities was $55.7 million, being a decrease of 21% from the prior year. The normalised profit before tax was $30.2 million, declining 28% from the prior year. The income tax expense on the normalised result is at an effective rate of 27.0% being slightly lower than the prior year. The Group generated a normalised profit after tax of $22.0 million, being a decrease of $7.7 million or 26% on prior year. CASH FLOW AND DEBT The decline in commodity markets impacted cash flows as the Group aimed to optimise financial returns and balance inventory requirements. The Group had a net cash outflow from operating activities of $17.3 million. After normalising for payments made to suppliers under the Milk Sustainability and Growth Program, the net cash inflow was $4.4 million compared with an inflow of $43.1 million in FY2014. The other key elements of cash flows in FY2015 include: An increase in trade and other debtors of $11.6 million driven mainly by the increase in revenue An increase in inventory of $10.7 million driven by an increase in milk intake in the last quarter A decrease in trade and other payables of $25.1 million Payment of tax of $18.3 million from the sale of shares in FY2014 of WCB Capital expenditure on property, plant and equipment of $18.7 million. SALES In FY2015 the Group generated sales of $1,112.6 million compared to $1,069.4 million in FY2014. This growth across all key business platforms is a strong endorsement of our business development strategies despite global commodity returns dropping by 35% in FY2015. 12 We are actively establishing our bio-nutrients business as a fourth commercial platform for the Group. The expanded lactoferrin capacity at Tatura Milk Industries was fully utilised in FY2015. We forecast continued long-term growth in lactoferrin demand and have plans to invest in a bio-nutrient extraction facility at Lagoon Street, NSW. This investment has also been favourably supported by the Federal Government, which has committed to provide $5 million towards this investment under the Manufacturing Transition Program. We wish to acknowledge this support and thank the Federal Government for their active encouragement of technically advanced manufacturing processes that will assist in keeping Australian industries globally competitive. The Group would not be successful without the continuing commitment to and support from each of our customers. We have a broad customer base domestically as well as across South East Asia, China, Japan and the Middle East. We would like to thank all of our customers for their continued support, particularly ALDI, Bellamy's, Coles, Fonterra, Mondelez and Woolworths in Australia and our international customers including Chongqing General Trading Group (CGTG) in China, Ingredia in France, Lacto Japan and Meg-milk Snow in Japan and Mead Johnson Nutrition from the USA. BEGA BRAND By the end of June 2015 the Bega brand had grown to a value market share of 15.3% in the Australian retail cheese category, further consolidating its position as the number one cheese brand in Australia. It is appropriate to recognise the excellent work by the team at Fonterra in Australia who represent our Bega brand under a franchise agreement in the Australian market. In a global context the Bega brand is now available in over 35 countries. Bega branded products now include natural and processed cheese, mozzarella, cream cheese, butter, UHT milk and UHT cream. Core dairy ingredients Cheddar/mozzarella Cream cheese/frozen cream A notable extension to the brand has been the introduction of Bega UHT milk into China in partnership with CGTG in South West China. This relationship has been instrumental in developing new channels for our products into China in both supermarkets and e-Commerce, which we see as the future of much of our business internationally. We see further international opportunities to leverage the Bega brand franchise across new products and markets. OPERATIONS The manufacturing operations of Bega are committed to continuous improvement and it is pleasing to see very positive results over the past year. The Group achieved record production output in FY2015 with total volume increasing by 4.2% to 224,986 tonnes. A summary of the volume of production is shown by platform in the chart below: Consumer packaged goods Natural cheese Processed cheese Skim milk powder Other core dairy ingredients Other powder Nutritionals Nutritionals BEGA CHEESE LIMITED 2015 | CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES 13 CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES The continuing focus on operational productivity across all six manufacturing sites resulted in a 3.2% decrease in the average conversion cost across the Group. This was particularly noteworthy in the cheese cut, pack and process facilities at Strathmerton and Ridge Street where we achieved a 6% increase in overall line efficiencies. In addition to production line improvements the business also achieved a 4.2% reduction in energy use per tonne of production while overall water consumption across the Group dropped by 16.5%. The Operations Team continues to extract opportunities for improvements in this area of our business, with technology advancements assisting us in identifying new opportunities for performance improvement. MILK PRODUCTION We have a well-defined milk supply strategy that is aligned to our 2020 Strategic Plan, matching milk intake to optimal product demand. Total milk collected from our direct suppliers was 631 million litres, which is an increase of 6.4% over the prior year. The Milk Sustainability and Growth Program was a contributing factor to the growth in milk intake in FY2015. In FY2015 the increase in milk supply resulted in higher closing inventories than in the prior year, impacting on working capital. However we consider this to be an acceptable situation given the alignment of milk supply to our production needs over the medium-term. INVESTMENTS The Group maintained its 25% shareholding in Capitol Chilled Foods (Australia) Pty Ltd (CCFA), a regional milk processor based in Canberra. The performance of CCFA has further deteriorated in FY2015, reflecting the competitiveness of retail milk pricing in the domestic market. ENVIRONMENT Bega Cheese manages manufacturing activities in regional areas to ensure that they are economically, socially and environmentally sustainable. The Group tracks environmental sustainability through a number of key performance indicators that are reviewed monthly. The Board and Management team is committed to identifying and managing economic, environmental and social sustainability risks, the long-term viability and sustainability of the dairy industry and the regional locations of our manufacturing plants. Bega Cheese has also maintained close relationships and support for milk suppliers through development of environment management systems on farms. This, along with the Milk Sustainability and Growth Program, is focussed on protecting the environment whilst conducting profitable farming enterprises for the benefit of the industry in the long-term. PROFIT AFTER TAX ($'000) Per Financial Statements REVENUE ($'000) Normalised Result* PRODUCTION VOLUME (TONNES) Per Financial Statements 14 2011 2012 2013 2014 22,017 12,408 29,764 66,055 25,846 2015 25,445 1,112,630 2014 20,429 1,069,392 2013 20,429 1,004,387 2012 21,693 932,911 2011 21,693 931,690 Per Financial Statements 2015 NET ASSETS ($'000) 186,223 203,767 210,052 216,007 224,986 205,475 246,440 261,952 314,388 312,666 Per Financial Statements 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 *Normalised refers to excluding the impact of significant events occurring during the year. Executive Team, from left to right: Grattan Smith, David McKinnon, Aidan Coleman, Garth Buttimore, Paul van Heerwaarden, Colin Griffin. SAFET Y STRATEGIC OUTLOOK The organisation remains committed to continuous development and improvement of our safety systems, processes and staff engagement. Our goal of no injuries to anyone remains central to our core value of Safety Always. It is pleasing to note that our safety performance is on a path of continuous improvement. The number of lost time injuries (LTI's) reduced a further 11% in FY2015 and the lost time injury frequency rate (LTIFR) reduced by 17%. The Board and executive have confirmed the 2020 Strategic Plan for the Group as a positive evolution of the strategy we have been working towards since listing on the Australian Securities Exchange in 2011. We have reconfirmed our strategic focus to be on: Extracting increased value from our milk solids intake and improving returns from milk going into commodities, particularly skim milk powder Investing in existing business platforms to improve our competitiveness as well as to develop new international markets for these existing products Identify acquisition opportunities aligned to our core capabilities in dairy technology, manufacturing and market development of dairy foods. PEOPLE A key aspect of growing our business is to develop an organisational structure that speeds up decision making, enables greater accountability within the business and develops new leaders for more demanding senior roles in the future. This is a core CEO focus at this time and is also a key component of succession planning within senior ranks. It is reassuring to note that we have a broad pool of capable, energetic and passionate young leaders emerging within the business who will be central to fulfilling the growth aspirations of the Group in coming years. The extended management team is committed to continual cost control in order to retain global competitiveness. It is also recognised that control of costs in established areas of the business will free up resources to increase investment in new platforms such as bio-nutrients. It is appropriate that I recognise the commitment of each of our 1,700 employees who drive the success of the Group. I would particularly like to thank my Executive Team for their focused leadership in what has been a dynamic year. We are committed to building on the successful base we have today to take the Group to new levels. We believe the outlook for global dairy markets will see short term price volatility, due to softer immediate demand, while the medium to long-term will see an increasing demand for dairy products, particularly from regions with restricted agricultural capabilities. We see this as a significant opportunity for Bega Cheese Group, given much of this growth in demand will come from the Asian region, in which we already have a sound presence. The business continues to manage a range of contracts including those linked to underlying costs as well as those on pre-determined selling prices. Our key focus continues to be to provide safe food products competitively to our core customers and regional segments in order to generate acceptable returns to our customers, shareholders and broader stakeholders. Aidan Coleman Chief Executive Officer 27 August 2015 BEGA CHEESE LIMITED 2015 | CHIEF EXECUTIVE OFFICER'S REVIEW OF OPERATIONS AND ACTIVITIES 15 DIRECTORS' REPORT YOUR DIRECTORS PRESENT THE ANNUAL FINANCIAL REPORT OF THE BEGA CHEESE GROUP FOR THE YEAR ENDED 30 JUNE 2015. BARRY IRVIN AM Executive Chairman Director since September 1989. EXPERIENCE AND EXPERTISE Barry Irvin is recognised globally for his extensive knowledge of the Australian dairy industry. In 2011 he was awarded the Rabobank Agribusiness Leader of the Year. He was awarded the NAB Agribusiness Leader of the Year in 2009 and appointed a member of the Order of Australia in 2008. RICHARD CROSS BAgSci (Hon), GAICD Director since December 2011. EXPERIENCE AND EXPERTISE Richard Cross has represented dairy farmers at various levels within the United Dairyfarmers of Victoria, and was recently a member of the Horizon 2020 working group. Richard Cross was a Director of Tatura Milk from 2003 to 2011. JOY LINTON BComm, Grad Dip AFI, GAICD Independent Director since October 2011 - resigned 31 May 2015. EXPERIENCE AND EXPERTISE Joy Linton had relocated to Bupa's London office and appointed to the role of General Manager, Health Services Bupa UK, when she resigned from the Bega Cheese Board in May 2015. She has 22 years of experience in strategic and financial roles with companies such as Bupa Australia, Ford Motor Company, Pacific Dunlop Food Group and National Foods Limited. She held the role of CFO of National Foods from 2007 to PETER MARGIN BSc (Hons), MBA Independent Director since June 2011. EXPERIENCE AND EXPERTISE Peter Margin has many years of leadership experience in major Australian and international food companies. His most recent position was the CEO of the ASX-listed food group Goodman Fielder Ltd from 2005 until April 2011. Prior to that appointment he was the CEO and Chief Operating Officer of National Foods Limited and has had experience at Heinz, Birds Eye Foods and Plumrose. RAELENE MURPHY BBus, CA, MAICD Director since June 2015. EXPERIENCE AND EXPERTISE Raelene Murphy is currently a Managing Director of the 333 Group, a leading specialist consultancy firm which provides strategic, financial and operational advisory services. She has over 30 years' experience in strategic, operational and financial roles in both industry and in professional services as a Partner. Her industry experience includes FMCG, supply chain, logistics and construction. 16 OTHER CURRENT DIRECTORSHIPS Director of Gardiner Foundation, Tatura Milk, Capitol Chilled Foods (Australia) Pty Ltd and Giant Steps Sydney Limited. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Warrnambool Cheese and Butter Factory Company Holdings Limited. SPECIAL RESPONSIBILITIES Chair of the Board and member of the Nomination, Remuneration and Human Resources Committee until 1 July 2014. OTHER CURRENT DIRECTORSHIPS Director of Murray Dairy Inc. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Tatura Milk. SPECIAL RESPONSIBILITIES Member of the Nomination, Remuneration and Human Resources Committee from 1 July 2014. 2010 and prior to that was General Manager Commercial for the Dairy Foods Group. OTHER CURRENT DIRECTORSHIPS Nil. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Executive Director of Bupa Australia Holdings Limited and subsidiaries. SPECIAL RESPONSIBILITIES Chair of the Audit & Risk Committee and member of the Milk Sustainability and Growth Committee - resigned 31 May 2015. OTHER CURRENT DIRECTORSHIPS Non-executive Director of Nufarm Limited, PMP Limited, Pact Limited, Huon Aquaculture Limited and Costa Group Holdings Limited. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Ricegrowers Limited. SPECIAL RESPONSIBILITIES Chair of the Nomination, Remuneration and Human Resources Committee and member of the Audit & Risk Committee. Raelene was the Chief Executive Officer of the Delta Group prior to her current role and has served in senior executive roles in the Mars Group. OTHER CURRENT DIRECTORSHIPS Director of EVZ Limited and DOXA Youth Foundation. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Nil. SPECIAL RESPONSIBILITIES Chair of the Audit & Risk Committee. Directors, from left to right: Max Roberts, Richard Cross, Richard Platts, Barry Irvin, Peter Margin, Raelene Murphy, Jeff Odgers, Richard Parbery JEFF ODGERS BBus (Ag Mgt) Director since December 2011. EXPERIENCE AND EXPERTISE Jeff Odgers owns and actively manages an expanding dairy farming business on two properties near Shepparton, Victoria. He has experience in regional and national dairy industry leadership roles. Jeff Odgers is a former Chairman of Murray Dairy Inc. RICHARD PARBERY FCPA, MAICD Director since September 1988. EXPERIENCE AND EXPERTISE Richard Parbery is the managing Partner of a successful regional accounting practice, is a Fellow of the Australian Society of Certified Practicing Accountants, a registered Company Auditor, registered Tax Agent, a registered Self-Managed Superannuation Fund Auditor, Justice of the Peace NSW, an External Examiner for the Law Society of NSW and RICHARD PLATTS Adv Dip Agr, GAICD Director since November 2000. EXPERIENCE AND EXPERTISE Richard Platts owns and manages a large dairy farming business near Bega, NSW. He completed the Rabobank Executive Development Program in 2011. In the past he has represented dairy farmers on a number of organisations. MAX ROBERTS MAICD Director since September 1983. EXPERIENCE AND EXPERTISE Max Roberts has been involved in the dairy industry for many years, including agripolitical, Board representation and direct dairy farming activities. Max Roberts is also a member of the Australian Institute of Company Directors. OTHER CURRENT DIRECTORSHIPS Director of Dairy Australia Limited. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Tatura Milk. SPECIAL RESPONSIBILITIES Chair of the Milk Services Committee. a member of the Australian Institute of Company Directors. Richard Parbery is experienced in servicing many agricultural and general business clients. OTHER CURRENT DIRECTORSHIPS Nil. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Tatura Milk. SPECIAL RESPONSIBILITIES Member of the Audit & Risk Committee. OTHER CURRENT DIRECTORSHIPS Nil. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Nil. SPECIAL RESPONSIBILITIES Member of the Nomination, Remuneration and Human Resources Committee. OTHER CURRENT DIRECTORSHIPS Nil. FORMER DIRECTORSHIPS IN THE LAST 3 YEARS Chairman of Dairy Australia Limited. SPECIAL RESPONSIBILITIES Member of the Nomination, Remuneration and Human Resources Committee and member of the Milk Services Committee. BEGA CHEESE LIMITED 2015 | DIRECTORS' REPORT 17 DIRECTORS' REPORT PRINCIPAL ACTIVITIES The principal activity of the Bega Cheese Group in the course of the financial year was receiving, processing, manufacturing and distributing dairy and associated products. A number of key events in relation to the activities of the Group during the year ended 30 June 2015 are set out in the Executive Chairman's review and the Chief Executive Officer's review of operations and activities, which is to be read in conjunction with this Directors' report. DIVIDENDS The dividends paid to shareholders during the financial year were: 2015 $'000 Interim ordinary dividend for the year ended 30 June 2015 of 4.0 cents 6,104 Final ordinary dividend for the year ended 30 June 2014 of 4.5 cents 6,867 Interim ordinary dividend for the year ended 30 June 2014 of 4.0 cents - Final ordinary dividend for the year ended 30 June 2013 of 4.0 cents - 2014 $'000 6,090 6,074 In addition to the above dividends, since the end of the financial year the Directors have recommended payment of a final ordinary dividend of $6,867,000 (4.5 cents per fully paid share) to be paid on 18 September 2015. REVIEW OF OPERATIONS A comprehensive review of operations is set out in the Chief Executive Officer's review of operations and activities. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Other than that disclosed in the Executive Chairman's review and the Chief Executive Officer's review of operations and activities, there have been no significant changes in the state of affairs of Bega Cheese Group since the last Annual Report. INDEMNIFICATION AND INSURANCE PREMIUMS FOR OFFICERS During the financial year, Bega Cheese Group paid a premium in respect of a contract insuring the Directors and all executive 18 officers of the Group and of any related body corporate against a liability incurred as such a Director or executive officer, not exceeding the extent permitted by law. The contracts of insurance prohibit disclosure of the nature of the liabilities and the amount of the premiums. The Group has not otherwise, during or since the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer of the Group or any related body corporate against a liability incurred as such an officer. This does not include remuneration or employmentrelated benefits, any sum payable pursuant to a financial support direction or contribution notice issued in respect of any pension scheme, fines and pecuniary penalties for a deliberate or intentional act, nor amounts which are prohibited to be paid by law. Each Director has entered into a deed of access and indemnity with the Group which indemnifies them for losses incurred as a Director or officer of Bega Cheese and places an obligation on Bega Cheese Group to maintain a current Directors' and Officers' policy with a reputable insurer for the period of the Director's tenure and for a seven year tail period (or longer if there is an unresolved outstanding claim against the Director) and a contractual right of the Director to access Group records for the period of the Director's tenure and for a seven year tail period (or longer if there is an unresolved outstanding claim against the Director). The Company has also agreed to indemnify the Company Secretaries and certain senior executives for all liabilities to another person (other than the Company or a related body corporate) that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. RETIREMENT, ELECTION AND CONTINUATION IN OFFICE OF DIRECTORS Raelene Murphy was appointed to the Board on 1 June 2015. Joy Linton resigned as a director on 31 May 2015. In accordance with the Constitution, Barry Irvin, Richard Cross and Jeff Odgers are due to retire as Directors at the Annual General Meeting and, being eligible, offer themselves for re-election. COMPANY SECRETARIES The Company Secretary registered with the ASX is Brett Kelly FCA, GAICD. Brett Kelly was appointed to the position of Company Secretary in 2002. Brett Kelly holds a Bachelor of Commerce in Accounting and is a Chartered Accountant with 30 years' experience. He has also been a graduate member of the Australian Institute of Company Directors since 2006. Brett Kelly completed the Certificate in Governance and Risk Management with Chartered Secretaries Australia in December 2011. Colin Griffin CA was appointed to the position of Company Secretary in 1993. Colin Griffin holds a Bachelor of Arts in Accounting and is a Chartered Accountant with 32 years' experience. Colin Griffin's primary responsibility is as Chief Financial Officer. MEETINGS OF DIRECTORS AND BOARD COMMITTEES The following table sets out the number of Board, Audit & Risk Committee, Nomination, Remuneration & Human Resources Committee, Milk Sustainability and Growth Committee and Milk Services Committee meetings held during the year ended 30 June 2015 and the number of meetings attended by each eligible Director and other members: Meetings of the Audit & Risk Committee Held and Eligible Attended Raelene Murphy 1 1 Joy Linton 7 7 Peter Margin 8 8 Richard Parbery 8 8 Meetings of the Nomination, Remuneration & Human Resources Committee Held and Eligible Attended Peter Margin 3 3 Richard Cross 3 3 Richard Platts 3 3 Max Roberts 3 3 Meetings of the Milk Sustainability and Growth Committee Held and Eligible Attended Jeff Odgers 5 5 Joy Linton 5 2 Max Roberts 5 5 The last meeting of the Milk Sustainability and Growth Committee was held on 25 October 2014. The Milk Services Committee was established on 11 November 2014 which, amongst other things, assumed responsibility for administration of the Milk Sustainability and Growth Program. Meetings of the Milk Services Committee Held and Eligible Attended Jeff Odgers 9 9 Max Roberts 9 9 Meetings of the Board of Directors Barry Irvin Held and Eligible Attended 14 14 Richard Cross 14 14 Joy Linton 13 13 Peter Margin 14 14 Raelene Murphy 1 1 Jeff Odgers 14 14 Richard Parbery 14 14 Richard Platts 14 14 Max Roberts 14 14 Joy Linton gave apologies in advance of the meetings she was unable to attend. ENVIRONMENTAL REGULATIONS AND SUSTAINABILIT Y Bega Cheese Group is committed to growing the business in a socially and environmentally sustainable manner. The Group works cooperatively with various stakeholders to ensure appropriate standards are adopted in operating the business. The Bega Cheese Group team has continued to deliver improved efficiency and reduced resource intensity. The manufacturing sites have achieved the 5 year goal set in FY2011 to reduce energy intensity by 5% and delivered a 7% reduction compared to the base year. The Bega Environmental Management System (BEMS) has continued to grow in 2015. The major focus for the year was on the implementation of the Milk Sustainability and Growth Program, including the completion of the BEMS sustainability assessments. The Group has also continued to be successful in partnering with other organisations to deliver programs direct to our suppliers, including receiving: grant funding of $850,000 over a three-year period from the Federal Government Department of Agriculture, and funding support of $495,000 provided by the NSW Local Land Service for on ground environmental works on dairy farms in the Bega region in 2015. The Bega Cheese Group is very grateful for the support received in delivering environmental improvements, both through this funding and working with milk suppliers. Other major initiatives included the continuation of the professional development program for our suppliers in the Tatura BEGA CHEESE LIMITED 2015 | DIRECTORS' REPORT 19 DIRECTORS' REPORT and Bega regions. The aim of the program is to help our farmers improve the efficiency of their businesses and reduce greenhouse gas emissions intensity. At Tatura a focus has also been the development of accredited nutrient plans to help our suppliers make informed, profitable nutrient management decisions. This program has been enthusiastically embraced by our suppliers at Tatura and we hope to extend this program to our other supplier regions in the near future. Significant development of our \"Farmsmart\" application occurred over the year. The aim of the application is to give milk suppliers an easy to use tool available via mobile phones to help manage overall farm performance, quality assurance and provide farm mapping. Bega Cheese Group will be releasing the application to our supplier farmers in late 2015. A cumulative summary of BEMS achievements to FY2015 are as follows: Number of BEMS projects approved 147 Number of projects completed 95 Effluent systems upgraded 48 Fencing installed 220km Streams protected 385ha Wetlands protected 63 Riparian areas revegetated 204ha Shade and shelterbelts created 108ha ENVIRONMENTAL REGULATIONS AND MANAGEMENT Bega Cheese Group is subject to the usual Federal and State environmental regulations. These include reporting requirements under the National Greenhouse and Energy Reporting Act 2007 (Cth), the Protection of the Environment Act 1997 (NSW), as well as the Clean Energy Act 2011 (Cth). Reporting under the National Greenhouse and Energy Reporting Act 2007 continues after the repeal of the Carbon Tax and closure of the Environment and Resource Efficiency Program. The Group has complied with all annual reporting requirements due and will continue to monitor and report energy intensity and carbon footprint. Bega Cheese Group's manufacturing sites are licenced under State Environment Protection Regulations. The licences stipulate performance standards for all emissions (noise, air, odour, wastewater etc.) from the sites as well as the frequency and method of assessment of the emissions. The Group's Tatura and Coburg facilities operate under Trade Waste Agreements with the local municipal body for disposal of wastewater. Both sites maintain a close working relationship with the municipal body and work towards continuous improvement of the sites' environmental performance to deliver full compliance. The Group's sites in Tatura, Strathmerton and Bega each enjoy an open and communicative relationship with the relevant regulators. The Strathmerton site meets current requirements of the regulators. The Tatura site is in the final stages of commissioning a major 'bag house' on one of its driers and completing other works in accordance with undertakings made with the regulators which will ensure compliance with requirements in accordance with timetables agreed with the regulators. The Bega management team is currently working with the regulator as it executes continuous improvement plans to address minor infractions in accordance with timetables agreed with the regulators. REMUNERATION REPORT INTRODUCTION This report sets out the remuneration of the Executive Chairman, Non-executive Directors, Chief Executive Officer (CEO) and other key management personnel (KMP) of the Group, being the executives accountable for planning, directing and controlling the affairs of the Group during the financial year to 30 June 2015. KEY MANAGEMENT PERSONNEL (KMP) Details of Directors are set out in the Directors' Report on pages 16-17. The CEO is appointed by the Board on recommendation from the Nomination, Remuneration and Human Resources Committee (NRHRC). Other KMP are appointed by the CEO in conjunction with the Executive Chairman. The CEO and other KMP comprised the following people during the whole of FY2015: Name Positions held Entity Aidan Coleman CEO Group Executive Director Tatura Milk General Manager Operations Group Garth Buttimore Colin Griffin Paul van Heerwaarden Chief Financial Officer Group Executive Director Tatura Milk Non-executive Director CCFA General Manager Sales & Marketing Group Executive Director Tatura Milk David McKinnon General Manager Human Resources Group Grattan Smith General Manager Supply Chain Group REMUNER ATION GOVERNANCE The NRHRC operates under a formal charter to assist the Board in relation to its responsibilities in identifying, attracting and remunerating Directors and other KMP. 20 The responsibilities of the NRHRC are to make recommendations to the Board in relation to the remuneration principles and practices for Directors and other KMP of the Group and to provide guidance to the Executive Chairman and CEO in implementing decisions of the Board in relation to remuneration and strategic human resource planning. The NRHRC has two key roles: 1. 2. to assess and make recommendations to the Bega Cheese Group Board on any changes to the composition of the Board with a view to ensuring that it is able to operate effectively and efficiently and adequately discharge its responsibilities and duties to advise and assist the Board to ensure that the Group: a. b. c. has coherent human resources policies and practices which enable the Group to attract and retain executives and Directors who will create value for shareholders and that support the Group's wider objectives and strategies, and that they are adhered to fairly and responsibly remunerates Directors and executives, having regard to the performance of the Group, the performance of the executives and the general remuneration environment has effective policies and procedures to attract, motivate and retain appropriately skilled people to meet the Group's current and future needs. Further details of the role of the NRHRC are provided in the Corporate Governance statement. REMUNER ATION GUIDELINES The Board, through the deliberations and recommendations of the NRHRC, is responsible for the remuneration strategy, principles and procedures for employees of the Group. In setting the remuneration of KMP the Board takes recommendations from the NRHRC. In formulating its recommendations, the NRHRC takes into account a range of factors including Group financial performance and the remuneration market data for KMP operating in similar publicly listed organisations and industry sectors. The level of performance and contribution of the individual KMP is also a material factor in determining the total remuneration for each KMP. Executive KMP have a significant amount of their remuneration directly related to budgeted profit, trade working capital and safety targets. Stretch targets provide the opportunity for executive KMP to derive additional remuneration at-risk (RAR) payments, where the achievement of performance criteria has a direct bearing on the earnings of the organisation and its potential to reward shareholders. was compiled by Godfrey Remuneration Pty Ltd in August 2014 and the fee charged was $28,600. The Board confirmed that the making of the remuneration recommendation was free from undue influence by any of the KMP to whom the recommendation relates. Godfrey Remuneration Pty Ltd was provided with a brief from the Chairman of the NRHRC to arrange an independent market review against practices of peer companies. Peer companies were independently selected by Godfrey Remuneration Pty Ltd. This information was taken into account by the NRHRC in August 2014 to determine base salary adjustments for the Executive Chairman for his executive duties, and for the CEO and other KMP. The approved base salary adjustments were implemented with effect from 1 September 2014 and were either at or below the recommended levels contained in the Godfrey Report. In the case of the CEO's long-term incentive, the granting of any performance rights over ordinary shares was linked to total shareholder return, earnings per share and return on funds employed. DIRECTORS' REMUNER ATION Directors' remuneration is set by the Board within the maximum aggregate amount of $900,000 per annum approved by shareholders. In order to maintain independence and impartiality, Nonexecutive Directors are not entitled to any form of incentive payments and the level of their fees is not set with reference to measures of Group performance. In setting fees, the Board takes into consideration the Group's existing remuneration policies, fees paid by comparable companies and the level of remuneration required to attract and retain Directors of the appropriate calibre. The Group pays Chair and Committee fees to the Non-executive Directors out of the maximum aggregate fee pool approved by shareholders. These fees are set at levels which reflect the time commitments and responsibilities of their roles. Non-executive Directors are also entitled to be reimbursed for reasonable travel, accommodation and other expenses incurred while engaged on the business of the Group. Pursuant to the Godfrey Report, Director's fees were increased by $4,000 per annum, inclusive of superannuation, from 1 November 2014. During the year there were changes to the composition of the Board, as well as the Chairs and membership on three Board Committees, being the Audit & Risk Committee, the NRHRC and the Milk Services Committee, the latter which formally commenced in July 2014. No fees were payable to members of the Milk Sustainability and Growth Committee. In reviewing KMP remuneration in FY2015, the General Manager Human Resources sourced current remuneration market data that focused on comparative organisations against criteria including revenue, market capitalisation, employee headcount and industry sector. The external information (\"Godfrey Report\") BEGA CHEESE LIMITED 2015 | DIRECTORS' REPORT 21 DIRECTORS' REPORT The following table summarises the previous and current level of all Directors' fees and allowances: remuneration earned by the Executive Chairman during the year ended 30 June 2015 from his responsibilities as a Director of the Geoffrey Gardiner Dairy Foundation Ltd was specifically deducted from his base salary in accordance with the above principle. No other remuneration from related organisations was earned during the year a structured at-risk short-term incentive up to $110,185 that was subject to achievement of agreed outcomes, as approved by the NRHRC in August 2014 in relation to the executive duties carried out by the Executive Chairman, the key terms of the existing employment contract with the Group was unchanged as follows: Annual amount including super Rate from 1/7/14 to 31/10/14 Fees and allowances by role Rate as from 1/11/2014 $ $ 175,000 175,000 Director fees 77,000 81,000 Chair of Audit & Risk Committee 15,000 15,000 7,500 7,500 Chairman of the Board Audit & Risk Committee member allowance Chair of NRHRC 12,000 12,000 NRHRC member allowance 6,000 6,000 Chair of Milk Services Committee 7,000 7,000 Milk Services Committee member allowance 3,500 3,500 REMUNER ATION OF THE EXECUTIVE CHAIRMAN OF BEGA CHEESE GROUP The Board determines the remuneration of the Executive Chairman and excludes the Executive Chairman from its deliberations in relation to the level of remuneration which sh