ALLIANCE GROUPalliancegroup.blob.core.windows.net/media/2050/all0078_alliance_an… · Alliance Group is a global leader in procuring, processing and marketing the world’s best

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Year in Review

Contents

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Board of Directors and Chief Executive

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Shareholder Information 3 4

Corporate Governance

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Your Co-operative 3 6

Financial Statements

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Chairman & Chief Executive Review 6 0

Independent Auditor’s Report

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Statutory Information

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Five Year Review

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Directory

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Highlights

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Health & Safety

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Strategy

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Processing & Supply Chain

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Sales

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Marketing

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Livestock & Shareholder Services

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Recognising Farmers

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W H I L E P R O V I D I N G

I M P R O V E D R E W A R D S

T O F A R M E R S , T H E R E

I S M O R E T O D O .

Alliance shareholders Simon and Matt Walker, Pahiatua

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(L-R) CEO David Surveyor, chef Samuel Wilkes, and former New Zealand Prime Minister Bill English at the TE MANA LAMBTM launch in Hong Kong

Tere Ngu, Matuara Production Manager

Alliance shareholder Murray Johns, Banks Peninsula

Alliance shareholders Alastair and Robin Barnett, Leeston

A supermarket in China

Grand Farm’s CEO Mr Chen’s daughter Jiao Jiao meeting some of New Zealand’s finest lambs

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Year in Review0 1

O P E R A T I N G P R O F I T D O U B L E D

V E R S U S L A S T Y E A R A N D C O R E

D E B T H A L V E D .

P O O L D I S T R I B U T I O N S O F

$ 1 1 . 4 M I L L I O N F R O M A

T U R N O V E R O F $ 1 . 5 3 B I L L I O N .

L A M B $ 1 . 8 0 /head

S H E E P $ 1 . 0 0 /head

C A T T L E * $ 1 0 . 0 0 /head

C A L V E S $ 1 . 0 0 /head

D E E R $ 7 . 5 0 /head

P O O L D I S T R I B U T I O N S $ 1 1 . 4 M I L L I O N

Distributions

Shareholders’ equity at year-end

E Q U I T Y R A T I O

7 1 %

D E B T

Core debt reduced to $19 million

The average premium on qualifying lambs was $2.66 per lambNo dividend will be paidD I V I D E N D Y I E L D Q U A L I T Y C O N T R A C T

P R O F I T

$ 2 0 . 2million operating profit before tax, pool distributions and excluding gain on asset sale.

1.53B$

*all cattle including prime, cow and bull

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Shareholder Information0 2

D I R E C T O R A T EMr R G Drummond and Mrs H D Sangster retire by rotation and offered themselves for re-election.

As no further nominations have been received, Mr Drummond and Mrs Sangster have been declared re-elected.

A N N U A L M E E T I N G O F S H A R E H O L D E R SThe annual meeting of shareholders will be held at 10:30am on Thursday, 14 December 2017 at the Distinction Te Anau Hotel, 64 Lakefront Drive, Te Anau. A formal Notice of Annual Meeting of Shareholders is set out in a separate document sent to shareholders.

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Your Co-operative0 3

Alliance Group is a global leader in procuring, processing and marketing the world’s best quality red meat products. We’re becoming a food company with world-class processing and livestock capability and our products are enjoyed in more than 65 countries across the globe. As New Zealand’s only 100% farmer owned red meat co-operative, our aim is to maximise returns to our committed farmer shareholders and support them to operate profitable and sustainable farms.

Alliance Group strives to create the best market value out of our red meat and co-products, whilst providing cost-effective, high-yielding meat processing when our farmer shareholders need it.

O U R G O A LAt Alliance Group, we produce the highest quality, best-tasting New Zealand grass-fed red meat that meets the taste and tenderness requirements of the world’s most discerning customers. Our products bring together the quality and experience of New Zealand’s best farmers with the expertise of New Zealand’s leading meat company. The clean, lush pastures of New Zealand, world-class technology, meticulous production, our proud heritage, the highest levels of ethical production and our adherence to environmental sustainability all contribute to our reputation for food excellence. Alliance Group’s eight processing plants are strategically located throughout the South Island and lower North Island. Approximately 7,000,000 lambs and sheep, over 200,000 cattle and 90,000 deer are processed annually.

We’re proud of our significant contribution to the New Zealand economy, employing approximately 4,700 staff during the peak of the season and exporting 95 per cent of our products. We directly affect the lives of thousands of New Zealanders – whether it be the families and employees of the farms and farmers that supply us with livestock, the people that work for us or the many businesses that we purchase goods and services from or provide product to.

As a co-operative, every cent we make is either delivered to our farmer shareholders or reinvested back into the company.

Alliance shareholder Neville Strachen with Alliance Livestock Representative Doug Brand

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Chairman & Chief Executive Review

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“Our farmers are at the heart of every decision we make”

Two years ago, we laid out a new path as part of our vision to build a stronger co-operative. Our three-phase business transformation strategy is focused on maximising operational efficiency and capturing more market value.

It is pleasing to see we are now making real progress. Alliance is now a much fitter co-operative as a result of our focus on lifting efficiency, lowering our costs, boosting our internal capabilities and capturing more value from the markets we operate in.

The numbers tell a positive story and show the strategy is on a positive trajectory. We are recovering market share, increasing our transacting shareholder numbers, achieving a stronger balance sheet, improving our profitability and, most importantly, offering better livestock pricing for farmers.

However, there is still a lot of hard work ahead of us. Profitability is not at the level we want for a company of this size and we need to capture gains more quickly – Alliance Group needs to run faster.

Whilst we are doing a better job and providing some rewards to farmers, we can do better. Recognition of more frequent minimum price contracts has helped farmers deal with uncertainty, but we have more work to do to give them confidence that Alliance will pay the best returns over the long-term.

Prime beef pricing needs to be lifted, we must continue to improve our alignment with our co-operative pricing principles, better manage our responses to competitor price movements and ensure that the message about grass-fed produce is well communicated. We also need to ensure we keep farmers closely informed on issues of concern to them, such as synthetic meats.

That is why the next phase is vital. We are seeking to ensure the changes and progress we have made are sustainable, through further investment, growing value-add, capturing market value and building organisational capability.

We have a wide range of short, medium and long-term programmes underway to gain deeper market penetration and capture more value from existing markets.

S A F E T YThis year has seen a significant improvement in the company’s overall safety performance. Our Total Recordable Injury Frequency Rate has improved by approximately 40% year on year.

We are committed to driving the business towards zero harm. Over the past year, we have invested in new blade stop saws and rebuilt the Pukeuri beef slaughter chain to improve safety performance.

Disappointingly, we had an accident at our Smithfield Plant in March, which resulted in one of our people being significantly injured.

This serious harm incident underlines the importance of redoubling our efforts and reinforces our commitment to ensuring every single one of our people goes home safely at the end of each day.

We will continue to work on improving safety because we owe it to our people and their families. Excellence in health and safety is at the core of our values and who we are.

M A R K E T C O N D I T I O N SThe past 12 months have seen positive market activity with all species experiencing firmer pricing, although some sub-groups such as wool and skins have been challenging. Lamb prices have been strong and venison has been increasingly recognised as a premium product.

In the UK, prices have been strong with increasing chilled returns but reduced frozen volumes. The Chinese market saw high sheep meat prices and consistent volume and solid beef prices on strong import demand.

The volatility and fluctuations in the New Zealand exchange rate continues to present challenges, and Brexit remains an unknown quantity.

P R I C I N GWe continue to work hard to maximise our weekly schedule price to farmers as we seek to remain competitive.

Alliance Group has taken a number of steps to improve our pricing structure in response to feedback from farmers. This includes offering more minimum price contracts, which provides greater certainty for farmers and ensures they can have greater confidence when budgeting. Importantly, farmers taking up minimum price contracts are not disadvantaged when prices rise.

Farmer shareholders are receiving a range of other financial benefits above the price on the day. These include advance payments, loyalty payments, pool distribution payments and a proposed bonus share issue.

K E Y M E T R I C S A N D Y E A R E N D P R O F I TOur key metrics are very positive.

Revenue grew significantly during the year to $1.53 billion. We ended the year with net profit before tax and

pool distributions of $28.1 million, compared to $10.1 million in 2016. This result includes the sale of a parcel of land at our Makarewa Plant. When this is excluded, the underlying operational profit before tax is $20.2 million. Shareholders should judge our performance on our operational profit. Our core debt has reduced to $19 million in 2017. We now have a balance sheet that allows us to do things we could not do before. We have seen a significant improvement in profitability, achieving our best profit in some years.

The strategy projects we have been implementing have allowed us to pass significant gains to our farmer shareholders in farmgate prices this year and we will distribute a pool payment.

We will also be making a non-taxable bonus share issue to farmer shareholders in December 2018. The non-taxable bonus issue will be paid based on livestock supplied during the F18 season. We are pleased to reward shareholders with equity.

We have also paid out more than $15 million in loyalty payments based upon supply of lambs, sheep, cattle, calves and deer during the 2017/18 season.

Today, we are nearer to where we need to be for a company of our size. While this is pleasing, there is still much more work to be done to build a stronger, sustainable and more resilient business for our farmer shareholders.

G R O W I N G S H A R E H O L D E R N U M B E R SWe would like to welcome new shareholders who have joined us this year. Many of these new shareholders have come from the North Island, with North Island farmers now making up 10 per cent of our total shareholders. Only shareholders can take part in the yield contract and will get priority processing. The growing numbers are an indication of our strengthening business and increased awareness of the value of our co-operative.

I N V E S T M E N T I N O U R P L A N T SAs part of our strategy programme, we are investing to build competitive advantage for our company. This is incorporating best practice from around the world, lifting processing and improving operational performance across all our plants.

This year, we have invested more than $10 million in robotic/primal cutting technology and reconfiguring the boning room at Dannevirke Plant, a major upgrade of the engine room and the chillers at Lorneville Plant, and a capital investment programme at Pukeuri

Smithfield Plant boning room

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Plant, including upgrades to the beef slaughter chain, expanding bovine offal facilities and providing a new blood room.

Our board has also approved plans for a modern $15 million venison processing plant at Lorneville Plant.

We have invested to ensure we retain our environmental credentials and have licence to operate in our local communities. This includes a planned $20 million upgrade of the wastewater system at our Lorneville Plant and an upgrade of Smithfield’s odour management and wastewater systems.

We successfully applied for six new resource consents for Lorneville Plant operations including wastewater and air discharge, which will be effective for the next 25 years.

We have also invested $3.4 million installing 49 new bandsaws across all plants. These are uniquely designed to prevent serious injury.

These projects are focused on moving our company forward by improving operational efficiency and health and safety – you can read more about these elsewhere in this report.

E R P P R O G R A M M EWe have launched our Enterprise Resource Planning Programme to update our entire organisation computer system. This will enable the biggest process and systems change within Alliance Group for over 20 years. It will

bring benefits for the business and farmers including real-time use of supply data, “onetime” entry of data, the integration of forecasting into processing space reservation and scheduling and an improved management of co-operative pricing principles.

G R O W I N G O U R P R O D U C T R A N G E A N D R E A C HWe have a range of activities in domestic and global markets focused on growth, providing a more sophisticated offering and capturing more value for our farmer shareholders. We are building two things – a differentiated portfolio of products and a suite of premium brands in which to house them.

Alliance has also established a dedicated food service team in the UK. The team is tasked with making direct connections with high-end restaurants and hotels and we have developed very good sales pipelines in the premium food services sector. Our food service strategy goes hand-in-glove with our new product developments, as chefs demand innovation and very specific products.

Our UK and New Zealand food service teams are both undertaking significant product development programmes and working on developing further chef-led products.

Currently the main types of product we are providing to the food service sector in New Zealand are shoulders, square cut shoulders and French racks. This year we have also introduced a lamb rib product, which is proving popular.

O U R P E O P L E2016/17 has been a very significant year for our people as we continue to build our organisational capability. We have changed the way we do things, from our Manufacturing Excellence Programme through to our Livestock Excellence Programme.

It is vital we continue to invest in developing the capability of our people. This year, we ran break through leadership courses for 50 leaders from livestock managers to finance team leaders.

We have completed our DuPont safety training programme. This has seen line leaders over the last two years coached in improving behavioural safety and has been important in shifting our safety culture.

In our processing plants, we have been helping our people begin to learn a range of lean manufacturing techniques.

While continual change is difficult, our 4,700-strong team is rising to the challenge, adapting and working incredibly hard to enable us to progress our strategy and allow the company to grow and move forward. We would like to thank them all for their commitment, skill and dedication.

G O V E R N A N C EAt the annual meeting in December 2016, Don Morrison and Murray Taggart were re-elected to the board. In April this year, Vanessa Stoddart was reappointed as an independent director for a further term of three years.

T H A N K - Y O UThank-you to all our farmer shareholders, directors, management and employees for your ongoing support of your co-operative. We look forward to building on our achievements this year to ensure a profitable and sustainable co-operative for all stakeholders.

M J TaggartC H A I R M A N

D R SurveyorC H I E F E X E C U T I V E

We have increased our focus on the New Zealand domestic market in recognition of its importance in overall value capture and increased our resources in Auckland. Pure South is now being placed in some of New Zealand’s finest restaurants.

Our Lorneville and Pukeuri Plants were among ten New Zealand processing plants selected to take part in a six month trial programme to export chilled products to China, between June and November. These are early days but chilled lamb exports to China offer significant opportunities, particularly in the food service sector.

C O - O P E R A T I V E P R I N C I P L E SThe feedback we are getting from our farmer shareholders, and from our recent farmer survey, is that we are living our Co-operative Principles more effectively. There is recognition that Alliance Group is now focusing on behaving ‘like a co-operative’ and doing a better job of rewarding loyal shareholders.

However, our farmer research also made clear that we have more work to do in building confidence around paying the best price over the long-term.

We are working to build that confidence among all of our farmer shareholders. All the decisions taken for the benefit of our company are part of our strategic programme to increase efficiencies, maximise the value of products and ensure our products are eligible for all markets – because this is how we will help further lift returns for Alliance farmers.

Ongoing feedback from farmers is vital to achieving this – input from those attending our annual Roadshows, Woolshed Meetings, Women’s Workshops and field days is built into our strategy development. We encourage farmers to attend these events.

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Highlights0 5

Ensuring our people go home safely every day is our number one priority. We are committed to lifting our health and safety performance to world-class standards, and that is a core part of our business strategy. This year we have continued to build on our Safety Interaction Programme, focusing strongly on engaging with our people around health and safety, through ongoing face to face conversations to help embed this into our culture at every level of the business. Safety interactions are conducted at all levels from the board of directors and senior management through to operations staff, where we have every employee involved during the course of a year.

The real value from safety interactions is identifying how we can continue to reduce risk of harm to employees and ensuring we all understand health and safety is more important than anything else we do. We have seen a further significant reduction on our Total Recordable Injury Frequency Rate.

This year we have replaced all our 400-model bandsaws with new blade-stop saws designed to stop the blade within 15 milliseconds when the unit senses a person, glove or both is in close proximity to the saw, preventing serious injury. As soon as this technology is available in our 600 series saws, we are also committed to making a similar investment.

Following the investment in primal cutter and middle cutter machines for our Pukeuri and Smithfield Plants last year, we have now commissioned the installation of that technology at our Dannevirke Plant. This eliminates the need to manually lift carcases from the rail, reducing the risk of musculoskeletal injuries.

The beef slaughter department at Pukeuri Plant was reconfigured due to a significant safety risk involving machinery and positioning of processing employees. The changes made have reduced the risk as well as having productivity gains.

On 17th March a serious incident occurred at our Smithfield Plant resulting in a significant life changing injury to one of our employees. The company continues to offer support to the employee and their family as they continue through the rehabilitation process.

During the year our critical risks were re-evaluated to ensure they are understood. We have work happening to manage our critical risks.

Safe management of ammonia used as a refrigerant has been a significant area of focus at our Lorneville site. The quantities of ammonia used at Lorneville means the plant is classified as a major hazard facility under new Health and Safety regulations. This project has also provided the opportunity to look at the safety and efficiency of the engine room and its systems which run the refrigeration process.

Towards the end of the year we completed a restructure within our health and safety team adding further professional capability, reporting to a new centralised function of People and Safety. This change will allow us to develop our safety management system to a world-class level in a more timely and efficient way. It will also enable us to focus more on other important areas such as health.

Health & Safety100 TRIFR (Total Recordable Injury Frequency Rate) per million hours worked

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Strategy

Increased sales

Higher livestock

price

Livestock volume and

contribution growth

and marketing

continuous Improvement

Investment inand markets

Develop new products

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E F F I C I E N C Y

Alliance shareholder Rodney Potts, Canterbury

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L I V E S T O C K E X C E L L E N C E P R O G R A M M EOur Livestock Excellence Programme, one of Alliance’s business strategy projects, has been designed using feedback from farmers, to ensure we can provide a more tailored and flexible service to understand and meet the needs of individual farmers.

We are investing in developing our livestock representatives’ skills and abilities to meet the individual and varying needs of farmers. We have a coaching programme underway and are investing in better tools and development of specialist apps, to support enhanced service and enable our livestock representatives to better engage with farmers.

We have also made changes to the way the livestock team operates, including introducing forecasts and weekly reviews. This is about creating the opportunity to improve our performance.

Alliance Group has farewelled some of our long-standing livestock representatives this year. We have also welcomed a number of new reps who will contribute to refreshing and reinvigorating the team for the benefit of farmers. We are still in the early stages of this process, but farmers will begin to notice as we build further capability.

M O R E T H A N $ 1 5 M I L L I O N D I S T R I B U T E D I N L O Y A L T Y P A Y M E N T SAlliance distributed more than $15 million in loyalty payments to committed farmer shareholders this year.

Platinum and gold farmer shareholders are paid a loyalty payment for each stock species they supply. That means farmers supplying 100 per cent of their lambs are paid an additional 10c/per kilogram per animal, sheep 6c/per kilogram per animal, cattle 8.5c/per kilogram per animal and deer 10c/per kilogram per animal.

Rewarding shareholders for their committed and consistent livestock supply strengthens our competitive advantage, building on our efficient livestock processing position and market penetration.

A N N U A L R O A D S H O WAlliance Group’s annual Roadshow was held at 20 locations across the country during October.

This was an opportunity for Alliance farmer shareholders and any farmers interested in finding out more about supplying the co-operative to share their views and ideas and receive an update on the progress of Alliance’s strategy.

There was valuable feedback and insights from farmer shareholders and it was encouraging to see more women farmer shareholders and Alliance Group’s new shareholders attending.

Y E A R 3 F O R W O M E N ’ S W O R K S H O P SOur Women’s Workshops, held country-wide, were again a popular event on the rural calendar.

Women make up about half of our 5,000 shareholders. They make a huge contribution to agriculture in New Zealand and their experience and input is vital to our business.

Women have tended to be under-represented at shareholder events and other meetings. Our Women’s Workshops were launched three years ago to address this issue. The workshops are a specific forum for women shareholders to provide valuable input direct to senior management, and to hear first-hand about our strategy and latest plans and network with other women in farming. This year, the events focused on marketing and livestock and shareholder services. They were well received by a wide cross section of participants ranging from young farmers through to our most experienced attendee, aged 92.

L I V E S T O C K S N A P S H O TWe are committed to ensuring that Alliance is the processor of choice for farmers. Our goal is for our farmers to be more successful by supplying Alliance than by supplying any other processor.

Our field team works closely with suppliers to select stock for processing through our network of processing plants across the North and South Islands and facilitates store stock sales and purchases.

The 2016/17 year has been positive for our farmer shareholders.

Our farmers have experienced generally favourable farming conditions, although there have been wet areas. Despite volatility, the markets have been positive with prices firming for all species.

We are focusing on rewarding loyal shareholders and focusing on behaving like a co operative.

We have supported the sale and purchase of large volumes of store lambs, sheep, cattle and deer for shareholders. It is a key part of our business and aids the efficient utilisation of our processing plants.

The growth in livestock volumes and new shareholders demonstrates the confidence farmers have in the co-operative model.

We have invested in offering more minimum price contracts as we seek to provide certainty to farmers on forward pricing and availability of our processing capacity.

The co-operative has also continued to strengthen our connections with farmers. We launched the popular Farm Alliance app and the team looked to further improve our engagement with our farmers via the Roadshow meetings, Woolshed Meetings and our fortnightly Brief Bytes e-newsletter.

We acknowledge some farmers are still to be convinced Alliance pays the best returns over the long-term and our prime beef and bull pricing need to be lifted.

Ongoing supply and loyalty to Alliance adds value to the co-operative and we will work with our farmers to better understand how we can contribute to growing the success of our shareholders’ farming businesses.

Generations of farming families have supplied livestock to Alliance – we are determined that we will meet the needs and expectations of Alliance’s farmers of the future.

Livestock & Shareholder Services

Alliance director Dawn Sangster presents to farmers at a Women’s Workshop in Mosgiel

Heather Stacy, General Manager Livestock and Shareholder Services, presenting at the Women’s Workshop in Geraldine

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S H A R E H O L D E R S C H R I S T I N E A N D A N G U S C A M E R O N ’ S G L A M M I E S T R I U M P HAlliance Group shareholders and Dannevirke suppliers Christine and Angus Cameron of Ashurst (Growbulk) carried off the 2017 Grand Champion title at the Beef + Lamb New Zealand Golden Lamb Awards, aka “the Glammies”, in March. Lorneville supplier Robert Gardyne from Oturehua, a former Golden Lamb winner, was honoured as Producer of the Decade. Alliance suppliers were also very well represented in many of the other awards categories.

S H E E P I N D U S T R Y A W A R D S S U C C E S SAlliance Group farmer shareholders Andrew, Katherine, Russell and Pam Welsh, from Southland, won the New Zealand Maternal Worth award at the Beef + Lamb New Zealand Sheep Industry Awards in July. Fellow Southland farmer, Hayden Peter, a former Alliance Group scholarship winner and Alliance employee, won the Emerging Talent category.

S U P P L I E R J O N N Y E L D E R W I N S R A B O B A N K P R I Z EAlliance Group supplier Jonny Elder was awarded the Rabobank Business Development Prize in July, after being selected from a group of New Zealand’s and Australia’s most progressive young farmers, who were graduates of last year’s Rabobank Farm Managers Programme. Jonny and his wife Michelle operate a 460-hectare sheep and beef farm near Balfour in Northern Southland.

S H E P H E R D H E M O A T A K O P A F I N A L I S T I N A H U W H E N U A A W A R DHemoata Kopa, a general shepherd at Alliance Group supplier Pukemiro Station, near Dannevirke, was one of three finalists in the Ahuwhenua Young Māori Farmer Award in June.

M A N U F A C T U R I N G E X C E L L E N C E P R O G R A M M E

Unlocking the potential of our assets and our people

Alliance is adopting world-class manufacturing practice so we can achieve sustainable high performance at our plants across the country.

That means investing in improving our processing, challenging the status quo, embracing new ideas and encouraging our teams to continually strive for excellence.

We are introducing innovative thinking in the running of our plants, re-configuring our product flows and adding value so we can deliver greater returns to our farmer shareholders.

Our Manufacturing Excellence Programme aims to improve processes and productivity and unlocking latent capacity in our plants.

First introduced at Lorneville and Mataura with very good results, the programme is now being rolled out country wide. The structured management framework is designed to lift performance, productivity and returns to farmer shareholders. This is a significant part of our business strategy - based on achieving behaviour and culture change, driving accountability and responsibility and helping supervisors and managers to make good decisions.

It focuses on every department at every plant. We are training our people, including establishing new targets, key priorities and action points for each area every week, looking at a wide range of factors from safety through to productivity.

It includes putting mechanisms and good management practices in place, to improve yield and focusing on that on a daily basis. We have added additional resource this year and are working with managers and supervisors across our plants, on programmes to optimise yield and other opportunities. We are using structured processes to track daily performance.

There are now visual boards in each department, and our supervisors and production managers hold stand-up meetings every day to discuss the previous day’s results and what is important today. They discuss how to improve an area and allocate people to those tasks. It ensures there is individual responsibility for finding solutions, getting results and engaging people in the business.

Processing & Supply ChainRecognising Farmers

Katherine and Andrew Welsh, winners of the New Zealand Maternal Worth award

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N E W P R I M A L C U T T E R T E C H N O L O G Y F O R D A N N E V I R K EOur investment at Dannevirke Plant is being commissioned as this report goes to print. We have introduced a new configuration, building upon the success of Smithfield and Pukeuri Plants and learning from global best practice.

Our $10.6 million investment in new robotic/primal cutting technology and reconfiguring the boning room of our Dannevirke Plant results in higher product yields with additional productivity and safety benefits.

The technology has the ability to automatically adjust to a wide variation in carcase size, a significant challenge in the red meat processing sector. It also minimises waste and improves the accuracy of the cut.

S M I T H F I E L D W A S T E W A T E R U P G R A D EAn upgrade of Smithfield’s odour mitigation and wastewater systems will include installation of a new process tank and a rotary screen to capture solids currently lost in the wastewater.

The investment will have the added benefit of generating more revenue by capturing additional fats and solids to improve yield of our co-products.

L O R N E V I L L E P L A N T U P G R A D EA $3.5 million engine room upgrade at Lorneville has improved the safety of the engine room operation, upgraded equipment, ensured compliance with regulations, improved our ability to control our refrigeration system and provided a platform for future investment and automation. The chillers at Lorneville have also been upgraded at a cost of $3 million to improve efficiencies. These improvements will generate significant savings and create additional value for farmer shareholders. Other upgrades are planned as part of our successful application to renew resource consents for Lorneville which will improve water quality in the long-term and also reduce boiler emissions.

Alliance Group is constantly looking ahead to make sure our practices support the long-term future of our co-operative and recognise the important role we play in local communities. We monitor our plants’ environmental impacts and assess what improvements are needed to meet both current and likely future regulations.

The Lorneville programme, developed after consultation with the community and other stakeholders, will also include enhancements to local habitats, including riparian environments, such as whitebait spawning areas. The plant will also continue to help maintain low cost wastewater treatment and disposal for Wallacetown residents and businesses. The six consents, including wastewater and air discharge, will be effective for the next 25 years, and we have also renewed our water take consent. These consents provide us with certainty to continue to invest in the region and reflect our commitment to the communities.

C A P I T A L I N V E S T M E N T C A P T U R E S M O R E P R O D U C T A T P U K E U R IWe are investing $1.3 million in our Pukeuri Plant to improve the recovery of offal. The range of beef offal captured at Pukeuri is currently limited by the size of the offal room however this upgrade will boost the capacity of our bovine offal and blood capture facilities significantly.

The beef pet food area will be improved to support the full savings of pet food materials and a new blood room will help increase blood recovery at Pukeuri for sale to the pharmaceutical industry.

This is our business strategy in action as we seek to capture greater value and improve our operational performance.

W O R L D - C L A S S V E N I S O N P L A N TAlliance’s new $15.2 million venison processing plant at Lorneville is being built. The new plans include design improvements, improved handling facilities, enhanced configuration, increased slaughterboard size, a wider boning room and an increased offal area, which will deliver improved efficiencies and value for farmer shareholders, resulting in a significant reduction in costs for our southern deer processing.

Marketing

A N E W A P P R O A C H T O B R A N D I N GOur strategy is to capture more market value through increasing sales and margins and developing new products and services.

This year, we have created a new marketing function separate from sales to help us achieve this goal and put specific and targeted focus on each area.

Our marketing strategy recognises the future for red meat is differentiation. Therefore, a key priority is the development of a portfolio of premium brands and strengthening Pure South by looking at exactly what consumers want market by market.

This portfolio will be an expression of the farming philosophy, the land and environment the products come from, coupled with seasonality attributes. In the future, we will be creating a range of premium market offers with defined attributes that will provide access for all our farmer suppliers.

This year, we welcomed Silere Alpine Origin Merino to the premium portfolio. These products are proving a draw card for food service and already opening doors for other Pure South products and building Alliance Group’s credibility as a specialist supplier in that space.

Although Germany remains a key market, we have continued our push to diversify venison, reducing dependency on the traditional German market. We now have a much more diversified market place for venison, with both the US and UK showing strong demand and opportunities with UK food service retailers.

There has also been considerable growth in demand from the premium pet food sector, driving value of offal products.

We are committed to shifting Alliance’s product offer up the value chain to create more value. This is already delivering increases in new revenue from new products and building a new product pipeline.

Our investment in marketing is supporting the company as we enter the next stage of our strategy, which is value creation.

We are transitioning to increasingly become a food company with a strong, consumer-facing brand portfolio with a raft of value added products that we are developing whilst retaining our traditional strengths.

P R E M I U M A G E D B E E FWe are working to improve market returns for beef and are developing a premium quality beef product. This will have superior eating quality, achieved through hand selecting carcases and then putting them through a special ageing programme.

A new product – Handpicked 55 Day Aged Beef – signals the starting development for Alliance’s differentiated beef portfolio.

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Sales

S A L E S S N A P S H O TOur global sales strategy is focused on delivering more expertise, capability and leadership so we can capture more market value for our farmers’ produce. This is demonstrated in the launch of a dedicated food service sector team in the UK and the acquisition of Goldkiwi Asia in Singapore.

In New Zealand, the co-operative has experienced significant growth over the past 12 months. Establishing a presence in Auckland for the first time is underpinning this advance.

The move into food service and higher end restaurants will demand more bespoke specification, logistics and higher distribution service levels. Alliance is looking at opportunities across the business to support this initiative to ensure we can meet new customer expectations. This will also look to advance various other production and product-type concepts that include skin packaging, fixed weight, weight ranged, diced/minced and portion control

On-line and the development in the utilisation of e-commerce especially in Asia has progressed significantly through the year with both Facebook and Instagram being established to support the business.

New opportunities to drive and improve the business include introducing more initiatives around having “chef” days where we invite the key decision makers to come and view, look and taste our products. We ran a launch event in the UK. This concept is used to create more opportunities and engage more with influential people who design the menu selection.

There remains ongoing risks with the fluctuations in exchange rate movements and potential ramifications from Brexit. Another increasing risk is the influence of the ‘Buy British’ campaign, which has seen demand for frozen New Zealand lamb reduce.

We have made good inroads this year in growing higher returning markets for mutton. Our access to the Malaysian market for mutton and the growing demand from China are positive drivers of mutton returns. Returns from wool have been poor. Global signals suggest beef prices will reduce, although the timing and magnitude of this remains to be seen. The increased kill in the US and supply out of both Brazil and Australia may have an impact on pricing.

A L L I A N C E A S I AIn September, Alliance Group acquired the business of Goldkiwi Asia, a Singapore-based company – which will now be known as Alliance Asia.

Goldkiwi Asia is well-established in red meat marketing and sales in the region. It has built sound customer relationships across China, Hong Kong, Thailand, Vietnam, Malaysia, Singapore and Indonesia.

Alliance has worked closely with Goldkiwi Asia for many years. It has played a key role in building our presence in the region, including supporting our strategic co-operation with our important Chinese in-market partner, Grand Farm.

Our new Asia headquarters in Singapore will accelerate our understanding and responsiveness to our Asian customers, connect us to some of the world’s largest populations and their growing demand for quality foods and lift our visibility and engagement across all steps of the supply chain.

Over the coming year, we will be developing and investing in new approaches in retail and e-commerce, product development in the Asia markets and packaging and services to match our products with markets.

Customers get a taste of Pure South products at the Pure South launch event in the United Kingdom

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U K F O O D S E R V I C E S E C T O RAlliance Group has launched a business in the UK targeting high-end restaurants and hotels.

We have established a team in the UK, tasked with making direct connections to top chefs and building new distribution channels.

Historically, much New Zealand lamb has gone into the wholesale sector and can go through several sets of hands before reaching the end customer. There is opportunity to gain more value by selling direct to customers, ensuring they get the right cuts in the right form and hear the New Zealand farming story.

New distribution channels are being developed and new products are being trialled. In October, we held a launch event in London for Pure South products, targeting the premium food service sector.

The food service sector is growing globally, the aim is to extend the programme to other countries.

C H I N A C H I L L E D T R I A LAlliance Group’s Lorneville and Pukeuri facilities were among ten New Zealand processing plants selected to take part in a six-month trial programme to export chilled products to China.

We were the first company to provide lamb – a consignment of French racks, processed at Pukeuri, and airfreighted to Shanghai at the end of June. These were destined for a high-end customer in the retail and food service sectors.

One of our technical managers also visited China in September to support further work around the logistics of large volumes while ensuring the quality of the produce. It is critical to ensure the cold chain is robust if our chilled programme in China is to be sustainable in the long-term.

These are very early stages in this programme, however, we are preparing initiatives that will maximise Alliance’s share of future chilled opportunities, developing new channels, a premium food service and exploring new market specific offerings. Chilled lamb exports to China over the long-term offer significant opportunities for our co operative and our farmer shareholders, particularly in the food service sector, which is a growing segment of our business and a key part of our strategy to capture more market value.

V E N I S O N M A R K E T I N G P R O G R E S S I N G W E L LAlliance Group’s venison marketing initiatives are progressing positively. These programmes have enabled us to build on Germany and the European game season and add balance with both the US and UK with value added propositions. This has resulted in a more diverse market and currency mix.

Our Pure South programme to increase out of season chilled consumption along with growth in seasonal chilled supply. In March, we participated in a major promotion in Belgium to raise awareness of venison as a summer dining option.

Eighty-five members of the Belgian food and trade media enjoyed a taste of Pure South at three tasting events at different restaurants, designed to generate awareness of the brand.

D O M E S T I C S A L E S S U R G EOur domestic sales business is experiencing significant growth. Pure South is now being placed into some of New Zealand’s finest, premium restaurants. A wider portfolio of offerings (including aged beef) is establishing our reputation as the home of New Zealand’s premium “farmers’ produce”.

G R O W I N G P U R E S O U T H L A M B S A L E S I N I N D I A Alliance Group’s Pure South lamb sales are growing in India. The product is now on the menu of a growing number of five-star hotels and in high-end retail stores.

We have worked closely with our in-market partner QualityNZ to develop the market and have expanded the product offering to now include ten different premium cuts of Pure South frozen lamb. French racks are among the most popular.

It will take time to mature but we believe it will one day represent a significant export destination for our co-operative.

Brendon McCullum with Chef Adrian Moller at The Leela Palace, New Delhi

3 1


3 0

Board of Directors and Chief Executive

0 6

M U R R A Y T A G G A R T ChairmanOxford

• Appointed Chairman 2013

• Supplier representative elected 2010

• Member of the Remuneration and Nominations Committee

• Director, Ballance Agri-Nutrients Ltd

• Director, FMG Insurance Ltd

• Trustee, Oxford Health Charitable Trust

• Director, Oxford Health Charity Ltd

• Trustee, North Canterbury Farmers’ Charitable Trust

G R A E M E M I L N EHamilton

• Independent director appointed 2013

• Member of the Audit and Risk Committee

• Member of the Remuneration and Nominations Committee

• Director, Elviti Holdings Ltd and subsidiaries

• Director, Farmright Ltd

• Director, FMG Insurance Ltd

• Partner, GR & JA Milne

• Chairman, Nyriad Ltd

• Director, PF Olsen Group Ltd and subsidiaries

• Chairman, Pro-Form Ltd Advisory Board

• Chairman, Rimanui Farms Ltd Advisory Board

• Trustee, Rockhaven Trust

• Chairman, Synlait Milk Ltd and subsidiaries

• Chairman, Terracare Fertilisers Ltd

• Council Member, Waikato University

D O N M O R R I S O NGore



• Member, Alpha Sheep Genetics Group

• Director, DG & BC Morrison Ltd

• Director, Pure Taste New Zealand (NZ) Ltd

R U S S E L L D R U M M O N DAvondale


• Member, Takitimu Discussion Group

J A R E D C O L L I EDipton


• Independent Advisor, Arrow Dairy Ltd

• Director, Benmore Downs Ltd

• Chairman, Kakapo Farms Partnership

• Chairman, Platinum Dairies Ltd

• Facilitator, Takitimu Discussion Group

D A V I D S U R V E Y O R Chief Executive OfficerInvercargill

• Appointed Chief Executive 2015

• Member, Meat Industry Association Council

• Chairman, Alliance Group (NZ) Ltd, UK subsidiary

• Director, The Lamb Companies, North America

V A N E S S A S T O D D A R TAuckland

• Independent director appointed 2014

• Chair of the Remuneration and Nominations Committee

• Member, Department of Conservation Audit & Risk Committee

• Member, Financial Markets Authority

• Chair, Global Women Trust Advisory Board

• Director, Heartland Bank Ltd

• Trustee, Kings College School Board of Trustees

• Chair, Ministry of Business, Innovation & Employment Audit & Risk Committee

• Chair, Defence Employer Support Council

• Member, Tertiary Education Commission Board

• Director, The New Zealand Refining Co Ltd

• Director, The Warehouse Group Ltd

J A M E S O G D E NWellington

• Independent Director appointed 2014

• Chair of the Audit and Risk Committee

• Member, The Crown Forestry Rental Trust Finance & Audit Committee

• Member, New Zealand Markets Disciplinary Tribunal

• Member, Pencarrow IV Investment Fund Investment Committee

• Director, Pencarrow Bridge Fund GP Limited

• Director, Summerset Group Holdings Ltd

• Director, The Warehouse Group Ltd

• Director, Vista Group International Ltd

D A W N S A N G S T E RRanfurly



• Member, Central South Island Beef + Lamb New Zealand Farmer Council

• Facilitator, Red Meat Profit Partnership Understanding Your Farming Business

J A S O N M I L L E RSouthdown


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Corporate Governance0 7

Alliance Group Limited is a co-operative company owned by approximately 5,000 farmers who supply livestock to the company for processing and sale of the resulting meat and co-products to international markets.

The company’s shares are not listed on any stock exchange.

B O A R D O F D I R E C T O R SThe constitution provides that there shall be not more than ten directors of the company at any time, of which not less than six and not more than eight shall be directors elected by the shareholders. One-third of the elected directors retire by rotation each year and may stand for re-election. The directors who retire each year are those who have been longest in office since their last election.

Provided that the total number of directors does not exceed ten, the board may from time-to-time appoint up to four directors who, in the opinion of the board, are capable of rendering services in relation to the affairs of the company. These directors are appointed for a term of up to three years and may be re-appointed for subsequent terms of up to three years at a time. The board exercises the discretion to appoint independent directors to the board to ensure that the board comprises directors with an appropriate range of skills and experience.

The board currently comprises nine directors of which three are independent directors and six are elected directors, one of whom is appointed chairman on an annual basis.

The board has adopted a board charter which sets out the role and responsibilities of the board and formalises board process and practice. A copy of the charter and the constitution may be viewed on the company’s website (www.alliance.co.nz).

B O A R D R E S P O N S I B I L I T I E SThe board has statutory responsibility for the affairs and activities of the company. The responsibility for the day-to-day operation and administration of the company is delegated by the board to the chief executive. The long-term strategic direction of the company, the annual business plan and capital expenditure budget are approved by the board. The board also approves expenditure on specific projects that are outside normally delegated authorities and reviews operational performance against the business plan objectives.

The board ensures that the affairs of the company adhere to all regulatory obligations, that high ethical standards are maintained and that the company is a responsible corporate citizen. Particular emphasis is placed on the health and safety of employees and the protection and sustainable use of the environment. All directors register and formally record any conflicts of interest.

Succession planning is undertaken for both directors and management to ensure appropriate skill sets are available to the company on an ongoing basis.

B O A R D M E E T I N G STen board meetings are scheduled each year with extra meetings held if required. Comprehensive management reports are provided to directors prior to board meetings being held. The board encourages the chief executive to bring to board meetings employees who can provide additional insight into the matters being discussed because of direct involvement in those matters.

A U D I T A N D R I S K C O M M I T T E EThe Audit and Risk Committee comprises four directors who meet three times a year. The committee operates under terms of reference approved by the board and is required to establish a framework of internal control mechanisms and ethical standards to ensure proper management of the company’s affairs. The committee is responsible for ensuring that arrangements are in place to adequately manage areas of significant business risk. The committee reviews the annual external audit plan and the report of the auditors following completion of the audit. It assists the board to meet its accounting and reporting responsibilities under the Companies Act 1993 and related legislation. The committee is also responsible for the internal audit plan and reviews all internal audit reports.

R E M U N E R A T I O N A N D N O M I N A T I O N S C O M M I T T E E The Remuneration and Nominations Committee comprises three directors meeting two or more times a year. The committee operates under terms of reference approved by the board. The committee provides oversight of the people strategy of the company, assists the board on remuneration and performance management policies and procedures for the company and specifically the appointment, remuneration, performance goals and reviews of the chief executive and senior management. The committee also participates in annual succession planning reviews and selection processes as required for key senior positions, and assists with the appointment of independent directors, the review of the board and board remuneration.

M E E T I N G A T T E N D A N C EThe table below reports attendance of directors at board and board committee meetings during the year ended 30 September 2017.

*Non-committee member in attendance. In addition to the above board meetings held in person, the board also met on two occasions by telephone conference.

C O M M U N I C A T I O N W I T H S H A R E H O L D E R SAlliance Group makes every effort to keep shareholders informed of all major developments affecting their company. Information is communicated to shareholders through the Alliance Group website, annual report, Product Disclosure Statement, regular company newsletters and emails including “Brief Bytes”. Each year a series of meetings is held throughout the company’s stock catchment areas at which the chairman and chief executive update shareholders on issues affecting the company and the industry. These meetings also provide the opportunity to receive and discuss feedback on issues important to shareholders. The board welcomes full participation of shareholders at these meetings.

Board Audit & Risk Committee

Remuneration & Nominations

Number of Meetings

10 3 2

M J Taggart 10 3* 2

J G Collie 10 3* 2*

R G Drummond 10 3* 2*

J A Miller 9 2* 2*

G R Milne 10 3 2

D G Morrison 10 3 2*

J H Ogden 9 3 2*

H D Sangster 10 3 2*

V C M Stoddart 10 3* 2

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Financial Statements0 8

GROUP

Note 2017 2016 $000 $000

Revenue A1.1 1,533,408 1,357,609Cost of sales (1,465,160) (1,303,565)

Gross profit 68,248 54,044

Operational operating income 3,955 3,665Sales and marketing expenses (7,369) (7,574)Administrative expenses (35,565) (30,136)Other operating expenses (2,277) (1,815)Restructuring costs (603) (1,970)

(41,859) (37,830)

Profit before financing costs 26,389 16,214

Financial income A2 170 285Financial expenses A2 (6,739) (7,316)

Net financing costs (6,569) (7,031)

Equity accounted earnings E2 428 646Operating result before pool distributions 20,248 9,829

Gain on disposal of property, plant and equipment 7,886 282Profit before pool distributions 28,134 10,111Pool surplus distributions A1.2 (11,387) (9,795)Profit before tax 16,747 316

Income tax expense A4 (2,321) (214)Profit after tax 14,426 102

I N C O M E S TAT E M E N TFor the year ended 30 September 2017

The income earned and expenses incurred by Alliance Group

For the year ended 30 September 2017S TAT E M E N T O F C O M P R E H E N S I V E I N C O M E

GROUP

2017 2016

$000 $000

Fair value changes in derivatives: recognised in cash flow hedge reserve (278) (81)

transferred and recognised in income statement 81 312

(197) 231

Tax effect on cash flow hedge reserve 55 (65)(142) 166

Movement in foreign currency translation reserve 1,433 (10,459)Other comprehensive income, net of tax 1,291 (10,293)Profit after tax for the year 14,426 102Total comprehensive income/(loss) for the year 15,717 (10,191)

Items of income and expenditure that are not recognised in the income statement and hence taken to reserves in equity

The notes to the Group financial statements form an integral part of these financial statements.

4 0Notes to the Financial Statements

5 6

5 8

Statement of Changes in Equity

About This Report

3 7Income Statement

3 7

3 8

3 9

Statement of Comprehensive Income

Statement of Financial Position

Statement of Cash Flows

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The notes to the Group financial statements form an integral part of these financial statements.The notes to the Group financial statements form an integral part of these financial statements.

GROUP

Note 2017 2016

$000 $000

EquityShare capital C2 76,328 70,715Reserves C3 (14,927) (16,218)Retained earnings 261,758 247,331

Total equity 323,159 301,828

LiabilitiesBank overdraft C4 9,167 -Trade and other payables C6 81,981 63,775Employee benefits 13,232 12,080Financial liabilities - derivatives 1,938 2,272Income tax payable 507 480

Total current liabilities 106,825 78,607

Interest bearing loans and borrowings C7 19,000 41,400Employee benefits 6,005 5,965

Total non-current liabilities 25,005 47,365

Total liabilities 131,830 125,972

Total liabilities and equity 454,989 427,800

AssetsCash and cash equivalents C4 1,313 3,309Trade and other receivables C5 99,014 93,532Inventories B2 77,868 76,614Assets held for sale - 590Financial assets - derivatives 482 1,147

Total current assets 178,677 175,192

Investments in equity accounted investees E2 27,682 20,894Deferred tax assets A4 23,546 24,094Other assets 66 72Property, plant and equipment B1 220,374 207,410Intangible assets B3 4,644 138

Total non-current assets 276,312 252,608

Total assets 454,989 427,800

S TAT E M E N T O F F I N A N C I A L P O S I T I O NAs at 30 September 2017

A summary of the Alliance Group assets and liabilities at the end of the financial year

GROUP

2017 2016

Cash flows from operating activities $000 $000

Cash receipts from customers 1,525,185 1,411,043Interest received 820 279Dividends received 650 503Cash paid to suppliers and employees (1,487,664) (1,277,894)Interest paid (6,739) (7,221)Income tax paid (832) (24)

Net cash flow from operating activities 31,420 126,686

Cash flows from investing activitiesRepayment of investment 4 1,146Purchase of investments 190 -Purchase of Intangibles (4,506) (138)Proceeds from sale of property, plant and equipment 8,526 601Acquisition of property, plant and equipment (25,703) (27,619)

Net cash flow from investing activities (21,489) (26,010)

Cash flows from financing activitiesReduction in term debt (22,400) (87,100)Issue of share capital 3,672 862Redemption of share capital (2,756) (2,877)

Net cash flow from financing activities (21,484) (89,115)

Net movement in cash and cash equivalents (11,553) 11,561

Opening cash and cash equivalents 3,309 (9,331)Effect of exchange rate fluctuations on cash held 388 1,079

Closing cash and cash equivalents (7,856) 3,309

Reconciliation of Profit to Cash Surplus from Operating Activities

Profit for the year 14,426 102

Adjustments for items not involving cash flows:Depreciation 17,638 16,489(Increase)/Decrease in deferred tax 626 (272)Share issues retained from pool surplus 4,697 3,420Fair value of financial derivatives (1,752) (2,110)Non-cash rebate from associates (3,867) -Effect of exchange rate movement on working capital 1,245 (9,322)Gain on sale (7,886) -Accounts receivable and payable movements for investing and financing activities (5,364) (538)Earnings from Associate (429) (646)Other non cash items 380 212

5,288 7,233

Movement in working capital items 11,706 119,351

Cash flow from operating Activities 31,420 126,686

S TAT E M E N T S O F C A S H F L O W SFor the year ended 30 September 2017

Cash generated and used by the Alliance Group during the financial year

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A . F I N A N C I A L P E R F O R M A N C E

I N T H I S S E C T I O N

This section explains the financial performance of Alliance providing additional information about individual items in the income statement, including:

– accounting policies, judgements and estimates that are relevant for understanding items recognised in the income statement.

– analysis of Alliance’s performance for the year by reference to key areas including: revenue, payments to our farmers, expenses and taxation.

R E V E N U E M E A S U R E M E N T & R E C O G N I T I O N

Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates.

This revenue is influenced by customer contract sales prices and international demand for meat products and is recognised when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable and the associated costs can be estimated reliably.

Other operating income materially consists of rebates from associates and for the 2017 year the proceeds from the sale of land situated at the Makarewa Plant site.

M E A S U R E M E N T & R E C O G N I T I O N

Provision is made for benefits owing to employees in respect of services rendered. Provisions are recognised when it is probable they will be settled and can be measured reliably.


Income tax expense is the income tax assessed on taxable profit for the year. Taxable profit differs from profit before tax reported in the income statement as it excludes items of income and expense that are taxable or deductible in future years (i.e. deferred tax) and also excludes items that will never be taxable or deductible. Income tax expense components are current income tax and deferred tax.

I M P U T A T I O N C R E D I T S

As at balance date imputation credits available for use in subsequent periods totalled $34.5 million (2016: $34.3 million)


Interest income is recognised as it accrues. Finance expenses comprise interest expense on borrowings.

A 1 : C R E A T I N G W E A L T H A N D A D D I N G V A L U E T O O U R F A R M E R SA 1 . 1 R E V E N U E

GROUP

2017 2016

$000 $000Revenue 1,533,408 1,357,609Other operating income 3,955 3,665

Total Income 1,537,363 1,361,274

GROUPPOOL DISTRIBUTIONS

$/HEAD

2017 2016 FY17 FY16

$000 $000Pool surplus distributions per income statement 11,387 9,795 Lamb 1.80 1.50plus over provided from last year 98 - Ewes 1.00 1.00Qualifying payout 11,485 9,795 Cattle 10.00 10.00Transfer to share issues pending (3,872) (3,420) Calves 1.00 1.00

Total payable at end of year (7,613) (6,375) Deer 7.50 5.00

A 1 . 2 P O O L S U R P L U S D I S T R I B U T I O N S P A Y A B L E

GROUP

2017 2016

$000 $000

Interest from bank 170 280Dividend received - 5Financial income 170 285Interest paid on loans and borrowings 6,739 7,316Financial expenses 6,739 7,316

Net finance costs 6,569 7,031

A 2 F I N A N C E I N C O M E A N D E X P E N S E S

GROUP

2017 2016

$000 $000Wages and salaries 214,552 211,932Contributions to KiwiSaver plans 7,747 7,357Increase in liability for long service leave 104 221

Total personnel expenses 222,403 219,510

A 3 P E R S O N N E L E X P E N S E S

GROUP

2017 2016

$000 $000Recognised in the income statementCurrent tax expenseCurrent income tax expense 779 (1,602)Adjustments for prior years 154 (267)Unutilised prior year tax credits 839 -Deferred tax expense 569 2,083

Total income tax expense in income statement 2,321 214

Income tax expense calculationNet profit before tax for the year 16,747 316

Income tax using the company’s tax rate (28%) 4,689 88Non assessable income (2,056) (323)Tax effect of legislation change - 933Tax effect of post-tax equity accounted earnings 156 -Tax effect of lower tax for overseas subsidiary (372) (219)Under / (over) provided in prior years (96) (265)

Income tax expense 2,321 214

A 4 T A X A T I O N

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Movement in temporary differences during the year

Opening balance

Recognised in income

Recognised in equity

Closing balance

$000 $000 $000 $000

2016

Property, plant and equipment 766 (1,238) - (472)Inventories 339 (153) - 186Employee benefits 3,927 (221) - 3,706Other items 2,919 (481) - 2,438Derivatives 88 - (65) 23Tax loss carry forward 15,783 2,430 - 18,213

23,822 337 (65) 24,094

2017Property, plant and equipment (472) 30 - (442)Inventories 186 305 - 491Employee benefits 3,706 432 - 4,138Other items 2,438 (765) - 1,673Derivatives 23 - 55 78Tax loss carry forward 18,213 (605) - 17,608

24,094 (603) 55 23,546

Land Buildings Plant and Equipment

Work in Progress Total

Group $000 $000 $000 $000 $000CostBalance at 1 October 2015 26,267 124,345 393,058 6,530 550,200Transfers from capital work-in-progress - 689 5,787 (6,476) -Additions - - 36 27,901 27,937Reclassification of Assets Held for Sale (590) - - - (590)Disposals - (173) (557) - (730)Effect of movements in exchange rates - - (237) - (237)

Balance at 30 September 2016 25,677 124,861 398,087 27,955 576,580

Balance at 1 October 2016 25,677 124,861 398,087 27,955 576,580Transfers from capital work-in-progress - 6,182 30,499 (36,681) -Additions - - 109 30,537 30,646Reclassification of Assets Held for Sale - - - - -Disposals - - (454) - (454)Effect of movements in exchange rates - - 13 - 13

Balance at 30 September 2017 25,677 131,043 428,254 21,811 606,785

Depreciation and impairment lossesBalance at 1 October 2015 - 74,695 279,141 - 353,836Depreciation - 2,122 14,357 - 16,479Provision for writedown - (79) (305) - (384)Disposals - (99) (473) - (572)Effect of movements in exchange rates - - (189) - (189)

Balance at 30 September 2016 - 76,639 292,531 - 369,170

Balance at 1 October 2016 - 76,639 292,531 - 369,170Depreciation - 2,259 15,381 - 17,638Provision for writedown 68 - (63) - 5Disposals - - (404) - (404)Effect of movements in exchange rates - - 2 - 2

Balance at 30 September 2017 68 78,898 307,445 - 386,411

Net book valueBalance at 1 October 2016 26,267 49,650 113,917 6,530 196,364Balance at 30 September 2016 25,677 48,222 105,556 27,955 207,410Balance at 30 September 2017 25,609 52,145 120,809 21,811 220,374


Deferred tax is income tax that is expected to be payable or recoverable in the future as a result of the unwinding of temporary differences. These arise from differences in the recognition of assets and liabilities for financial reporting and for the filing of income tax returns. Deferred tax is recognised on all temporary differences, other than those arising from goodwill and the initial recognition of assets and liabilities in a transaction (other than in a business combination) that affects neither the accounting nor taxable profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the year when a liability is settled or an asset realised, based on tax rates and tax laws that have been enacted or substantively enacted at balance date.

K E Y J U D G E M E N T :

A deferred tax asset is recognised to the extent it is probable that future taxable profits will be available to use the asset. This is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available in the future to utilise the asset.

B . O P E R AT I N G A S S E T S


This section shows the assets Alliance uses in the processing of red meat products supplied by our New Zealand farmers in order to generate operating revenues. Key revenue generating assets include:

– property, plant and equipment;

– inventories;

– intangible assets.

D E F E R R E D T A X

B 1 P R O P E R T Y , P L A N T A N D E Q U I P M E N T

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Owned assets

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses.

Cost includes expenditures that are directly attributable to the purchase of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Impairment

The carrying value of property, plant and equipment are reviewed at each reporting date. If an indicator of impairment exists, then the recoverable amount is estimated. An impairment loss is recognised in the income statement if the carrying amount exceeds the recoverable amount.

Disposals

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.

Depreciation

Depreciation of property plant and equipment assets is calculated on a straight-line or diminishing value basis. This allocates the cost of an asset, less any residual values (estimated value at time of disposal) over the estimated remaining useful life of the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated.


Inventories are valued at the lower of cost and net realisable value.

Cost: consistent with other meat processors, Alliance utilises the “retail method”, in accordance with NZ IAS 2 - Inventory, to value the cost of inventory. Under the “retail method”, the cost of inventory is ascertained by deducting from sales value an estimated profit margin expected to be earned on the future sale of inventory.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Livestock is valued at fair value.


Costs incurred in obtaining resource consents for Alliance’s processing sites are capitalised and amortised from the granting of the consent on a straight line basis for the period of the consent. This represents a change in policy from prior years where costs incurred in obtaining resource consents were expensed as they were incurred. Resource consents are granted for periods 5 - 35 years

Costs associated with acquiring and developing software are capitalised at cost and amortised over the life of the assets.

The useful life of software is 2 - 15 years Goodwill represents the future potential earnout obligation in relation to the purchase of Goldkiwi Asia Marketing PTE Limited in Singapore.K E Y J U D G E M E N T

Alliance makes estimates of the remaining useful lives of assets, which are as follows:

– buildings 15 - 50 years;

– plant and equipment 4 - 25 years.

The residual value and useful lives are reviewed and if appropriate adjusted, at each reporting date.

GROUP

2017 2016

$000 $000Raw materials and consumables 8,643 8,489Livestock 1,707 1,102Trading stocks 67,518 67,023

Total inventories 77,868 76,614

B 2 I N V E N T O R I E S

Resource consents Software Goodwill Total

Group $000 $000 $000 $000Net book value at 30 September 2016 - 138 - 138Additions 435 3,621 692 4,748Amortisation Expenses - (242) - (242)

Net book value at 30 September 2017 435 3,517 692 4,644

Cost 435 7,379 692 8,506Less accumulated amortisation - (3,862) - (3,862)

Net book value at 30 September 2017 435 3,517 692 4,644

K E Y J U D G E M E N T

Alliance determines the sale values used to calculate the cost of inventory by reference to:

– contract sale prices, or

– for uncontracted inventory, the future anticipated realisable value.

B 3 I N T A N G I B L E A S S E T S

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C 3 R E S E R V E SC . M A N A G I N G F U N D I N G

As at 30 September 2017 there was a share issue pending of 4.162 million shares. These shares are predominantly to be issued and paid from the pool surplus distribution to shareholders in December 2017.

All shares have equal voting rights and shareholders are entitled to one vote per share. The maximum shareholding is 1.35 million shares. Upon winding up, all shares rank equally with regard to the company’s residual assets.

Shares are issued and surrendered at their nominal value under the company’s constitution and the Co-operative Companies Act 1996. Co-operative shares may be surrendered where shareholders have not transacted with the company for five years or do not have the capacity to be a transacting shareholder.

I N T H I S S E C T I O N This section explains how Alliance Group manages its capital structure and working capital along with the various funding sources.

2017 2016 2015 2014

$000 $000 $000 $000Total Equity 323,159 301,828 308,869 296,684Total Assets 454,989 427,800 536,123 504,755

Equity ratio 71.0% 70.6% 57.6% 58.8%

Alliance Group’s capital includes share capital, reserves and retained earnings.

The board’s objective when managing capital is to maintain a strong capital base to ensure Alliance is able to undertake future growth opportunities and maximise return to shareholders. The board considers a strong capital base is necessary to protect the company from volatility and changes in capital and operating market conditions.

The board monitors forecast capital inflows and outflows, and the level of shareholding relative to shareholders’ supply to ensure that the company retains a strong base, with a key reference point being the shareholders equity ratio.

C 1 C A P I T A L M A N A G E M E N T

Group

2017 2016

$000 $000Share capital 76,328 70,715

C 2 S H A R E C A P I T A L

Group

2017 2016

$000 $000Foreign currency translation (14,726) (16,159)Cash flow hedge (201) (59)

Reserves (14,927) (16,218)

C 3 R E S E R V E S


Foreign Currency Translation Reserve

The foreign currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations well as from the translation of financial instruments that hedge the company’s net investment in a foreign subsidiary.

Cash Flow Hedge Reserve

The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet been settled.

Group

2017 2016

$000 $000Cash and cash equivalents 1,313 3,309Bank overdraft (9,167) -

Net cash and cash equivalents (7,854) 3,309

C 4 C A S H A N D C A S H E Q U I V A L E N T S

Group

2017 2016

$000 $000Trade receivables - net of impairment 83,456 69,767Prepayments 1,806 2,620Receivables from related parties 13,752 21,145

Total receivables 99,014 93,532

Impairment losses included in trade receivables 20 279

C 5 T R A D E A N D O T H E R R E C E I V A B L E S

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Trade receivables are measured on initial recognition at fair value, and are subsequently carried at amortised cost. Receivables are reviewed on an individual basis to determine whether any amounts are unrecoverable and a specific provision is made. The provision for doubtful debts is the estimated amount of the receivable that is not expected to be paid. Debts known to be uncollectible are written off as bad debts to the profit and immediately. In assessing the collectability of receivables Alliance considers the customers credit history and historical recovery performance and trends.

The status of trade receivables at the reporting date is as follows:

Group Trade receivablesNot yet due 1 - 30 days

overdue> 30 days

overdue Total

$000 $000 $000 $000

2016

Gross receivable 65,232 4,371 443 70,046Impairment - - (279) (279)

Net receivable 65,232 4,371 164 69,767

2017Gross receivable 74,827 7,957 692 83,476Impairment - - (20) (20)

Net receivable 74,827 7,957 672 83,456


Borrowings are initially measured at fair value, net of transaction costs. They are subsequently measured at amortised cost (using the effective interest method). Fees for establishing new borrowings are spread over the term of those borrowings. The loan facility comprises a Core Facility (expiring 30 September 2020) and a Seasonal Facility which is renewed on an annual basis. The loan facilities are secured against the property and assets of Alliance given under a Security Trust Deed. Interest rates under the Facility Agreement are floating rates based on bank bill interest rates. The financial covenants under these facilities have been fully complied with during the year.


Trade payables and other accounts payable are recognised when the entity becomes obliged to make future payments resulting from the purchase of goods and services. No interest is charged on the trade payables. The entity has financial risk management policies in place to ensure that all payables are paid with in the credit timeframe.

Group

2017 2016

$000 $000Trade payables and accrued expenses 74,368 57,400Pool surplus distributions payable A1.2 7,613 6,375

81,981 63,775

C 6 T R A D E A N D O T H E R P A Y A B L E S

Group

2017 2016

$000 $000Secured bank loans 19,000 41,400

19,000 41,400

C 7 I N T E R E S T - B E A R I N G L O A N S A N D B O R R O W I N G S

D. F I N A N C I A L I N S T RU M E N T S U S E D T O M A N A G E R I S K

M A N A G E M E N T O F A L L I A N C E ’ S K E Y F I N A N C I A L R I S K S

Credit risk

Credit risk is the risk of financial loss to the group if a customer or counter-party fails to meet its financial obligations. Exposure to credit risk primarily arises in relation to trade debtors. Refer to Note C5 for the status of trade receivables. This risk is managed through a credit approval process and on-going monitoring being undertaken. Offshore debtor credit risk is also partially managed by the use of confirmed letters of credit from reputable banks. There are no significant concentrations of credit risk. The carrying amount of financial assets represents the group’s maximum credit exposure.

Liquidity risk

Liquidity risk represents the group’s ability to meet its contractual obligations as they fall due.

In general, the group generates sufficient cash flows from its operating activities to meet its obligations arising from its financial liabilities and maintains adequate banking facilities to cover potential shortfalls.

The group is required to disclose the expected timings of cash outflows for each of its financial liabilities. The amounts in the table below are the contractual undiscounted cash flows (including interest), so will not always reconcile to the amount disclosed on the statement of financial position..


This section explains the financial risks that Alliance Group faces and how these risks are managed. This includes reviewing the hedging instruments used to manage risk.

Group Trade receivables

Balance Sheet

Contractual Cash Flow < 3 months 3 - 12 mths 1 - 5 yrs

$000 $000 $000 $000 $0002017

Loans and borrowings 19,000 19,008 8 - 19,000

2016Loans and borrowings 41,400 41,483 83 - 41,400

Alliance is subject to a variety of financial risks relating to its operations that are managed by the group’s Treasury Policy. This policy provides guidance to management on minimising the exposure to these risks and the use of derivative financial instruments. Alliance is exposed to foreign currency, interest rate, credit and liquidity risks which arise during the normal course of business. The group manages commodity risk through negotiated supply contracts.

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I N T E R E S T R A T E R I S KThe group is exposed to interest rate risk on movements in floating interest rates on loans and borrowings.

In managing interest rate risk, the group aims to reduce the impact of short-term fluctuations on the group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates will have an impact on profit.

Cash flow sensitivity* At 30 September 2017, it is estimated that an increase in interest rates of 100 basis points would decrease the group’s profit before income tax by approximately $1.2 million (2016 $1.5 million). * Calculated using average of year rates

Fair value sensitivity At 30 September 2017, it is estimated that for interest rate hedge instruments, an increase in interest rates of 100 basis points would increase the group’s profit before income tax by approximately $0.04 million (2016 $0.8 million).

F O R E I G N C U R R E N C Y R I S KThe group operates internationally, and is subject to the risk of financial losses arising from adverse exchange rate movements in USD, EUR, GBP CAD, JPY and AUD. To manage the foreign exchange risks arising the group enters into financial market derivatives.

The following table shows the estimated pre-tax impact on the group of a general 10% change in the value of the New Zealand dollar in respect to foreign exchange currency derivatives that the company had in place at balance date:

Foreign exchange contract: Changes in the fair value of hedges that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over the period to maturity.

Cash flow hedge: Changes in fair value of hedges that are designated and qualify as cash flow hedges and are considered effective for accounting purposes are recognised through other comprehensive income into the cash flow hedge reserve (in equity). The gain or loss relating to any ineffective element is recognised immediately in the income statement. Amounts accumulated in other comprehensive income are recycled in the income statement in the periods when the forecast transactions take place.

M E A S U R E M E N T O F F A I R V A L U EForeign exchange contract: Fair value is the difference between the contract exchange rate and the quoted forward exchange rates to close it out at the reporting date. This is calculated by using the present value of the estimated future cash flows and applying published forward exchange rates and discount rates based on the forward interest rate swap curve.

Foreign exchange options: The fair value has two components being; – intrinsic value, being the difference between the option strike rate and the current market rate, and – time value, this can never be negative, and represents the dollar value that the option has of the time

left to run to maturity.

The intrinsic value of the option, if it is deemed effective is taken through the hedge reserve in equity. Time value is always taken through the profit and loss account.

The fair value uses a discounted cash flow and applies observable option volatilities and quoted forward exchange and interest rates that match the maturity dates of the contracts.

Interest rate swaps:The fair value is the estimated amount that the group would pay or receive if the contract stopped at the reporting date. This is calculated by discounting the future interest and principal cash flows using published market interest rates that match the maturity dates of the contracts and discount rates based on the forward interest rate swap curve. The fair value uses a discounted cash flow and applies observable option volatilities and quoted forward exchange and interest rates that match the maturity dates of the contracts.

What is a derivative? A derivative is a type of financial instrument typically used to manage the interest rate and foreign exchange risks that the group faces due to its business operations. The different types of derivative used are:

Forward exchange contracts: This contract enables the group to purchase or sell foreign currency at a set rate at a future date.

Foreign exchange option: An option gives the ability to manage risk with the potential to benefit from favourable foreign exchange movements, while defining the best/worst case cash-flow outcome on an agreed future date.

Interest rate swap: This contract allows the group to obtain a fixed interest rate on a fixed borrowing amount for a future date.

R E C O G N I T I O NDerivative financial instruments are recognised at fair value on the date the contracts are agreed and are re-measured on a periodic basis. The recognition of movements in fair value depends upon the hedging instrument and its designation or classification, as summarised below:

2017 2016

Profit & Loss

EquityProfit

& LossEquity

$000 $000 $000 $00010% increase in value of NZD 2,734 2,264 (178) 8,31310% decrease in value of NZD (3,301) (3,388) 346 (10,255)

2017 2016

Notional Principal

Fair Value

Notional Principal

Fair Value

$000 $000 $000 $000Derivatives designated as cash flow hedges - Foreign exchange contracts 65,498 (279) 64,834 (81)Derivatives not designated as cash flow hedges - Interest rate swaps 53,000 (723) 48,000 (1,400) - Forward rate agreements 60,000 (35) - - - Foreign exchange contracts 96,966 (419) 113,128 356

275,464 (1,456) 225,962 (1,125)

The following table details the notional principal amounts of derivatives at the end of the reporting period:

D 2 D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S

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E . G R O U P S T RU C T U R E

I N T H I S S E C T I O N This section provides information to help readers understand the Alliance Group structure and how it affects the financial position and performance of the group.

Summary financial information for equity accounted investees and proportionately consolidated entities, not adjusted for the percentage ownership:

Total assets Total liabilities Revenues Profit

(loss)

Associates and joint ventures $000 $000 $000 $0002016 84,035 49,210 529,685 8,5422017 120,593 80,454 617,391 8,073

The company has the following investments: 2017 2016

Country Balance dateOwnership

interestOwnership

interest

AssociatesThe Lamb Co-operative Inc. USA 30-Sep 45.8% 44.9%The NZ and Australian Lamb Company Ltd CAN 30-Sep 44.8% 43.4%Porkcorp New Zealand Ltd NZ 30-Sep 50.0% 50.0%Alpine Origin Merino Ltd NZ 30-Sep 50.0% 0.0%High Health Alliance Limited NZ 30-Sep 50.0% 50.0%

2017 2016

$000 $000Investments in equity accounted investeesMovements in carrying value of equity accounted investments:Balance at beginning of year 20,894 22,440Investment in share capital 190 -Add patronage dividends issued as advances 3,834 1,583Add patronage dividends reinvested 2,800 -Less promissory notes repaid - (1,104)Add/(less) share of foreign exchange translation reserve 186 (2,171)

27,904 20,748

Add share of profit after tax 428 646Less dividends received (650) (500)

Closing balance 27,682 20,894

This balance comprises:Shares in associate companies and joint ventures 6,430 6,240Advances to associated companies at cost 10,896 10,896Share of post-acquisition increases in net assets 14,635 8,223Share of foreign exchange translation reserve (4,279) (4,465)

Closing balance 27,682 20,894

The financial statements include the financial statements of Alliance Group Ltd and the subsidiaries listed below.

Subsidiaries are entities controlled by the group. Control exists when the group has the power to govern the financial and operating policies of the entity so as to obtain benefit from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

E 1 S U B S I D I A R I E S

The company has the following investments: 2017 2016

Country Balance dateOwnership

interestOwnership

interestInvestments in subsidiariesNew Zealand Holdings (UK) Limited and its trading subsidiary Alliance Group (NZ) Ltd

United Kingdom 30-Sep 100.0% 100.0%

(b)

M E A S U R E M E N T & R E C O G N I T I O NAssociates are those entities in which Alliance has significant influence, being the ability to participate in however not control the financial and operating decisions of the entity.

Associates are accounted for using the equity method of accounting where the investment is recorded at cost plus its share of any profit or loss during the ownership period. Any dividends received are deducted from the investment value.

If Alliance’s share of losses exceeds its interest in the associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that Alliance has an obligation or has made payments on behalf of the entity.

E 2 A S S O C I A T E S

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F. O T H E R

I N T H I S S E C T I O N This section includes information required to comply with financial reporting standards that is not covered in other sections.

Transactions with related parties, including directors, are made on terms equivalent to those that prevail in arm’s length transactions.

P A R E N T A N D U L T I M A T E C O N T R O L L I N G P A R T YThe immediate parent and ultimate controlling party of the group is Alliance Group Ltd.

I D E N T I T Y O F R E L A T E D P A R T I E SThe company has a related party relationship with each of its subsidiary companies outlined in Section E. The company has a related party relationship with its key management personnel.


Operating leases are leases where the lessors retain substantially all the risks and benefits of ownership of the leased items. Lease payments including any incentives received are recognised in the income statement on a straight-line basis over the term of the lease.

Group

Operating leases 2017 2016

Non-cancellable operating lease rentals are payable as follows: $000 $000

Less than one year 2,787 2,757Between one and five years 3,950 3,653After five years 19 -

6,756 6,410

Operating lease expense recognised 3,739 4,028

F 1 R E L A T E D P A R T I E S

Group

2017 2016

$000 $000Within one year 31,750 8,961

F 3 C A P I T A L E X P E N D I T U R E C O M M I T M E N T S

C O M M I T M E N T S

Transactions with related parties Group

2017 2016

Income $000 $000Sales to associates 1 75,319 131,308Rebates received from associates 3,834 3,565Dividends from associates 650 500Interest received by the company from associates 144 154

Balances with related partiesAmounts owed to the company by associates 13,752 21,145Loans to associates 19,502 12,046

Key management personnel compensation v Group

2017 2016

$000 $000Short-term employee benefits 3,772 2,731Post-employee benefits 175 182Termination payments - 544Directors’ fees - Alliance Group Ltd 697 699

Other services performed by KPMG include accounting services on pro forma accounts.

Group

2017 2016

$000 $000Audit fees - KPMG 212 210Audit fees - other auditors 48 54Fees for other services - KPMG 10 158Fees for other services - taxation (other auditors) 9 11

Total 279 433

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F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 7Components that make up the capital and reserves of Alliance Group and the changes of each component during the year

Reserves

Group

Share Capital

Foreign Currency

TranslationCash Flow Retained

Earnings Total

$000 $000 $000 $000 $000

Balance at 1 October 2015 67,565 (5,700) (225) 247,229 308,869

Profit after tax for the year - - - 102 102

Net change in fair value of financial instruments - - 166 - 166

Movement in foreign currency translation reserve - (10,459) - - (10,459)

Total comprehensive income for the year - (10,459) 166 102 (10,191)

Shares issued - ordinary shares 2,320 - - - 2,320Shares surrendered - ordinary shares (2,877) - - - (2,877)Share issue pending 3,707 - - - 3,707

Total transactions with owners 3,150 - - - 3,150

Balance at 30 September 2016 70,715 (16,159) (59) 247,331 301,828

Balance at 1 October 2016 70,715 (16,159) (59) 247,331 301,828

Profit after tax for the year - - - 14,426 14,426

Net change in fair value of financial instruments - - (142) - (142)

Movement in foreign currency translation reserve - 1,433 - - 1,433

Total comprehensive income for the year - 1,433 (142) 14,426 15,717

Shares issued - ordinary shares 4,207 - - - 4,207Shares surrendered - ordinary shares (2,756) - - - 2,756)Share issue pending 4,162 - - - 4,162

Total transactions with owners 5,613 - - - 5,613

Balance at 30 September 2017 76,328 (14,726) (201) 261,757 323,158

F 4 S T A T E M E N T O F C H A N G E S I N E Q U I T Y

There have been no events subsequent to balance date which have had a material effect on the financial performance and financial position reported in these statements.

F 5 E V E N T S S U B S E Q U E N T T O B A L A N C E D A T E

A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 30 September 2017, and have not been applied in preparing these consolidated financial statements:

NZ IFRS 9 (2014) Financial Instruments, replaces the existing guidance in NZIAS 39 Financial Instruments: Recognition and Measurement. NZIFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and de-recognition of financial instruments from NZIAS 39. The standard becomes effective in the group’s 2019 financial statements. The group does not plan to adopt this standard early and the extent of the impact has not yet been determined.

NZ IFRS 15 Revenue from Contracts with Customers. This standard introduces a new revenue recognition model for contracts with customers. The standard becomes effective in the group’s 2019 financial statements. The group does not plan to adopt this standard early and the extent of the impact has not yet been determined.

NZ IFRS 16 Leases has been issued. This standard eliminates the classification of leases as either operating leases or finance leases. The standard uses a single lessee model which requires a lessee to recognise on the Statement of Financial Position assets and liabilities for all leases with a term of more than 12 months.The standard is effective for the group’s 2020 financial statements. The group does not plan to adopt IFRS 16 early and the extent of the impact has not yet been determined.

F 6 N E W S T A N D A R D S A N D I N T E R P R E T A T I O N S N O T Y E T A D O P T E D

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M J TaggartD I R E C T O R

J H OgdenD I R E C T O R


F O R E I G N C U R R E N C YTransactions denominated in a foreign currency are converted at the exchange rates at the dates of the transactions. Foreign currency assets and liabilities (such as receivables and payables) are translated at the rate prevailing at balance date.

The assets and liabilities of international subsidiaries are translated to New Zealand dollars at the closing rate at balance date. The revenue and expenses of these subsidiaries are translated at rates approximating the exchange rates at the dates of the transactions.

Exchange differences arising on the translation of subsidiary financial statements are recorded in the foreign currency translation reserve (equity). Cumulative translation differences are recognised in the income statement in the period in which any international subsidiary is disposed of.

The principal functional currency of international subsidiaries is UK dollars; the closing rate at balance date was 0.5379 (30 September 2016: 0.5601). A full list of international subsidiary functional currencies is in note E1 Subsidiaries.

O T H E R A C C O U N T I N G P O L I C I E S

Other accounting policies that are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. The accounting policies have been consistently applied to the periods in these financial statements. Where applicable comparatives have been amended to align with current year’s expenses.

C R I T I C A L J U D G E M E N T S A N D E S T I M A T E S

The preparation of financial statements requires management to exercise its judgement in applying Alliance’s accounting policies. Estimates and judgements are reviewed by management on an on-going basis, with revisions recognised in the period in which the estimate is revised and in any future periods affected. Areas of estimate or judgement that have most significant impact on the amounts recognised in the financial statements are:

- Note B2 Inventories; - Note D2 Derivative financial instruments.

A B O U T T H I S R E P O RT

R E P O R T I N G E N T I T YAlliance Group Ltd is a for-profit entity domiciled in New Zealand and registered under the Companies Act 1993 and the Co operative Companies Act 1996. The company is an FMC Entity in terms of the Financial Markets Conduct Act 2013 and prepares its financial statements in accordance with this Act and the Financial Reporting Act 2013.

The consolidated financial statements are for Alliance Group Ltd and its subsidiaries (together referred to as “Alliance”) and Alliance’s interests in associates as at and for the year ended 30 September 2017.

Alliance is primarily involved in meat processing and export sales.

S T A T E M E N T O F C O M P L I A N C E A N D B A S I S O F P R E P A R A T I O NThe financial statements have been prepared:

- in accordance with Generally Accepted Accounting Practice (GAAP) in New Zealand and comply with International Financial Reporting Standards (IFRS) and the New Zealand equivalents (NZ IFRS), as appropriate for a for-profit entity;

- on the basis of going concern. The directors, having considered projected future performance and the availability of financing, consider the going concern basis to be appropriate; and

- in New Zealand dollars, with all values rounded to the nearest thousand dollars unless otherwise stated.

In preparing the group financial statements, all material intragroup transactions, balances, income and expenses have been eliminated. Subsidiaries are consolidated on the date on which control is obtained to the date on which control is lost.

I N T H I S S E C T I O N The notes to the financial statements within sections A to F include information that is considered relevant and material to assist the reader in understanding changes in Alliance Group’s financial position or performance. Information is considered material if:

- the amount is significant because of its size and nature;

- it is important for understanding the results of Alliance;

- it helps explain changes in Alliance’s business; or

- it relates to an aspect of Alliance’s operations that is important to future performance.

22 November 2017

A L L I A N C E

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©2017KPMG,aNewZealandpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternationalCooperative(“KPMGInternational”),aSwissentity.

1

Independent Auditor’s Report TotheshareholdersofAllianceGroupLimited

Report on the consolidated financial statements

Opinion Inouropinion,theaccompanyingconsolidatedfinancialstatementsofAllianceGroupLimited(thecompany)anditssubsidiaries(thegroup)onpages36-59:

i. presentfairlyinallmaterialrespectstheGroup’sfinancialpositionasat30September2017anditsfinancialperformanceandcashflowsfortheyearendedonthatdate;and

ii. complywithNewZealandEquivalentstoInternationalFinancialReportingStandardsandInternationalFinancialReportingStandards.

Wehaveauditedtheaccompanyingconsolidatedfinancialstatementswhichcomprise:

— theconsolidatedstatementoffinancialpositionasat30September2017;

— theconsolidatedincomestatement,statementsofcomprehensiveincome,changesinequityandcashflowsfortheyearthenended;and

— notes,includingasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.

Basis for opinion

WeconductedourauditinaccordancewithInternationalStandardsonAuditing(NewZealand)(‘ISAs(NZ)’).Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.

We are independent of the group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics forAssurancePractitioners issuedby theNewZealandAuditingandAssuranceStandardsBoardand the InternationalEthicsStandardsBoardforAccountants’CodeofEthicsforProfessionalAccountants(IESBACode),andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirementsandtheIESBACode.

Our responsibilitiesunder ISAs (NZ)are furtherdescribed in theauditor’s responsibilities for theauditof theconsolidatedfinancialstatementssectionofourreport.

Our firm has also provided other services to the group in relation to accounting services. Subject to certain restrictions,partners and employees of our firmmay also dealwith the group on normal termswithin the ordinary course of tradingactivitiesofthebusinessofthegroup.Thesemattershavenotimpairedourindependenceasauditorofthegroup.Thefirmhasnootherrelationshipwith,orinterestin,thegroup.

Other information

TheDirectors,onbehalfofthegroup,areresponsiblefortheotherinformationincludedintheentity’sAnnualReport.Otherinformation includes the Chairman and Chief Executive’s report and disclosures relating to corporate governance andstatutory information and the other information included in theAnnual report.Our opinionon the consolidated financialstatementsdoesnotcoveranyotherinformationandwedonotexpressanyformofassuranceconclusionthereon.

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Inconnectionwithourauditoftheconsolidatedfinancialstatementsourresponsibilityistoreadtheotherinformationand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththeconsolidatedfinancialstatementsorourknowledgeobtainedintheauditorotherwiseappearsmateriallymisstated.If,basedontheworkwehaveperformed,weconclude that there is a material misstatement of this other information, we are required to report that fact. We havenothingtoreportinthisregard.

Use of this independent auditor’s report

Thisindependentauditor’sreportismadesolelytotheshareholdersasabody.Ourauditworkhasbeenundertakensothatwemightstatetotheshareholdersthosematterswearerequiredtostatetothemintheindependentauditor’sreportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthantheshareholdersasabodyforourauditwork,thisindependentauditor’sreport,oranyoftheopinionswehaveformed.

Responsibilities of the Directors for the consolidated financial statements

TheDirectors,onbehalfofthecompany,areresponsiblefor:

— thepreparationand fair presentationof the consolidated financial statements in accordancewithgenerally acceptedaccounting practice inNewZealand (beingNewZealand Equivalents to International Financial Reporting Standards)andInternationalFinancialReportingStandards;

— implementingnecessaryinternalcontroltoenablethepreparationofaconsolidatedsetoffinancialstatementsthatisfairlypresentedandfreefrommaterialmisstatement,whetherduetofraudorerror;and

— assessing the ability to continue as a going concern. This includes disclosing, as applicable,matters related to goingconcernandusingthegoingconcernbasisofaccountingunlesstheyeitherintendtoliquidateortoceaseoperations,orhavenorealisticalternativebuttodoso.

Auditor’s responsibilities for the audit of the consolidated financial statements

Ourobjectiveis:

— toobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror;and

— toissueanindependentauditor’sreportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithISAsNZwillalwaysdetectamaterialmisstatementwhenitexists.

Misstatements can arise from fraudor error. They are consideredmaterial if, individually or in the aggregate, they couldreasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financialstatements.

AfurtherdescriptionofourresponsibilitiesfortheauditoftheseconsolidatedfinancialstatementsislocatedattheExternalReporting Board (XRB) website at: http://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-5/.Thisdescriptionformspartofourindependentauditor’sreport.

Theengagementpartnerontheauditresultinginthisindependentauditor'sreportisPeterTaylor.

Forandonbehalfof

KPMGChristchurch

22November2017

©2017KPMG,aNewZealandpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternationalCooperative(“KPMGInternational”),aSwissentity.

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Independent Auditor’s Report TotheshareholdersofAllianceGroupLimited

Report on the consolidated financial statements

Opinion Inouropinion,theaccompanyingconsolidatedfinancialstatementsofAllianceGroupLimited(thecompany)anditssubsidiaries(thegroup)onpages36-59:

i. presentfairlyinallmaterialrespectstheGroup’sfinancialpositionasat30September2017anditsfinancialperformanceandcashflowsfortheyearendedonthatdate;and

ii. complywithNewZealandEquivalentstoInternationalFinancialReportingStandardsandInternationalFinancialReportingStandards.

Wehaveauditedtheaccompanyingconsolidatedfinancialstatementswhichcomprise:

— theconsolidatedstatementoffinancialpositionasat30September2017;

— theconsolidatedincomestatement,statementsofcomprehensiveincome,changesinequityandcashflowsfortheyearthenended;and

— notes,includingasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.

Basis for opinion

WeconductedourauditinaccordancewithInternationalStandardsonAuditing(NewZealand)(‘ISAs(NZ)’).Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.

We are independent of the group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics forAssurancePractitioners issuedby theNewZealandAuditingandAssuranceStandardsBoardand the InternationalEthicsStandardsBoardforAccountants’CodeofEthicsforProfessionalAccountants(IESBACode),andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirementsandtheIESBACode.

Our responsibilitiesunder ISAs (NZ)are furtherdescribed in theauditor’s responsibilities for theauditof theconsolidatedfinancialstatementssectionofourreport.

Our firm has also provided other services to the group in relation to accounting services. Subject to certain restrictions,partners and employees of our firmmay also dealwith the group on normal termswithin the ordinary course of tradingactivitiesofthebusinessofthegroup.Thesemattershavenotimpairedourindependenceasauditorofthegroup.Thefirmhasnootherrelationshipwith,orinterestin,thegroup.

Other information

TheDirectors,onbehalfofthegroup,areresponsiblefortheotherinformationincludedintheentity’sAnnualReport.Otherinformation includes the Chairman and Chief Executive’s report and disclosures relating to corporate governance andstatutory information and the other information included in theAnnual report.Our opinionon the consolidated financialstatementsdoesnotcoveranyotherinformationandwedonotexpressanyformofassuranceconclusionthereon.

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Statutory Information1 0

The directors present to shareholders the Sixty-Ninth Annual Report and Financial Statements of the company for the year ended 30 September 2017.

D I S C L O S U R E S O F I N T E R E S TDirectors have disclosed interests in the following entities pursuant to Section 140 of the Companies Act 1993:

F I N A N C I A L R E S U L TThe result for the year is a net profit of $14.4 million after tax.

I N T E R E S T S R E G I S T E RThe company maintains an Interests Register in which particulars of certain transactions and matters involving the directors are recorded. Entries in the Interests Register must in turn be disclosed in the annual report. The following entries were recorded in the Interests Register for the period 1 October 2016 to 30 September 2017.

Director Entity Relationship

J G Collie Arrow Dairy Ltd Independent AdvisorBenmore Downs Ltd DirectorKakapo Farms Partnership ChairmanPlatinum Dairies Ltd ChairmanTakitimu Discussion Group Facilitator

R G Drummond Beef+Lamb New Zealand Monitor Farm Programme Committee MemberTakitimu Discussion Group Member

G R Milne Elviti Holdings Ltd and subsidiaries DirectorFarmright Ltd DirectorFMG Insurance Ltd DirectorGenesis Energy Ltd DirectorGR & JA Milne PartnerMassey University School of Advanced Engineering & Technology Advisory Board MemberNyriad Ltd ChairmanPTR Holdings Ltd and subsidiaries DirectorPF Olsen Group Ltd and subsidiaries DirectorPro-Form Ltd Advisory Board ChairmanRimanui Farms Ltd Advisory Board ChairmanRockhaven Trust TrusteeSynlait Milk Ltd and subsidiaries ChairmanTerracare Fertilisers Ltd ChairmanWaikato University Council Member

D G Morrison Alpha Sheep Genetics Group MemberDG & BC Morrison Ltd DirectorPure Taste New Zealand (NZ) Ltd Director

J H Ogden New Zealand Markets Disciplinary Tribunal MemberPencarrow IV Investment Fund Investment Committee MemberPencarrow Bridge Fund GP Ltd DirectorSummerset Group Holdings Ltd DirectorTegel Group Holdings Ltd ChairmanThe Crown Forestry Rental Trust Finance & Audit Committee MemberThe Warehouse Group Ltd DirectorTW Financial Services Operations Ltd DirectorVista Group International Ltd Director

H D Sangster Central South Island Beef + Lamb New Zealand Farmer Council MemberRed Meat Profit Partnership Understanding Your Farming Business Facilitator

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Director Entity Relationship

V C M Staddart Department of Conservation Audit Risk Committee MemberFinancial Markets Authority MemberGlobal Women Trust Advisory Board ChairHeartland Bank Ltd DirectorKings College School Board of Trustees TrusteeMinistry of Business, Innovation & Employment Audit & Risk Committee ChairDefence Employer Support Council ChairTertiary Education Commission Board MemberThe New Zealand Refining Co Ltd DirectorThe Warehouse Group Ltd Director

M J Taggart Ballance Agri-Nutrients Ltd DirectorFMG Insurance Ltd DirectorOxford Health Charitable Trust TrusteeOxford Health Charity Ltd DirectorNorth Canterbury Farmers’ Charitable Trust Trustee

Statutory Information (continued)

R E L E V A N T I N T E R E S T S I N S H A R E SDirectors have disclosed the following holdings of relevant interests in Alliance Group Ltd shares pursuant to Section 148 of the Companies Act 1993:

All share transactions were carried out at their nominal value of $1.00 per share.

R E L A T E D P A R T Y T R A N S A C T I O N SThe company has frequent transactions with its elected directors conducted on an arm’s length basis in the ordinary course of business.

E M P L O Y E E R E M U N E R A T I O NDuring the year, the numbers of employees of the group who received remuneration including benefits, of $100,000 or more were:

Our remuneration policy and practices are designed to attract, retain and reward high calibre senior leaders for the delivery of results that create value for our shareholders. This is achieved through market benchmarked remuneration that balances fixed and variable pay linked directly to the performance of the co-operative. The remuneration package for the Chief Executive and Executive Leadership Team is reviewed annually by the Remuneration and Nominations Committee taking into account company results, individual performance and market data supplied by external specialist remuneration advisors.

The above details include seven employees employed by the company’s UK based subsidiary, Alliance Group (NZ) Ltd and four employees whose employment ceased including redundancies and retirement.

I N S U R A N C E A N D I N D E M N I T I E SUnder the provisions of Section 162 of the Companies Act 1993, the company has entered into deeds of indemnity with its directors and has effected directors’ and officers’ liability insurance to indemnify them against liabilities and costs associated with claims made against them in their capacity as directors of the company.

C O - O P E R A T I V E S T A T U SAs required by Section 10 of the Co-operative Companies Act 1996, the following resolution was passed by the board on 9 November 2017. All directors present voted in favour of the resolution:

“It was the opinion of the board that Alliance Group Ltd has, throughout the year ended 30 September 2017, been a co-operative company within the meaning of the Co-operative Companies Act 1996 on the following grounds:

(a) the company carries on, as its principal activity, a co-operative activity as that term is defined in the Co-operative Companies Act 1996;

(b) the constitution of Alliance Group Ltd states its principal activities as being co-operative activities;

(c) not less than 60% of the voting rights of Alliance Group Ltd were held by Transacting Shareholders as that term is defined in the Co-operative Companies Act 1996.”

Shares Held at30 September 2016

Shares Acquired since 30 September 2016

Shares Held at30 September 2017

J G Collie 93,431 8,917 102,348R G Drummond 120,027 20,770 140,797J A Miller 81,460 12,778 94,238

D G Morrison 34,006 4,151 38,157H D Sangster 54,821 10,318 65,139M J Taggart 43,274 6,190 49,464

R E L A T E D P A R T Y T R A N S A C T I O N SThe following remuneration was paid during the 2017 financial year:

J G CollieR G DrummondJ A MillerG R Milne D G Morrison J H Ogden H D Sangster V C M Stoddart M J Taggart (Chairman)

$65,000 $65,000 $65,000 $65,000 $65,000 $75,000 $65,000 $70,000

$160,000

Remuneration No. of Employees

$100,000-$110,000 47

$110,000-$120,000 16

$120,000-$130,000 9

$130,000-$140,000 7

$140,000-$150,000 7

$150,000-$160,000 7

$160,000-$170,000 4

$170,000-$180,000 3

$180,000-$190,000 1

$190,000-$200,000 3

Remuneration No. of Employees

$200,000-$210,000 7

$210,000-$220,000 1

$220,000-$230,000 1

$240,000-$250,000 2

$260,000-$270,000 1

$280,000-$290,000 3

$290,000-$300,000 1

$350,000-$360,000 1

$400,000-$410,000 1

$410,000-$420,000 1

$1,180,000-$1,190,000 1

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Statutory Information (continued)

D I R E C T O R SThe names of persons holding office as directors of the company as at 30 September 2017 are listed in the directory on the inside of the back cover.

Mr R G Drummond and Mrs H D Sangster retire by rotation and offer themselves for re-election.

As no further nominations have been received, Mr Drummond and Mrs Sangster have been declared re-elected.

A U D I T O R SUnder Section 200 of the Companies Act 1993 KPMG, Chartered Accountants, continue in office as auditors.

C O M P A N Y ’ S A F F A I R SA profit for the year has been recorded and the company’s balance sheet remains robust with an equity ratio of 71%. Further details of the year under review, including material changes in the nature of the business of the company or any of its subsidiaries, are included in the Chairman’s and Chief Executive’s Review and the financial statements of the company accompanying this report.

22 November 2017

Five Year Review1 1

2017 2016 2015 2014 2013

$000 $000 $000 $000 $000

Turnover 1,533,408 1,357,609 1,498,838 1,459,279 1,383,610

Net profit before restructuring costs and pool surplus distributions 28,737 12,081 9,192 20,473 10,898

Restructuring costs 603 1,970 1,325 2,900 2,500

Pool surplus distributions 11,387 9,795 - 7,000 -

Profit after tax 14,426 102 4,625 6,210 5,614

Fixed assets 220,374 207,410 196,364 201,775 203,102

Total assets 454,989 427,800 536,123 504,755 485,036

Shareholders’ funds 323,159 301,828 308,869 296,684 297,323

Shareholders’ funds as a percentage of total assets 71.0% 70.6% 57.6% 58.8% 61.3%

Ordinary shares 72,166 67,008 67,565 70,086 72,257

M J TaggartD I R E C T O R

J H OgdenD I R E C T O R

A L L I A N C E

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Directory1 2

C O R P O R A T E O F F I C E51 Don Street PO Box 845, Invercargill 9840 Telephone: 03 214 2700 Email: [email protected] Website: www.alliance.co.nz

E L E C T E D D I R E C T O R SJ G Collie Dipton R G Drummond AvondaleJ A Miller SouthdownD G Morrison GoreH D Sangster RanfurlyM J Taggart (Chairman) Oxford

A P P O I N T E D D I R E C T O R SG R Milne HamiltonJ H Ogden WellingtonV C M Stoddart Auckland

E X E C U T I V E L E A D E R S H I P T E A MChief Executive D R SurveyorCompany Secretary D J HailesChief Financial Officer C J MathewsonChief Information Officer M D BlandfordGeneral Manager Sales M D Brown General Manager Supply Chain G W FaberGeneral Manager Strategy N C Jones General Manager Marketing P S RussellGeneral Manager People & Safety C B Selbie General Manager Livestock & Shareholder Services H J StacyGeneral Manager Processing K A Stevens

M A N A G E R SDannevirke Plant B A PooleLevin Plant P L HansenLorneville Plant R M MitchellMataura Plant A G GilderNelson Plant T M KreftPukeuri Plant I J Docherty (Acting Plant Manager)

Smithfield Plant N R CuthillAlliance Meats P G LubbersAlliance Group (NZ) Ltd (UK subsidiary) D G Smith

A U D I T O R S KPMG

B A N K E R S ANZ Bank LtdBank of New ZealandThe Hongkong and Shanghai Banking Corporation LtdRabobank NZ Branch

R E G I S T E R E D O F F I C ELevel 3 51 Don Street Invercargill 9810

The information in this annual report is for shareholders only and is not to be reproduced in whole or in part without the consent of Alliance Group Ltd.

A L L I A N C E

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W W W . A L L I A N C E . C O . N [email protected]

03 214 2700

0800 354 435

PO Box 845, Invercargill 9840

51 Don Street, Invercargill 9810

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